The Pacific Institute Analyzes How Water Rate Structure Can Help Foster Resiliency in the Face of California’s Changing Conditions
June 6, 2013, Oakland, CA: California is facing new challenges to sustainable water management, particularly when it comes to financing. Climate change, increasing costs, and an uncertain economy mean that water service providers can no longer rely on past levels of supply, consumption, or revenue to predict future conditions. New research from the Pacific Institute analyzes different rate structures that can be used to accommodate this “new normal” so that a utility is able to meet costs and ensure resiliency in an uncertain future.
The most common water rate structures – flat fees, uniform rates, block rates, and water budget rates – require varying levels of financial, institutional, and human capacity to implement, and so choosing between them means evaluating whether the potential benefits are greater than the cost to provide the necessary capacity. The report An Overview of the “New Normal” and Water Rate Basics examines the rate structures and the characteristics of the new normal, which includes more uncertain water supply; new legislation, codes, and standards; and overall increasing costs to provide a safe drinking water supply.
“It would make sense that the cost of providing water should be recovered through the prices customers pay to use water. But the cost of providing water varies. For example, water may be more expensive during a drought or if increased treatment is required,” said Dr. Juliet Christian-Smith of the Pacific Institute, coordinator of the research. “And the total number of customers and the amount of water that they use also varies from season to season and year to year. In reality, it’s extremely difficult to perfectly match the cost of providing water with the price of using water, often leading to a gap.”
New legislation in California has also directly affected the water rate-setting process by requiring new processes for changing water rates, and has indirectly affected the water rate-setting process by requiring water conservation, which impacts total water sales – and therefore revenue.
“In order to send a conservation signal to the customer, the monthly bill must clearly reflect consumption; that is, a customer must be able to directly connect their bill to their water use,” said Kristina Donnelly, lead author of the first white paper in the series. “Water managers face the challenge that conservation-oriented rates may result in some level of fiscal variability. But accurate analysis, thoughtful planning, and effective communication can foster resiliency, both of the water resource and of the utility’s financing, in the face of these changing conditions.”
Water service providers are increasingly concerned about rising costs, including aging water and sewer infrastructure, managing capital costs, funding or availability of capital, and energy costs. A water utility’s rate structure is critical to the support of operating needs. However, there is no “one-size-fits-all” rate structure: the structure must be able to meet the goals and implementation capacity of the utility.
To help rate-payers understand how their water is priced, and to help water managers who are involved in the planning and communication of water rate structures, the Pacific Institute white paper also provides case studies that highlight some of the challenges associated with adopting new rate structures. These include Carmichael Water District’s change from a flat fee to a volumetric rate structure; the Moulton Niguel Water District’s move to a water budget-based rate structure; and the City of Pasadena’s move to a three-tiered water rate structure.
“In reviewing the basics of water rate design, describing trends over time, and analyzing new challenges related to water service provision, we see how critical clear communication with customers is to both successful implementation of water rate changes and of conservation efforts,” said Christian-Smith. “We are used to taking our water for granted. Helping communities understand the deteriorating state of our water infrastructure and the cost of providing water service is key to customer buy-in on changing water rates structures and the need to invest in sustainable water management.”
The white paper, An Overview of the “New Normal” and Water Rate Basics, can be downloaded free of charge from the Pacific Institute website at: http://pacinst.org/publication/water-rates-series/
This is the first in a series covering critical issues for water service providers as they deal with the “new normal,” including: water affordability, water financing mechanisms, and lessons from the energy sector. These additional white papers will be released over the coming month.
The Pacific Institute is one of the world’s leading independent nonprofit research organizations working to create a healthier planet and sustainable communities. Based in Oakland, Calif., the Institute conducts interdisciplinary research and partners with stakeholders to produce solutions that advance environmental protection, economic development, and social equity – in California, nationally, and internationally. www.pacinst.org