NJ Clean Stream
njcleanstream.org
How NJ sets water rates — and why the utility model makes it hard to invest in pipes nobody can see
The core problem behind New Jersey’s aging water infrastructure is not technical — engineers know how to replace pipes. It is regulatory and political: a framework that evolved to protect customers from monopoly pricing has also created incentives that discourage the long-term infrastructure investment those same customers need. Changing those incentives is NJ Clean Stream’s central infrastructure advocacy goal.
The structure of New Jersey water utility regulation
New Jersey’s water utilities fall into three institutional categories with different regulatory frameworks.
Investor-owned utilities — private companies serving water as a business, including New Jersey American Water with over 700,000 customers — are regulated by the New Jersey Board of Public Utilities (BPU). They must seek BPU approval for rate increases through a formal rate case proceeding.
Municipal utilities — water systems owned and operated by city or township governments — are not regulated by the BPU. Their rates are set by municipal governing bodies subject to ordinary local political dynamics. They receive limited financial and infrastructure management oversight from any state agency.
Water authority utilities — independent public authorities with power to issue revenue bonds and set rates — occupy a middle ground, with some subject to BPU oversight and others not. This patchwork of institutional types makes comprehensive state-level infrastructure oversight difficult.
The rate-setting process: how it works and where it breaks down
For BPU-regulated utilities, rate-setting works through a rate case — a detailed financial and engineering filing presenting the utility’s costs, its rate base (the value of assets on which it earns a return), and its proposed rate structure. The BPU conducts a regulatory proceeding — reviewing the filing, allowing intervenors including the Division of Rate Counsel (which represents customer interests) to challenge aspects, and ultimately setting allowed rates. The process typically takes 9 to 11 months.
The central concept is the rate base: capital assets the utility has invested in infrastructure, on which it earns a return. Infrastructure investment adds to the rate base, generating additional allowed revenue. In theory, this encourages investment. In practice, several features create perverse incentives.
Rate cases are adversarial. The Division of Rate Counsel has a mandate to protect customers from excessive rates. In practice, every dollar of infrastructure investment is subject to challenge — was it necessary? Prudently designed? Cost-effectively procured? This creates rational incentive for utilities to minimize capital investment rather than invest proactively, since they face uncertainty about whether investments will be included in rates.
Rate cases are infrequent. Large utilities may file every 3 to 5 years. Between cases, utilities operate under rates set in the last proceeding. If infrastructure investment costs rise faster than the rate case cycle allows rate updates, utilities face “regulatory lag” that erodes financial margins and creates pressure to defer capital investment.
Infrastructure investment is invisible to customers. There is no ribbon-cutting ceremony for a replaced water main, no visible amenity. The political reward for elected officials who approve rate increases for pipe replacement is low; the political cost — constituent complaints about higher bills — is immediate and certain.
The infrastructure investment gap in numbers
The American Water Works Association periodically assesses the national water infrastructure investment gap — the difference between current investment levels and the investment needed to maintain safe, reliable service. For New Jersey, the gap is substantial. More pipe is aging past its service life each year than is being replaced. The backlog of deferred replacement grows. The cost of eventually addressing it grows with it.
The Infrastructure Investment and Jobs Act of 2021 — the Bipartisan Infrastructure Law — represents the largest federal investment in water infrastructure in American history. New Jersey has received and will continue to receive substantial allocations. But federal funds are a fraction of the total investment needed. Sustaining infrastructure investment beyond the federal funding window requires the rate-setting framework to generate adequate ongoing revenue, direct state investment, or both.
What the BPU should do differently
Infrastructure investment tracker mechanisms. Pennsylvania and Connecticut have implemented “distribution system improvement charge” mechanisms that allow utilities to recover pre-approved infrastructure investment costs between rate cases, rather than waiting for the next rate case. This reduces regulatory lag, reduces the financial risk of proactive investment, and creates a stronger incentive for main replacement. NJ Clean Stream is pushing the BPU to implement a similar mechanism for New Jersey water utilities.
Long-term infrastructure plans as a condition of rate approval. BPU rate case proceedings should require investor-owned utilities to submit 20-year infrastructure investment plans demonstrating that proposed rate structures generate sufficient revenue to fund adequate replacement timelines. Plans projecting insufficient replacement rates should not be approved.
Performance metrics linked to infrastructure condition. The BPU should establish annual reporting requirements for average pipe age, annual break rate per mile, and percentage of system exceeding design service life. Utilities whose metrics deteriorate below established thresholds should face regulatory consequences and be required to demonstrate a credible remediation plan.
Municipal utilities: the oversight gap
The regulatory framework above applies primarily to investor-owned utilities. Municipal water utilities — serving many of the most financially stressed communities, including communities with the oldest infrastructure — face much weaker oversight. Without an external regulator requiring long-term capital planning, without mandated infrastructure condition documentation, and without the financial sophistication of larger investor-owned utilities, many municipal utilities have been the worst performers on infrastructure investment.
What NJ Clean Stream is pushing for: NJ DEP development of a municipal water utility infrastructure oversight framework — requiring long-term capital improvement plans, establishing minimum performance standards for infrastructure condition, and creating state technical assistance resources for smaller and lower-capacity utilities — comparable in substance to what the BPU provides for investor-owned utilities.
Low-income customer protection: making rate increases affordable
Adequate infrastructure investment requires rates that reflect the true long-run cost of service. But rate increases must not place an unaffordable burden on lower-income customers. These are not competing objectives — both can be achieved with the right policy design.
New Jersey currently has limited, inconsistent low-income rate assistance programs. NJ Clean Stream is pushing for a statewide low-income water rate assistance program — funded through a small volumetric surcharge on all residential water customers, similar to programs in other states — providing meaningful rate discounts to income-qualified households. This would allow rates to reflect the true cost of infrastructure investment without placing unaffordable burden on lower-income customers disproportionately concentrated in communities with the oldest infrastructure and highest rate pressures.
The political will problem — and how advocacy changes it
The deepest obstacle to adequate infrastructure investment is political, not technical or financial. Investing in underground infrastructure at a cost that shows up on rising water bills requires elected officials and regulators to make choices that are politically costly in the short term with benefits that are diffuse, long-term, and largely invisible.
Changing this requires an informed, engaged public that understands the connection between pipe replacement and water quality, between deferred investment and higher long-term costs, and between today’s rate increases and tomorrow’s safe drinking water. It requires advocates who show up at BPU proceedings and utility board meetings, who ask hard questions about capital plans and replacement rates, and who make the case that investing in water infrastructure is not a discretionary amenity but a fundamental public health obligation.
How to engage on water infrastructure in your community
- Find your water utility’s next rate case or board meeting. Investor-owned utility rate cases are public proceedings at the BPU — you can file comments or attend hearings. Municipal utility board meetings are public and must accept public comment.
- Ask the hard questions: What is the average age of pipes in our distribution system? What is our annual main replacement rate? How long at the current rate to replace all pipes past their service life? Does our capital plan include funding for that replacement?
- Contact your state legislators about the NJ Water Infrastructure Replacement Fund and the BPU infrastructure tracker mechanism. These are achievable regulatory and legislative changes that would meaningfully accelerate infrastructure investment in communities that need it most.
- Visit njcleanstream.org/take-action to find hearing schedules, contact your representatives, and sign up for legislative alerts on water infrastructure funding.
This is Article 3 of 3 in NJ Clean Stream’s Aging Water Infrastructure Series. Article 1 explains the scale of NJ’s aging water main problem and the equity dimensions. Article 2 explains the hidden connection between aging mains, main breaks, and water quality contamination risk.