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Sunday, March 1, 2015 |  Madison, WI: 15.0° F  Light Snow
The Daily
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The high cost of water
Brace yourself for steady rate increases
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Years ago George Carlin did a comedy bit called "Water Sez," which included the lines "water says, who cares. Drink me, I don't give a *#$%!" Many water users feel the same way and only think about their water when it's time to pay the semiannual bill. That may be about to change, though, and not just because the Madison Water Utility will soon be invoicing you monthly. Water is taking a bigger bite out of household budgets at the same time that Wisconsin's water utilities are apparently shirking their responsibilities in order to become cash cows for fiscally strapped municipalities.

In Milwaukee, this situation was admirably summarized in a March 8 story in the Milwaukee Journal Sentinel, which reports that "the city of Milwaukee will take more than $12.1 million this year in water rate revenue generated by the Milwaukee Water Works and deposit the cash in the city's general fund, where it can be spent on other municipal services. At the same time, the Water Works this year is asking to raise rates because it is short of cash to do one of its primary jobs: replacing old and break-prone water distribution mains."

The $12 million transferred to Milwaukee's general fund could have been used to replace 12 miles of old water distribution main, or more than the current Water Works target of 10 miles per year. The actual main replacement in 2011-12 was just 1.35 miles a year, or nearly 90% below the target. The Milwaukee Water Works therefore wants to raise customer rates supposedly to replace distribution main, while it simultaneously funnels revenue to the city's general fund rather than undertake the amount of replacement spending it claims is necessary.

Industry insiders have a term for this behavior: "harvesting" your assets. Basically, this involves letting utility infrastructure depreciate rather than replace it, so that the revenues paid by customers for use of the infrastructure can instead be used to provide handsome returns to shareholders. In this case, the "shareholder" is the city of Milwaukee, not private investors.

Milwaukee claims it needs the money because of fewer shared revenues from the state and levy limits on property taxes. But harvesting utility assets to pay for current operating expenditures is both shortsighted and deceptive. Raising water rates to pay for other services is a backdoor way for city councils to increase taxes without taking a vote. These tax increases are regressive since essential services account for a larger share of expenditures for the poor than for middle-class or affluent households. Asset harvesting also cannot go on forever; at some point, old water mains need to be replaced. When they are, paying for the necessary infrastructure will require even larger price increases, which could lead to "rate shock" for city residents.

Here in Madison, we are likely to experience a series of slow but steady rate increases for water services that, over time, could prove to be shocking.

The last rate increase for the Madison Water Utility was in May 2011. The 6.4% rate hike approved then by the Public Service Commission was largely designed to fund the utility's Advanced Metering Infrastructure, or AMI, also referred to as "smart meters." (Full disclosure: I advised a local consumers group on what it would be appropriate for MWU to charge customers who opt out of having a smart meter.) The PSC agreed that it was necessary to raise rates "to address cash flow needs involved with the utility's AMI metering project." The PSC therefore allowed the city of Madison to earn an ample 12.6% return on its equity stake in the Madison Water Utility, which is more generous than what it allows for privately owned utilities that run riskier businesses.

However, this appears to be just the beginning of a series of intended rate increases for the Madison Water Utility. A report analyzing AMI options for the city of Madison assumed that water rates would rise by 7% per year over the next 10 years and that "rate increases will be a way of life." The cumulative impact of these rate increases would be to double what Madison residents currently pay for water. The report also says the need to replace infrastructure, especially old pipes, is one of the main factors driving MWU's business plan over the next 10 years.

Now, the Madison Water Utility should be replacing infrastructure that is past its useful life. But the sudden need for massive capital replacement raises the question of whether MWU has been harvesting assets in the past, similar to what is currently taking place in Milwaukee, and deferring replacement expenditures that it should have been making. This subject deserves serious attention during MWU's next rate case, because Madison ratepayers should not be forced to pay for imprudent behavior on the part of MWU, either past or present.

Madison residents also need assurance that the Madison Water Utility will actually follow through on needed capital investments and not use revenues from rate increases to transfer money into the city's general fund. This is one of those rare issues - increased government transparency - that both the left and the right should be able to agree on.

Larry Kaufmann is an economic consultant based in Madison.

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