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Differences in raw water costs, treatment processes, geography, and infrastructure investments all contribute to why one utility's rates may be higher or lower than another's.
Neighboring utilities may have different rate structures, financial policies, and cost recovery methods, making direct bill comparisons an oversimplification of complex financial realities.
Setting rates should focus on maintaining safe, reliable service and long-term sustainability, rather than simply aligning with what other utilities charge.
The bill comparison includes an estimate of the utility’s current and projected residential bills alongside the estimated residential bills in neighboring communities and other utilities in the local region. And, as we often see in these comparisons, the cost of water and wastewater service can vary from one community to the next. But why does this occur? How can the cost of providing the same service be so different for utilities that draw their water from the same source, serve neighboring communities, or operate within the same regulatory environment? The answer may surprise you as there are many reasons why the cost of water and wastewater service can vary. Some of the most common reasons are highlighted and discussed in more detail below.
The cost of raw water supplies can vary from one community to the next, even among neighboring utilities, and these differences can be significant enough to be reflected in customer bills. Some utilities have easy access to pristine water sources, while others may be required to purchase their raw water from an outside municipal entity. Furthermore, some utilities may incur costs for dams or reservoirs as well as for transporting raw water long distances and/or uphill to their treatment facilities.
Water treatment plants may employ different processes, reflecting the unique treatment requirements of their raw water supplies. As a result, the cost to operate the plant may differ in response to higher or lower chemical costs, electricity use, and repairs and maintenance requirements. The same can be true for wastewater treatment facilities.
Some communities receive water or wastewater treatment and transportation service from a neighboring utility. In this situation, service agreements are put in place to recover costs in a fair and equitable manner. However, it is common for the utility providing service to assess a higher treatment and transportation rate to an outside municipal customer than it does to its inside-district retail customers. The higher rate paid by the outside municipal customer reflects an appropriate rate of return for the risks incurred by the utility to provide service to the municipal customer, and this difference can have an impact on customer bills.
Some utilities serve customers over a large area, requiring more extensive distribution or collection systems than communities with service areas that are denser. In turn, distribution or collection system maintenance and replacement costs may be higher on a per account basis for these utilities. Similarly, some communities may need to transport treated water or collected wastewater to higher elevations or across variable terrain. Therefore, additional infrastructure such as pump stations and storage tanks may be needed to meet service demands. The result can be higher electric costs to operate the pump stations and increased maintenance or repair and replacement costs to operate the additional infrastructure.
In many communities, water and wastewater infrastructure is old and in dire need of significant repair or outright replacement. Some utilities are further along in the process of replacing old and out-of-date infrastructure than others. Those that are reinvesting more in their systems may have higher capital costs, such as debt service costs or pay-as-you-go capital expenditures and, as a result, may assess comparatively higher rates to fund these costs.
Rates can play a significant role in creating utility bill differences across communities. For example, some utilities may assess the same set of rates to all classes, while others may assess cost-justified class-based rates—where one class of customers pays one set of rates, while other classes pay a separate set of rates based on a thorough cost-of-service evaluation.
Cross-class subsidies, where one class pays more than its cost of service while another pays less than its cost of service, can occur unbeknownst to utility managers. In addition, cross-class subsidies may occur intentionally as a matter of policy. For example, some utilities may shift the cost burden from residential to non-residential customers to address affordability concerns. Alternatively, other utilities may set their industrial rates lower than their cost-justified level to encourage economic development, with other customer classes, including residential customers, paying more than their cost-justified share in support of this type of initiative.
Stormwater management costs can be funded with a dedicated stormwater fee, wastewater rates, or through tax revenues within the general fund if stormwater management costs are a public works activity. When all things are equal, a community with wastewater rates that fund wastewater and stormwater costs will have higher rates than a community with wastewater rates that only fund wastewater system costs and a separate stormwater fee to fund its stormwater-related costs. Therefore, many wastewater bill comparisons do not accurately account for stormwater service costs.
While a municipality’s water and wastewater operations are accounted for separately from its general fund activities, a municipality may at times subsidize its utility operations with revenues from its general fund. In this way, revenues used to support utility operations are provided from property tax revenues (or other revenue sources in the general fund) in addition to utility rates. Using revenues from the municipality’s general fund can lower water and/or wastewater bills if these revenues would have otherwise been generated by rate increases.
Alternatively, many utilities transfer funds from utility operations back to the municipality’s general fund as payment for support services. For example, the utility may receive support from the municipality’s executive (i.e., City Manager, Town Supervisor, etc.), finance, human resources, and IT departments. When this occurs, a portion of the personnel costs from these departments may be allocated to utility operations and paid for with utility rates. Utilities receive varying degrees of support from these departments and without a detailed cost analysis, the actual support service costs charged to utility operations may be discretionary, and in turn, may be over or under recovered from utility operations.
While it can be helpful for utilities to compare residential bill of neighboring utilities, the results should not be interpreted as support for, or an argument against, an increase to the utility’s own rates. The decision to raise rates should include an assessment of the utility’s service requirements, a detailed analysis of its current and future costs, and a thorough understanding of the projected bill impacts.
The cost of water and wastewater service for a residential customer can vary from one utility to another, even among neighboring utilities. Given the number of reasons why, it is recommended that a survey of rates and the resulting bill comparisons be used for informational purposes only. While it can be helpful for utilities to compare residential bills of neighboring utilities, the results should not be interpreted as support for, or an argument against, an increase to the utility’s own rates. A utility’s financial strength is foundational to its ability to provide safe and reliable service. Therefore, the decision to raise rates should include an assessment of the utility’s service requirements, a detailed analysis of its current and future costs, and a thorough understanding of the projected bill impacts on its own customers.
For more information on water and wastewater rates, contact Phil Sapone at psapone@raftelis.com.
