An Economic Perspective on Fiscal Sustainability of U.S. Water Utilities: What We Know and Think We Know

Abstract

A key issue facing U.S. water utilities is that while costs are generally fixed and increasing over time, the revenue is typically variable and has generally been decreasing/dampening over time, making it harder to maintain fiscal sustainability. Based on a comprehensive review of the relevant literature, we highlight the major factors that can potentially impact the fiscal sustainability of a water utility from an economic perspective. Furthermore, using numerical examples and data from North Carolina, we critically examine which of these factors actually contribute to the fiscal unsustainability of water utilities. We conclude that decreases in demand and increases in costs are the two primary driving forces. Particularly, rate increases cannot be attributed as a determinant of fiscal unsustainability because of the inelastic nature of water demand. Finally, we also highlight strategies for U.S. water utilities to improve their fiscal sustainability.