Big News in the World of Innovative Water Rate Design
Last week, one of the most interesting water rate structures we’ve seen recently was narrowly voted down in a referendum vote. After several years of debate and campaigns to win the hearts and minds of rate payers, voters in the City of Davis, California very narrowly (51% versus 49%; only 264 votes apart) passed a measure that repeals changes to their water rates. One of the key features of the rate structure that would have otherwise been implemented was a Consumption-Based Fixed Rate.
Under the common residential water use pricing model, utilities face a trade-off between reliance on a stable base charge (a recurring fixed fee no matter how much water a customer uses) and dependence on a variable volumetric charge (a rate applied to customer water use). The way these rate structures are typically designed, most utilities generate much more revenues from the variable charges than the base charges, exposing their revenues to declining water demands. However, most of the utility’s costs are fixed, and some utilities are examining ways to modify their rate structures to better align revenues with costs.
Consumption-Based Fixed Rates: A Base Charge that is Customized to Historic Water Use
The Consumption-Based Fixed Rates (CBFR) that Davis, California proposed is an innovative rate structure design that tailors the monthly base charge for each customer to how much water that customer used during the previous year’s summer months. A uniform volumetric rate would also be charged on all water use. CBFR would essentially make the base charge partly dependent on water use. However, since the water use is historic and customers are locked into a base charge for the next 12 months, it retains the fixed charge nature of base charges while introducing an element of variability to encourage water conservation. This rate structure was very similar to the PeakSet Base Rate Structure described in our recent report on new revenue-resilient utility business models.
City of Davis, California’s Proposed Consumption-Based Fixed Rate
This rate structure was set to be effective in January 2015, but was voted down in a referendum on June 3, 2014.
- Customer pays a distribution charge + supply charge + variable charge each month
- The distribution charge is a fixed monthly charge based on meter size ($10.21/month for 3/4″ meter)
- The supply charge is the new piece. Each customer’s total water use in the six-month May through October period of the previous year is determined, and then multiplied to a rate ($0.32/ccf) to determine the customer’s supply charge that is applied to the next 12 months. E.g.: a household that uses a total of 102 ccf between May and October of last year would pay $32.64/month (=102 ccf * $0.32/ccf) as their supply charge next year.
- The variable charge is a uniform volumetric rate applied to the customer’s water volume above 0 ccf ($0.86/ccf)
A Narrow Vote
A large number of people voted to implement Davis’ new rate structure, demonstrating that a sizable portion of the population is ready to accept change to utilities’ long-standing rate structures. In the end, though, it may have been the “newness” of the rate structure that contributed to its downfall. From the beginning when the focus was on the “untested” nature (actual term used in the headline of the local newspaper) of the rates, some customers started to realize that “new” means change, and change often means winners and losers. In this case, critics of the rate structure were extremely vocal reaching out to the customers that may have ended up paying more for their water. The fact that the vote was so close and views were so divided illustrates the passion people feel about water rates, or least water rates that are being advertised as “unfair.”
The question of fairness often seems relative from an outsider’s perspective. Those opposed to the rates seemed to make the argument that certain groups of customers should not pay relatively more under the new rates. Those promoting the CBFR structure pointed out the unfairness of charging all residential customers with the same meter size the same base charge. However, there is ample evidence that customers with different usage patterns place very different cost burdens on the system, and the base charge was originally designed to reflect those cost burdens.
Alternative Approaches to Base Charges
In our research, we continue to see the methods for calculating base charge components of water rates as one of the most outdated aspects of most utility rate setting processes. Stay tuned for an upcoming series of blog posts through which we will highlight alternative approaches to setting base charges that are currently in place or under investigation across the country.
Written by Jeff Hughes, Director of the Environmental Finance Center at UNC Chapel Hill, and Shadi Eskaf, Senior Project Director at the Environmental Finance Center at UNC Chapel Hill.