Assessing the Governance of Water Utility Financial and Infrastructure Management

Policy conversations around aging infrastructure and performance issues of water utilities and related affordability of services have often centered on the role of the federal government in spending more to subsidize capital investment. Less attention has been paid to the ability of state governments to systematically target issues affecting utility financial and infrastructure management through different policy approaches. This dissertation focuses on the impact of state-level economic regulation and oversight of publicly-owned water utilities, primarily through a mixed methods case study of the Wisconsin Public Service Commission (PSC) which uniquely regulates all publicly-owned water utilities in the state. In particular, the research considers the extent to which the PSC impacts water utility performance and how such impacts come to fruition through specific regulatory policies and mechanisms.

Overall findings indicate the PSC has a net positive impact and plays a net beneficial role despite the creation of regulatory burdens for utility managers. Performance impacts from economic regulation are most strongly perceived by stakeholders in the areas of water loss management and financial sustainability. Annual reporting requirements are a fundamental strength of regulation as they force managers to generate information that in turn produces internal capacity building mechanisms that aid decisionmaking. Smaller utilities especially benefit from these capacity building mechanisms and other regulatory actions that assist with financial and asset awareness. Additionally, outside of its impacts on utility performance, the PSC is a key stakeholder in the Wisconsin water sector and enhances utility systems of governance through dispute resolution, increased accountability, communication and sectoral involvement, and prudent decisionmaking.

However, quantitative evidence produces a more nuanced picture of the impacts of certain regulatory functions, especially related to the core role of ratemaking. There is a dual narrative on the impact of economic regulation on sustainable financial management. Stakeholders perceive the PSC plays a positive role in ensuring that water utilities remain financially resilient. However, many utilities fail to achieve benchmark rates of return, a key indicator of sustainable performance, and are financially vulnerable to exogenous shocks. These impacts in turn have broad implications for the ability of water utilities to invest in their infrastructure. These findings indicate the difficulty of applying existing tools of economic regulation primarily developed for investor-owned utilities to publicly-owned utilities that lack economic incentives and the need to further develop tools that address utility bias towards infrastructure underinvestment.