Fixed Costs and Variable Costs Impact of Shrinking or Declining Towns

The discussion on the question below continues with Heather and Ross providing more insights.

“Is there a formula or is research being done to assist utilities balancing aging infrastructure with the possibility that the customer base will decline? The population in our area is declining. If we plan to replace existing infrastructure, we may be overbuilding. Getting this balance correct seems very difficult.”

Heather shares:

It is by far the biggest issue in infrastructure because you know we often talk about fixed cost and variable cost.

And when you have fixed or you have assets in the ground, there is a cost associated with just having those assets there and whether you serve a million gallons a day or two million gallons, or a hundred thousand, or ten thousand, those assets are still there and you still have to maintain them.

So that fixed cost isn’t going to change. The variable cost might go up or down a little bit because you don’t have to pump as much water, or you don’t have to treat quite as much water.

But that’s usually a very small portion of your bill. The bigger portion is that fixed cost for having that infrastructure already in place.

So it does become a huge, huge problem. One of which you have to think long term.

What does the community look like when we replace the infrastructure the second time around? How are we going to do that?

Is it going to be a process like Ross talked about shrinking that infrastructure down to meet a different-sized population?

And the only other suggestion I have is, in many cases if it’s small communities and if there are several small communities around, you can get a little bit of economy of scale by working together.

I know that regionalization is not a topic that a lot of people like to hear about but I think it has a lot of merits, especially in a case where we have a declining population base and we have fewer people that could pay for the services.

You have to look for ways to cut your cost, and even if you don’t physically interconnect systems, if you develop a managerial structure, such that you’re part of a bigger operation that can cut some overhead costs and cut some of your fixed expenses.

So, looking to your neighbors to see if there are any opportunities to work together, that might be a way to cut some of your expenses and try to make ends meet because it does become very difficult going forward if you have that shrinking population base.

How are you going to keep paying for the services that you’re providing?

So again, one of the ways, one of the only tools that we have available is really to come up with a structure – a regional structure where maybe there’s one entity managing several systems and we’re kind of pooling resources.

Maybe we’re sharing operators, we’re sharing managers, we’re sharing bookkeepers, maybe billing systems – things of that nature to try to help as much as possible to cut your costs and make it affordable for your customers.

Ross says:

The real issue is always and again, several of the towns I’ve got in New Zealand that are shrinking quite rapidly.

The most influential person in town or group of people in town has chosen to buy houses, big houses, and properties on the edge of town.

So whilst you might have some empty lots and some houses that are effectively being abandoned or whatever between them and perhaps the center town where there are few more people still living.

There’s no way that they want the services cut out to their mansion on the edge of town. And you know that’s just the political reality.

And they’re obviously, often very well-resourced and very articulate people, and well, politically connected as well.

And so the issue is then again you could look at Detroit as the example there. Growth isn’t uniform and nor is decline.

And the trouble is that services go past empty areas before they get to areas that still require the service to go on and still cost money to maintain and to replace.

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