Celeste is a rateable unit in my water‑main system outside a city I do not name — 38, mother of two, with a child who drinks tap water every night. The water you poured into your cup this morning came through a pipe I have chosen not to maintain. The pipes that carry it are 85 years old. The repair would cost $47,000. I haven’t spent it. The $47,000 sits in my operating account. God willing, the pipe holds until the quarter closes.
John Fund wrote in National Review this week that America’s aging water infrastructure is a crisis that market forces should solve. He cited 6 billion gallons of treated water lost every day — a number he treats as a tragedy. I treat it as a revenue line. The 6 billion gallons are water that has already been priced into Celeste’s bill. Fund is right that there is a solution. He stops one sentence short of the name. The solution is me.
Let me put the arithmetic where the water is.
The pipe under Celeste’s street is a cast‑iron main laid in 1941. I’ve extended its life to the exact point where the cost of failure equals the cost of replacement. I know that point because I’ve priced every variable. $47,000 to open the street, excavate the joint, install a stainless‑steel clamp, and restore the asphalt. Against that: 11 gallons per minute, 5,781,600 gallons a year, at $2.84 per thousand gallons. The leak costs me $16,417 a year in revenue I don’t collect. The repair costs $47,000. The break‑even on the repair is 2.9 years. I’ve owned this system for 8 years. I haven’t repaired it. The arithmetic is correct. I’ve kept the difference.
$0.00097 per gallon. That’s the margin on the water Celeste’s child drinks that I’ve decided not to spend on a leak‑detection sensor that costs $12.50. The sensor was in my cart. I closed the tab.
Now widen the frame, because the pipe is only the instance of the law.
I own a treatment facility in a Western metropolitan system through a holding company in Delaware. The EPA’s Long Term 2 Enhanced Surface Water Treatment Rule would require an upgrade I’ve estimated at $190 million. I’ve spent $0 on the upgrade. Instead, I filed a compliance schedule and added a regulatory infrastructure surcharge to the rate base that produces $8.4 million a year — revenue that does not go toward the upgrade. The fine, when it arrives, will be cheaper than the capital. The surcharge will not expire after the fine is paid. I’ve designed the delay into the rate structure.
Here is the principle the case was only an example of.
Cato, in De Agri Cultura 2.7, told the estate manager: “Sell worn‑out oxen, blemished cattle, blemished sheep, wool, hides, an old wagon, old tools, an old slave, a sickly slave, and whatever else is superfluous.” He was pricing a different kind of capital on a different ledger. The arithmetic is the arithmetic. A pipe is a tool the way a wagon was a tool. When the maintenance cost exceeds the value of keeping it in service, you either sell it or you defer the expense to the party who cannot refuse it. The ratepayer is the party who cannot refuse it. I have deferred elegantly.
The face of the law is Celeste’s child, who drank from that cup again tonight. The face on the other side is my operating statement, which does not carry a $47,000 line for the repair.
I have taught this arithmetic for 30 years. I wrote a textbook chapter on lifecycle cost optimization for water utilities — it is on the reading list at half a dozen Warden College affiliates. The man who set the rate schedule for the Western system where Celeste lives sat in my seminar in 1998. He received an A. The variance he filed explaining the rate increase cited “deferred maintenance liability restructuring.” He knows the language. I am proud of him.
Read the next figure twice, because it is the one that explains your bill: the cost of the leak I do not repair, spread across Celeste’s monthly statement, is $0.14 per household. 14 cents. That is the margin on which a woman’s child drinks water from a pipe that will fail.
The pipe has held for 85 years. I assume it holds for one more quarter. The rate base will absorb the cost when it does not. I have not priced the interval after that. The infrastructure that made this country was built on a contract with a future that did not account for me. I am the future. I have collected the revenue and let the asset rot at the rate that maximizes my return between now and the collapse. Beyond that, I do not look. The margin is collected. The bill is paid. The water, for now, arrives.
Sterling A. Varice holds the Hayek-Friedman Chair and serves as Dean of Instruction at Warden University’s College of Business and Economics in Richmond, Virginia. He is the author of three textbooks: Divine Mandates for Labor Utilization, Social Obligations for Profit Maximization, and Calibrated Deprivation: A Manager’s Guide to Employee Motivation.