Water Works in Healthier Financial Condition
Statistics Showing Improved Outlook of 1922 for Water Supplies—Necessity of Adequate Rates to Restore the Balance Between Income and Outgo Conclusively Shown
THIS article by Mr. Metcalf brings up-to-date a series of statistics published by him in three successive years, 1918, 1919 and 1920, on conditions affecting water works departments and companies during those years. Excerpts from those articles were published in the issues of FIRE AND WATER ENGINEERING for June 25, 1919, on page 1604, and October 20, 1920, page 828. Mr. Metcalf has gone to considerable trouble in compiling the following paper, and its facts and conclusions will be found of great value and interest:
Data have been submitted to this association at previous conventions to show the effect upon the expenses and net revenues of water works in the United States, of the higher costs and lesser efficiencies resulting from war conditions. The first report was presented in 1918 under the title, “War Burdens of Water Works in United States,” and extensions of the data to cover later periods were submitted in 1919 and 1920. The present paper extends the data to include the records of the years 1920 and 1921, the figures having been furnished, as in previous cases, through the courtesy of the managers of the plants covered by the reports.
The data submitted herein for the years 1920 and 1921 do not cover precisely the same plants but they are practically the same to all intents and purposes. The records of about forty-five plants, both publicly and privately owned, are included in the present tabulation, serving a gross population of 9,000,000 in the year 1920, as compared with about fifty plants, serving approximately the same total population, covered by the earlier reports.
The records indicate that, speaking in general terms, the water works of the country are past the period of acute distress due to the war, and that their revenues available for depreciation, interest, dividends and surplus, are approaching what, would have constituted a normal basis under pre-war conditions, but they have not yet reached the higher level corresponding to post-war conditions, nor have they been permitted to make good the cumulative losses of the war period, nor has it been possible for them to make the deferred betterments to adequately meet the growing demands of the service. The results accomplished have been attained in part by increasing the rates charged customers, in part by natural growth, in part by increasing efficiency and decreasing cost of operation as the effects of the war have been gradually overcome, and in part by deferred maintenance and deferred betterments, and an undesirable reduction in margins of safety.
“The records indicate that, speaking in general terms, the water works of the country are past the period of acute distress due to the war and that their revenues are approaching what would have constituted a normal basis under pre-war conditions but have not yet reached the higher level corresponding to post-war conditions.”
In table 1 is shown a summary of data upon changes in cost of unskilled labor and of materials used in the construction, maintenance and operation of water works from 1915 to 1921. The cost of contract Ialtor, such as ordinarily used in construction was of course much higher during the war period than that of the permanently employed labor used in maintenance and operation. It is to be borne in mind, too, that the maximum reduction in efficiency was probably at least fifty per cent, at the peak or worst period.
The cost of unskilled labor reached its peak shortly after the presentation of the last report to the 1920 convention, the average cost for all works reporting, for the year 1920, being 50c. per hour, while the average cost in 1921 was 43.5c. per hour, and the present average rate is probably about 40c. The average price for 1920 represented an increase of 123 per cent, over pre-war (1915) prices; the average for 1921, 94 per cent, in excess of the 1915 prices— both without allowance for decline in efficiency or output.
The data, both as to prices and percentages, are shown in diagrammatic form on Fig. 1. It will be noted that the reduction, both in price and percentage, has been much less marked in the western group than in other sections of the country.
The increase in efficiency of labor has probably been somewhat more pronounced than the reduction in price—the efficiency or output has returned from 50 per cent, below normal, to normal, broadly speaking.
Cast Iron Pipe Prices
When the last report was made to this association, two years ago, prices of cast iron pipe were practically three times normal pre-war prices. In 1920 they rose somewhat further. The average for 1921 was a little more than twice pre-war prices, and at the present time the price is probably a little less than twice that which prevailed before the war. It appears to be abnormally high still and out of line with pig iron and steel prices and with the price level of other manufactured products as well as of labor, seriously retarding the betterment of water works.
Valves and Hydrants
The prices of valves and hydrants, which never reached so high a plane during the war as that of other materials, continued to rise in 1920 and receded in 1921 to a figure somewhat higher than that which prevailed in 1919. The fluctuations were much less marked than in the case of cast iron pipe.
The fluctuation in gross annual revenue, operating expenses, including taxes, and in net revenues applicahle to depreciation, interest, dividends and surplus, expressed in percentage over pre-war conditions, as exemplified by those of the year 1915, are shown in table 2 and Fig. 2, in average amounts and for geographical groups.
(Continued on page 1036)
Table 1-Summary of Data Upon Increase in Cost of Unskilled Labor and Materials to Water Works in the United States, from Pre-War Basis (Characterized by 1915 Costs) Up to 1921
Water Works in Healthier Financial Condition
(Continued from page 1028)
It is to be noted that gross revenues, which lagged behind in normal rate of growth from 1915 to and including the year 1919, have grown more rapidly during the years 1920 and 1921.
Operating expenses, which continued to increase rapidly up to and through 1920, have increased very much less in 1921. Indeed in the case of the southern group there has been an actual decrease in the operating expense of 1921 as compared with 1920, and in many works there has been a decrease in per capita cost of operation.
Net Revenue Has Improved Materially
The net revenue increased at a very slow rate to and including the year 1920. It has improved very materially in the year 1921. The average percentage increase for all groups has recovered to a point but little below the line of increase normal for pre-war conditions assumed in 1918 and carried forward as a straight line since that time, as shown in Fig. 2, thought it is far below the plane of present price levels.
In the paper presented in 1919, the statement was made that “the net revenue of water works usually increases at the rate of from 4 to 5 per cent, compounded annually.” The straight line in Fig. 2, marked “Normal Increase,” corresponds to an increase of 3.9 per cent, annually without compounding and is, therefore, somewhat below the position which it would have had if the annual increments had been compounded, but the difference is not great and it is interesting to compare the actual conditions developed, with the forecast then made. These differences are shown on the three last lines at the end of Table 2.
Percentage Increase in Net Operating Revenue
A study of Fig. 2 and of the last three lines of table 2, indicate the following comparison:
Percentage Increase Over Pre-War Amount (in 1915) of Net Operating Revenue, Applicable to Depreciation, Interest, Dividends and Surplus, Covering Six-Year Period from 1916 to 1921 Inclusive.
Expressed in words, this indicates that,
First, the actual growth in net revenue during the six year period front 1916 to 1921 inclusive, has been about one-half of that normal for the growth in population and service during this period under pre-war price and fair return conditions, despite the effect of such increase in rates as was actually granted in many parts.
Second, the present average net return is slightly below normal pre-war basis.
Third, the cumulative losses to the water works of this country, both publicly and privately owned, of this six year period (1916-1921), have not been amortized, nor can they be on the present rate basis within a reasonable length of time.
Fourth, while many works have been granted increases in rate which will probably enable them to maintain credit and to make much needed betterments and extensions of plant and service, this is not yet true of the average plants, therefore, many yet remain, the rates of which will have to be still further increased, if desirable standards of service are to be maintained.
Thirty Per Cent. Increase in Rates Justified
Assuming that the “normal increase” line in the net revenue diagram of Fig, 2 does represent the increase in net revenue which might normally have been expected under pre-war conditions (though as has been shown, it is really below a normal rate of increase) it is interesting to estimate approximately the extent to which the water works of the country have suffered from the failure to earn the revenue which should normally have accrued to them under pre-war conditions. Applying the differences between the assumed normal increase and the actual gain in net revenues for the various districts into which the country has been divided, and making approximate computations, it appears that the works represented by these reports have suffered a loss of upwards of $6,000,000 by the failure to earn the net revenues which might normally have been expected, during the years 1917 to 1921 inclusive. If the same ratio were assumed to hold for the entire country, with some allowance for the small proportion of the population not served by water works, it seems probable that the total loss to the water works of the country has approximated $50,000,000 on pre-war normal basis. If proper recognition be given to the higher plane of war and post-war conditions, the amount below a fair return would probably be from four to six times as great, or say roughly, $250,000,-000. Or to express the matter in a different way, the water works of this country are on the average back again on the deflated pre-war income basis, though they are still carrying the losses accumulated during the war, whereas the general loss in purchasing power of money or increase in costs would probably justify an average increase in net revenue over prewar basis of at least 30 per cent, and probably as great as 40 per cent, or even more in some cases.
Table 2—Increase in Revenues and Expenses of Water Works in the United States Over Those of 1915— In Percentage
Rate Increase Granted Not Adequate
These later studies indicate the soundness of the earlier conclusion that the regulatory authorities have found it impossible under war conditions, at least, to remove the hazard of investment and burden of loss in such enterprises, and that the rate increases granted were not only inadequate but lagged after the adverse conditions by at least eighteen months.
(Continued on page 1042)
Water Works in Healthier Financial Condition
(Continued from page 1036)
The financial problem involved is not yet solved. It is a difficult thing, practically, to increase rates now, where no increase or inadequate increase was granted during the war period—in the face of lower and yet declining prices. But such increase is essential in many if not most cases, if desirable standards of service are to be maintained. The public wants, is entitled to have, and is ready to pay for, a really high standard of service. The difference in cost to the family, between the good and the mediocre or inadequate service, is probably considerably less than is spent by many a family in chewing gum. Water service is by far the cheapest of all public services and easily within the resources of the public.
The public and the individual has a right to demand that the water service shall be good in every respect and that fair margins of safety shall be maintained.
The administrators and regulators of water works have no right, to carry the hazards and take the chances incident to a water supply which is inadequate, either in quality, in quantity, or in pressure.
The war is past and sound economic doctrine demands that the water works should be rehabilitated first of all, as they are the utilities most important to the public health and they involve the least cost to the public.
It is encouraging to note that, despite the difficulties involved, some of the utilities commissions are coming to sense the inherent dangers of the situation and the desirability of somewhat more liberal standards than those of the past. Already several have considered means of amortising losses of the war period, recognizing that failure to do so must have the inevitable effect of retarding recovery.
It is with the water works as with the individual. To deny good food and living conditions and normal hope of recovery to the patient recuperating from a long and serious illness, is but to court death or further continued burden or expense; whereas a friendly attitude and atmosphere of encouragement, with occasional assistance from a competent doctor, on the other hand, hastens recovery and lightens the burden of all.
(Excerpts from paper read before the Philadelphia convention of the American Water Works Association.)