Municipal water systems are public assets operated for the benefit of current and future municipal residents. South Carolina law requires that municipal elected officials retain oversight and control of their water systems — including establishing appropriate charges and rates for water service. This responsibility cannot be delegated away.
Elected officials are entrusted with these decisions because they serve at the will of the people, and their decisions will be judged through democratic processes. Setting rates is a core municipal responsibility, and officials must make the decisions required to sustain the public asset.
Composition of water rates
Water system charges are more than the monthly bills customers receive. Systems may also include fees for new development impacts, system connections, base service charges, volumetric usage and differentiated rates for in-city and out-of-city customers, among other specialized fees.
Municipalities should establish these charges at rates to support ongoing maintenance and necessary system expansion. Rather than relying on subjective judgments, officials should base rates on objective data, measurements and formal analyses. To ensure accuracy and fairness, many municipalities engage professional consultants to conduct comprehensive rate studies that establish a clear, sustainable pricing framework.
Monitoring and adjusting
Municipalities should review and update water rates annually as part of the budgeting process, allowing for small, incremental adjustments to keep pace with inflation and the ongoing costs of system operation and maintenance. When officials shy away from annual increases, they can create the need for sudden and steep rate hikes later, which can be difficult for residents to absorb and for officials to justify.
Updated water rates can be included in the annual budget ordinance and should be posted online to ensure transparency for ratepayers.
From an accounting perspective, a municipal water system operates as a business within an “enterprise fund,” meaning it must remain financially self-supporting. Transfers from the enterprise fund to the general fund are constrained not only by financial best practices and credit rating agency expectations but also by legal precedent, including the decision in Azar v. City of Columbia, which underscores the importance of maintaining appropriate, defensible rate structures.
Keeping rates 'reasonable'
Unlike private systems, municipal water rates are not subject to state-level regulation from the Public Service Commission or otherwise. SC Code Section 58-5-30 provides that the PSC does not have any power “to regulate or interfere with public utilities owned or operated by or on behalf of any municipality.” Instead, municipalities retain local control over rate-setting, subject to the legal requirement that rates be “reasonable,” under SC Code Section 5-31-670.
Municipalities must set rates that uniformly charge customers within defined customer classes. Unequal treatment among similarly situated users can be considered discriminatory and may raise constitutional concerns about due process and equal protection.
However, it is well established that municipalities may charge higher rates to customers located outside city limits. Many municipalities adopt out-of-city rates that are approximately double those charged to in-city users to reflect differences in tax support and service obligations.
Water rates and development
Municipalities may consider the strategic use of water rates as an economic development tool. Site selection for industrial and commercial users are often heavily influenced by the availability, capacity and cost of utilities.
In many cases, municipalities can establish a distinct rate classification for large-scale customers. These reduced or incentivized rates can make a community more competitive in attracting businesses. While such rates may result in lower short-term utility revenues, the broader economic benefits — such as job creation, an increased tax base and long-term system utilization — can justify these decisions. Careful structuring and documentation are essential to ensure that these rates remain reasonable, non-discriminatory within the defined class and aligned with the municipality’s long-term financial and policy goals.
Balancing the concerns
A municipal water system is an asset for the municipality’s residents. Elected officials should manage this system responsibly, balancing financial sustainability with community priorities. When properly governed, the water system can support both current residents and future growth — ensuring reliable service and long-term value for the municipality.