While the prices play catch up, utilities and regulators should start looking for ways to mitigate costs.
Water utility rate increases have outpaced those of other utilities. In fact, water rate increases since 1984 %n1%n have surpassed the overall rate of inflation. Yet among utility services, water remains a real bargain; consumers spend less on water than on any other utility.
While more stringent drinking water standards, an aging infrastructure and increasing demand have all contributed to these recent increases, rising water utility costs also stem from historic underpricing. Pricing water services at artificially low prices has harmed consumers. If water services were priced correctly, consumers would benefit through improved system maintenance and water quality, timely replacement of aging capital facilities and more reliable service. In the long term, rising prices will induce conservation and more efficient water use. New facilities will be sized more appropriately to meet demand patterns that reflect realistic prices.
In recent years, state public utility regulators have proven more willing to price water correctly. But inflationary prices also can affect how industries are regulated.
Policymakers tend to increase regulatory control when costs are increasing, and decrease control when costs are falling. %n2%n Stable or falling energy and telecommunications prices and increasing competition provide an opportunity to relax price regulation or even to deregulate. But rising costs would argue for continued regulatory oversight of the water sector, if not closer scrutiny of utilities.
Utility Spending and Historical Underpricing