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Posts Tagged ‘utility costs’

A major concern for water utilities nationwide is the intensifying need to replace old and aging infrastructure. However, utility managers that delay replacement of older plant and equipment can be setting their customers up for shocking rate increases. The subsequent conflict between payer and provider is unpleasant at best – even for communities with larger water systems. For smaller water utilities, though, infrastructure replacement problems can be – if not catastrophic – financially painful for the community.

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.

Major capital replacement projects are unavoidable. As infrastructure nears the end of its useful life, the facility almost always requires upgrade or replacement. So what is the best way for small providers to handle aging infrastructure? Dollars previously coming from grant funding have disappeared, and the possibility for rate hikes in the 60% range to cover replacement costs are a real possibility for water providers that have not planned for the expenditure. Returning to Lebannon, OR, the water treatment plant in need of replacement was originally constructed in 1946. After 64 years in operation, the plant was rapidly nearing the end of its service-life and clearly required substantial improvements and upgrades or even complete replacement.

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.

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 across the country improve operations and improve cash flow handling processes in challenging economic times. Contact the Water Utility Consultants and Wastewater Consulting Experts at StepWise today! You are welcome to reprint this article – but get your own unique content version here.