Utility Side
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Utility Side
What Drives High Utility Rates?
News articles about increasing water utility rates are frequently found throughout the nation’s media. Still, there may be little understanding of the political dynamics that drive the water and sewer rate setting process. This process is unique in our public square.
There is no question that water and sewer utility services are fundamental public goods. Whether these services are provided by a local government or by a private company, the factors driving the need for rate increases are common. And as we have seen in 2009, utility rates appear to be rising at an accelerating pace. Utility managers and water utility consultants fight a daily battle to reduce water rate increases, but in the end, the forces putting upward pressure on consumption rates are often simply overwhelming.
What is behind this trend? There appear to be about five major factors contributing to rapidly rising utility rates:
· Diminishing Growth
· Disappearing Development Fees
· Massive Capital Requirements
· Increasing Supplier Costs
· Waiting for the wrong Time
Together, these factors contribute to the current environment of increasing fees for water utility service.
Diminishing Growth
Because water and sewer utilities tend to have high fixed costs relative to total cost, referred to in the industry as “high operating leverage”, growth in the total number of customers can help keep rates down. As the number of customers and demand grows, total revenue increases. Should growth exceed inflation and real increases in costs, then rate increases are not normally required.
Growth in many parts of the country has been one of the factors that helped keep utility rates in check. With the recession, however, some areas have experienced negative growth and some areas actually lost customers due to displacement (such as in Detroit). Overall demand has also fallen off, owing to conservation, or just because customers reduced consumption during difficult economic times. A reduced demand, regardless of the reason, spells trouble. Reduced demand means that the utility’s fixed costs are shared by fewer people, and that rates probably have to be increased. The utility can fight back by slashing operating budgets, but the reality is that many costs simply cannot be avoided. Once this point is reached, higher service rates are the only solution.
Disappearing Development Fees
Utilities frequently charge a fee for connecting a new home or business to the service or system. Connection fees fall into two categories: a fee to cover the direct costs of simply
Connecting a meter, as well as a larger amount intended to recover at least a portion of the capital the utility will need to invest in order to provide service capacity for that new connection. This second category of fees goes by many names but is frequently referred to as a “development fee.”
In some areas, these development fees can be significantly large. Western areas in particular can have development fees for a single-family home can run as high as $20,000 or more. Although the purpose of these fees is to offset capital requirements (acquisition costs for pipes, pumps, tanks, etc.), revenue generated by the fees provides cash that utilities desperately need. When growth slows, revenue from these fees declines. As the revenue stream from these fees dries up, the Utility may need to replace it. This often translates into higher consumer rates.
Massive Capital Requirements
Water and sewer utilities are exceptionally ‘capital intensive’ businesses. These utilities are also natural monopolies. The extremely high amount of investment capital required for infrastructure before a single dollar of revenue is earned is a major reason for this.
Utilities possess very large asset holdings. Pipes, pumps, tanks, treatmentplants all cost a great deal of money, not only to acquire but also to maintain repair, and replace when necessary. The cost to build or replace these assets is enormous.
In many parts of the US, these assets have reached the end of their useful service lives. Water main breaks and sewer back-ups are just a few manifestations of systems that are worn out and in dire need of repair or replacement. To facilitate the replacement, large amounts of new capital must be raised. That usually translates into higher debt payments for utilities themselves and big increases in customer rates to pay for it.
In our capacity as Water Utility Consultants, we recently assisted on a project where a small community of about 2,000 customers was required to construct a new sewer treatment facility at a cost of about $13 million. The debt service on the plant comes to about $460/yr/customer – the debt service alone would have caused the sewer bills to double.
Increasing Supplier Costs
The costs of treatment chemicals, electricity, and fuel have all gone up substantially in the past couple of years due to a variety of factors that are well beyond the control of any local water/sewer utility. Some of these costs can be managed, but more often than not they have to be absorbed translating into a need for higher rates in many cases.
Waiting for the Wrong Time
Is there ever a good time for a water/sewer rate increase when you’re an elected official? Probably not, but some ‘times’ are worse than others. Now would be one of those “worse” times. Unfortunately, when times are good the need for rate increases is not always obvious. There are untold thousands of stories out there about how communities have not addressed let alone increased their utility rates for years and years and are now faced with the need for a big increase to meet current needs.
Avoiding major and sudden increases in water and sewer rates should be a major objective of utility managers. Solid management and planning can help avoid the bad timing as well as the large increases. Communities can help themselves be prepared by addressing utility rates on a frequent basis and making the small adjustments when they are necessary. When you wait until deficits start appearing, then all those small increases that were avoided in the past tend to compound into a much larger increase later.
StepWise Utility Advisors is comprised of highly efficient and experienced technical and financial planning experts focused on specific needs of water utilities and utility customers. Founder Jason Mumm brings over 15 years of experience analyzing the water utility industry and the needs of its customers. Visit the StepWise Blog for the latest water and utility industry news.
About the Author
Jason Mumm brings over 15 years of experience analyzing the economics and conditions surrounding the water utility industry and the needs of its customers.
How do you test trailer lights on a utility trailer for a short?
My trailer is blowing fuses on whatever I tow it with. It's the 15AMP backup fuse. I can't see any raw wire but I am sure it is shorting out somewhere. The system has two wires from each taillight going into a plug that has three female and one male connection. How can I check this to at least determine which side of the trailer the problem is on?
there is a product sold that tests the connection coming out of the car or truck, to make sure that side is wired correctly. Nominal cost and worth owning. On the trailer side, a continuity test is probably good enough. Take a multi-meter and set it on ohms. Test the meter by touching the two leads together and look for a strong reading. If you get one, you have the tool you need. Now remove the bulbs in your trailer's light sockets and test the brown and green wires, one with the red tester lead, and one with the black. You should not get a reading because the bulb is out of the socket. Then put a good bulb back in (filament is not broken). Test again to be sure you get a reading to show the circuit is completed. Now do the other side, testing the yellow and brown wires on that side.
If everything checks out okay, take the ground wire off the frame of the trailer and sandpaper the contact area and reattach. I would say that at least 80% of trailer wiring problems are due to a ground wire being broken or no longer conducting to the frame, which is the route that the car uses to complete the grounding circuit through the metal of the trailer hitch.
If things did not check out okay, verify that the meter is strong enough to pass through the circuit by removing the bulb and connecting the wires at the light socket with a jumper wire. If the meter still doesn't register a reading, you know you have an open circuit. If the meter registers a reading with the bulb out and no jumper wire, then you have the route of the short. Then inspect carefully along the length of the trailer, or pull new wire through if its inside the frame. To save money, you can use the existing wire to pull a string through instead of new wire, and examine the wire when its outside the frame. you may be able to repair it and pull it back in and reuse it.
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