NRRI 17-05 Small Water Systems

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There are over 50,000 community water systems in the United States; of these, just over 82 percent serve fewer than 3,300 customers, which are categorized as small water systems. Therefore, small water systems represent an important segment of the water industry in the United States (EPA, 2016B). While many small water systems are successful, others face challenges in providing clean, reliable water service to customers for a variety of reasons. This document provides an overview of small water and wastewater systems in the United States, and reviews actions being taken by state utility commissions to assist small water systems in effectively managing their work to ensure reliable service and quality.
Section I of this document provides a historical and literature review of small water systems. This section also provides an overview of the challenges unique to small water and wastewater systems. Some of the primary challenges faced by small water systems include, but are not limited to:
 Funding the replacement of aging infrastructure,
 Expanded regulatory requirements under the Safe Drinking Water Act, and,
 Difficulties in achieving economies of scale.
Section II presents the results of NRRI's survey of state utility commissions' use of the ten best practices established in the National Association of Regulatory Utility Commissioners (NARUC) resolution entitled “Supporting the Consideration of Regulatory Mechanisms and Policies Deemed Best Practices for the Regulation of Small Water Systems” (NARUC, 2013). These include:
1. Simplified rate applications for small water systems;
2. Electronic filing procedures;
3. Use of the annual report to provide a significant portion of the rate application;
4. Commission staff assisted rate cases;
5. Simplified rate of return mechanisms;
6. Cost of living adjustments;
7. Rate mechanisms to facilitate emergency infrastructure funds;
8. Operating ratio rate mechanisms where there is very limited rate base;
9. Limiting the use of Contributions In Aid of Construction; and,
10. Combining water and wastewater revenue requirements for purposes of rate cases, as appropriate.
The review of best practices for small water systems, revealed some key insights into how states support small water systems. Forty five states have regulatory authority over water utilities; of these, 41 include at least one best practice for small systems in their water rules. For states that included at least one NARUC best practices in their rules and regulations, the average number of best practices for a state to adopt was three. The majority of states that were responsible for regulating more than 100 small water systems included more than three best practices in their rules and regulations. The most commonly adopted best practices were: E-filing (31), use of annual reports (23), and simplified rate applications (18).

Section III reviews a cross-section of additional policy tools used by state commissions to support small water and wastewater systems, and includes information on how states have adopted policy tools into regulation. This review uncover a variety of different approaches to supporting small water systems, and documents 16 policy mechanisms for supporting small water systems.
Section IV provides an overview of findings from the literature review and survey of best practices for small water and wastewater systems.
Section V presents topics for future consideration and research, including issues such as low-income affordability in the face of likely future increases in customer water rates for aging infrastructure replacement, and possible applications for Nudge Theory (Heiskanen, Lehner & Mont, 2014).