Setting Up and Clearing Hurdles in a Water Pricing Overhaul

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Mary Tiger is the Chief Operating Officer of the Environmental Finance Center.

We have written about a number of alternative rate designs for water utilities on this blog in the past year (see posts on PeakSet Base Model and CustomerSelect Rate Plan). Admittedly, we have a lot of fun at the EFC thinking through creative models, linking  those models to utilities’ underlying cost structures, and testing out the ramifications on utility finance, customer demand and affordability. But in practice most governing boards and utility managers are hesitant to blaze a trail, especially on an initiative that significantly alters the way revenue is earned.  In a Peer2Peer virtual exchange in December, we asked eighteen utility officials what hurdles would need to be cleared before moving forward with an overhaul to their utilities’ pricing model. Their responses communicated the challenging, but not insurmountable, process of transforming a utility’s business practices. 

Some saw technical hurdles. They recognized that their current metering and billing technology were not sophisticated enough to communicate real-time water usage information likely to be demanded under the CustomerSelect model or to individually calculate base charges off a customer’s historical demand under the PeakSet Base Model.

Others felt like the models needed more standardization on how the industry should approach pricing transformation and a bit of tweaking to make them simpler. The utility officials had outstanding research questions like what to do with new customers that have no demand history when setting a Peak Base Charge. And they needed better assurance that the models would actually generate revenue neutral rates: no massive surpluses, no scary deficits.

Overwhelming, though, the utility officials expressed a need for a well-executed communication and education campaign – more investigation into how customers will understand, receive, and react to these models. Even before going to the customers, utility officials expressed a need for stakeholder and board communication. Getting stakeholder and board buy-in to a rate structure that has the potential to significantly alter customers’ monthly bills is no insignificant hurdle. A revenue-neutral overhaul of the status quo will undoubtedly result in lower costs for some customers and higher costs for others. And squeaky wheels can be very loud.

In Davis, California, the water utility will soon find out if the squeaky wheels get the grease. Last year, the City Council charged a Water Advisory Committee to develop a “fair” way to recover the costs of the new surface water project. The Committee recommended a pricing structure called the Consumption-Based Fixed Charge Model, which is similar to the PeakSet Base Model that uses historic demand to calculate individual base charges for customers. The City will get direct feedback next month on how their customers understand, receive, and react to this model. California’s Proposition 218 requires cities to notify all customers of proposed rate increases, and if more than half of the roughly 16,500 property owners in the city protest, the rates are blocked. Staff is concerned that the complexity of the rate structure could hinder the chances of approval but hope that the public forums and online bill calculator will help rate payers better understand and personalize the overhaul.

The headline of story in the Davis Herald the morning after the Council decided to move forward with the Consumption-Based Fixed Revenue Rate Model read “Council to consider untested rate model.” And to my knowledge, this is largely true.

At this point, they have cleared many of the administrative hurdles and implemented a communication strategy. If their customers approve of the transformation, Davis officials will have blazed a trail for other utilities to watch and follow.  I know we will certainly be looking to Davis for empirical evidence on whether an entirely new way of charging customers will lead the way to financial sustainability.

2 Comments

  1. The cost environment and revenue environment are diverging. With water scarcity increasing along with people becoming more educated about our environment, water demands will likely drop. However, costs for the water utility will still be rising, at least in the short term. Cost of service models allocate most costs into the “variable” category and assign them to the consumption charge but in fact they are fixed. Clear and understandable communication to stakeholder will have to be developed about the clear difference between the cost structure and rate structure in order to get them aligned once again. I think rate structures will have to significantly change in the next 20 years.

  2. Thank you for your comment, Shane. We tend to agree.

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