Charges for Services – Raise Water and Sewer Rates to National Average

 Revenue: $380 million

The City currently provides water to approximately 5.3 million customers in the metropolitan area, including all City residents and 125 suburbs.[1]  The City charges for water service in one of two ways: by using water meters to charge a fee based on the volume of water consumed or, for customers without meters, through a formula that takes into account factors such as building size and the number of bathrooms.[2]  As of 2010, of the nearly 500,000 accounts that are provided water service, 63.1% are not metered.[3]  In addition to water service, the City also provides sewer service to over 432,000 accounts.[4]  Sewer service fees are a percentage of an account’s water service charge.

The table below shows the water and sewer rates from 2006 to 2010 as well as the water and sewer service fee revenue for this time period.[5],[6]  The table shows that rates and revenue have increased substantially over the last several years.

2006

2007

2008

2009

2010

Water Rate per 7,500 Gallons*

$9.98**

$9.98**

$11.48

$13.20

$15.08

Sewer Rate as a % of Water Bill

83.00%

83.00%

84.00%

85.00%

86.00%

Water Sale Revenue (in millions)

$317.2

$323.6

$358.1

$397.0

$445.5

Sewer Sale Revenue (in millions)

$134.3

$137.0

$158.7

$173.9

$197.5

Total

$451.5

$460.6

$516.8

$570.9

$643.0

* Water rates are presented as per 1,000 gallons. To derive the cost per 7,500 gallons, multiply by 7.5.

** In 2006 and 2007, the City provided discount rates to customers who made payments within 21 days. Beginning in 2008, this discounted rate was eliminated.

Despite the recent increases, Chicago’s water and sewer rates remain well below the national average.  According to a 2009 survey of the 50 largest cities water and wastewater (sewer) rates, the average water rate for residential customers for consuming 7,500 gallons of water is $25.66 and the average wastewater (sewer) rate is $33.80.[7]  Using the 2009 survey data, for residential customers for consuming 7,500 gallons of water, Chicago has the 5th lowest water rate and the 3rd lowest sewer rate of the 50 largest cities.  Although if one includes an estimate of the sewer rate charges of the Metropolitan Water Reclamation District (MWRD), Chicago charges the 15th lowest sewer rate among the 50 largest cities.[8]

Under this option, the City would raise its water and sewer rates to the national average found in the 50 largest cities.  The table below details the size of the rate increase this would entail.

2011 Rate

2012 Rate after Increase

Percent Increase in rate

Water Rate per 7,500 Gallons

$15.08

$25.66

70.22%

Total Sewer Rate

$23.48

$33.80

43.92%

City of Chicago Sewer rate per 7,500 Gallons

$12.96

$23.28

79.57%

Metropolitan Water Reclamation District Property Tax per month

$10.52

$10.52

0.00%

If there were no reduction in water and sewer usage in response to an increase in rates, then revenue would simply rise by the same percentage as the rate increase.  However, as water and sewer rates were increased significantly in 2008, 2009, and 2010, water and sewer usage declined, suggesting an adverse response to the increased price.[9]  From 2007 to 2010, water rates increased 51 percent, while water revenues increased 38 percent.  Over this same time period, sewer rates increased 57 percent, while sewer revenue increased 44 percent.  This implies that for every 100 percent increase in water rates there is a 74 percent increase in water revenue and for every 100 percent increase in sewer rates, a 78 percent increase in revenue.

This option would cause a 70 percent increase in the water rate and nearly 80 percent increase in the sewer rate, which corresponds to a 52 percent increase in water revenue and a 62 percent increase in sewer revenue if we assume a similar drop in water and sewer usage in response to the price increase that was observed over the last three years.  The table below details how much revenue this would generate compared to the 2010 revenue.

2010 Revenue

2012 Estimated Revenue after Rate Increase

Revenue Increase

Water Sale Revenue (in millions)

$445.5

$692.97

$247.47

Sewer Sale Revenue (in millions)

$197.5

$328.18

$130.68

Total

$643.0

$1,021.1

$378.14

Thus, this option would generate approximately $380 million annually.

Proponents might argue that the City should increase its water and sewer rates because they are far below the national average according to the survey cited above and a New York City study.[10]  Others might argue that increasing the cost of water and sewer service would encourage consumers to conserve water, which is important to ensuring Chicago has an adequate water supply in the future.[11]  Lastly, others might argue that a substantial increase in water and sewer rates would allow the City to upgrade the water and sewer system’s aging infrastructure, which, in some places, is 100 years old. Opponents might argue that increasing water and sewer rates is regressive, meaning that this rate increase will fall most heavily on low-income households as a greater percentage of their income will be used to pay these increased fees.  Others might argue that any revenue from increased rates should be used to improve the system and service delivery and not be used to offset the City’s larger budget deficit.  Still others might argue that the amenity of a nearby abundant source of fresh water is not found nationwide and, therefore, fixing the rate to the national average unfairly penalizes area residents who may have chosen to live in the region because of its proximity to Lake Michigan.

 

 

Discussion and Additional Questions

An important component of deciding whether or not to implement this option is what steps the City will take to increase water metering.  As noted above, 63.1% of water accounts are currently unmetered.  If the City was to increase the rates without increasing the percentage of metered accounts, the goal of water conservation would be hampered by the fact that customers would not be paying based on their actual water usage but on factors such as lot size and the number of toilets in a building.  A question might include:

  • If the City were to implement this option, would the process of metering the entire system be sped up?

An additional consideration is determining how much it costs to deliver water and sewer service when deferred maintenance and postponed capital improvements are included.  As noted above, significant parts of the City’s water and sewer infrastructure are over 100 years old and need to be replaced.  Some questions to consider:

  • Over the next 30 years, how much capital investment is needed to bring the water and sewer system into a state of good repair?
  • If the City were to increase the water and sewer rates, how much of the new revenue would be invested in addressing the City’s budget deficit and how much would be invested in upgrading the water and sewer system’s infrastructure?

Budget Details

Fund: Water and Sewer Fund, 0200 and 0314 Type of Revenue: Water and Sewer Rates
The appropriation is located on pages 19 and 20 of the 2011 Annual Appropriation Ordinance.

http://www.cityofchicago.org/content/dam/city/depts/obm/supp_info/2011BudgetOrdinance.pdf

 

 


[1] City of Chicago. “2010 Financial Statement for Water Fund.” pg. 47. http://www.cityofchicago.org/content/dam/city/depts/fin/supp_info/CAFR/2010/Water2010.pdf

[2] City of Chicago. Municipal Code. Section 11-12-270 (American Legal 2011)

[3] Id., pg. 39. 314,002 Non-metered accounts out of 497,620 total accounts. 314,002 divided by 497,620 equals 63.1%.

[4] City of Chicago. 2010 Financial Statement for Sewer Fund. pg. 40.

http://www.cityofchicago.org/content/dam/city/depts/fin/supp_info/CAFR/2010/Sewer2010.pdf

[6] City of Chicago. 2010 and 2008 Financial Statements for Water and Sewer Funds.

[7] The study compares rates with residential usage of 3,750 gallons, 7,500 gallons, and 15,000 gallons a month.  For simplicity, we used the 7,500 figure because it essentially corresponds to 1,000 cubic feet of water, which is one of two volumes for which the City quotes a water rate.

Black & Veatch. “50 Largest Cities Water/Wastewater Survey”. 2009/2010. http://www.bv.com/Downloads/Resources/Brochures/rsrc_EMS_Top50RateSurvey.pdf

[8] Chicago Sewer Rate per 7,500 gallons: 86% times $15.08 equals $12.97.

Metropolitan Water Reclamation District (MWRD) charges property tax of $10.52 per month.  Assuming that the average billable water usage for a property is 7,500 gallons, then the MWRD property tax adds $10.52 to the sewer rate charge per 7,500 gallons.

Combined Sewer Rate for Chicago is thus estimated at$23.48 [$10.52 plus $12.96 ].  This would place Chicago in between Raleigh [Sewer Rate: $23.20, ranked 14th in the survey] and Oklahoma City [Sewer Rate: $24.72, ranked 15th in the survey].

Source: City of Chicago. “Presentation to Credit Providers.” June 13, 2011.  pg. 48.

http://www.cityofchicago.org/content/dam/city/depts/fin/Bonds/Credit_Presentation_61311.pdf

[9] As discussed above, “the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price” is called the price elasticity of demand in economics.

http://en.wikipedia.org/wiki/Price_elasticity_of_demand

[10] New York City. Department of Environmental Protection. “Water and Sewer Rate Study.” pg. 21.

http://www.nyc.gov/html/dep/pdf/water_board/dep_water_rate_study_03182010.pdf

[11] Chicago Metropolitan Agency for Planning. “Water 2050: Northeastern Illinois Regional Water Supply/Demand Plan.” March 2010. pg. XIII.

http://www.cmap.illinois.gov/documents/20583/be751083-5476-4eb0-a66f-65b0059241b3