A Rate Structure Rubik’s Cube

It costs consumers to conserve water

Laura_Sanchez_Blog

Water agency rate structures typically recover costs by charging consumers per gallon, which means that when usage drops, rates have to go up. In many cases, that means that it costs rate payers more to conserve water.

The financial logic is simple. If a company sells less of something, it has to cut costs, raise the price, or a combination of both to maintain the bottom line. So when utilities encourage consumers to use less water, a rate increase is inevitable.

According to utility sources, about 80 percent of the costs of delivering water to urban customers are fixed. They cover maintenance expenses for pipes, pumps, and treatment plants, as well as energy costs and storage.

The Alliance for Water Efficiency explains that some water districts charge an increasing block tier rate, with those using the most water paying the highest amount per gallon. Other water districts have implemented an allocation model, in which a fixed amount of water for basic usage is sold at the lowest price, with gallons above that base amount charged higher rates. And others use water budgets with punitive tiers when budgets are exceeded.

In California, from June 2015 to January 2017, consumers reduced water consumption an average of 22 percent in response to the state’s drought. Although this winter, extensive rains brought some drought relief, several California water agencies recently announced that they are planning rate increases.

In Southern California, Whittier City water rates may go up from 4.5 to 6 percent over the next two years. And according to the New York Times, the East Bay Municipal Utility District plans to raise water rates 9.25 percent on July 1 and another 9 percent the next year. In nearby Marin County, the water agency plans to raise rates 7 percent per year for the next two years. An agency spokesperson explained that some of the revenue will support infrastructure renewal projects.

Although the rate increases are rational shifts driven by an evolving market, they have created dissatisfaction among utility customers who have worked to reduce their water usage. Today, many of these customers have dry lawns and dusty cars, but are paying higher water bills than ever before.

How does your agency encourage consumers to conserve while maintaining budgets? Are conservation rebates a valid option? WE_bug_web

Comments
    • Laura S.

      Ms. Schat, you are absolutely right. I hoped to convey that there has been some relief. I will correct that sentence. Thank you for pointing that out.

      Reply
  • phil dick.

    Laura, this has been an issue for municipal water-dependent food processors in my home province for years. The challenge is municipal services charges for use are also calculated to cover the value of access. I have made this recommendation in the past that access and use rates need to be de-coupled. Access rates need to cover fixed costs while use rates should cover variable costs. Large water users have argued successfully to get declining block rates based on their “efficiencies”, then are surprised when they reduce use and pay more for water. By incorporating fixed costs into use costs, small water users do not pay for access.

    One other issue I have seen is that municipalities have, in the past, based their water revenue projections on the assumption that residential use and ICI use should pay for a fixed proportion of the budget — say 70/30. A conservation program that is dis-proportionately undertaken by one group, then disproportionately increases their share of fixed costs and reduces the other’s fixed cost liability. that is neither fair nor equitable.

    We could take a lesson from the Netherlands where municipalities judiciously separate and decouple charges for services and use.

    Reply
  • Bruce Flory.

    A utility must ask, why do conservation? The answer should be because it’s cheaper than the alternative. For example, a utility with growing demand and forecasts of continued growth may be faced with having to develop new sources of supply to meet that demand. If it’s less expensive to reduce demand through conservation than to build new supply, conservation is the better investment. Yes, rates will go up as the revenue to cover existing fixed costs must be generated from a declining consumption base. But customer bills are more relevant than rates. Bills (consumption times the rate) will not increase as fast as rates because the customer is buying less water and using it more efficiently. Conservation reduces total future costs by avoiding the cost of new supply. Average water bills are lower than they would be without conservation (even though rates might be higher). And that’s the goal. The trick is to explain this to customers: Yes, your rates are increasing because of conservation but your total bill is less than it would be if we weren’t doing conservation. This blog post does a disservice by leaving out that important detail.

    Reply
    • Laura S.

      I’m grateful for your comments, Mr. Flory, and I agree that education is key.

      Reply
  • Frank Roth.

    I totally agree that education is key. A common question many water customers ask is “Why are my rates going up again when I am conserving?” It’s a question that our utility wanted to answer for its ratepayers because it goes to the heart of what has been called the “Conservation Conundrum.” To help our customers understand this challenge, we decided to use our “Customer Conversations” outreach program, which consists of interactive public forums designed to obtain customer input. The meetings set out to educate and inform while also soliciting ideas and opinions from customers. In this case, we wanted to start a dialogue regarding the utility’s increasing infrastructure needs, as well as rate structure scenarios that would help deal with the Conservation Conundrum.
    Read more:
    http://www.financingsustainablewater.org/blog/infrastructure-and-rates-what-your-customers-think-might-surprise-you

    Reply

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