On Tuesday, March 29, Denver was treated to a well-run and highly interesting conference sponsored by the Jewish National Fund (JNF) regarding our most precious resource…water. The speakers and panelists included well-known and highly regarded authors, politicians (including Governor Hickenlooper), farmers, water technology experts (some representing exciting Israeli technologies), and water utilities. The surprisingly well-attended event attracted hundreds of attendees representing a wide swath of industry professionals, engineers, environmentalists, ancillary businesses, and lay people.
As I was sitting there, absorbing the vast amount of data, learning about water-saving solutions and hearing conservation anecdotes, I got to thinking practically about our water future. Specifically, how much is all of this going to cost me, really? Am I willing to pay double, triple, or even ten times what we pay now for safe and reliable water?
My perspective is a somewhat unique one. I own and manage water utilities for a living. My income is dependent on people paying their monthly water bill. Most of my utilities are in Arizona but all of them serve customers in an arid region, many facing major water shortages and supply challenges, just like us here in Colorado. And all of my utilities are subject to regulatory oversight. That means that the prices we charge our customers are, by law, required to be reviewed, tried, and approved by the state agency charged with utility oversight (the Arizona Corporation Commission – in Colorado, it’s the Public Utilities Commission).
State PUCs are important for the protection of the public interest. It’s a check and balance on a business/ industry that typically does not have any competition. That said, as is the case with any governmental bureaucracy, the process of obtaining approval for new financing or requesting a rate increase is expensive, time consuming, highly political, and often self-defeating.
Let me explain: State PUCs are inherently political bodies of elected or appointed officials placed in a position of significant power and control, but beholden to three disparate stake-holders. The first, and most obvious stakeholder is the customer, or end-user. No customer likes to see their bills go up, no matter the reason. Politicians placate their constituents by making the approval process difficult and costly (high barrier to entry = less frequent rate increase requests), and by offering the customers ample opportunities to express their objections to higher rates in public hearings. The second stakeholder is the utility. The PUC is commensurately obliged to make certain that any decision allows utility companies not only survive, but thrive. By statute, utilities are mandated to recover sufficient revenues to cover expenses and provide a reasonable return on investment. Finally, the third stakeholder is the water resource itself. Regulators and politicians alike have learned what many learned at the Denver JNF water conference; our water supplies, at present levels of consumption, will not be sufficient to absorb the expected population growth here in the arid Southwest. How, then, does a PUC encourage conservation? One typical approach is to approve rate designs that create a financial incentive to conserve water. In this model (called tiering), customers that use more water than is deemed reasonable will pay a premium for the “excess” amount of water consumed. In a minute, you’ll see the fallacy of this approach. Either way, the job of the regulator to balance these three stakeholders’ interests is a nearly impossible balancing act.
So where, in this discussion, lies the paradox? It’s actually fairly simple, now that you understand the different interests and stakeholders. The cycle starts out with the utility who decides they need to charge customers higher rates. This might be because the utility company needs to replace aging infrastructure, or because input costs (i.e. labor, electricity) have increased. They go to the state’s PUC, and file an application for higher rates. The PUC generally supports the increase, but is obligated to allow for customers to weigh in, which they do, and in large numbers. Busses of customers arrive at the commission hearings, demanding the PUC hold rates steady, as they, themselves are on a fixed income, and can’t afford it. Water is a right, they insist! Some customers with lots of time on their hands go even further, filing formal intervention requests, and become a party to the proceedings. They are granted the right, and can/ do present evidence and alternatives for the PUC to consider. With intervenors involved, the hearings take days, sometimes weeks. In the end, after an eighteen month application process, multiple hearings, expert witnesses, and hundreds of thousands of dollars in legal fees, the commissioners approve higher rates, though not as high as the Company’s request. Commissioners are political beings. They would never want to be seen as pandering to business, even if the facts justify the increase. Commissioners also want customers to conserve (remember our third stakeholder – the water resource itself). So they devise a tiered rate structure that penalizes users who consume more than normal. But the tiers don’t raise rates on the low water users, a nod to the complaining busloads of constituents. The cycle continues as new rates take effect and customers get their bills. Most don’t like paying more, and then get serious about how they can conserve water. They buy low-flow toilets and fixtures, fix leaks, and convert their lawns to rock gardens. Their bills go down along with consumption. Mission accomplished, right?
Now comes the utility again. A year later following new rates, and consumption throughout their system has been reduced by 25%, but revenues remain flat. Of course, the PUC says they didn’t anticipate this. The new rates were set to encourage conservation, but the financial models they rely upon presume consumer behavior wouldn’t change. How does that make sense? Now the utility is in more trouble than it was initially. It spent the money on new infrastructure, spent the money on the rate case, and was awarded new rates. But the net effect, the paradox, is they’re back in applying for even higher rates once again. Busloads of angry customers return. Commissioners are frustrated and the cycle restarts. At least the lawyers are happy!
What do I suggest, and how can this paradox be avoided? I believe it’s a cultural mindset. Customers and regulators need to understand and expect that water’s increasing scarcity will cause prices to rise…significantly. They should make every effort to conserve, but also realize that reducing individual consumption does not necessarily mean a lower water bill. All three stakeholders’ interests need to be considered for our water future to be secure. It’s a good sign that the water company makes money. Customers should insist that their water utility be a healthy, financially stable enterprise that can attract investment, and accommodate future growth. I dream of the day customers arrive by the busload to support their water provider, and its request for higher rates…now that would be a paradox!
Jason has been developing and managing independent water distribution and sewer treatment systems for over 20 years in Arizona and the southwest US. He founded Denver-based Pivotal Utility Management in 1999 and JW Water Holdings in 2013, and acts as managing partner of both entities. He currently owns and/or provides management services for thirteen water and sewer systems serving nearly 7,000 customers.
Jason holds a BA in International Affairs & Economics from the University of Colorado, and a Masters in Business Administration (MBA) also from the University of Colorado.