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Financial Focus Shifts From Controlling Operations Costs to Replacing Aging Infrastructure
Author(s) -
Stannard William,
Warmath Lex
Publication year - 2004
Publication title -
journal ‐ american water works association
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.466
H-Index - 74
eISSN - 1551-8833
pISSN - 0003-150X
DOI - 10.1002/j.1551-8833.2004.tb10677.x
Subject(s) - commission , competition (biology) , finance , service (business) , government (linguistics) , business , water utility , rate of return , population , water conservation , environmental economics , economics , water resources , water supply , engineering , marketing , ecology , demography , environmental engineering , sociology , biology , linguistics , philosophy
This article discusses the changes and advancements over the last 90 years in the area of water utility finance and pricing. The article mentions how in 1914 a relatively small proportion of the nation's population was served by municipally or investor‐owned water systems, and water meters were not widely used. Customers paid flat rates that did not reflect their actual water use or property taxes. Municipally owned water systems were components of larger government functions as opposed to the independent and self‐sufficient enterprises of today. The article outlines the evolution of rate‐setting concepts, and discusses how the court case of Federal Power Commission v. Hope Natural Gas in the 1940s established the concepts of return on rate base and embedded average cost as appropriate criteria for setting utility rates. The article details how AWWA Manual M1, Water Rates, published in 1954, established a capacity‐based, cost‐of‐service approach for setting water rates, known as the “base‐extra capacity” allocation method. Then, the costs associated with the passage of the Safe Drinking Water Act in 1974 put intense pressure on water rates. System development fees were introduced in the 1980s to pay the costs associated with serving new customers. The growing need for water conservation resulted in pricing structures that provided an economic benefit to customers who limited their discretionary use of water. The 1990s introduced utility competition through privatization, and in the 21st century the focus is now on reinvestment in aging infrastructure.