Conservation rates in the real world

Abstract

Conservation‐oriented rates that reflect the true price of water can change consumers' water use and pay off in reduced operating and development costs. Old and familiar ways of setting water rates can fail to recover the cost of providing water service, can send inaccurate signals as to the worth of this scarce resource, and are becoming more and more difficult to defend. At the same time, revenues from rates and charges are essential if water agencies are to accomplish their mission of providing dependable, potable water on demand. What can water utilities do to price water more sensibly, ensure financial viability, and achieve a publicly accepted and successful rate‐making process? The California Urban Water Conservation Council has developed a technical handbook on alternative pricing approaches and their associated effects. “Designing, Evaluating, and Implementing Conservation Rate Structures”1 demonstrates how quantitative tools can be used to measure rate effects, develop strategies for managing the results of rate changes, and provide insights about the process of successful rate‐making. By linking technical knowledge with practical implementation tools, rate‐making that incorporates conservation objectives can be accomplished.

U.S. drinking water challenges in the twenty-first century.

“…That is, higher rates encourage a demand response, but that very response makes it more difficult to predict revenues. If conservation is too successful, revenue shortfalls are possible (26).…”

The Residential Water Demand Effect of Increasing Block Rate Water Budgets

“…While the adoption of non-price instruments (e.g., short-term water restrictions, subsidies for water-saving technologies, and public-awareness campaigns) likely will continue to be wide-spread, volumetric pricing and, in particular, block-rate pricing is gaining traction. This is not surprising to economists who have long espoused the merits of pricing as an efficient and effective means to address water scarcity (e.g., Howe and Linaweaver 1967;Chesnutt and Beecher 1998;Renwick and Green 2000;Griffin 2001;Dalhuisen et al 2003;Olmstead and Stavins 2009;Grafton et al 2011). One challenge confronting water utilities that are considering switching to volumetric pricing is identifying the particular rate structure that is best suited to their needs.…”

Feasibility of Water Efficiency and Reuse Technologies as Demand‐Side Strategies for Urban Water Management

“…Ideally, an price signal would provide an economically-efficient incentive for water users to curtail their usage and the desired level of conservation would inform the specific water rate (Chesnutt and Beecher, 1998;Renwick and Green, 2000;Olmstead and Stavins, 2009). …”

“…The specific unit and fixed prices that makeup the water rate are designed to achieve both revenue stability and cost recovery for a utility (Howe and Linaweaver, 1967). The rationale behind the tiered rate structure is that largevolume water users influence peak (often seasonal) demands, and, by extension, infrastructure capacity more so than small-volume users; thus, this justifies their paying higher rates for marginal water use (Howe and Linaweaver, 1967;Chesnutt and Beecher, 1998). …”

“…This limitation is in part due to the relatively price inelastic nature of indoor water demand, meaning that an increase of 1% in the price of water results in less than a 1% decrease in water demand. However, it is worth noting that estimates of price elasticity of total (indoor and outdoor) demand for water are more variable than estimates of price elasticity of only indoor demand in the relevant literature (Thomas and Syme, 1988;Espey et al, 1997;Chesnutt and Beecher, 1998;Renwick and Green, 2000;Dalhuisen et al, 2003;Olmstead and Stavins, 2009). Due to the price inelasticity of indoor demand, there is an inherent limit to the efficacy of an increasing block rate price structure in reducing indoor residential water demand.…”