Econ 101 - Water and Sewer Rates

At the Evanston City Council Budget Workshop on November 17, City staff presented a study on water and sewer cost of service rates and fees. A deficit is projected, primarily because water usage has declined by over 16% since 1998, resulting in less revenue. Given the large increase in rates to pay for the improved storm sewer system, is it any wonder that Evanston residents have cut back their usage?

The study went on to project deficits based on current (2007) water usage and proposed increases in water and sewer rates. Has anyone considered what might happen to water usage should additional rate increases be enacted? The Council discussed “discretionary” vs. “necessary” consumption and the possibility of enacting a tiered rate schedule. As an economist by training, I agree that demand for water is not very responsive to changes in price, but people will always react to an increase in price. A tiered rate structure would create relative winners and losers and, I’m sure, a political struggle. What other alternatives are there?

The water and sewer systems are designed to last for decades. The capital investment made by today’s residents will benefit residents 10, 20, 50 years from now. Why shouldn’t the cost of financing this investment be spread out over a longer time frame? The study projected that rates would drop in 2014 and 2015, as the bonds used to finance the improvements are paid off. One alternative to higher rates could be to refinance the debt. Current residents would be spared the increase in rates and future residents would pay a greater share of the cost of water and sewer services provided in the future.

Basic economics teaches that increased price leads to less consumption, and that the cost of capital investment should be spread over the life of the capital asset.