Balancing environmental concerns and customer rates

Water conservation can paradoxically drive up water rates due to several interconnected economic and infrastructural factors.

Firstly, water utilities often have high fixed costs associated with infrastructure maintenance, treatment plants, and distribution networks. These costs remain constant regardless of the volume of water consumed. When consumers use less water due to conservation efforts, the utility’s revenue decreases because they are selling less water. However, the fixed costs of operating and maintaining the water supply system do not decrease proportionately. To cover these costs and ensure the utility remains financially viable, water companies may need to increase rates.

Moreover, water conservation often involves investments in infrastructure upgrades and the adoption of new technologies. Implementing these conservation measures, such as installing more efficient fixtures, repairing leaks, and updating treatment facilities, can be expensive. These initial costs are typically recovered through increased water rates over time. Although these investments lead to long-term savings and sustainability, they require upfront capital that must be recouped.

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Working in a state or local regulatory environment

 Another contributing factor is the regulatory environment. Water utilities are often subject to regulatory frameworks that mandate conservation but also require utilities to maintain financial health. Regulators may approve rate increases to ensure utilities can cover their costs and continue providing safe and reliable water service. This regulatory support for rate adjustments can help utilities manage the financial impact of reduced water sales.

Lastly, there is a psychological aspect to consider. When consumers see their water rates increasing despite using less water, they may perceive conservation as less beneficial or even counterproductive. However, the underlying economic dynamics necessitate these rate adjustments to maintain the balance between sustainability and service provision.

While water conservation is essential for environmental sustainability and long-term resource management, it can drive up water rates due to the need to cover fixed costs, fund infrastructure improvements, comply with regulatory requirements, and ensure the overall financial stability of water utilities.

About Russ Hissom - Article Author

Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.  

Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.

The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.