Water Utilities May See Faster ROI for Infrastructure Upgrades

State agency's proposal would mean speedier recovery of costs and, less regulatory oversight

The state is spelling out details of a proposal that will allow water utilities to recover costs for improving their water mains, hydrants and other infrastructure more quickly from customers without as much regulatory scrutiny.

The proposal, in the works for the past several months, would address a priority of Board of Public Utilities (BPU) President Lee Solomon, who has often said that the next big crisis facing New Jersey will be the cost of upgrading its aging water infrastructure.

With New Jersey facing as much $20 billion to repair its water and wastewater infrastructure, the streamlined payment mechanism is seen as a way of prodding water companies to speed up much needed repairs. If upgrades are done sooner rather than later, the long-term costs to ratepayers will be much less, according to advocates of the proposal.

Rising Water Rates

Still, the proposal is not without controversy. Water rates have been steadily rising in recent years, as utilities struggle to comply with tougher mandates to eliminate potential toxins and other contaminants from drinking water. At the same time, consumers in New Jersey are burdened with some of the highest energy bills in the country, and agency officials are considering implementing a similar mechanism to allow gas utilities to recover the costs of infrastructure improvements more quickly.

The agency earlier this month held a stakeholder hearing on a proposal, which, for the first time, spelled out details of how such a program would work. It allows a utility 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 of 5 percent of its revenue.

Also, under the tentative proposal presented to various stakeholders, the program would sunset after five years, unless the agency took action to extend it. The scheme would only apply to water companies and not wastewater authorities.

Among those pushing for the proposal is the New Jersey American Water Company, which first proposed the mechanism several years ago.

“There is a significant need for accelerating the current levels of infrastructure spending and for a regulatory mechanism that will allow this accelerated spending to take place while minimizing the economic impact on customers,” said Mike Sgro, vice president and general counsel of the New Jersey American Water Company.

Sgro argued the imposition of a distribution improvement system charge, or DISC, as it has been dubbed, would have significant positive impact on long-term reliability of the water delivery system, as well as the additional benefit of creating jobs.

The Cost to Customers

Others are more skeptical. The Division of Rate Counsel, which represents the interests of ratepayers in utility cases, conceded that utilities must invest in their aging infrastructure, but has argued in the past it must be done cost-effectively, while recognizing the cumulative impact on base rates customers pay to the water companies.

For instance, many utilities have large segments of cast iron pipes in the ground, which, rather than being replaced, would be more effectively cleaned and lined, according to the rate counsel. In some cases, cleaning and lining the pipes would be done at one-third to one-half the cost of replacing the cast iron pipes, the office argued.

Unlike the state’s gas and electric utilities, New Jersey’s water companies file for rate increases more frequently than other regulated companies. But utility executives argue the same system is in place in neighboring states and it has minimal impact on customers there. In Pennsylvania, for example, customers subject to the charge pay a maximum amount $3.20 more a month on their water bill.