September 2012 by Greg Clumpner, M.S., Director, NBS
So what’s up with water conservation rates these days? Lots! If you have been at least minimally following legislative/regulatory efforts, you know that there are three key concepts to be mindful of:
- 20% reductions in per capita water use by year 2020
- Adoption of conservation rates, including “water-budget” rates
- 70% of rate revenue should be collected from volume-based rates
Here’s an update on how this whole concept is working out…
Status of Conservation Efforts
Largely due to the economic downturn and ratepayer’s response to rate increases, most communities have already met, or are close to meeting their mandated 20% per capita reductions.
The state-wide conservation regulations are underscoring the highly localized need for water conservation – whether you actual need it depends on your location. Communities in the north coast and Tahoe areas have more water than they could possibly use, but conservation makes a lot of sense in areas with increasingly expensive and constrained water supplies, such as Southern California and the Central Valley. Widely accepted rate-making and cost-of-service methodologies don’t particularly emphasize water conservation, but instead allow and even recommend that communities consider broader-based pricing policies that include social, economic, political and environmental concerns. Rates should also be easy to understand, fair and equitable, and easy to administrate.
Conservation Trends and Their Impacts
Increasing emphasis – some would say over-emphasis – on water conservation has, in many cases, produced revenue instability. Generally, the higher the percentage of revenue collected from volumetric rates (such as tiered rates), the greater the revenue instability. This is due to normal drought-wet year cycles (which can be state-wide or localized), economic conditions, and customer reaction to rate increases.
Water-budget rates, which set rates based on individual customer “needs” and focus on improving efficiency rather than reducing total consumption, have raised questions about the fairness and equity of this approach. Regardless, implementing water-budget rates is typically expensive and time consuming.
In the search for a “better mouse trap” approach to water rates, the City of Davis is evaluating a new rate design that the local newspaper says “…could have Davis residents paying the fairest water bills in the State…” This approach retains residential tiered rates, but adjusts fixed monthly charges based on the customer’s previous year’s water use. This step towards mostly volumetric-based rates needs careful vetting to determine its validity, or lack thereof.
Here are few key guidelines when considering how you set your water rates:
- Fixed and Variable Costs – It’s important to accurately and fairly allocate costs between “fixed” and “variable” categories. Fixed costs include capital improvements, debt service, salaries and benefits. Variable costs are purchased water, energy, treatment chemicals, etc.
- Rate Design – If fixed costs are collected through fixed charges, and variable costs through volumetric rates, annual water rate revenue will be highly stable. An example of this is Irvine Ranch Water District, which happens to use water-budget rates; they have said, “We don’t care whether we sell a lot of water or not…we get the revenue we need either way.”
- Low Income and Senior Subsidies – While Prop 218 prohibits subsidies, discretionary revenues such as interest earnings or property tax revenue can be used to cover these subsidies. Carefully designed water rates can also be effective in benefiting these customers.