January 06, 2017

Drinking Water Concerns: More Than Just Scarcity

Ben Goossen, Business Development Fellow

Someone once said, “Highways are the cathedrals of our time.”

While the truth of that statement is easy to recognize, there is perhaps an equally impressive infrastructural undertaking lying hidden beneath our feet.  More than 1 million miles of buried pipes make up vast water networks across the United States. Like the many American bridges and highways that are in desperate need of repair, much of the drinking water infrastructure has become outdated and will need to be replaced in order to avoid serious disruptions to public health and safety.

Many Americans tend to take their access to safe and reliable drinking water for granted. This lack of concern is understandable when you consider the fact that the United States has been so successful at storing, treating and conveying water for so long. Affected by increasing demand and dwindling supply, the current price of drinking water does not fully account for the costs associated with infrastructure upkeep and the improvements needed to deliver safe drinking water to a growing population.

It has been more than 65 years since the U.S. made any kind of sizeable investment in drinking water infrastructure. One 2012 study conducted by the American Water Works Association predicts that the U.S. will need to invest over $1 trillion in buried drinking water infrastructure over the next 25 years. Similarly, a Massachusetts Water Infrastructure Finance Commission report published in 2012 concludes that the state faces a substantial water infrastructure funding gap. The report estimates the commonwealth will face a $10.2 billion gap in allocated drinking water funding and necessary investment over the next 20 years alone.  A need for infrastructural funding coupled with growing water scarcity issues mean that water bills will increase in the coming years regardless of a change in consumption. While that fact might be a hard pill to swallow, it is essential in understanding the water pricing issue. It is important to think about drinking water infrastructure as a fixed-price service rather than a commodity. While water itself is a commodity, the amount of money associated with a consumer’s volume consumption typically accounts for less than 5 percent of a utility’s budget. This understanding will become increasingly important as population expands and the supply of safe drinking water grows scarce.

There are a number of different water pricing schemes, but most of them rely on heavy water users to cover the bulk of water system costs. Tiered pricing structures that increase the unit price of water as consumption levels go up can be effective in encouraging conservation, but they can also create a revenue gap that is difficult to overcome. If the fixed costs of operating a system are not built into the pricing structure, then revenues will drop as consumers conserve more water. The other two common price structures are called flat rate and uniform volumetric rate pricing. A flat rate scheme charges consumers a uniform price independent of water use, whereas volumetric rate pricing is tied to consumption. Volumetric rate pricing differs from tiered pricing in that there is no exponential change in price, or put another way, the unit price of water doesn’t change as consumption increases, only the total water bill.

While these pricing structures are the most common, there are other pricing schemes that could better account for the full costs of supplying drinking water. The EPA highlighted  the need for these alternative pricing structures in a report on Sustainable Water and Wastewater Pricing in 2005: “By charging their customers for the actual cost of service, systems guarantee themselves not only a stable source of funds sufficient to cover their costs of operation (including treatment, storage, and distribution costs, but also funds for infrastructure investments").

One such sustainable water pricing solution calls for utilities to price water in proportion to their fixed and variable costs. Using this structure, all consumers would be charged a flat rate price based on the fixed costs of operation and upkeep of the system, in addition to any revenue that needs to go towards infrastructural improvements. The rest of a utility’s revenue would come from a variable cost charge based on an individual’s water consumption. In regions dealing with water scarcity, a surplus charge could be implemented to cause a dip in demand. The revenues from this surcharge would be redistributed to all water users regardless of water usage to ensure that the charge is only implemented during drought. The featured graphic outlines this pricing structure. 

Proportional rate structures allow for better planning and steady investment in infrastructure. After incurring a huge revenue deficit in the summer of 2014, Austin Water decided to turn to a pricing structure based more soundly on fixed costs. Since making that decision, fixed costs charges have doubled and now make up more than twenty percent of the utility’s revenue. The new pricing structure has made revenues less volatile and will allow Austin Water to better plan for the future.

While any solution looks costly, the longer we wait to address the issue the more expensive it could become in the long term. It is vital that we stop taking our drinking water system for granted and start investing in its upkeep and improvement to ensure the health and prosperity of generations to come.

 

Source for Graphic: “Pricing Water for Efficiency and Fairness”