Financing for the future: How water utilities can tackle capital costs

By Kaitlyn McClain

The Columbia Water Center, a water management think-tank at Columbia University in New York, recently released a white paper that analyzed factors influencing water utility operating expenses, debt, rate-setting and financial stability. One of the key findings of the study was that small utilities, those producing less than 20 million gallons of water per day, have the highest average operating expenses and are most likely to rely upon other sources of funding like property taxes and connection fees to cover daily expenses. This finding is cause for concern because, in many cases, these sources of funding are not enough to finance looming infrastructure repair projects. According to the study, between 2002 and 2010, water rates in the Chicago region did not keep pace with increases in long-term debt. The Metropolitan Planning Council (MPC) recognizes the significance of the water supply challenges we face as a region and is focused on maximizing existing infrastructure and exploring creative financing options for local communities.

Worker fixing pipes

A worker makes repairs to a pipe. Many small utilities are struggling to pay for infrastructure repairs. Source—MPC

MPC is working with groups like the Northwest Water Planning Alliance and DuPage Water Commission to provide elected officials and public works employees from small utilities with tools to simultaneously implement water conservation measures and raise revenue. As I covered in a recent blog post, one way for small utilities in our region to tackle this financing problem is to implement full-cost pricing. Full-cost pricing utilizes a two-part rate structure with a fixed charge and a variable charge. This pricing scheme allows utilities to have their fixed costs covered even if demand decreases due to higher prices. In addition to implementing full-cost pricing, there are other tools available to finance water infrastructure projects in Illinois like performance contracting or utilizing loans from the Drinking Water State Revolving Fund. The Clean Water Initiative has recently expanded the pool of money available through this state revolving loan fund from $3 million annually to $1 billion. Applications are now accepted on a rolling basis, and the system is weighted to give communities with immediate public health concerns and financial hardship priority.

Another option is for smaller utilities to join forces. Northeastern Illinois has a handful of interjurisdictional water management collaboratives, such as the Central Lake County Joint Action Water Agency, Northwest Water Commission, and the DuPage Water Commission. Currently, most communities are on their own, even though the water resources they rely on often don’t match up with municipal boundaries. In 2014 MPC will research our region’s experience with these collaboratives to determine whether they have proven effective mechanisms for helping smaller utilities manage their water and financial resources more effectively.

As the Columbia paper highlights, the cost of consuming water is likely to rise for everyone as water becomes scarcer and infrastructure begins to decay. MPC has been helping local communities manage their water supplies for nearly a decade and will continue to work with communities to implement effective policies and practices as the era of artificially inexpensive drinking water comes to a close.

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