Structuring Water Rates to Encourage Conservation
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The long streak of hot and dry weather this summer has made us all more conscious of water usage. As storage levels have dwindled and as production capacity has been maxed out, some areas have had to resort to voluntary or even mandatory water use restrictions.
If you’ve always had a traditional view of how to set water rates, here’s a new idea: you can actually structure your water utility rates to encourage conservation.
Most utilities postpone expanding the capacity of their water treatment facility until absolutely necessary because it is a very expensive investment. Facilities must be designed to provide for peak daily flows, thus the most expensive service is provided at periods of maximum usage. If you can use your rates to even out peak demand, it produces both short-term and long-term cost savings. Rate structures based on consumption send a price signal to the users driving the demand for water.
There are five common ways to re-structure water rates to promote conservation:
1. Seasonal Rates – A seasonal rate varies by time period, establishing a higher price for water consumed during the utility’s peak demand season. The Seattle, Washington public water utility among many others throughout the western United States uses a seasonal rate.
2. Conservation Rates – A rate that increases as water usage increases promotes conservation because it is in the user’s economic interests to use less. It is the opposite of a declining-block rate typically found in Indiana. Here’s one example:
| Volume | Cost |
| 0-10 CCF (1) | $ .50/CCF |
| 11-50 CCF | $ .75/CCF |
| 51+ CCF | $ .95/CCF |
3. Rate Block Compression — Utilities have historically maintained as many as five or six rate blocks. The current trend is to have fewer rate blocks with each block covering a larger consumption range at a higher average price per unit purchased.
4. Rates by Customer Class – Rates can be structured based on the water usage characteristics of each class: residential, commercial and industrial. One university community not only has different residential, commercial and industrial rates, it has two rates for the university and yet another rate for irrigation.
5. Interruptible Rates – Interruptible Rates have been used mainly in the electric industry, but they can work for water as well in some situations. You offer a cheaper commodity rate to customers in exchange for the ability to take them offline during peak usage periods. This rate structure is most commonly applied to industrial customers, hospitals and other large-volume users, because it requires either on-site water storage or a backup water supply.
Which model works best depends on your goals and your customer mix.
For public health and safety, your end goal is to ensure an adequate supply of potable water and to maintain a sufficient water supply for fire protection even on peak days.
Before moving to a conservation-minded rate structure, you must be sure the structure you propose is fair and legally defensible. “Fair” means the rates are not arbitrary or discriminatory. To be legally defensible, you must be able to present facts to demonstrate the rates are based on the cost of providing service and that the rate structure was enacted in accordance with applicable laws.
It is best to start early, because it is much easier to make gradual adjustments in your water rates rather than sweeping changes.
If you have questions or would like help in analyzing whether rate changes might promote water conservation in your community, please contact us at footnotes@umbaugh.com.
(1) CCF = 100’s of Cubic Feet
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Information in this article was believed current as of the date of publication. As you know, changes occur frequently. The information presented is of a general educational nature. Before applying to your specific circumstances, please contact us at footnotes@umbaugh.com.