LOST IN TRANSLATION
Linguistically, New Guinea is one of the most diverse areas on earth with over 1,000 distinct languages and dialects, all within an area slightly larger than Texas.1 Across these languages and dialects, there are a staggering 1,190 different words for water.2
What is even more striking is that across that same area, there are only five representations of “money” and only three variants for “value.” And most astonishing of all, there is no word for “payment.” Setting aside the fact that the tribal culture in New Guinea has retained significant isolation from western influence, the microcosm represented within the data can serve as an analog for those of us working in the western water world.
With continued declines in water demand, mandated conservation (demand destruction) and overall increases in the costs of service, utilities are in an increasingly vulnerable financial condition. Despite this, utilities often struggle with communicating the “value” of water to their constituents, who most frequently focus on the “cost” of water. Like the New Guineans, customers and utilities are speaking different languages with respect to water—we lack the concepts and words necessary to convey the right sentiments and meanings. As a result of that failure to communicate effectively, utilities believe that water is “undervalued” and customers believe that “water costs too much.”
THE LEXICON OF PAYMENT
The truth is that when customers pay for “water service,” they are rarely paying for the H2O molecule itself. They are actually paying for treatment and conveyance—otherwise known as the “delivery charges” associated with water service. While some utilities may face charges for the rights to withdraw or abstract water that are then passed on to customers, those fees again do not represent a payment for the molecule. Rather, they fund water allocation entities.
Coupled with the fact that in most cases utilities are operated as enterprise funds within cities or as full-cost recovery regulated monopolies, the call for increased rates to solve water (and financial) volatility and scarcity is an empty prayer. The molecule itself has no intrinsic cost.
THE ETYMOLOGY OF RATES
In the municipal environment, water rates are set by councils based on cost of service analyses that take into account the operational expenses, the current and proposed capital expenditures and debt service—in an effort to allocate costs to consumers commensurate with their water use. Municipalities and rate consultants need to predict future consumption to make this method effective, which is as good as guessing as costs go up.
In the investor-owned utility world, rates are established by public utilities commissions (PUCs), through an administrative law proceeding. During this proceeding, the utility justifies proposed rates based on the operating expenses in the “test year”, a regulated return on “prudently installed” capital (rate base) plus an allowance for depreciation. While the language of the rules for PUCs vary across jurisdictions, in general, these PUCs seek to balance the customers’ interest in affordable and reliable utility service with the utility’s interest in earning a fair profit. For example, the Arizona Corporation Commission—the PUC for the state of Arizona—is constitutionally bound to “prescribe…just and reasonable rates and charges to be made and collected, by public service corporations [utilities] within the state for service rendered therein.”4 “Just and reasonable” are open to debate in rate hearings before the PUC, but rates are typically determined solely on real costs that have existed in the past.
And that is the dilemma. Rates are established on the basis of actual historic costs—and if a utility is lucky, perhaps with an eye to the future investments required to continue to operate the utility safely and in compliance with regulations. But in most cases, rates cannot—either legally or constitutionally—contemplate the impact of unquantifiable events.
Further, rates cannot be arbitrary. In April 2015, the California Fourth District Court of Appeals issued a decision which found that the tiered rates proposed by the City of San Juan Capistrano did not comply with Proposition 218’s requirement that charges reflect “the cost of service attributable to” a parcel because there was a lack of support for the discrepancy between the rates assigned to the price tiers.5 In essence, the Superior Court found that without an attribution to costs, the City was not legally entitled to charge for it.
A DYNAMIC DEFINITION
Even assuming that a charge for the molecules or a potential scarcity premium for the molecule could be conjured and implemented, the data suggests that utilities rarely recover the full intent of a rate increase in revenue—due in large part to the elasticity of demand once a threshold price is reached.
When water rates were fairly low, a rate increase would have very little impact on consumption. Customers would simply accept those small increases in their water bill because the impact on their monthly budgets was negligible. However, as rates have continued to rise, that is no longer the case.
For those utilities where customers have reached an elastic response to rate increases, rate increases now have a noticeable impact on consumption. As the cost of water increases (particularly as it relates to the overall portion of a customer’s monthly expenses), the customer responds by consuming less. While this is great for water resources in general, it is not so good for the utility.
Since the cost of the physical resource is not included in rates, the customer’s “savings” translate only into savings of the marginal cost of water delivery for the utility. So the costs for the utility are essentially the same, but revenue is declining as customers use less water.
This exposes the real structural financial frailty that exists in our utilities—and raising rates cannot solve this problem. In fact, it can actually make the problem worse.
TRANSLATING DATA INTO REVENUE
As with all revenue constrained businesses, water utilities need to drive efficiencies into their operations and derive value within the margins. By maximizing the value of water inherent in our utility data and operations as well as adopting a less expensive means to deliver services and ensuring the collection of current, authorized revenue streams, utilities can find the financial stability and resources to meet the challenges of the future.
The FATHOM bundle of services including Advanced Metering Infrastructure with FATHOM MDM (Meter Data Management), FATHOM CIS (Customer Information System), and Revenue Management and Customer Care offer utilities the opportunity to obtain best-in class technology and services—resulting in significant savings. In addition, by getting the data right, and keeping it right, our utility partners have benefited from substantial increases in revenue—without raising rates. Adding the FATHOM U2You Customer Presentment portal, utilities can provide their customers direct insight into how their consumption patterns are impacting their cost of water. And with the notifications and geospatial comparisons available, they can understand their consumption in context.
Most importantly, we can use these tools to finally speak one language when it comes to water and rates.
4The Constitution of the State of Arizona, Article 15§3
5CONSERVATION PRICING, PROPOSITION 218 AND REAL-TIME DATA, FATHOM Drought Watch, Vol. 1, Issue 7, 22 May 2015 (http://www.gwfathom.com/download/1549/)
6Jeff Hughes, UNC Environmental Finance Center (http://www.efc.sog.unc.edu/sites/www.efc.sog.unc.edu/files/HughesCascadePresentation_0.pdf)