Christine E. Boyle, PhD is a Post-doctoral Fellow at the Environmental Finance Center. Dr. Boyle investigates new models for sustainable local water and energy provision.
Why are utilities exploring alternative business models?
Water and wastewater utilities in Georgia, and most of the country, generally use rate structures that tie revenues to the volume of water sold. With the increasing pressure to conserve water, utility revenues are declining. For most utilities the reality of reduced water demand presents a significant financial challenge: rising infrastructure costs must be recovered from a sinking sales base. Simply raising rates will not necessarily solve the problem. To the extent that demand for water is elastic, increases in water rates can actually drive water use down further. Additionally, the public may perceive an increase in rates as “punishment” for reducing their water use.
To further explore strategies for utilities to minimize revenue vulnerability due to declining water sales, the Environmental Finance Center worked with Clayton County Water Authority to see what modifications to their water business model could better address this “conservation conundrum.”
Exploring a new model
Clayton County Water Authority, located outside of Atlanta Georgia, was approached for this project because the Authority places strong emphasis on sound financial management, as evident through the utility’s credit ratings, and the many awards that the Authority has received in the financial arena. Perhaps one of the most relevant awards though was the 2010 Business of the Year award from the Clayton County Chamber of Commerce.
The goals of the following water service pricing modifications are to:
- Keep water affordable to customers
- Provide more stabilization in utility revenue
- Encourage water conservation
(Not necessarily in that order.)
The CustomerSelect Rate Plan is based on the plans offered by the majority of cell phone service providers, in which an allotment of use is included in one fixed charge. The customer chooses a plan and pays an overage fee if he/she uses more (see your local Verizon store for more information).
Application for Clayton County Water Authority (CCWA)
The rate schedule displayed below (for residential water and irrigation) presents 5 Plans and their associated charges. The rates were calculated using a revenue neutral model, based on CCWA’s actual 2011 residential water and irrigation revenue.
Figure 1 CustomerSelect Rate Plans simulated for CCWA
Under the CustomerSelect plan, most customers would probably look to their previous year’s use to determine which plan to select. The graph below (Figure 2) shows how many residential customers would have, on average, exceeded their plan (as hypothetically laid out above) in FY 11 as determined by FY10 average water use. If residential customers selected their FY11 CustomerSelect Plan Option purely based on their own average in FY10, 18% would have exceeded their Plan’s allotment on average (based on their FY11 use).
Figure 2 Utility Wide Impacts
Impact on Customers
Let’s look at one sample customer to see how this plan impacts individual households (see Figure 3). Sample Customer 3 is referred to as a “Low peaker, high user” customer type. This type of customer has a high baseline use and is less inclined to peak, a ‘large family’ type household. This sample customer was in Customer Select Plan 3, based on their 2010 average monthly use.
Customer 3 keeps use at 10 kgal per month or less, thereby never exceeding his/her plan. By staying within Plan 3 (Light Irrigation / Large Family) avoids the overage fees and saves money in under the CustomerSelect Plan. This customer’s total annual charge decreases by 26%.
Figure 3 Customer Impacts – Example Customer 3
Potential benefits of CustomerSelect
- Increased revenue stability: Customers “lock into” plans
- Gives customer a choice: This means less administrative burden than budget-based rates of utility determining block rate for customers
- Moves more to a model of water and sewer service, rather than a commodity
- Promotes conservation, especially around the “break points” Relatively easy to add ancillary services (like service line protection) a la carte
Potential challenges of CustomerSelect
- Complicates budgeting process:
-How do you predict what plan customers will choose?
-When will they “lock in”?
-Can they change plans? How often? What is the optimal length of the contract?
- Does not fit with seasonal use of water: Water use is not as consistent month-to-month as cell phone use. Allowing roll-overs could help this, but would dissuade conservation.
- Customers will request real-time water use information: In order to provide this service, metering upgrades will be required.
Considerations for implementation
- Given the questions above and the lack of knowledge on a cell model application with water, this would be a good candidate for a pilot project to test psychology and actual impact of model on customer demand.
- Important to keep the blocks and overall rate structure as simple as possible to reduce risk of customer cognitive overload (i.e. heavy customer service calls).
Clayton County Water Authority used this exercise as a “thought experiment” to consider their policies and objectives. No action to implement this design is being considered at this time. This project was funded by Water Research Foundation and the Metro Atlanta Chamber of Commerce.
Verizon Store: All rights reserved by jasonhiner
Drop Photo: All rights reserved by Lisa Nail Photography
 Beecher, Janice. The Conservation Conundrum: How Declining Demand Affects Water Utilities. Journal AWWA, Vol. 102 Iss. 2, February 2010, Pages 78-80.