7 Water Pricing Strategies for Sustainability

The Growing Gap Between Water Utility Costs and Revenues

Municipally-owned water utilities account for more than 85% of all water service providers in the US. These organizations are expected to balance the costs of delivering clean water to their customers with the revenues that they collect – revenues that are typically comprised of one-time fees (such as hook-up charges) plus periodic billings that include a fixed base fee and a variable volumetric fee based on actual water usage.

However the costs of water utilities are on the rise due to: (a) inefficient aging infrastructures, (b) the need to develop new water sources to meet the needs of growing populations, and (c) the extra expenses incurred to deal with increasingly frequent climate-related stresses such as drought and flooding. According to the U.S. Conference of Mayors, municipal water utilities have increased their per capita spending by 60% between 2001 and 2010[3]. Yet, during the same time period, many water utilities have witnessed a decrease in revenues from volumetric fees due to the success of their water conservation campaigns.

pipe-classificationAnd, according to the EPA, public water systems will require an estimated $335 billion in investment over the next two decades – mainly for transmission and distribution capabilities.[3] Although water utilities have access to a variety of instruments for financing infrastructure investments – from municipal bonds, to state or federal loan programs, to public-private partnerships[4] – ultimately these costs have to be passed on to the rate-payer. For example, California’s ambitious Bay Delta Conservation Plan (BDCP) includes a twin tunnel conveyance facility that will cost $14.6 billion. The Metropolitan Water District of Southern California has already estimated that the twin tunnel project will increase the average household water bill by $5 a month for its 18 million customers.[3]

Creative Strategies for Closing the Gap

water-pricing-goalsThe diagram on the right, from an Alliance for Water Efficiency discussion paper[2], presents the various goals that water pricing should aim to achieve. It shows clearly that water pricing is a delicate balance among covering the true long-term costs of water delivery while encouraging conservation and being ready for the impact of external events (such as drought, flooding) – all within a framework that ensures water services are universally affordable. Achieving all of these goals requires creative thinking about today’s current water revenue models. The following are some strategies that are being put forward by the many stakeholders[1], [2], [3], [4], [5] who are thinking deeply about this critical issue:

  1. Better forecasting and longer financial planning cycles: Utilities should use their own big data and powerful analytic tools to strengthen their management of long-term water demand, and then be allowed to set rates based on financial cycles that are longer than a year. Improved forecasting will fine-tune investments for developing new water sources and longer financial planning cycles will enhance revenue stability.
  2. Consolidation of all water-related systems into one utility: In many municipalities the management of drinking water, rain water, storm water, sewage treatment , etc. are divided up amongst multiple agencies. A fundamental re-organization that would bring all of these water-related systems under one roof would promote more robust water resource planning as well as operational efficiencies.
  3. Encouragement of closed-loop local initiatives: Water utilities are natural monopolies. Unless a consumer has access to a private well, if someone wants water, he/she must use the water utility’s services. However, there are more and more local “green” initiatives that, in some ways, could be seen to compete with the water utility. For example, closed-loop buildings can recycle gray or even black water. Although these initiatives reduce variable revenues, in the long-term they reduce demand and the need for infrastructure investments and thus they should be encouraged by the water management authorities.
  4. Tiered pricing structures based on usage: More and more water utilities should introduce a tiered pricing structure whereby water usage above a certain norm is charged at a higher rate. This rate structure encourages consumers to conserve water, but also ensures that above-average users pay a premium rate that stabilizes the water utility’s revenues.
  5. Tiered pricing structure based on type of water used: Today’s rate structure is based on the most expensive type of water – clean drinking water. However, only a small percentage of this water is actually being drunk, with most of it going to water lawns, flush toilets, or take showers. What if (see Strategy #2) the various water management “silos” were consolidated and consumers could pay different rates for the different types of water they draw from the system? Such an approach would encourage “green” building initiatives (see Strategy #3) and reward consumers for using water that is less expensive to produce.
  6. Base fees based on peak usage: Today base charges are usually set according to the size of the service line or the water meter. But peak monthly usage would be a more accurate parameter to use. And it could be adjusted at intervals that are long enough to ensure revenue stability to the utility but short enough to give consumers the incentive to conserve water.
  7. Temporary surcharges: Although not the most creative of strategies, temporary surcharges should not be overlooked as a way for utilities to recover the costs incurred by extraordinary events such as drought or

P.S. Many of the above strategies are based on the assumption that the water utility has implemented sophisticated AMI/MDM systems that can provide highly precise, real-time water consumption data.

References

[1] It’s Great That Americans Are Using Less Water Than Ever—Unless You’re a Water Utility, Laura Bliss, The CityLab, October 30, 2015

[2] Declining Water Sales And Utility Revenues: A Framework For Understanding And Adapting, Janice a. Beecher, PH.D., Thomas W. Chesnutt, PH.D., Alliance for Water Efficiency, October 2012

[3] “Liquid Gold: Water Utilities and Users Must Revalue the Cost of Their Aquatic Assets”, Geoffrey Buswick, 2015 Strategic Directions: U.S. Water Industry Report, Black & Veatch, pp.66f

[4] Financing Sustainable Water Infrastructure, The Johnson Foundation at Wingspread, Ceres, January 2012

[5] Measuring & Mitigating Water Revenue Variability: Understanding How Pricing Can Advance Conservation Without Undermining Utilities’ Revenue Goals, Environmental Finance Center at University of North Carolina, Chapel Hill, Ceres, July 2014

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