The California State Water Resources Control Board approved new regulation in July 2024 that places conservation requirements on approximately 400 water agencies in the state. Cumulatively, these agencies deliver water to approximately 95% of California’s residents. The regulation is expected to be in effect by January 1, 2025.

Under the new regulation, each affected agency will be required to calculate a water budget to develop a “water use objective,” which is what the agency must comply with starting in 2027. There will be a gradual reduction of the amount of water that each of the state’s urban retail water agencies can use between 2027 and 2040.

As water agencies face pressures to avoid rate increases, it is anticipated that outreach efforts to ratepayers will focus on encouraging less outdoor landscape use, both for residential and commercial customers. While conservation is good from a supply and environmental standpoint, it places added financial pressure on the water utilities. Consumption impacts both revenue and expenses and, with positive conservation efforts continuing to be a priority in the state, revenue declines could put the water utilities at risk in the future without changes in the consumption charges. As a result of this focus on conservation efforts, it is anticipated that water agencies will not be selling as much water to their customers under this proposed regulation framework, which means decreasing revenues for the agencies from volumetric rates. As the regulation requires water reductions over time from 2027 to 2040, this directly translates to lost revenues increasing over time as well for the agencies.

Ideally, water agencies should recover all their fixed costs from fixed charges and all of their variable costs from volumetric rates. When this is the case, fluctuations in water sales revenues would be directly offset by reductions or increases in variable expenses. When rates are set in this manner, they provide greater revenue stability for the water agencies. However, other factors are often considered when designing water rates, such as community values, water conservation goals, ease of understanding, affordability, and ease of administration.1

With the new conservation regulations now in place, NBS is available to assist water agencies in analyzing potential revenue shortfalls for their existing rate structure based on the calculated water budgets for the agency. Based on the analysis, it may be advisable for an agency to re-visit their rate structure within the five-year adopted rate period to proactively address revenue shortfalls, rather than having to play “catch up” later on. Additionally, to help offset these risks of potential revenue shortfalls, developing demand reduction rates are one strategy that NBS has implemented in rate studies to account for various stages of water conservation and/or reduced demand to allow for water agencies to continue meeting financial obligations going forward. The demand reduction rates would be intended to go into effect whenever the agency declares it is in a specific stage of its adopted conservation or drought emergency plan. If ratepayers are required to reduce their water usage, the agency will essentially have the same costs to treat water and operate the system, as well as the additional variable costs related to the treatment of potentially less clean water, communicating usage requirements, monitoring compliance, and responding to customer requests. The agency will then have the ability to recalculate the volumetric charges and spread the adjusted costs over the projected (lower) water sales.

Solving California’s interconnected challenges facing our water supply is critical. NBS has a powerful mission to be the experts in our field to help communities flourish with innovative and practical financial, consulting, and administrative advice and support. The next time you start pondering how to address these topics in your local community, feel free to reach out to us. We’d love to talk and partner with you.

1: Principles of Water Rates, Fees, and Charges, Manual of Water Supply Practices, Manual M1, AWWA, 7th Edition, 2017, pp. 6 and 96.