Opinion: NJ Needs a Better Approach to Affordable Water and Sewer Utilities

Daniel J. Van Abs | September 30, 2016 | Opinion
Drinking water and sewer utility costs have been rising faster than both inflation and median incomes, and are very likely to continue doing so for the foreseeable future

Daniel J. Van Abs
Nationally, the costs of drinking water and sewer services have been increasing much faster than inflation since the 1980s. The reasons are many, including increased capital and operations costs to meet the drinking-water quality standards from the Safe Drinking Water Act and wastewater-effluent quality requirements from the Clean Water Act, plus the need to maintain aging utility systems. Increases in water and sewer utility rates are fully expected to continue for most areas of New Jersey.

Upgraded treatment will be needed to better protect human health and the environment. Wastewater-treatment technology is changing, as utilities learn how to generate energy from wastes and to recover materials such as phosphorus for productive use. Water-supply treatment technology is also changing. Some of these changes can reduce long-term costs, but many will increase costs.

Combined sewers in many of New Jersey’s older cities frequently discharge raw sewage into rivers and coastal waters of the Northeast and Southwest. Combined sewer overflow controls will require the investment of billions of dollars over the next two to three decades.

In addition, aging water infrastructure (including pipelines, pumps, and treatment plants) will require repair, rehabilitation, or replacement in the coming decades. We will need to continually maintain our existing treatment plants to ensure that they function well. Aging infrastructure is not just an urban problem. Pipelines in many of our suburban areas are reaching or exceeding their expected lifespan. Our small historic towns also have aging water infrastructure. Nationally, the estimated costs for drinking water and sewer utility infrastructure needs is well over $1 trillion in the next two decades. New Jersey systems are among the oldest, and so we should expect to pay more than younger states. Some of these funds are available in existing rates and low-cost financing provided by the state and federal governments, but more is needed.

All of this is happening against a background of mostly stagnant wages and the spread of poverty from the cities to the older suburbs and out into newer suburbs. New Jersey has an increasing population of senior citizens who will be living on fixed incomes but facing rising costs. More and more households have just one person, which limits household income and increases the potential for financial stress.

We face a very real prospect of increasing utility costs for drinking water and sewer utilities in areas where households face increased financial stress. New Jersey has one of the nation’s highest median household income levels, so it is clear that many households will have no difficulty even with significant rate increases. However, more and more households at the lower income levels will be stressed.

The U.S. Environmental Protection Agency measures affordability by comparing sewer utility costs to median household income (where half of the households have higher income and half have lower income). The USEPA guidelines are a rough indicator at best, and they have a limited use. For the most part, they are employed to determine how quickly new sewer infrastructure projects must be implemented, such as for combined sewer overflow controls. The regulatory requirements don’t change, but they can in some cases be implemented over a longer schedule to reduce rate increases.

In some New Jersey municipalities, such as Camden, current sewer rates already are nearly at USEPA’s threshold. In other areas, some rate increases are feasible without becoming unaffordable for median income households.

One problem is that what may be affordable for median income households can be a heavy burden for lower-income households. Household income is a very rough measure of capacity to pay. Households can have one person up to a large family. Some senior citizen households will have low incomes but also savings and paid-off homes, while others will have no assets at all.

In sum, drinking water and sewer utility costs have been rising faster than both inflation and median incomes, and are very likely to continue doing so for the foreseeable future. The number of financially stressed households will increase, resulting in more and more households that have to make choices between paying their utility bills and buying other essentials.

Utilities are required to charge customers for the services they receive. New Jersey drinking water and sewer utilities can’t subsidize some customers at the expense of others. Some utilities have established separate funds to help customers with emergency situations, where short-term help can get a household past a crisis. These funds help, but not where utility costs are routinely unaffordable for a household.

Even if New Jersey law explicitly authorized household assistance programs for drinking water and sewer costs, many utilities would struggle to make such programs work. Assistance programs require that those with greater incomes pay into a fund that helps struggling households. How can this work if most customers are lower-income households? The poor would be subsidizing the poorer, which isn’t appropriate.

New Jersey has faced this issue before, for household energy costs. The answer was a statewide system, the Universal Service Fund (USF), where qualified lower-income households can receive assistance to address energy costs. It is funded by the Universal Service Fee on everyone’s energy utility bills. This system was established by the Board of Public Utilities and is feasible primarily because our household energy needs are provided by a small number of utilities, nearly all of which are regulated by the board. All New Jersey energy customers fund assistance for the relatively small number of households that need help. It works because the burden is spread, and the costs of collecting the funds are minimal.

It is clear that a similar system will be needed soon for drinking water and sewer utility costs, but will be far more difficult to implement. New Jersey has over 600 public community water-supply systems, most of which are government utilities. Fewer are privately-owned, and fewer still are regulated by the Board of Public Utilities. We have hundreds of sewer utilities also, almost all of which are governmental entities. The difference between the energy and water fields is stark.

Implementation of a household assistance program for drinking water and sewer costs will require that we answer some key questions. First, how many households might qualify for assistance? For planning purposes, we can probably use information from the household energy assistance program, as the needs are likely similar.

Second, we need to understand where existing utility rates cause household financial stress. Drinking water and sewer utility rates vary a great deal, which is understandable given the different system ages, water-supply sources, treatment technology, maintenance history, utility size, and so on. As a result, households with exactly the same financial condition may be stressed, or not, by their local utility rates.

So far, the questions simply require data, not choices. The third question is harder. How much should stressed households be subsidized? After all, we are talking about a transfer of funding from those who can afford to pay to those who can’t. Tough choices are required on what level of support is appropriate through this program rather than other programs, such as housing subsidies or earned income credit provisions in our income tax system, and how much remaining financial stress is acceptable. As part of this decision, we need to know how much water-supply use and sewage generation will be subsidized, so that we are not creating an incentive for wasting resources.

Finally, and hardest, is the big question: Where does the money come from? The multiplicity of drinking water and sewer utilities makes this very difficult, as does a fundamental fact of sewer systems — we don’t measure sewage flows from households. Instead, sewer charges either reflect water demands or are a per-household fee (regardless of water use). Therefore, the best option for an equitable Universal Service Fund is to likewise base the charge on measured or estimated water use.

A related issue is how the funds are collected and managed. The Board of Public Utilities regulates so few drinking water and sewer utilities that another agency, most likely the Treasury Department, would need to collect the funds. There is a major benefit to relying on an agency that already helps households, such as the Department of Community Affairs for the energy assistance program.

New Jersey is facing a major current and future problem with affordability of drinking water and sewer utility services, but lacks any easy means for addressing the problem. We need to determine whether, how, and how much to address affordability issues for lower-income households, not just in our cities but in many suburban and rural towns. What we don’t want is a repeat of the Detroit issue, where in 2014 they were cutting water service to thousands of customers who couldn’t afford to pay. New Jersey doesn’t need that kind of publicity.