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Financially Healthy Utilities: Going Beyond the Price of Water and Wastewater

#Featured Articles,
#Data
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09/15/21
Glenn Barnes, Director, Water Finance Assistance

Jersey WaterCheck was created by Jersey Water Works (JWW) to tell the story of our state’s water and wastewater infrastructure needs. One of JWW’s shared goals is Effective and Financially Sustainable Systems. JWW aims for adequate and affordable utility operating budgets and capital investment, which will result in systems that operate efficiently and in a state of good repair. That way, utilities can efficiently deliver quality water services that meet community needs.

Rates charged to customers are the primary form of revenue for most water and wastewater utilities.  Ideally, those rates should cover the full cost of providing water and wastewater services to that community today and into the future.  That includes covering the cost of day-to-day operations, needed capital improvements, debt service payments, and contributions to reserve funds to be used for emergencies and future capital needs.

Jersey WaterCheck includes a slew of financial metrics collected under the subgoal of Adequate and Fair Revenue.  The metrics examine whether individual utilities have raised the funds required to make appropriate capital investments and ensure proper operation and maintenance in a cost-effective, equitable manner that treats ratepayers fairly. Additionally, metrics identify whether utilities have programs authorized and established to ensure affordability.

The metric that may draw the most attention is the average monthly price of water for a household that uses 45,000 gallons of water and wastewater a year, which is typical for the average New Jersey family.  At a statewide level, the average price of water is $31.94 per month for a family that uses 45,000 gallons, and the average price of wastewater is $28.30 per month.  But, an examination of the system-level data reveals a huge range in average monthly prices.

On the low end, some utilities are able to provide 45,000 gallons of water or wastewater service for an average price of under $10 per month.  On the high end, that same volume of service is priced at $50 per month or more.

An obvious question comes to mind—why is there such a discrepancy in price?  After all, shouldn’t a gallon of water or wastewater cost the same no matter which utility is making or treating it?  While that notion may seem logical, it is actually wrong.  Many factors influence the price of producing and delivering safe drinking water, and many factors influence the price of collecting and treating wastewater.   For example, the salaries paid to employees, the terrain of the community, the quality of the source water, and how the utility is regulated can have a significant impact on the cost of operations. As a result, the full cost of providing water and wastewater service today and into the future is unique to each system.  In other words, we expect the price of water and wastewater to vary widely from community to community, which makes head-to-head comparisons of water and wastewater prices unhelpful.  

Nevertheless, if high prices are necessary to cover all costs, they can be a burden for lower-income customers.  And for some low-income customers, even relatively low monthly prices can be burdensome.  Jersey WaterCheck features two metrics related to whether customers can afford the water and wastewater services offered in their communities.  The first measures the percentage of households that may struggle to pay water and sewer utility bills.  This metric is based on research from “A New Jersey Affordability Methodology and Assessment for Water and Sewer Utility Costs” (Van Abs, 2021), which compares 2020 water and sewer rates for both systems to the income of households at the top of the lowest quintile (20th percentile) of household incomes for each area.  Statewide, the report estimates that about 20.6 percent of New Jersey households may have difficulty paying water and sewer bills in the absence of subsidies.  At an individual utility level, those percentages vary widely, from under 5 percent of households to greater than 67 percent of households.  Through a utility survey, Jersey WaterCheck collected information on which utilities have residential customer assistance programs to address short-term water or wastewater affordability, but the sample size is too small to draw any broad conclusions about the prevalence of these programs statewide.

The average monthly prices in Jersey WaterCheck show what utility customers were paying for service in 2020.  But, these metrics alone do not give us any indication of whether those prices cover the full cost of providing water and wastewater service for the long term—what the customer should be paying to allow the utility to recover its full costs and to remain sustainable over time.  Is a utility able to offer low prices because it is operated very efficiently, or are prices low because the utility is neglecting necessary capital improvements?  Likewise, does a utility with relatively high prices need them to cover higher per customer costs of operations, or is the utility wasting money?  

Jersey WaterCheck offers more metrics that help solve this puzzle, all of which are found under the Wise Management and Spending subgoal.  The first is operating ratio, which calculates whether the utility generates enough revenue each year to cover its day-to-day expenses.  Currently, Jersey WaterCheck has data for only 31 utilities for operating ratio, but almost all of these utilities did generate enough revenue to cover operating expenses for the most recent year that data is available.  The second set of metrics is related to capital investment.  While determining the amount of annual investment in water and wastewater infrastructure is tricky (see our recent blog post on the topic), Jersey WaterCheck also looked at whether utilities certified that they have an Asset Management Plan that met NJ Water Quality Accountability Act requirements.  Statewide, 82 percent of utilities have such a plan, which will make it easier to anticipate future capital needs and set rates accordingly.

The appropriate way to judge water and wastewater prices, therefore, is by measuring the overall financial health of the utility that is charging them instead of comparing prices between  utilities that may face a vastly different set of expenses and capital needs. Jersey WaterCheck’s metrics are a great place to start.  There are many more financial metrics that utilities can calculate, including ones that examine whether a utility can pay its long-term debt, whether it can cover its current liabilities, and how long it can operate on its cash reserves.  The Environmental Finance Center at The University of North Carolina has a free spreadsheet tool that utilities can use to calculate these ratios with data from annual financial statements, and it also has a whiteboard video explaining the ratios in more detail.

If utilities discover that the financial metrics they calculate are below industry standards, there are steps they should take to improve their financial health.  For example, utilities can find ways to lower expenses, or they can adjust their pricing and rate structures to generate additional revenue.  Financial health is ultimately not just about expenses on a balance sheet.  It’s about the utility’s ability to protect the public health of its customers for years to come.  

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