Reassessing Our Rate Structures: Including Conservation Rates & How to Make it All Work

Transcription

1 Reassessing Our Rate Structures: Including Conservation Rates & How to Make it All Work Andrew Westbrook Environmental Finance Center University of North Carolina at Chapel Hill

2 Presentation Topics Water pricing as a conservation tool Financial impacts of water conservation Case Studies of Rates-Conservation- Revenues intersection Assessing water rates in North Carolina

3 What is the value of water? Everything is worth what its purchaser will pay for it. Publilius Sirius ~ 100 B.C.

4 Full Cost Hierarchy Operating expenditures Reactive maintenance Capital to serve new customers Mandated watershed/water quality protection Proactive maintenance Asset management/capital rehabilitation Non-mandated watershed protection

5 Full cost pricing? Operating Ratio: OR = Op. Revenues Op. Expenses Data sources: LGC, FY & 2008 EFC-NCLM Rates Survey

6 What drives pricing Cost of service State law, Constitution and common law Politics Affordability Water supply / drought Round numbers

7 What should drive pricing Cost of service State, Constitution and common laws Politics Affordability Water supply / drought Round numbers

8 Conservation Messages

9 What determines residential water use? Slide source: Cummings & Walker, Georgia State University

10 Water price elasticity of demand Data Source: Southwest Florida Water Management District, July 2005

11 Defining Price Elasticity of Demand

12 Residential Price Elasticity From Arbues, Garcia-Valinas & Martinez Espiniera, 2003

13 Residential Price Elasticity In neighborhood of -0.3 to -0.8

14 What determines residential demand sensitivity to price? Income Urban vs Rural Age of Housing stock Household size Average age of customers Homeowners vs Renters Lot size

15 How to send a really strong price signal

16 OWASA Block Rates Effective October 1, 2007 Volume of Use (1,000s of Gallons) Calculated Commodity Rate per 1,000 Gallons Block 1 0 to 2,999 $1.98 Block 2 3,000 to 5,999 $4.70 Block 3 6,000 to 10,999 $5.53 Block 4 11,000 to 15,999 $7.46 Block 5 All use 16,000 and up $13.05 Slide Courtesy of: Kevin Ray, OWASA

17 The type of rate structure? Increasing tier Decreasing tier Uniform Seasonal Seasonal Uniform Seasonal Tiered

18 Percent Bill Reduction Conservation price signal measures 60% 50% 40% 30% 20% 10% 0% Uniform Decreasing Block Increasing Block $0 $10 $20 $30 $40 Total Water Bill Reduction ($) Data: EFC-NCLM Water and Wastewater Rates Survey

19 Water Rate Block Structures Data: EFC-NCLM Water and Wastewater Rates Survey

20 Know who will be impacted by blocks

21 Know how much customers will be impacted by blocks

22 Conservation pricing is not a shortterm solution Catch customers off-guard Difficult to implement in billing system Difficult to project revenue impacts Short term it is better to focus on penalties and penalty compliance

23 How often do you send price signals? Distribution of Consumption 2002 Based on Billing Frequency Avg.: 4,957 GPM Avg.: 5,334 GPM Monthly Bimonthly/ Quarterly 0 2,000 4,000 6,000 8,000 10,000 Water Bill Data: EFC-NCLM Water and Wastewater Rates Survey, 2002 Local Water Supply Plans

24 How often do you send signals? Billing Cycle Number of Systems Percentage Every Month % Every Two Months 30 12% Quarterly 4 2% Grand Total % Data: EFC-NCLM Water and Wastewater Rates Survey

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26 Not much to go on

27 Haw-lelujah! Slide courtesy of: Kristine Williams, City of Greensboro

28 Rate Change Overview Abandoned declining block structure Abandoned minimum purchase in favor of flat billing and availability fee Instituted increasing block residential rate with four tiers Charged all irrigation at highest tier price Raised rates to improve system with support from Council and Public Slide courtesy of: Kristine Williams, City of Greensboro

29 ccf Slide courtesy of: Kristine Williams, City of Greensboro Consumption per Residential Account Flat Rates Increasing Block Rates 23 9% 17.5% 10% 22 17% 21 10% % 10% 13.5% 9% 10% 4% FY 93 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07

30 MGD Slide courtesy of: Kristine Williams, City of Greensboro Greensboro Water Consumption Total Greensboro Annual Average Water Consumption $34 Million Revenues $80 Million Revenues Wet Restrictions Restrictions

31 Examples: Bring out the calculators! Utility B: Price increase = 10% Elasticity = -0.8 Average usage before = 6,000 gal Number of residential customers = 600 Rate structure: $4 / 1000 gal Estimate the change in system revenues.

32 Examples: Bring out the calculators! Utility B: Price increase = 10% Elasticity = -0.8 Average usage before = 6,000 gal Number of residential customers = 600 Rate structure: $4 / 1000 gal Rev. before = 600 ($4 6 kgal) = $14,400 Usage change = 10% (-0.8) 6 kgal = kgal Rev. after = ($ kgal 600) = $14,573 $14,573 $14,400= $173 or +1.2%

33 CMU s Conservation Tools WaterSmart conservation program since Liquid Assets, shower head swaps, etc. Tiered water rates Basin wide drought response plan Slide courtesy of: Maeneen Klein, Charlotte-Mecklenburg Utilities

34 Slide courtesy of: Maeneen Klein, Charlotte-Mecklenburg Utilities

35 Drought Response Stage 2 restrictions on August 24 th 2 days a week watering Stage 3 restrictions on Sept. 27 th No lawn watering Slide courtesy of: Maeneen Klein, Charlotte-Mecklenburg Utilities

36 Consumption Reduction Slide courtesy of: Maeneen Klein, Charlotte-Mecklenburg Utilities

37 Budget Impacts Revenues Projected FY08 Shortfall $10-20 Million Fund Balance Deferred Capital Reduce Operations Spring Rate Increase Impact Future Years Rate Increases Rate Restructuring Slide courtesy of: Maeneen Klein, Charlotte-Mecklenburg Utilities

38 Million Gallons Per Day Raw Water Supply, Demand, and Potential Deficits Pre-CCR Existing System (with 2007 quarry pump improvements) Expanded Quarry 30-Yr Safe Yield Drought Drought 30-yr Safe Yield Without Reuse With Reuse Lesser PC & Less Reuse Greater PC & More Reuse 2001 Master Plan "Expected Growth" Slide Courtesy of: Kevin Ray, OWASA

39 Financial Implications Potential revenue shortfall this Fiscal Year projected at $.81 million $2.5 million Assumes 9% to 13% demand reduction Stage 2 surcharges - $1.9 to $2.5 million Stage 3 surcharges - $0.81 to $1.5 million Work to reduce O&M spending by $1.3 million this FY Slide Courtesy of: Kevin Ray, OWASA

40 Predicting and Offsetting Revenue Shortfalls Slide Courtesy of: Kevin Ray, OWASA Applied new demand assumptions to existing rates Across the board for seasonal rates Applied to each block for residential customers Variable starting dates for water use restrictions and attending surcharges. Surcharges not intended to generate revenue Intended to encourage greater conservation Nevertheless, they have deficit offsetting properties $20K to $40k deficit recovery per month under Stage 2 Additional $200k to $500k per month under Stage 3 Bottom line deficit to be offset with spending cuts

41 Source: Fayetteville Observer 2/6/04

42 Marginal Price at14,000 GPM Drought Level (10/2/2007) D1 - Moderate Drought D2 - Severe Drought D3 - Extreme Drought D4 - Exceptional Drought Rate Structure Increasing Uniform Decreasing _ Other Marginal Price Low: < $2 (n = 76) Medium: $2 - $5 (n = 229) High: > $5 (n = 45) Source: EFC-NCLM Water and Wastewater Rates Survey

43 Source: EFC-NCLM Water and Wastewater Rates Survey

44 Pricing trends in North Carolina

45 Pricing trends in North Carolina Source: EFC-NCLM Water and Wastewater Rates Survey

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47 For More Information: Andrew Westbrook Environmental Finance Center University of North Carolina at Chapel Hill