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October 07, 2013
Brattle Consultants Author Report Analyzing Regulation and Ratemaking Approaches in the Water Industry

Brattle principals Joseph Wharton and Bente Villadsen, and Senior Policy and Marketing Analyst Heidi Bishop recently authored a report commissioned by the National Association of Water Companies (NAWC) that provides a path breaking state-by-state survey of comparable policies for regulated water, electricity, and natural gas delivery companies. While there are some distinctions in many individual policies, the results of the survey show the importance of alternative ratemaking policies in meeting the future challenges for the country’s critical water infrastructure.

Today, private water companies provide the essential water and wastewater services to nearly 73 million people in the United States, one fourth of our nation’s population. In the coming years, the U.S. water industry faces a set of critical infrastructure investment needs that is expected to total between $335 billion to $1 trillion. In addition, the EPA estimates that after years of drought, up to 70% of the states face some form of water shortage and this will increase costs of water and perhaps require separate investments to insure long term reliable water supply. The authors argue that, given that the water industry is the most capital intensive regulated industry, an efficient regulatory policy that puts private capital to work meeting a substantial share of the future infrastructure needs is vital.

The traditional regulatory approach for setting prices is known as cost of service regulation and has been in place for at least half a century. Growth rates in unit sales of water, electricity, and natural gas for residential and commercial customers have fallen and in some regions have been negative. This has taken away a source of funds for future investments and for overcoming regulatory lag that is built into the regulatory process. Today traditional cost of service regulation alone is not well designed to meet the future needs of the water industry. The report focuses on policies that states have explicitly developed that go beyond the normal limits of traditional cost of service regulation to improve the outcomes. It shows that the electric and natural gas delivery industries have in place a larger number and a greater variety of alternative regulation policies compared to the private water industry. The survey also showed that the water industry has recently made significant progress in mechanisms such as the Distribution System Improvement Charge (DSIC) that address core investment issues.

The report, “Alternative Regulation and Ratemaking Approaches for Water Companies,” is available for download below.