August 31, 2013
As Consumption Declines, Water Utilities Need New Pricing Models
by Robert Kropp
A report from Ceres and the University of North Carolina reveals that the current pricing models
used by water utilities are inadequate at a time when they face considerable infrastructure costs.
The needle may have budged a little bit when it comes to recognition by governments and
corporations of the crisis of climate change, but there's little doubt that we remain perilously
close to a business as usual scenario. Couple that with the persistent overconsumption of natural
resources, and we face a multitude of issues whose resolutions remain unrealized.
Water scarcity is one such issue. In a recent study entitled Water availability and
vulnerability of 225 large cities in the United States, authors James Jawitz and Julie Padowski
assessed the adequacy of water supply for US cities with populations in excess of 100,000, and
found that at least 20 of them—including some of the nation's largest cities—have medium or high
vulnerability to water shortages. “Reports of water shortages,” the report states, “reflect deeper
concerns about the impacts of climate change, population growth, and environmental regulation on
Interviewed on weather.com, Jawitz observed, “The southwestern United
States is projected to have decreased rainfall, decreased snowpack, decreased flows in rivers like
the Colorado River, and naturally decreased water availability for some of our major cities in the
western United States.”
His observations were borne out earlier this month when the
Interior Department's Bureau of Reclamation announced that the
release of water from Lake Powell in 2014 will be the lowest since the reservoir, which straddles
the boundary between Utah and Arizona, was filled in the 1960s. Water deliveries to Arizona and
Nevada will be affected by the cutback in releases from the reservoir.
"This is the worst
14-year drought period in the last hundred years," Larry Walkoviak of the Bureau said.
“But it would be wrong to call this a natural disaster,” Mindy Lubber of Ceres wrote in a blog.
“While drought and climate change are important factors in the river’s lower flows, human
mismanagement is the bigger cause.”
Referring to the fact that Phoenix set a record for
daily water use as recently as June, Lubber continued, “This record-breaking water use is almost
entirely the result of poor water pricing, which undervalues this precious resource...The costs of
maintaining unsustainable water use are spiraling out of control.”
The degree to which
costs for water are mounting is outlined in a recent report from Ceres and the University of North
Carolina Environmental Finance Center, entitled Assessing Water System Revenue Risk. The first
sentence of the report's executive summary describes the scope of the expense: “Water utilities are
on the brink of extraordinary investments to replace aging infrastructure—the Environmental
Protection Agency estimates that by 2030, capital expenditures of more than $300 billion will be
needed to safeguard drinking water.”
However, the report points out, while utilities can
plan for fixed costs for infrastructure upgrades, their ability to anticipate revenue is much less
clear. The advent of energy efficient appliances in the 1990s as well as the conservation efforts
of the utilities themselves have led to a decreased demand for water in most areas of the country.
But efforts to recover costs and maintain revenue can be challenged by the local political
priorities governing municipal utilities.
“For municipal bond investors, the vulnerability
of water systems’ revenues to demand changes is a matter of credit risk,” the report states. “Yet
the credit metrics used by most analysts in today’s market may not sufficiently assess revenue
vulnerability for many utilities.”
The report suggests a number of potential metrics to be
used by utilities, ranging from the fairly simple—lower the residential consumption level from
7,500 gallons per month to 5,000—to others that are rarely used by analysts.
and analyses described in this paper should help analysts and utilities better assess the
resilience of water systems to demand changes, while also providing a clearer view of how well a
utility is meeting their own stated goals,” the report concludes. The next paper in the series will
analyze emerging pricing models further, Ceres stated.