The Theory of Water and Utility Pricing - Global Drinking Water Management and Conservation - page 96

5.7 Water Pricing in Developed Countries

5.7.1 Water Pricing Practice in the US

Currently, there are roughly 50,000 community drinking water systems in the US
and most of these systems are owned by municipalities (USEPA 2009 ). Privately
owned systems merely account for 8.3 percent of total water supply, and a state
public utility commission almost invariably regulates the privately owned systems.
Only a few state commissions have no authority over the water sector (e.g. in
Georgia, Michigan, Minnesota, North Dakota, South Dakota, and Washington)
(Beecher 2011 ).
The US water systems have properly followed the guidelines in American Water
Works Association) Manual M1, Principles of Water Rates, Fees, and Charges. As
a manual of standard practice, the American Water Works Association advocates
“ the use of the generally accepted cost-based principles and methodologies for

establishing rates, charges, and fees cient funding to allow

communities to build, operate, maintain, and reinvest in their water system that
provides the community with safe and reliable drinking water and

…” to “ provide suf

”
(Zieburtz and Giardina 2012 ). Thus, as an important component in a well-managed
and operated water system in the US, the

fire protection

”
principle is applied. Moreover, all the numerical examples provided in Manual M1
are illustrative and the pricing methods may vary depending on the speci

“ cost-based rates, fees, and charges

c local

conditions.
Water charges for each customer class mainly consist of two rate components: a

fixed charge that may differ among the meter sizes and a volumetric consumption
charge (i.e. uniform rate, increasing-block rate or decreasing-block rate) depending
on water consumption. The fixed costs associated with infrastructure, distribution

network, service and fire protection are normally recovered through xed charges,

'

while the volumetric-related costs cover the rest of the water system s annual costs.

That is, the additional costs are commonly recovered by a volumetric consumption
charge (Zieburtz and Giardina 2012 ). Many municipal water utilities follow the
practice of recovering the distribution-related costs by volumetric charge; but in
many cases, this probably leads to revenues being inadequate to cover distribution
costs alone. Overcast ( 2012 ), a director in the Ratemaking and Financial Planning
Services Group at Black and Veatch, proposed that fixed distribution-related costs

be recovered by a fixed service charge. Moreover, all the water systems seem to be

facing declining per capita consumption as a result of a successful conservation-
oriented policy. If the volumetric charges are raised, revenue tends to drop in the
future and this exacerbates the problem of recovering fixed costs since high-volume

water users usually have an elastic demand (Zieburtz and Giardina 2012). Fur-
thermore, the pressure on water costs is also due to the substantial

xed costs

associated with replacing the critical infrastructure.
A recent survey conducted by Beecher and Kalmbach ( 2013 ) focused on the
water pricing practices in eight states located in the Great Lakes Water Basin: