Shanghaied Water Rates: What Palm Coast Has in Common With China’s Largest City

Palm Coast residents might have smiled knowingly when they picked up their Friday issue of Shanghai Daily and read, on page 2, a familiar headline, but for the geography: “Shanghai plans 30% rise in tap water charges.” A few months ago the Palm Coast City Council approved a 16 percent water-rate increase over three years. Combined with a steeper stormwater rate increase, Palm Coast’s “adjustments” rival those of Shanghai, which folds its stormwater costs as part of its water bills.

China’s (and the world’s) largest city–with a population approaching 25 million–is increasing its water rates for much the same reasons and with the same rationales as Palm Coast, if not, on occasion, the same excuses compelled by similar pressures: over-development, over-extension, and regulatory demands. A seemingly outlandish comparison between the two cities turns out to be much less so–and much more instructive–when comparing the similarities of the two cities’ utility challenges, and the limited ways they can go about addressing them without, in the end, making the rate-payer pay.

The lesson: when it comes to managing a utility, no matter the setting, the bottom line generally has a lot less to do with conspiracies to stick it to the rate-payer and a lot more to do with the vagaries of the market, demographics, environmental expectations and unexpected turns in the economy.

“This is not a price adjustment meant to make money,” Chen Yuanming, the vice director of the Shanghai Water Authority, is quoted as saying. “While Shanghai continues to spend heavily to improve water supply and quality,” the article continues, “‘we have to ease water utilities’ financial strains,'” Chen says. In other words, Shanghai’s authority is facing the same pressures as Palm Coast’s utility: bond holders must be appeased.

The push behind Palm Coast’s water hike–16 percent over the next three years, starting with an 8 percent jump rate-payers saw last month, when they received their bills for April usage–was the result of several factors. The city overextended itself during the boom years by assuming that the boom would continue. Its high-end water plants and its well fields were expensive to develop. But as long as new residents kept moving in, the city could defray much of the cost by using development impact fees rather than rate hikes. Fee collection stopped after the crash in 2007. Financing the system, which borrowed heavily, did not.

Bond holders always come before rate payers, otherwise they tend to break cities’ legs: a municipality that doesn’t make good on its debts sees its bond rating crumble and its financing costs climb, and could theoretically face bankruptcy. Originally the city planned a 22 percent water-rate increase over three years. Residents howled. The city council adopted a 16 percent increase, but with no promises that the increases further down the road will not be steeper than the current pledge to just go up in line with inflation. The city is again making a bet that in three years, development will pick up where rate-payers would have for the next two. It’s the same bet the city made in the previous decade, and lost.

The comparison with Shanghai is not en exaggeration, except in terms of scale: Shanghai is the largest city in the world, but it’s under the very same pressures a city like Palm Coast–and innumerable cities across the globe–are facing when it comes to utility management. The recent history of Shanghai’s utilities makes the point. In 2008, Shanghai was estimated to have 18.9 million residents, according to a United Nations report, with a population growing to 25 million by 2020–a Flagler County-like growth rate on a much larger scale.

In 1992, the city created the Urban Development Investment Company to finance and manage development authorized by the city government. (The city itself could not directly sell bonds until 2011.) Its main sources of financing, according to a UN report, are “loans from commercial banks and [international financial institutions] such as the World Bank and the Asia Development Bank; funds raised from the capital markets by the listed subsidiary company; and the issuance of bonds.” The authority oversees a group of utilities within the city, but those water suppliers reported a $44 million loss last year, according to the Shanghai Daily article (268 million yuan), and are facing higher costs this year “because of higher raw water prices, operation costs, depreciation of fixed assets and rising interest costs.”

Why those rising interest costs? Here’s a hint: in mid-April, Moody’s, which also rates Palm Coast, lowered the bond rating of China’s government, an unhappy signs for borrowers in the country’s largest local government. Five months earlier, the Shanghai Water Authority had announced a five-year, $16 billion investment to upgrade its water utilities, including, ironically, its stormwater system (what they call flood control and “riverbank administration” over there), what has also been a huge financial (and bond-holder-driven) challenge for Palm Coast: stormwater rates have also jumped 46 percent this year.

Shanghai’s push has as much to do with modernization as with water quality–and conservation. “As with fuel, power and natural gas,” the Shanghai Daily article concludes, “water is another commodity for which the Chinese government is pursuing price reform to better reflect the scarcity of resources and to encourage conservation.”

The Palm Coast City Council and administration have used a few different euphemisms to describe their price increases, but they have never gone so far as to call them “price reform.”