Water Utilities To Get Paid Faster for Fixing Infrastructure

Tom Johnson | November 10, 2011 | Energy & Environment
New mechanism lets utilities pass along costs of routine upgrades to customers -- without full regulatory review

The state yesterday approved a change that will allow water utilities to more quickly recover the costs of upgrading pipelines, hydrants and other infrastructure, a step that officials hope will speed up repair of New Jersey’s aging water systems.

Approved unanimously by the New Jersey Board of Public Utilities (BPU), the proposed rule will be published in the New Jersey Register. It is modeled on similar programs now in place in other states, including Pennsylvania, that allow utilities to recoup investments in upgrades without going through a full-blown regulatory review.

With New Jersey needing as much $20 billion to upgrade its water and wastewater infrastructure, the streamlined payment mechanism is seen as a way of prodding water companies to speed up 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.

“We have a water infrastructure that is among the oldest, if not the oldest, in the country,’’ said BPU President Lee Solomon after the board approved the proposed rule. “Its reliability is in question. Its safety is in question. If allowed to disintegrate, the cost is much greater.’’

Solomon said the only way to avoid that problem is to have a mechanism for an infrastructure improvement program.

The financing mechanism, dubbed a distribution improvement system charge, or DISC, would have significant positive impact on long-term reliability of the water delivery system, as well as the additional benefit of creating jobs, proponents said.

Initially pushed by the New Jersey American Water Company, which first proposed the mechanism several years ago, the rule change 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.

In Pennsylvania, where a similar mechanism is in place, customers subject to the charge pay a maximum amount of $3.20 more a month on their water bill.

Not everyone is happy with the proposal, however, especially given the high energy bills ratepayers in New Jersey have to pay. An advisory panel helping the BPU revise its Energy Master Plan recently recommended implementing a similar mechanism to allow gas utilities to recover the cost of infrastructure improvements more rapidly. In addition, 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 present, repairs and replacements of the state’s water and sewage pipes and treatment plants are estimated at more than $20 billion, according to the American Society of Civil Engineers. On average, the age of New Jersey’s sewer lines is more than 70 years, while the estimated life expectancy of pipe is 50. The state is approaching a time when unanticipated failures may occur.

The issue also has drawn the attention of the New Jersey Clean Water Council. A white paper issued by the council suggested that the state’s efforts to keep water and sewer rates steady for years is a sure sign of sound management, but it may also mask systemic problems that present imminent danger.

“Utility rates absolutely must be set a level sufficient to recover the cost of current operations and maintenance and the full cost of capital,’’ the paper argued. “Full-cost pricing ensures that utility rates are not artificially low with too little invested in infrastructure renewal.”

The issue is complicated by a hodgepodge of entities managing the state’s water and sewer infrastructure. On the water side, the BPU regulates rates of a small number of investor-owned utilities, which serve about 40 percent of the state. There also are 620 public community water supply systems, but three-quarters of them serve less than 3,000 customers. Most are overseen by the state Department of Community Affairs, but those municipalities are hard-pressed in these tough budgetary times to find the resources to invest in their infrastructure.

The New Jersey Chapter of the National Association of Water Companies estimates that an accelerated infrastructure system could result in the four largest regulated water utilities investing approximately $119.7 million annually for each of the next five years, creating more than 900 jobs.