Pay Them in Water : Water Utility Infrastructure Management May/June 2011

Carl Brown cites a way to negotiate water deals without parting with cash. In situations where utilities must settle large refunds, entice companies to locate in their service area, pay developers for not only current but future capacity, purchase large capital improvements, paying with water might present a financially sound option.

To analyze the feasibility of a potential transaction, a utility would have to consider it various types of costs: fixed, variable, and marginal. The author classified the basic costs that utilities incur into these categories. Administrative salaries, insurance and bonds, and a percentage of utility costs and loan payments make up most of the fixed costs. In contrast, maintenance and maintenance supplies, water purchases, chemicals, and water pumping, a percentage of the utility costs, replacement fund payments, and a portion of loan payments comprised the variable costs. Brown calculated marginal cost by adding the variable costs that strictly apply to water production--water purchases, chemicals, etc.--and dividing that sum by "the total billable units of volume used for the year" (p. 1). If the marginal cost reflects a fraction of the average cost, it might be prudent to pay in water.

Disadvantages to this approach include possible water lawyer and rate analyst fees. Utilities should consider the time frame of the transaction and the impact of the loss of water to existing customers.  As the author states "the payback better be substantial, measurable, and sure" (p. 1).  If water costs inflate to supply the water or the utility must expanded capacity meet the contracted amount, paying cash is more economically sound. However, utilities should put this option in their toolkit of negotiating strategies.