Whether it’s space for agriculture, expansive landscapes, lifestyle, or recreation, our rural communities provide a host of essential services for their residents and the rest of the country. They also comprise the better part of 97% of U.S. land.
These communities — and the services they proffer — all hinge on the availability of one resource: clean, accessible water. I stress access here because in these areas, water as a service can be exceedingly difficult to provide. The obstacles typically ladder back into either water providers struggling to operate in areas with little or no development; limited revenue to maintain existing systems and expand outward in the wake of demand; or limited or difficult-to-access water supply. Here, we’ll cover some of the challenges small-system providers typically face as well as how they can better serve their communities into the future.
A 2019 analysis from the National Resources Defense Council reveals that more than 80% of Safe Drinking Water Act violations stem from water systems that serve 3,300 people or fewer. But it isn’t out of a lack of prudence or care that these violations occur in the main. Rather, it is a combination of limited resources, small workforce and/or low employee retention, and short-term financial plans that often leave systems critically underequipped. Budget shortages are perhaps the most constraining. Where there is less revenue, we see smaller operating teams and older (often manual) technologies in place. It is also relatively costlier to operate these smaller systems — with their customers bearing that financial burden.
Growing Pains (But Without the Growth)
Smaller systems face the subsequent challenge of aging infrastructure. Pipes that were placed 20 or 30 years ago start to corrode, meaning more leaks that require repair or replacement. Some providers even liken their pipes to Swiss cheese; I can imagine it is only with half exaggeration that they make this joke. Routinely, frontline workers are searching for and digging to fix leaks. For small providers without big budgets, it’s a major pain point.
Contrast this with a bigger city with greater customer concentration. If there’s a break in a water main, it might impact a few hundred or even a thousand customers with decreased flow (or no flow). The city can quickly have a designated team dig the street up, replace the compromised section of pipe, and seal it for use. Moreover, the municipality is often able to step in with project funding if it isn’t already in place for these problems.
Complications arise, too, when you consider the lack of development in areas where people might want future service. Let’s say you have a system serving a vast expanse of territory where perhaps only 60% of that land is developed. Now, let’s say a developer seeks to build a new housing development within an undeveloped portion of that service area. If you’re the water provider, getting pipes to serve this new area will be tremendously expensive and could compete for time and resources with other projects. Depending on the size of the new development, the cost per customer, even if paid by the developer, could be substantial. Contrast that with a denser urban or suburban development where fewer miles of new pipe is likely to be considerably less per customer.
Perhaps you’re having the opposite problem of low growth in your area. Such is the case in states like Texas, where more than 500,000 people moved to the state in 2019 alone. Here, we have developers scrambling to meet buyer demand. If you’re the provider in an area where development has set in this rapidly, will your system be able to account for the uptick? Does it have the water source(s) to meet demand? It could involve growth your operation might not be able to take on. Or worse, those developing might consider alternative areas or providers.
Squaring Between Developers and Municipalities
Developers often seek to tie in with municipal systems as they rely on the municipality for other services and permits while the municipalities are frequently searching to expand their customer and tax base. It’s more convenient for developers to bundle services when they can and often more profitable for municipalities creating a competitive situation for growth.
What happens if the development falls under another system's Certificate of Convenience and Necessity (CCN) for which you are the designated water provider? If the appetite is there, the municipality might initiate a legal battle with the designated water provider. Their goal would be to annex the territory in question and effectively take over as the water service provider for that portion of the service area.
Here, too, smaller service providers could face an uphill battle. Under Chapter 7 of the U.S. Code, smaller providers have sought to rely on code 1926(b), which was designed to protect the right of service for providers that have received federal loans. Unfortunately, providers who have sought to assert such protections in court don't always have sufficient right-of-service protection from municipalities seeking to take over or incur hefty legal bills fighting the case.
The Need for Operational Resilience
Each of these dilemmas highlights how fundamental it is for utilities to future-proof their systems. That can be done by prior planning (i.e., capital reserves) in advance of potential scenarios providers think will come along.
Although some utilities have financing in place to maintain their operation into the future, there is progress to be made on this front. To better understand how water utilities operate, the American Water Works Association routinely gathers survey data assessing how utilities utilize asset management for infrastructure funding. Findings indicate that only 29% of respondents have a coordinator and staff dedicated to the task, despite many within the utility community recognizing it as a need. Further, while half of the respondents reported the existence of an asset management work plan, only 12% indicated that most elements of the work plan were in effect.
It is for more than one reason that having a rainy-day fund is essential for smaller systems. Plenty of smaller utilities build their budget from and plan upkeep around state and federal funding. It’s a practice that has gone on for decades now. But what if the grant funding doesn’t come through? Is there a contingency plan? Even if a utility or other small system does account for this, the increased borrowing costs might strain rate structures for smaller systems.
Regardless of the event, having capital reserves in place — and taking the necessary steps — allows utilities to weather the disruptions that eventually come along.
Getting the Rate Right for Your System and Its Customers
It’s also important to acknowledge that rate-setting does have a place in this equation. However, providers are certainly mindful of sensitivities customers have in not wanting to pay more for the same service each year. The need for public education around water costs will always be there. Understanding how rate structuring is marketed, as well as the size and frequency of increases, though, can be just as helpful.
All too frequently, the availability of water is taken for granted. You turn the tap, and it’s there. It sometimes takes a natural disaster (like that in Texas this past winter) to showcase just how precious water is. Grievous as they are, such events help all customers reexamine the value they place on this resource. Accordingly, those shaping rate proposals will do well to keep such considerations top of mind.
There are quite a few moving parts in factoring out the total cost of service around water. Sourcing, treatment, storage, and distribution are only a few of them. The EPA has a step-by-step guide tailored to help smaller water systems establish rates for future operations. And if you think there’s more your system can be doing to tackle asset management for the operating years ahead, the American Water Works Association also has a page dedicated to the task of getting your infrastructure funding up to speed. Additionally, statewide rural water associations work with member-systems on a host of rate setting, operational, legal, and technical support through their dedicated staff and the USDA circuit rider program.
Utilities and smaller systems set themselves up for success when they have emergency funding in place for times of turbulence. Equally — if not more — important, they’re assuring the communities they serve that they are the water service provider for those near and far alike.
About the Author: John DeLuca is the vice president and senior relationship manager of the Water and Community Facilities division at CoBank, a national cooperative bank serving vital industries across rural America by providing loans, leases, export financing, and other financial services in all 50 states. In his current role at CoBank, John works to provide credit and financial solutions to nonprofit and municipal water and wastewater facilities across 10 states and manages a portfolio of about 80 customers.
