I recently participated in a brief discussion about potential rate impacts in Gary, IN. The gist of the story is that Gary, IN is facing some very large capital costs to separate its sewer system into two parts: one for sanitary sewer needs, and the other for storm water drainage. Currently, like many older cities in the US, Gary has what is called a combined sewer system. The problem with a combined sewer system is that they can result in raw sewage being discharged into local waterways during high rainfalls, as is apparently the case in Gary, IN. The EPA will often require such combined systems to mitigate overflow events, sometimes by requiring sewer separation.

My comment on the story talks about the need for local funding and working with the EPA to develop a phased-in sewer separation plan to help mitigate rate impacts as much as possible. Read the article from the Post Tribune: Fixing Sewer Overflows Neither Easy or Cheap.  At the end of the linked article, you will see a few comments, one of them mine.  It’s the other comments there that worth more discussion though.

A certain “mikeh1993″ writes that “if they [the Gary Sanitary District] raise rates now, there is no guarantee they use that money for those [sewer separation] upgrades.”  He continues by saying “I think it’s ridiculous that treatment plant costs always run in the red, even though the costs to the users has gone up every single year and yet they never come in the black at the end of the year.”  A person with the nickname of “meeee” wrote that “maybe they [Gary Sanitary District] should have thought of that before allowing all the apartments etc to be built without thinking of the problems down the road.”  He concludes, “oh…forgot, isn’t that the norm anyway…Lot of talk and little action. Just keep adding to the problem until it becomes a big disaster.”

These comments are critical of the utility but they are not necessarily responsive to the point that there is a big cost for meeting the EPA requirements to separate the sewer system.  That said, comments like these are the rule rather than the exception in any discussion about utility rates.  In so many of these instances, the people making the comments are just unaware of how publicly owned utilities work, and tend to vent their frustration rather than address the issue.  They are frustrated for the most part because the only thing they ever seem to remember hearing from their water/sewer utility is news about yet another rate increase.

Managers of public water and sewer works need to understand, first of all, that nobody wants to pay more for anything.  That’s just one of the basic elements of all economics, and it’s nothing personal.  Second, managers need to know that people will pay more for the right reasons and under the right conditions.  Most public opposition to rates can be categorized into just a few areas; knowing these general areas can help managers work toward defining the reasons for increases and setting the right conditions:

1. There is a lack of trust that the money is being used appropriately. Government-owned utilities will forever suffer from the perception that the only government spending is wasteful government spending.  If there have been issues of real fraud, waste, and abuse in the past, then the public may have valid trust issues.  Mostly though, the perception that rates and fees are being misappropriated or even just poorly spent are just that: perception.  Managers have a lot of tools at their disposal to address these trust issues, but regardless of what tool is used communicating the utility’s financial stewardship to its ratepayers in an ongoing and effective way is what it will take to change perceptions and to gain (or regain) trust.
2. There is a lack of understanding about the basic economics of the utility. Typical citizens don’t understand how to run a business, let alone a big business like a water/sewer utility.  That’s not their fault really, but it is a problem when managers and elected officials expect ratepayers to just understand how it all works.  Public utilities are run at cost and not for profit.  This is a major misunderstanding for many people for many different reasons.  Even those who are familiar with  standard business accounting reports sometimes fail to understand what it really means to run at cost.  In addition, most people don’t understand just how much money it takes to pay for a utility’s debt, its operations, or its annual repair and maintenance of plant and equipment.  After all, the numbers can be intimidating and far exceed most people’s experiences.  A $100 million treatment plant upgrade might as well be a zillion dollars, because very few people have any experience visualizing that kind of money.  Again, communication is the key to changing attitudes.  Make the dollars and cents common in your communications; break the dollars down into manageable bits (e.g. $/household, $/capita) and talk about how the utility only charges for what it needs.  Managers can make a lot of ground by working to increase the general knowledge of their ratepayers about how the utility business works.
3. There is disagreement over the timing and/or urgency connected with the increase. Especially when big capital projects are at the center of a requested increase, there is bound to be disagreement over the immediacy of the need and, therefore, the urgency of the requested rate increase.  If we can put off capital investments longer, then the needs decrease and the rates stay low, or so the argument goes.  One of the things that financial plans, like those we prepare for clients here at StepWise, can be useful for is to show how the timing of big capital projects can affect rates.  When it comes to timing big capital projects, there is often a trade off between lower rates now, and even larger ones in the future.  Knowing what those impacts are and being able to communicate them effectively is important for winning buy-in from ratepayers.  Being objective about financial impacts and clear (and a little conservative) about the assumptions goes a long way to developing the message.