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Economic Analysis of Issues Associated with Converting Greater Cincinnati Water Works to A Regional Utility

Submitted by pitzerjr on Mon, 08/23/2010 - 10:57am
Prepared for: 
Greater Cincinnati Water Works

General Economic Principles of Water Utility Expansion and Costs

  • Water utilities typically have very large fixed costs of production for a given capacity, the total amount of which do not change with the amount of water provided to consumers.
    • These large fixed costs include capital costs for treatment plants and distribution systems. These are generally the most significant cost component for water provision.
    • Increasing the amount of water delivered, allows for lower per unit production costs across the entire system as the fixed costs are spread out over more customers.

    Economics of Greater Cincinnati Water Works (GCWW) Operations

  • Total consumption in the City of Cincinnati has declined over the last decade, almost 3 percent on average annually between 2000 and 2009.
    • Expansion of the system has maintained total output.
    • Expansion has allowed per unit production costs to decline for all customers
    • Customers in the Non-Expansion areas benefit from these reduced production costs particularly in light of decreased consumption for these customers.
  • Without the addition of the major Expansion areas, Warren County, Northern Kentucky, and Butler County, per unit production costs for water would have been higher, about $0.07 per ccf (hundred cubic feet) of water.
    • This would have resulted in a total of nearly $30 million in additional production costs borne by Non-Expansion customers over the period 2000 through 2009.
    • The $30 million in savings to households and non-residential customers, if entirely spent within the region, would generate an additional $18 million dollars of economic activity for the total impact in the region, savings plus additional activity, estimated to be $48 million for the ten-year period.
  • Future expansions may be necessary to maintain per unit production costs incurred by the Non-Expansion consumers in particular, but also all of GCWW’s consumers.
    • If Non-Expansion consumption declines over the next decade at its historical rate, future expansions that maintain total system volume could produce production costs savings of$23 million over ten years, relative to keeping Expansion area consumption at roughly current levels.
  • Expansion area customers benefit from joining GCWW in two ways:
    • Lower per unit production costs associated with the larger system; and
    • Avoidance of large fixed costs for setting up and/or maintaining an independent system.

    Economics of Public Investment in Infrastructure

  • Public investments in infrastructure can promote regional economic growth.
    • Public investment can support private sector businesses that use the infrastructure.
    • Construction of the infrastructure directly generates employment, as can ensuing private sector activity.
    • Households also benefit privately from using the infrastructure.
  • Converting the Greater Cincinnati Water Works from a City-owned to a regional water district will provide the City of Cincinnati with the ability to fund infrastructure investments that will directly contribute to the City’s economic vitality.
    • Annual revenue averaging $15 million for 75 years will fund city infrastructure investments.
    • Economic impacts of infrastructure construction will include 300 permanent jobs with annual earnings of $11 million and generating $135,000 a year in Cincinnati earnings taxes.
    • Infrastructure construction impacts will total $26.25 million in economic activity in Hamilton County and another $7.5 million in the balance of the metro area.
    • By investing in economic development-oriented projects, the ongoing impact once this infrastructure is in place could amount to hundreds of additional jobs.