As mentioned in last week’s blog post, some utilities are creatively setting varying base charges for subgroups of customer classes in order to more equitably distribute the (fixed) costs of the utility among customers with varying demands. One way this is being done is by tailoring the base charge based on each individual customer’s water use levels. No doubt, consumption-determined base charges are rare among water utilities today. However, there are some examples, and these examples demonstrate two methods of determining base charges based on water use.
Tiered base charges based on current water use
In this method, a utility sets two or more levels of fixed base charges (e.g.: $25.00/month and $50.00/month). The volume of water used by the customer in that billing period determines which base charge is applied in that month.
For example, a customer of the Town of Clayton, North Carolina in January 2014 would have paid her volumetric charges based on the increasing block rate structure in place, plus one of the following base charges for water:
- $10.10 if her consumption for that month was up to 15,000 gallons, or
- $10.53 if her consumption was between 15,000 and 100,000 gallons, or
- $20.71 if her consumption was between 100,000 and 250,000 gallons, or
- $41.07 if her consumption was greater than 250,000 gallons.
It is possible, therefore, for the customer to pay $10.10 as a base charge in one month and $10.53 in the next when her water use exceeds 15,000 gallons. In this case, because the levels of consumption in the four tiers are vastly different, the Town of Clayton essentially created varying base charges for different customer classes (residential, small commercial, industrial, etc.) based on water use levels instead of the more typical method of using the meter size or designation of customer class in the billing system.
Likewise, Antelope Peak Domestic Water Improvement District in Arizona sets a monthly water base charge of $10 for use up to 300 gallons, and adds a $45 flat fee (for a total of $55) if consumption was anywhere between 301 and 3,500 gallons. Volumetric rates only apply after 3,500 gallons/month. In this case, the utility’s base charge can be considered to be $55/month including an allowance of 3,500 gallons, but the utility makes the base charge more affordable to customers that have nearly zero water use by dropping it to $10/month. Since base charges can be high for some utilities, tiered base charges can be attractive in an effort to achieve affordability for low-using customers, although this method increases the base charge for all other customers if the utility is to remain revenue-sufficient.
Base charges customized based on historic water use
Customizing volumetric rates and block sizes for each individual customer based on his or her historic water use patterns is somewhat common in the Western states (termed “water-budget rates” in the AWWA M1 Manual). However, customizing the base charge based on the customer’s historic water use is much rarer.
The consumption-based fixed rate that the City of Davis, California proposed is one example of how each customer’s base charge would be calculated and fixed for 12 months based on his or her water use patterns in the past. Had the rate structure been implemented, the City would have totaled each customer’s May through October 2014 water use and multiplied that volume by $0.32 to set that customer’s monthly supply charge (which is a part of the base charge) in January – December 2015. It is very similar to the PeakSet Base Charge model that we proposed in a blog post in 2012.
Ocracoke Sanitary District in North Carolina has a historic consumption-based fixed charge of a different sort for its customers. Each customer’s average use between June and September of the previous year places the customer in one of the following three rate structures for the next year (rates effective during FY2014):
- Step A – for customers averaging less than 5,000 gallons/month in previous summer: Base charge of $16.00/month including an allowance of 2,000 gallons, or
- Step B – for customers averaging 5,000 – 9,999 gallons/month in previous summer: Base charge of $42.87/month including an allowance of 5,000 gallons, or
- Step C – for customers averaging at least 10,000 gallons/month in previous summer: Base charge of $94.37/month including an allowance of 10,000 gallons,
plus the volumetric rates charged in an increasing block rate structure.
Base charges that are customized based on each customer’s historic peak water use more equitably allocate the utility’s fixed costs that are linked to capacity to the customers that have greater peak demands. This also shifts much of the revenue generation from the volumetric rates on to the base charges, increasing revenue resiliency against declining water demands in the short-term, while building a conservation incentive into the base charge itself. It is certainly a more complicated type of base charge and requires more data to be analyzed when allocating costs and a sophisticated billing system that can assign unique base charges to individual accounts. There are other issues to consider, such as how to determine the base charge for customers with insufficient historic water use data or customers moving into homes and inheriting the previous tenants’ water use patterns. Also, the long-term trends of water use behavior may be affected by switching to a base charge that is dependent on historic or current water use levels, which will have consequences on utility finances.
In addition to these two categories of consumption-determined base charges, we had also previously offered an idea for a tiered base charge structure with varying consumption allowances, called CustomerSelect, that customers would opt into based on their expectations for future demand. We are continuing to analyze the potential for this model (with some major changes since the time we wrote the blog post). To our knowledge, no water utility has attempted this type of base charge rate structure to date, although some have expressed interest in it.
Suggested reading on alternative price models and proposed new base charge structures that are customized based on customer water use:
- Water Research Foundation report, part of chapter 4 of Defining a Resilient Business Model for Water Utilities
- Ceres Report: Measuring & Mitigating Water Revenue Variability: Understanding How Pricing Can Advance Conservation Without Undermining Utilities’ Revenue Goals
Shadi Eskaf is a Senior Project Director at the Environmental Finance Center at the University of North Carolina, Chapel Hill.