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

Replacement of aging water utility infrastructure has emerged as a growing concern for water service providers nationwide. When utilities delay and can no longer avoid replacing older facilities, the cost of rebuilding or replacing them frequently shocks unsuspecting rate payers. The ensuing conflict between rate payers and water providers is very painful to many communities – even those with larger systems. However, infrastructure replacement problems can appear insurmountable for smaller water providers.

The US Government’s EPA recently reported that water utilities providing service to fewer than 3,300 users dominate the water service industry in the US. In fact, small utilities serving fewer than this number of customers constitute almost 85% of all the water systems nationwide. On a per customer basis, the cost of replacing infrastructure for small utilities then can be astronomical. The small town of Lebannon OR, when faced with replacing its very old water treatment plant, determined that rate payers would be subject to a huge, 60% increase in fees to cover the costs.

When presented with such high cost for replacing important equipment and infrastructure, what should a small utility do? There are no simple answers. The seemingly endless supply of grant dollars for these systems has all but disappeared, meaning that in order to avoid a 60% rate hike, even small utilities have to plan ahead for their replacement needs. Back in Lebannon, OR, the old water treatment plant had been in service since 1946! Running at capacity, the plant was only able to stay one day ahead of demand. It is not surprising that the facility would need to be substantially upgraded or replaced at some point – at least some time around the 64th year of service.

The costs for these replacements and upgrades can be reasonably estimated by professional engineers. With some foresight, small communities can begin implementation of smaller rate increases to establish a cash fund as well as build debt capacity for financing the replacement costs. Smaller utilities and communities that lack ready access to credit markets and don’t possess much reserve cash, the need for advance planning like this is even more critical.

Avoiding massive increases to service rates can be done with solid financial planning. Water utility consultants are available to help in the process, but many utilities can begin without extra help. However, utility managers must first recognize the need to plan. Understanding the fixed assets and accurately estimating their remaining useful service lives is critical. Acquiring estimates for replacement is also possible without too much external assistance. With this information in hand, the water service provider can project a reasonable expectation of what the future holds for its existing facilities and what it would cost to replace them.

As facility-life expectancy and replacement costs are understood and at least estimated, informed decisions can be made that may preclude imposing massive rate hikes on consumers. Utilities can then work within the community to research the best way to fund the replacement project and to set realistic expectations for future fee increases. Will most utilities have to increase service fees? Most likely, the answer to this is ‘yes.’ Although the costs are expensive, preparing in advance to replace aging infrastructure and establishing a solid financial plan to guide funding, utilities can avoid having to inform customers of sometimes staggering and unexpected fee increases. Utilities that wait until an integral facility becomes inoperable have narrowed their options to zero and are inviting trouble.

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

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Category: Finance