The good old days. Remember when movies were just $0.20, when the town of Vail was tiny, and when “conservation” wasn’t part of your vocabulary? Or remember just 10 years ago when water bills were half what they are today?
Things have changed. As water services have expanded to meet demand, so too has the cost of those services. “There is no difference between a water bill, an airline fare or the cost of McDonalds,” says Peter Binney, manager of sustainable infrastructure for Merrick & Company and former director of Aurora Water. “People see costs going up and they think, ‘What the heck is going on?’”
Water rates have surged in the past decade, doubling across much of Colorado. Nationally, according to the American Water Works Association, water and wastewater charges for 1,000 gallons of water have increased annually by 4.7 percent and 4.9 percent respectively—a rate nearly double the annual Consumer Price Index increase of 2.5 percent. (By comparison, the average electricity rate in Colorado increased by just 1.6 percent between 1990 and 2011.) At the same time, the roles of water and wastewater utilities have changed, and the environment they operate in is wrought with expense. “I don’t think we’ve done a good job of making people understand, appreciate and support why our water bill is what it is,” Binney says.
“The ability to provide low-cost reliable service is absolutely essential to a community’s quality of life and economic viability,” – Wayne Vanderschuere
The charges on customers’ water bills incorporate more than just the volume of liquid that pours from the tap or flushes down the toilet. They cover the cost of hiring and training staff, building and maintaining infrastructure, installing improved technology to meet regulatory requirements, paying for electricity to pump and treat water, providing water for firefighting and other emergency services, protecting existing water sources and acquiring new ones, planning for drought, and more.
Water utilities exist to meet community needs; many are public entities. Some, like Aurora Water, operate within the city government structure and are governed by the city council. Others, like the Greeley Water and Sewer Department, are governed jointly by the city council and an appointed board of directors. Then there are the special districts, like the Eagle River Water and Sanitation District, quasi-municipal corporations governed by an elected board of directors. In all cases, water and wastewater utilities fill a necessary role across Colorado. “The ability to provide low-cost reliable service is absolutely essential to a community’s quality of life and economic viability,” says Wayne Vanderschuere, general manager in water services at Colorado Springs Utilities.
Keeping Pace With Growth
Early public water systems in the United States expanded substantially in the early 20th century, largely due to fire danger. Cities were highly flammable and needed a consistent, high-pressure water supply capable of dousing fires. Giant infernos in San Francisco and Chicago provided the impetus for resizing pipes across the country. Today’s engineers continue to size pipes in order to meet demand for firefighting, as opposed to drinking water or toilet flushing, says David LaFrance, executive director of the American Water Works Association. Public water systems have since evolved further, making our water safer to drink, and treating our wastewater so thoroughly that many water-borne diseases have been virtually eliminated.
“It’s a question of what kind of community do you want to live in? A community that can suit your needs?” – Peter Binney
In many cases, utilities have innovated and allowed communities to grow, Binney points out. Look at Los Angeles in the 1920s and 1930s, Las Vegas in the 1970s and 1980s—the water systems they had in place were stifling growth because they were too small, but the communities didn’t let infrastructure define them; they built ample water systems to meet their needs.
The same was true in Colorado’s Eagle River Valley, where the Eagle River Water and Sanitation District has been consistently growing since the 1962 founding of Vail. As the resort community matured, the district had to keep pace. “We were having to make large investments in infrastructure,” says Becky Bultemeier, finance manager for the Eagle River district.
Now, Front Range cities like Aurora continue to face the realities of providing water— and collecting wastewater—for a large and growing population. “There was no question in the minds of the mayor or chambers of commerce that as people wanted to locate there [in Aurora], they were going to be able to provide the services,” Binney says. Aurora Water had to figure out how to meet the demand, and the expanded infrastructure meant an increase in rates. “It’s a question of what kind of community do you want to live in? A community that can suit your needs?”
The city of Grand Junction made a different decision when, in the 1950s, it chose not to expand its system. People outside city limits wanted to connect with the city’s water system, but Grand Junction didn’t think there would be enough growth in the Grand Valley area to warrant running water lines to those outliers, says Rick Brinkman, Grand Junction’s water services manager. In 1956, those without water service formed a conservancy district—Ute Water. In the 1970s, Clifton Water District also secured a more reliable source from the Colorado River. Today, the three systems are connected, but abut one another, limiting each other’s growth. “We just got surrounded,” Brinkman says. “We [Grand Junction’s water services] haven’t grown very much because we’re pretty much landlocked.”
Investing in Tomorrow
Just as communities decide on growth for public water systems and utilities respond to that direction, the public, water boards and city councilors strive to keep water rates in check. Public water entities are nonprofits, and because they operate in a monopolistic setting, there are some controls placed on their finances. Many have some ability to establish funds that roll over from year to year, used to stabilize revenues or build up capital for infrastructure projects. But, for the most part, they operate based on their costs of service in a pay-as-you-go system. Ultimately, the vast majority of the revenue a water utility uses to provide for the community comes from customer water rates. “Rates,” reiterates Greg Kail, director of communications for the American Water Works Association. “That’s how they pay for their operations and manage their assets into the future.”
In addition to rates, utilities charge tap fees when a new house or business comes online. In theory, tap fees should cover the costs of expanding water and wastewater systems, but big projects still have to be financed in advance. Municipal systems typically fund major repairs and other infrastructure work by issuing bonds that are repaid over time.
Since the economic downturn, many cities haven’t experienced ample growth to finance the infrastructure they built to accommodate expanding populations. “There are no more tap fees coming in; that’s dried up,” Bultemeier says of the Eagle River Valley. So, to service its debt, the district relies more heavily on existing customers. “That puts pressure on our rates.”
The American Water Works Association conducts a state-of-the-industry survey each year, speaking with about 2,000 utility professionals. The same issues regularly rise to the top: water infrastructure needs, regulatory challenges and the ability of utilities to finance those needs. Those same issues weigh heavily on utility managers in Colorado, and have been magnified in recent years by the challenging economy.
Much of Colorado’s infrastructure was built 30 to 50 years ago, or earlier. In the meantime cities have been able to rely on that infrastructure without making additional large capital investments. “Our generation has not experienced that cost before,” Kail says. “It was our parents, our grandparents, our great-grandparents who put most of the pipes in the ground. We’ve arrived at a new moment in our country’s history.”
The severity of the need to update infrastructure varies by utility. Vanderschuere estimates that about 75 percent of Colorado Springs Utilities’ budget is allocated for repairing and modernizing infrastructure. Some of the city’s infrastructure dates back to the 1800s, while the most recent segments were built between the 1950s and 1970s. Colorado Springs is also looking toward the future; the utility is in the process of building its Southern Delivery System, laying more than 50 miles of pipe to deliver water stored in Pueblo Reservoir northward to Colorado Springs, Fountain, Security and Pueblo West. The project’s first phase will cost about $1 billion, to be paid over 40 years by customers and developers through increased water rates and tap fees.
The job of meeting demands for growth, however, is largely viewed differently by utilities than it was 50 years ago. Since large water projects have become increasingly difficult to permit, cities are putting more effort into managing demand—focusing on conservation and efficiency to better use available water. Not only is conservation a public expectation, it comes back to cost, Binney says. Large capital projects cost hundreds of millions of dollars. “Public ratepayers, policy makers, city councilors…they expect you to find ways to solve problems so you don’t go through the rate increases,” Binney says. “Water conservation is the minimum point of entry to actually running any utility now. And it’s a good thing.”
At the same time, water conservation poses its own set of financial challenges. Utilities need a budget to staff conservation programs, fund outreach campaigns and finance rebates. When conservation is effective, water suppliers collect less income because consumption drops, while costs to utilities to continue providing services remain fixed or increase over time. “I call it the near-perfect storm,” says Bultemeier. “We’ve spent years telling people, ‘Don’t buy our product,’ and we’ve built facilities for growth. Now people are buying less and the growth is coming slower than projected, so our current customers have to pay those fixed costs.”
Adapting to New Challenges
Those fixed costs are going up in the Eagle River Valley and elsewhere. New state nutrient regulations are requiring utilities to better treat their wastewater for nitrogen and phosphorous, which can produce large algal blooms in water bodies. When those plants die off, the decaying matter deprives the water of oxygen, posing problems for aquatic life. The U.S. Environmental Protection Agency requires states to limit nitrogen and phosphorous pollution. Now, the Colorado Department of Public Health and Environment will require 44 facilities to install additional treatment—total costs are estimated at $1.5 billion.
“This is a big deal,” Bultemeier says, with emphasis. Small utilities are exempt from complying with the new rules, and the largest utilities are better able to distribute the cost of treatment plant upgrades among their many customers. Eagle River Water and Sanitation District is just big enough that it has to comply, and because of its topography, the district uses three wastewater treatment plants, each of which is subject to the new regulations. “We’re looking at a $90 million improvement in wastewater over the next 10 years,” Bultemeier says. “Those are not numbers we’ve ever used before. Our last improvements, when we totally improved the wastewater plants in the ‘90s, we spent $20 million.”
Of course, even $20 million is a lot of money. The city of Longmont plans to spend $20 million to comply with the new nutrient regulations—that is in addition to $20 million in other upgrades the city had already planned to complete during the same time period. The upgrades will be funded through rate increases that will raise the average Longmont household’s monthly sewer bill from $22.08 in 2012 to $35.80 by 2018. Small commercial users and multi-family buildings will face higher bills. Initially, bonds and cash will cover the costs of the projects—repaid by ratepayers over the next 20 years.
“I think it’s having an impact, but we’re talking about many decades of people paying under $3 for 1,000 gallons of water. When you think about what we pay for less essential things, it really is astounding.” – Greg Kail
Then there are federal regulations that serve to protect water quality, but can drive up costs. “As the Clean Water and Safe Drinking Water acts continue to move forward in time and more stringent regulations spin off of those, we have to employ techniques and technologies which can be very costly to remain in compliance,” Vanderschuere says. “From an industry perspective, it’s going to be expensive.”
Still, the national and state regulations on water quality serve a key purpose. By limiting contamination from both man-made and naturally-occurring substances, they ensure waterways remain vibrant and healthy, and protect humans from life-threatening illness— benefits that, if understood, most customers would likely be willing to pay to preserve.
The American Water Works Association runs an “Only Tap Water Delivers” campaign to raise awareness about water utility service. “It plays on the fact that water is out of sight and out of mind. The advertisements bring that water infrastructure above-ground and ask the customer, ‘If only our water infrastructure could talk to us, what might it say?’” Kail says. “I think it’s having an impact, but we’re talking about many decades of people paying under $3 for 1,000 gallons of water. When you think about what we pay for less essential things, it really is astounding.”
The cost of water, for the utility and the customer, will only continue to climb, right along with the cost of electricity and infrastructure and the price of securing new water supplies in an increasingly competitive market. It is, after all, a scarce resource, and without substitute. And for that, people will simply have to pay.
“I think this is a major change for water, how we provide the service,” Binney says. “The real water utility managers are social scientists, communicators, team leaders and strategists. We in the water industry need to do a better job of working with communities, having them understand what the value of water is.”