Water Affordability | Part 1
Riding out the financial whirlpool: what's happening with water affordability?
The affordability of water – both now and in the near future – is a hot topic these days, though we have mostly seen diagnoses rather than prescriptions for the challenges we are facing. From intake to faucet, there are a multitude of costs necessary for ensuring access to clean, reliable water. As many already know, drinking water has generally been priced below the true costs of delivering and sustaining its uninterrupted flow. This price gap has become increasingly stark in recent years as the bill associated with deferred maintenance has “come due” – the need to replace the nation’s deteriorating water infrastructure is now pressing. Generating sufficient revenue to cover these capital investments requires an increase in rates, yet doing so can easily undermine the affordability of a service so vital to life. Today, localities across the nation are facing a very serious and complex challenge: how to address the needs of an aging water system while maintaining equitable access to its service, given budgetary constraints, demographic shifts, and environmental uncertainties.
The factors at play vary by utility and geography, so the local context dictates the specific issues each utility faces. But even if solutions exist on a “site-specific” basis, what broader strategies exist that can be tailored to the needs and circumstances of each locality? In this 3-part blog series, we describe the reality of our water infrastructure challenges and identify opportunities to manage the financial burden on ratepayers.
By the Numbers
According to EPA estimates, water utilities will have to invest $384 billion** over the next 20 years to cover the costs of maintaining, upgrading, or replacing the nation’s deteriorating water infrastructure. To put this in perspective, total operating revenues for all water utilities in 2013 tallied $24 billion. The hefty $384 billion price tag equates to an annual investment of $19.2 billion over the 20-year time horizon, or 80% of total revenue for 2013. Capital expenditures, however, reflect just one-third of a utility’s entire budgetary requirements—utilities must also fund operating expenses (including labor), purchased services, treatment chemicals, and routine maintenance.
Revenue streams for water utilities are derived in large part from user charges, including volumetric water rate charges paid by the end use customer and water connection fees assessed to new development. (Other potential sources can include development fees, service fees, and equipment leasing.) Because utilities rely so heavily on user charges, increased costs often translate into increased fees for ratepayers. To compound this issue, when water sales start falling as a result of decreased demand stemming from fixture efficiency improvements or conservation, utilities may also need to raise their rates to compensate for a revenue deficit. A survey of nationwide water bills illustrates the rate at which prices have been climbing recently—from 2014 to 2015, water rates rose 6% in 30 major U.S. cities, and since 2010, they’ve jumped by 41%. How will these trends impact water affordability?
Source: Circle of Blue (2015)
A recent study published by Michigan State University warns of the growing un-affordability of water. Using the EPA’s income-based affordability criteria, this study evaluated the financial impacts American households would face as water prices continued to rise. According to the EPA’s benchmark, combined water and wastewater bills exceeding 4.5% of median household income are considered unaffordable. To surpass this threshold, households would need to earn at least $32,000 per year, assuming the 2014 national average for monthly water/wastewater bills of $120. Based on these figures, nearly 14 million households or 11.9% of all American households fell below the $32,000 threshold. Over the next 5 years, however, bills are expected to climb by $49, or by 41%. Given these projections, households would have to earn $45,120 to “afford” water/wastewater services, in which case 40 million households, or one third of all American households, would face difficulties paying their water bills. (It is possible – perhaps likely – that EPA will need to revisit the 4.5% benchmark for clean drinking water and treated wastewater, given the criticality of the service.)
The figure below highlights high risk and at-risk households for these water affordability challenges.
Source: Mack EA, Wrase S (2017)
Balancing the financial investments required to fix an aging infrastructure system with an equitable water pricing is no easy task. In the coming years, more and more utilities will be facing this critical challenge as the integrity of their water treatment and distribution systems becomes increasingly stressed by age, population pressures, and limited budgets.
In the second part of our blog, we will discuss a few strategies for maintaining affordable access to essential water services while managing ratepayer impacts and affordability. The third part of our blog will address ways in which water conservation can serve as a strategy, rather than a cause, of water affordability issues.
**Depending on who you’re asking, though, this number varies significantly. The American Water Works Association estimates infrastructure costs will reach $1 trillion over the next 25 years. Meanwhile, the U.S. Conference on Mayors projects that $2.8 trillion $4.8 trillion will be needed through 2028.