BPU Proposal Could Spur Investment in State’s Aging Water System

BPU plan would let water companies raise rates using a percentage cap rather than traditional oversight mechanisms

Hoping to spur quicker investment in New Jersey’s aging water system, the state is looking into allowing water utilities to recover the costs of upgrading their infrastructure more rapidly and without traditional regulatory oversight.

The state Board of Public Utilities (BPU) plans to begin stakeholder hearings next month on a proposal to allow the state’s six investor-owned water utilities and, potentially, wastewater utilities, to impose a rate increase on customers without a formal contested proceeding for certain types of infrastructure improvements, a move that would result in more frequent increases in water bills for consumers.

The proposal, called a Distribution System Improvement Charge (DSIC), is similar to mechanisms in place in neighboring states and has been kicked around in New Jersey since the mid-1990s. It allows utilities to pass along the cost of routine infrastructure improvements, such as water main replacements, so long as the projects do not cause customers’ bills to exceed a cap ranging between 5 percent and 7.5 percent.

It is a concept that BPU president Lee Solomon has talked about recently, warning that consumers could face much higher rate increases if the water utilities are not encouraged to repair and upgrade their aging water systems. If the state can convince utilities to invest faster, it would save customers over the long term, Solomon has said.

A $20 Billion Upgrade

The American Society of Civil Engineers has projected the cost of upgrading the state’s network of water and wastewater systems at more than $20 billion. In New Jersey, the state’s drinking water infrastructure requires an investment of $6.92 billion over the next 20 years.

“What this is intended to do is make sure the infrastructure gets updated more frequently to ensure clean drinking water, good water pressure and infrequent service interruptions,” said Karen Alexander, president and CEO of the New Jersey Utilities Association. “It’s in our interest to get the work done sooner rather than later.”

Consumer Protection

But consumer advocates argue it could make it easier for utilities to pass on rate increases to their customers without assurances the money was prudently spent.

“Our view is there is not a need for it at this time,” said Stephanie Brand, director of the Division of Rate Counsel. “It’s an effort to avoid the transparency you get in a rate case. It also removes an incentive to perform the work efficiently.”

Ev Liebman, program director for New Jersey Citizen Action, called the proposal an attempt by corporations to escape regulation. “Our view is we still need a strong regulator which ensures the prices customers are charged are fair and reasonable,” she said.

But Dennis Ciemniecki, president of United Water’s regulated businesses, argued the mechanism has worked well in neighboring states with few customer complaints about the surcharge.

“What we are seeing in those states with the surcharge is regular and consistent investment that brings more predictability and reliability to the system,” he said.

Frequent Filers

Unlike the state’s gas and electric utilities, New Jersey’s water companies file for rate increases more frequently than other regulated companies, Brand said, saying it is not unusual for a company to come in every two years for an increase in rates. “They are not waiting very long to recover the money they spend on their infrastructure,” she said.

Ciemniecki, however, argued the comparison between utilities is unfair, given the unique nature of the water sector, noting it is the only utility where consumers actually consume the product. “Water is three times or more capital-intensive than the gas, electric and telephone sectors,” he said.

Alexander added the surcharges do not weigh heavily on consumers. In Pennsylvania the DSIC mechanism has a cap of 7.5 percent, she said, which allows the water utility to spend and recover the costs of eligible infrastructure improvement projects on an ongoing basis, rather than wait for some years until the next rate case. Pennsylvania customers pay an average monthly water bill of $42.64, meaning the maximum amount it could increase under the mechanism would be $3.20, she said.

Given that the cost of drinking water delivered by investor-owned public utilities is less than a penny per gallon and the importance of water to everyone, Alexander said that seems like not an unreasonable investment for clear drinkable water.