With the national deficit approaching 10% of GDP, the US Treasury Department is compelled to compete more aggressively on world financial markets to acquire the funds to continue government operations. New spending only adds to this pressure. The current recession has applied significant downward pressure on the interest rates the US Treasury has had to pay purchasers of debt instruments, but conditions are rapidly changing and not for the better.

Recent demand for US Treasuries has been relatively strong recently as well, owing to investor concern regarding the European Union’s handling of the Greek financial crisis. However as the EU gains control of the situation, coupled with increased demand for corporate bonds, those that purchase US Treasuries now have other attractive options. And many of them are no longer investing as much in US debt instruments the way they were.

To combat declining demand and attract investors, the US Treasury must increase the rates it pays on its debt. Costs of increasing interest rates will of course be borne by US taxpayers. Increasing rate trends are poised to continue as spiraling federal spending will only drive the deficit to unprecedented levels, compelling the US Treasury to compete even more aggressively to attract investors willing to purchase US debt.

How does this impact the rates consumers pay for water and water utility service? As noted, increasing deficits require the federal government to pay more in interest to finance ongoing government operations. More importantly, as US Treasury instrument rate comprises the “floor” or “risk free rate” this sets the ‘baseline rate for nearly all other major lending rates. Prime rates, mortgage, corporate bond yields and many other investments rely on this baseline to set their rates. As the “risk free rate” increases, rates on other investment instruments increase as well.

Water Utility Consultants attempt to balance consumer demand for low prices with utility requirements to secure enough funding to support the organization. It is a difficult juggling act. Increasing interest rates as driven by federal spending and deficits only make this more difficult. Utilities must pass the costs – including costs for financing – of repairing aging plant and facilities on to its customers.

Municipal Bonds are the common financing instrument for water and wastewater utilities to finance growth or facility replacement. Bond rates have been relatively low but are now increasing due to upward pressures applied ultimately by the federal deficit. Utility customers should expect to see these increasing costs passed through in the form of increased service fees. In the end, the cost of higher interest rates driven by higher federal spending will be borne by individuals and consumers – including water customers.

Jason Mumm is a highly respected and important resource in the area of Water Utility Consulting. Delivering financial guidance to water utility companies, Jason helps improve financial performance and helps utilities better manage water rates and costs. Click here to get your own unique version of this article with free reprint rights.

The EPA reports that water utilities serving fewer than 3,300 customers – make up nearly 85% of all water systems in the United States. For these systems, the cost of infrastructure replacements is more than large, it’s unbelievable. The small town of Lebannon, OR provides a good example. The cost of replacing Lebannon’s incredibly old water treatment plant is going to cause water rates to increase by 60% is only one example among many of how major capital replacement costs in one small town can lead to a significant increase in customer water rates.

As infrastructure ages, facilities need to be replaced. So what is a small water utility to do? Unfortunately, there are no easy or simple methods to handle it. Grant money for these systems has been all but eliminated, leaving rate hikes in the 60% range a real possibility for those utilities that have not planned ahead. Back in Lebannon, Oregon the system to be replaced was put into service in 1946. It is not surprising that this plant is nearing the end of its useful life. After 64 years of service, most facilities can be expected to require substantial upgrades.

The costs for these replacements and upgrades can be reasonably estimated by professional engineers. With some foresight, small communities can begin implementation of smaller rate increases to establish a cash fund as well as build debt capacity for financing the replacement costs. Smaller utilities and communities that lack ready access to credit markets and don’t possess much reserve cash, the need for advance planning like this is even more critical.

Financial planning is essential to avoiding the surprises that accompany massive service rate increases. Water utility consultants provide these services, however most utility managers can begin without consulting help. Recognizing the need is step one. Understanding what the fixed assets situation is, where each facility is in its service life, and when each was put into service is important. Then, reasonable estimates can be made regarding expected timing of facility replacements and the associated costs for each replacement project.

As facility-life expectancy and replacement costs are understood and at least estimated, informed decisions can be made that may preclude imposing massive rate hikes on consumers. Utilities can then work within the community to research the best way to fund the replacement project and to set realistic expectations for future fee increases. Will most utilities have to increase service fees? Most likely, the answer to this is ‘yes.’ Although the costs are expensive, preparing in advance to replace aging infrastructure and establishing a solid financial plan to guide funding, utilities can avoid having to inform customers of sometimes staggering and unexpected fee increases. Utilities that wait until an integral facility becomes inoperable have narrowed their options to zero and are inviting trouble.

StepWise Water Utility Consultants assist water utilities across the country improve operations and improve cash flow management in difficult economic times. Contact the Water Utility Consultants and Wastewater Consulting Experts at StepWise today! Visit the Uber Article Directory to get a totally unique version of this article for reprint.