Full Cost Pricing: Making a Necessity of a Virtue

Abstract

Twenty-five years ago, while I was running the Office of Water at the US Environmental Protection Agency (EPA), we issued a policy document called “The Four Pillars of Sustainable Infrastructure.” The second pillar was full cost pricing, not a popular idea in the water sector then—or now, for that matter. Several water groups were pushing for a national fee and fund to support the water and wastewater sectors which, if memory serves, AWWA opposed.

According to EPA, “Full cost pricing factors all costs into prices, including past and future, operations, maintenance, and capital costs.” AWWA's Manual of Water Supply Practices M1, Principles of Water Rates, Fees, and Charges (seventh edition), speaks in terms of “cost-based water utility rate-making.” Failure to account for all these costs might be deemed “below-cost rate-making.”

The second pillar was viewed as a pipe dream by many municipal leaders and antithetical to the quest for more federal subsidies. The other pillars were better management (e.g., asset management), water efficiency, and the watershed approach. One wag, a dear friend and colleague, deemed the policy the “Four Pillows of Sustainable Infrastructure,” given his preference for more federal support for infrastructure.

Quelle surprise. Water rates have, inevitably, risen faster than inflation, given the aging of water infrastructure, as documented in AWWA's Buried No Longer (2012). That report posited a trillion-dollar need for replacement and expansion of underground infrastructure over time. These rate increases are accelerating, notwithstanding generous yet inadequate funding available in the Infrastructure Investment and Jobs Act (IIJA), which was passed in 2021. The law was a welcome contribution to water and wastewater investments but a pittance relative even to the two most expensive regulations, on lead and copper as well as per- and polyfluoroalkyl substances (commonly called PFAS), in the history of the Safe Drinking Water Act. Moreover, much of the funds in the IIJA were targeted to disadvantaged communities, which, while a worthy cause, was not focused on other needs throughout the sector.

Also, Congress has rediscovered earmarks, now called “congressionally directed spending,” conveniently funded through the Clean Water and Safe Drinking Water Acts’ state revolving funds (SRFs). These earmarks are grants, not loans, taken right off the top of the annual capitalization grants for the states. Thus, no money revolves back into the SRFs, depriving states of needed funds for prioritized expenditures based on their intended use plans. While people of good will can argue about any given set of priorities, it is, at least in a systematic approach, not a political lottery based on what utility is in whose congressional district.

According to the National Governors Association, “The impact has been stark: annual capitalization grants are cut for every state and territory, with $3.7 billion (45%) already diverted from these important, successful programs.” These deleterious impacts have been partially camouflaged by the large volume of dollars flowing through the system from the IIJA, which runs out on Oct. 1, 2026. To date, the Water Infrastructure Finance and Innovation Act has been allowed to function successfully and appears to enjoy robust support in Congress.

Another compounding problem, one that bodes ill for the future of federal infrastructure funding, is the national debt. The fiscal situation of the federal government is dire, to put it mildly. The federal deficit for fiscal year 2024 was almost $2 trillion. We are now paying more on the national debt than for national defense. Social Security trust funds are projected to run out of money by 2035. That same year, according to the Congressional Budget Office (January 2025), spending will grow to 24% of gross domestic product, but revenues by only 18.3%. Declining birth rates and an ever-aging population will put even more demands on benefit programs such as Medicare, Medicaid, and Social Security, which make up nearly 36% of the budget.

Water and wastewater utilities will need to become more financially resilient, which means getting the prices—or water rates—right. Full-cost pricing will have to become more than just an aspiration. It will be a necessity. It will also require utility managers, hopefully with the support of business, community, and environmental leaders, making the hard case for rate increases—and customer assistance programs—to their political leaders such as mayors, council members, and the like.

Overreliance on transfusions of federal dollars is problematic at best. Accounting for the full cost of providing safe drinking water is the best path to resilience in the long run.