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EXECUTIVE SUMMARY

A 1998 study for the Natural Resources Defense Council adds to the growing body of literature demonstrating that low density sprawl development is costly, inefficient, and inequitable. In analyzing wastewater collection systems in the Chicago and Cleveland areas, this study found that operation and maintenance (O&M) costs increase significantly as the density of development decreases. Thus, utility services to sprawling areas can be more expensive to operate and maintain than in compact, higher density areas.

The study found that the unit costs associated with the lowest service densities studied are significantly higher -- in some cases more than twice as high -- as those associated with the highest service densities. This finding suggests that, in wastewater systems that serve areas with varying service densities but that charge uniform rates for service, residents and businesses in more compact neighborhoods are likely to be subsidizing those in more sprawling ones. Further, in a separate examination of Cleveland's water distribution system, the study also found that Cleveland's system of geographically differentiated user rates goes a step in the right direction by charging outlying, higher-elevation customers in that region a premium to recover the higher costs associated with pumping water to them. Cross-subsidies likely remain in the system, however, because it does not address cost differences due to density or economies of scale. These results are important and timely as communities across the country struggle to cope with the high costs of growth.


OVERVIEW OF THE STUDY

Although previous studies have concluded that O&M costs for some services can be affected by land use patterns, the actual nature of the relationship has not previously been quantified for water and wastewater systems using empirical data. As such, this study sought to determine the extent to which O&M costs for wastewater and water utility infrastructure are influenced by different development patterns. Specifically, this study had two objectives: 1) to uncover the factors that influence the O&M costs for wastewater collection and water distribution (known as "conveyance") [1]; and 2) to determine whether current pricing schemes might provide a subsidy for low density developments.

With data from 10 wastewater systems in the Chicago and Cleveland metropolitan areas, the first part of the study analyzed the factors most influencing O&M conveyance costs. Using single and multiple regression analysis techniques, the study found that the density of development was the primary indicator of unit O&M costs for conveyance. Specifically, the variables used to express the density of the conveyance system were the number of service units per mile of pipe, the pipe miles per square mile, and the service units per square mile.

When the number of service units per mile of pipe was combined with either of the other two density variables, the multiple regression equations explained between 50 and 54 percent of O&M conveyance costs. This remainder of the variation is attributable to a combination of other factors, such as the age of the system, economies of scale, geographic and subsurface conditions, or historic maintenance policies. Additionally, variables for economies of scale (the number of service units and the volume of the system) produced significant results in single regression equations. These findings confirm that, in terms of utility service costs, the least costly land use patterns are those which have the following attributes: 1) minimize the distance over which lines must run to reach the treatment plant; 2) maximize the number of households and jobs served per mile of pipe; and 3) serve a large number of residences and businesses to take advantage of economies of scale for treatment.

These results are ground-breaking for a number of reasons. First, the study demonstrates that utility O&M costs are affected by land use patterns so that costs can be expected to increase as density decreases. In some cases, unit O&M costs for conveyance in low density service areas were more than twice as high as in the highest density service areas. Second, the study uses actual data from utility systems as opposed to hypothetical or indirect methods used by other studies. Third, because numerous systems were analyzed (i.e., the study was cross-sectional), the results can be confidently applied to other wastewater systems. Finally, although this study concentrates on the link between density and unit O&M costs for wastewater collection systems, similar results would be expected for water distribution systems.

A separate part of the study examined the Cleveland Division of Water's (CDOW) geographic zone-based user rates. Currently, CDOW, the regional water supplier for the Cleveland metropolitan area, has a zone-differentiated rate structure that is intended to take into account the higher costs of providing water service to its higher elevation areas, which, in the Cleveland area, tend to be farther from the urban core. These areas also tend to have the lowest densities and, as demonstrated in the first part of the study, higher unit O&M costs for conveyance.

This begs the question of whether CDOWs rate structure is an appropriate surrogate for relieving the cross-subsidies associated with systems that serve different densities. Although a thorough examination of this question proved to be exceptionally difficult (due to a lack of functional accounting data), a rough analysis was performed comparing in-city and out-of-city costs, along with in-city and out-of-city rate differentials. This shows that the rates generally do correspond to the approximate differences between the costs of providing water to city customers and the higher costs of pumping water to suburban customers. In this sense, the Cleveland system represents a step in the right direction toward redressing inequities inherent in uniform-rate systems that serve areas with differing service costs.

The analysis also shows, however, that Cleveland's geographic zone-based user rates do not attempt to recover-nor do they inadvertently recover-the differences in costs attributable to different land use patterns. Because these differences can be substantial, as the first part of the study revealed, it is likely that customers in denser neighborhoods (both city and suburban) within the Cleveland water service area are continuing to subsidize those customers living in less dense areas. This rate structure may also translate into a subsidy of higher income customers because lower income households tend to live in older, higher density areas.


KEY IMPLICATIONS

One of the most important implications of the study is that sprawl, the predominant pattern of land development in the last half-century, is fiscally inefficient because it can increase the costs of operating and maintaining utility services. Although previous studies found that the capital costs of providing linear infrastructure (e.g., water and sewer facilities) are more expensive for sprawl development, O&M costs have been largely overlooked prior to this study. The fact that O&M costs for water and wastewater conveyance systems are also more expensive for sprawl has far-reaching implications because these costs ordinarily account for the majority of local utility expenditures. If local governments can significantly reduce O&M costs by growing smarter, they can increase levels of public services and/or reduce costs, thereby reducing financial burdens and increasing the quality of life for their citizens.

This study also suggests that the pricing systems used by most water and wastewater providers can be inequitable because costs, although higher in sprawling locations, are usually spread evenly among all customers, including those living or operating businesses in compact neighborhoods that are more efficient to serve. In effect, the costs of sprawl are being subsidized by ratepayers in non-sprawling locations. Further, because lower income residents often live in these non-sprawling, higher density locations, such subsidies may frequently be paid by those who least can afford them.

These implications have previously not been well understood and, indeed, are obscured by financial reporting systems commonly employed by wastewater and water service providers. In fact, one of the primary difficulties in conducting this study was that the accounting systems of many wastewater and water utilities do not differentiate between various categories of costs (i.e., distribution costs and treatment costs) and do not allocate these costs to specific geographic areas. This made it difficult to determine the extent of any internal subsidies within a particular system caused by land use patterns. To rectify this problem, utilities can use accounting and financial reporting techniques that segregate data by various cost categories and by geographic location. This would begin to enable utilities to enact variable rates based on land use patterns.

This study represents only a beginning in our understanding of these complex issues. Its conclusions point to the need for a number of policy solutions:

  • The need to develop land in an efficient manner so that public and private costs are reduced.

  • The need to develop utility pricing schemes that account for locational and land use considerations and fairly and equitably distribute the costs of providing public and private services.

  • The need for utility providers to implement cost accounting methods that better illuminate costs related to location and land use.

Ultimately, this study shows that communities and regions could grow in a more financially efficient and equitable manner by developing more compact and mixed-use communities and by ensuring better parity between benefits received and fees paid. Doing so will reduce the financial burdens that sprawl places on governments and citizens.

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Notes

1. This study only examined conveyance costs of wastewater systems and did not analyze either water conveyance systems or other cost components of water and wastewater utilities such as treatment (costs of treating the water and wastewater in plants), billing, or customer service.

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