Handling Replacement of Water Utility Infrastructure – Without Surprise Fee Increases!

By Jason Mumm | February 23, 2010

As water and wastewater infrastructure ages and deteriorates, the cost of replacing it all becomes a growing concern. Replacement costs can be astronomical and, and it doesn’t help that many utilities have not planned for the inevitable expenditures for replacement. When providers cannot postpone replacement of this infrastructure, the high costs come as a shock to previously oblivious rate-paying customers. The resulting conflict between providers and ratepayers can be enough to cause gnashing of teeth for even large, well-heeled utilities. Unfortunately, the problem can occasionally be insurmountable for small water systems.

Recently, the Environmental Protection Agency reported that water utilities that serve fewer than 3,300 users constitute nearly 85% of all water utility and provider systems in the US. In relative terms, the cost on a per customer basis to replace important infrastructure ranges then between large and unbelievably large. Lebannon, Oregon recently researched replacement costs for its extremely old water treatment facility. Their study and determined that rate payers would have to absorb rate increases of 60% to cover the costs. It is an example of how major capital replacement costs in small communities can lead to very significant increases in consumer water rates.

As infrastructure ages, facilities need to be replaced. So what is a small water utility to do? Unfortunately, there are no easy or simple methods to handle it. Grant money for these systems has been all but eliminated, leaving rate hikes in the 60% range a real possibility for those utilities that have not planned ahead. Back in Lebannon, Oregon the system to be replaced was put into service in 1946. It is not surprising that this plant is nearing the end of its useful life. After 64 years of service, most facilities can be expected to require substantial upgrades.

Costs for upgrades and replacement can be estimated by professional engineers. Small communities with some foresight can initiate smaller scale rate increases to build up a cash fund as well as to establish debt capacity to finance replacement costs. This type of ‘forward planning’ is essential for small utilities and communities that may not enjoy reserve cash funds or ready access to credit markets.

Financial planning is essential to avoiding the surprises that accompany massive service rate increases. Water utility consultants provide these services, however most utility managers can begin without consulting help. Recognizing the need is step one. Understanding what the fixed assets situation is, where each facility is in its service life, and when each was put into service is important. Then, reasonable estimates can be made regarding expected timing of facility replacements and the associated costs for each replacement project.

Only at the point when facility life-span is understood along with replacement costs, can reasonable and informed decisions be made. The utility can then research the need for an increase to fees and rates and set expectations for the user community. Will most utility providers have to increase future fees? Many will. But by preparing to replace older facilities now and having a financial plan in place to handle the situation, smaller water providers can avoid the unpleasant surprises that accompany massive fee increases. Waiting until facilities become obsolete only invites difficulty and limits available options.

StepWise Water Utility Consultants help water utilities across the country improve operations and improve cash flow management in challenging economic times. Contact the Water Utility Consultants and Wastewater Consulting Experts at StepWise today!

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