Price of Water 2018: Utilities Revise Household Water Rate Formulas

By Brett Walton, Circle of Blue – May 30, 2018

In contrast to the federal government’s chronic underinvestment in the pipes, pumps, and plants that supply and treat the nation’s drinking water, America’s large cities are forging ahead with fresh spending to modernize their systems. One result is that all the work to repair municipal water systems is raising the cost of service.

In its latest annual survey of water price trends in 30 large U.S. cities Circle of Blue found that the average price of residential drinking water for a family of four using 100 gallons per person per day rose 3.3 percent last year. It was the smallest increase since the survey started in 2010 and continues a recent trend of slower price growth.

For a family of four using 50 gallons per person per day, the average price rose 4.6 percent, the same as the previous year. The median increase for the 100-gallon scenario was 2.4 percent. The median increase was 3.1 percent at the 50-gallon tier, a level that reflects more conservative use.

The largest price increases occurred in California, where major utilities are in a construction frenzy to cleanse dirty water for reuse, gird pipes against earthquakes, and respond to water-supply vulnerabilities that were exposed during the five-year drought that ended last year.  

Prices at the 50-gallon-per-person level in Fresno, Los Angeles, San Diego, San Francisco, and San Jose climbed more than 7 percent. Residents of San Jose (17.8 percent), Fresno (15.4 percent), and Los Angeles (13 percent) absorbed the three highest price increases in the survey.

“Two big cost drivers are diversification of water sources and replacing aging infrastructure,” Sanjay Gaur, vice president in the California office of Raftelis, a consultancy, told Circle of Blue. Cities that lost revenue due to water restrictions during the drought are also looking to make up that deficit, he added.

The survey has limits. The prices do not reflect average household bills. Circle of Blue has developed a separate data set for that category. The cost of water is a major factor in how much an urban American family generally uses. Higher prices generally result in lower usage.

A second constraint is that the survey is narrow. There are more than 50,000 community water systems in the United States. This assessment looks at only 30 of the largest, which typically display better financial strength and fewer health violations than their smaller counterparts. And it does not consider stormwater fees or sewer rates, which in many cases are far higher than drinking water.

The strength of the survey, though, is its annual accounting of the change in prices for three scenarios in which monthly water use remains constant. The survey, which attracts national attention, is useful for identifying financial trends that influence the water bills of tens of millions of American residents.

This year’s survey finds that the extensive investments large cities are making to their water systems comes as the federal government continues to display the decades old aversion to paying for improving infrastructure. President Trump entered office more than a year ago after campaigning to spark federal investment in the systems that move people, goods, water, data, and electricity. The grand infrastructure project Trump championed faded on Capitol Hill, where lawmakers opted instead for a status quo piecemeal approach that was less costly and used existing financing tools.

City leaders, though, understand the urgency of assuring their residents and businesses have adequate supplies of water and distribution systems that do not break in order to stay competitive nationally and globally. Los Angeles, for example, wants local water sources to account for half of the city’s supply by 2035, a transformation that will require billions of dollars of investment to reuse water, store more rainfall, and strip industrial chemicals from polluted groundwater basins. The city budgeted $6.6 billion over the next five years for capital projects, a category that includes basic fixes such as water main replacements.

Fresno’s increase is part of a five-year, $429 million plan to develop an alternative to the city’s declining groundwater reserves. The Southeast Surface Water Treatment Facility, expected to begin full operations in June, will draw water from the Kings River. The facility is being financed through the state revolving fund, a low-interest, water infrastructure loan program that Congress is still keen to support.

San Diego is spending $1.2 billion on the first phase of Pure Water, the brand name for a state-of-the-art wastewater recycling facility. Discharges from the city’s wastewater treatment plant that are currently cast into the Pacific Ocean will be reused for drinking.

Farther north, San Francisco is nearing completion of a $4.8 billion construction program to protect its regional water distribution system from earthquake damage. The city’s pipes cross three fault lines.

Six cities in the survey, meanwhile, did not change their rates, while Austin Water in Texas, bucking the national trend, decreased its water charges.

The investments made by these 30 cities are part of the $683 billion that Bluefield Research, a group that analyzes water infrastructure, expects municipal utilities to spend in the next decade on water and sewer systems. More than 40 percent of the money will go toward the most basic components: repairing and replacing old pipes. These networks, hidden from sight, are a formidable asset, with their total length in a single city often extending several thousand miles.

The challenge for water utilities is to earn enough revenue to repair pipes, expand systems, meet regulatory requirements, and prepare for the wet-dry punches expected from a warming planet. But they must do so at a time when many are selling less water than they have in decades. Los Angeles, for example, used 18 percent less water last year than in 1970, despite adding more than 1.2 million people.

Weakening the Link between Use and Revenue

While residential water prices are moving relentlessly upward, they did so over the last year at a slower pace. Instead of large, double-digit expansions every few years, some cities are introducing smaller, regular increases.

Houston, due to a 2010 ordinance, pegs its annual adjustments to inflation and to the city’s population growth. Chicago also links its increases to local consumer price trends.

Atlanta has not raised rates since 2012, thanks to supplementary revenue from a one-percent city sales tax.

To keep pace with decreases in water demand, utilities are shifting a larger share of their revenue from variable charges, which are based on the number of gallons used, to fixed charges, which are paid each billing cycle regardless of how much water flowed through a home’s taps.

Exemplifying that trend is San Jose, which had the most drastic change in rate structure last year of the 30 cities.

San Jose Municipal Water System, one of three water providers in the city, made three major moves that resulted in a double-digit percentage point increase for some customers. San Jose attributes its rate increase to the higher cost of purchasing water from San Francisco, which is also a regional wholesaler, and from Santa Clara Valley Water District.

San Jose began by scrapping its increasing block rate, a rate design in which the cost of each gallon becomes more expensive as use increases. The same concept governs federal income tax brackets. These rates are popular because higher prices are seen as a signal to conserve and those who use the most water pay more for it.

The utility’s next change was to shift more of its rate to the fixed fee, while also decreasing its variable charges. That shift is becoming a common adjustment for utilities, one they undertake in order to align their costs and revenues. One of the drawbacks of relying on increasing block rates, if they are not well-designed, is that utility revenue is exposed to changes in the weather. Wet summers or drought restrictions can slash water use at the upper end — and with it, the money from those more-expensive gallons. 

Denver Water executed a similar move last year as San Jose — increasing the fixed fee and trimming the variable. Starting with a rates overhaul in 2016, Denver Water has gradually shifted revenue to fixed charges. It now collects around 20 percent of rate revenue from the fixed charge, compared to less than 10 percent in 2015.

“The result is a more reliable revenue stream for us and smoother, more consistent, and lower price adjustments for our customers,” Travis Thompson, a Denver Water spokesman, told Circle of Blue. 

The challenge with this revenue shift is that it raises concerns about equity and conservation. Equity because frugal users will shoulder a relatively higher burden, and conservation because less of the rate will be attached to how much water is used.

“It’s a big balancing act,” Gaur, the rates consultant, remarked.

The numbers bear that out. Residents in San Jose’s Evergreen neighborhood who use relatively little water saw prices increase at a much steeper rate than high-volume users. (San Jose has eight water rates that correspond to particular neighborhoods.) At the 50-gallon level the increase was 17 percent, while at 100 gallons, prices rose only 3 percent. 

The intersection of these two trends — higher rates and equity concerns — have resulted in water affordability becoming a politically prominent issue. Philadelphia drew attention last year for its income-based rate, but other cities in the survey have increased financial aid for the poor. 

Seattle Public Utilities offers a bill discount of up to 50 percent for the more than 30,100 households in its customer aid program.

Denver, after its rates overhaul, still uses an increasing block rate. But the size of the blocks are based on winter water use. As a result, indoor use, which is fairly constant throughout the fall, winter, and spring, is priced at a low rate. Higher rates apply in summer, when lawns are growing and water use can spike as much as three times as winter use. It is a way both to personalize water rates and keep a price signal for conservation.

Not Everything Is Bigger in Texas

Rate decreases, on the other hand, are rare. But Austin Water, which serves about 1 million people in the Texas capital, accomplished the feat.

The utility did so by making two adjustments, according to David Anders, assistant director of finance. It refinanced its debt, which brought interest payments down, and the city started charging new housing developments more money to connect to the water and sewer system.

Austin is consistently ranked as one of the country’s fastest growing large cities. Its population swelled by roughly 140,000 people since 2010. But until recently it was taking in only $8 million to $10 million a year in connection fees, far lower than what the state allowed.

The City Council passed a resolution, effective January 2014, that increased the connection fees. Anders said the utility is now earning about $35 million a year in connection charges, which are used to pay down the debt.

“The policy change made development and growth pay more for itself, rather than have all ratepayers subsidize the growth,” Anders told Circle of Blue.