Making the Grade: How water rates can improve our marks - Metropolitan Planning Council

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Making the Grade: How water rates can improve our marks

Flickr user Alex Cheek (cc)

Water main breaks happened in record numbers across the region this winter demonstrating the lack of resiliency of our water infrastructure systems.

The American Society of Civil Engineers recently released their 2014 Infrastructure Report Card for Illinois. While slight improvements were made in some areas since the last report card came out in 2010, the state has a long way to go. The report assigned Illinois’ drinking water infrastructure a C- and wastewater infrastructure a D+. The organization estimates that the state will need to invest $19 billion into drinking water systems and $17.5 billion into wastewater systems over the next 20 years to replace aging systems and create adequate capacity to accommodate population shifts.

The economic and public health of the region depends upon having resilient, sustainable water infrastructure. We all know that the state of our infrastructure is largely unacceptable—think back a few months to the broken water mains and ice covered streets—but how does the region begin to address these staggering difficulties? The good news is that there are smart people already tackling these issues, and there are research-driven approaches that can be undertaken simultaneously to increase the financial and environmental sustainability of our water systems. These tactics include water conservation, which delays the need to expand water services and frees up that funding for system upgrades, and taking advantage of state programs like Illinois’ Clean Water Initiative.

However, the biggest driver of system sustainability is water rates. Water rates are the primary revenue source for water systems in most communities. According to the Chicago Metropolitan Agency for Planning, the average water bill in northeastern Illinois is around $20 per month. With water rates this low (~$0.004/gallon), it’s not surprising that water utilities reported funding, aging infrastructure and leakage as some of their most pressing challenges. Utilities that rely upon infusions from General Funds to maintain operations are not financially sustainable and should raise water and sewer rates to reach—and hopefully exceed—full cost recovery to adequately execute projects such as replacing outdated infrastructure or completing backlogged repairs.

The University of North Carolina’s Environmental Finance Center has developed free, interactive water rate dashboards for seven states and Canada that allow utility managers and elected officials to compare their rates to others and evaluate potential impacts of rate increases across customer classes (for example industrial, agricultural, single-family, multi-family, etc.). A dashboard for Illinois doesn’t yet exist, but the tool is still instructive. A financially sustainable utility should aim to have all of the pointers in the light green or dark green portions of the dials. As a rule of thumb, the affordability threshold is 2 percent of median household income.

UNC—Environmental Finance Center

Let’s look at a demonstration using the North Carolina dashboard. Select the “Low Rates, Low OR” example. This fictional utility has low water rates and a low operating ratio (operating ratio = operating revenues/operating expenses; see the Cost Recovery dial). An operating ratio of less than one indicates financial trouble, a ratio of one indicates a breakeven scenario and a ratio of greater than one indicates there are funds to be used for capital projects. Even a rate increase of 50 percent with consumption at the 5,000 gallon per month level—common for households—leaves the utility with an operating ratio in the red end of the spectrum. While this demonstration is based upon North Carolina-specific data, it puts the doubling of water rates in the City of Chicago and similar increases in suburban communities into perspective. Despite some backlash, these rate increases are totally necessary and overdue.

Water has been undervalued in this region for too long. Keeping water and sewer rates low to avoid community pushback just increases the backlog of infrastructure projects. As this past winter demonstrated, our water infrastructure is outdated and definitely not resilient. We can no longer afford to spend less on water than we do for amenities like cell phone service and coffee every month. It’s time to value water and water infrastructure as the economic necessities that they are.


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