Driving Efficiency Through Price

Transcription

1 Driving Efficiency Through Price

2 Is there a relationship between water rates and usage?

3 In theory Utilities set rates based on projected use to recover costs As rates go up, water use goes down

4 Does it happen in practice? Yes!

5 In North Carolina, utilities with higher rates generally have lower residential use 10 Residential Water Rates and Water Use in 2008 (n=345) Average Residential Water Use (1,000 gallons/month) y = 0.075x R² = $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Water Price for the Next 1,000 Gallons after 5,000 Gallons (Marginal Price)

6 What about one utility that raises its rates from one year to the next? Study of >250 NC utilities, tracking their rates and usage over two years. Utilities that raised their rates saw a decline in their average residential water use. tesetting.htm

7 Is this unique to North Carolina? Studies and studies and studies showing the same result all over the country Studies of the studies

8 Price Elasticity of Demand

9 Before we continue why should you care? If you ignore it, danger of overestimating potential revenues when you propose to raise rates (especially if there is a substantial rate increase) Driving efficiency through price (long term)

10 QUIZ!!

11 Which is greater? % Change in Demand % Change in Price What is the sign of Elasticity? Positive Negative

12 What do you think? If a utility raises price (rates) by 100%, how much will average demand (water use) decline?

13 Example Utility A: Combined W & WW price increases 10% Demand decreases 2% What is the elasticity? Elasticity = 2% / 10% = 0.2

14 Example in rate setting Avg. use before price change = 5,000 gallons/month Proposing raising combined W & WW rates 15% Elasticity is 0.2 Therefore, change in demand after rate increase = 0.2 * 15% = 3% New avg. use = 5,000 3% of 5,000 = 4,850 gallons/month Use 4,850 instead of 5,000 gal/mon to estimate revenues

15 What elasticity number should you use? Residential customers: In the neighborhood of 0.2 to 0.8

16 What elasticity number should you use? Average residential elasticity across the state of NC (for W & WW combined) is between 0.3 and % NC_ratesetting.htm

17 Is that the elasticity for your utility? Maybe, maybe not. Elasticity is unique for each utility & customer based on: Season, customers final uses of water, lot size, income, education, 30% household size, urban vs. rural, current price and rate structure, age of customers, age of homes and plumbing, etc. Other things will also affect water use: Weather, growth, billing period, policies, etc.

18 Elasticity numbers to use 40 60%: if higher than average discretionary use in community 30 40%: good starting point for the southeast 10 20%: if low discretionary use or suspect low price responsiveness in community

19 So, you can account for reduced use with price increases. Now what? What else can you do?

20 SWIC Recommended Guidance for North Carolina Utilities Attempting to Support Water Conservation in the Long Term through Rate Structure Design and Billing Practices (Nov. 2010) lications/2010/swicguidelin esforconservationratesand Billing.pdf

21 S.L : The Drought Bill Section 17 [SWIC]... shall develop guidelines for water rate structures that are adequate to pay the cost of maintaining, repairing, and operating the system, including payment of principal and interest on indebtedness incurred for maintenance or improvement of the water system. The guidelines shall also consider the effect of water rates on water conservation and recommend rate structures that support water conservation.

22 The guidance document What it is What it is not Guidance Menu of rate structure and billing options Acknowledgement that each utility is unique Recognition that there may be tradeoffs with other utility policies Mandatory Requirement for funding Encouraging conservation over cost recovery The only alternatives at your disposal

23 Rank Your Utility Rate Setting Objectives Full cost recovery/ revenue stability Fostering businessfriendly practices Encouraging conservation Maintaining affordability (keeping rates low to whom?) Refer to this list and focus on the highest ranked objectives when following the guidelines for selecting the appropriate rate structure design.

24 With rate structures: cost recovery first then efficiency Once the utility has determined the baseline cost to deliver services, utilities attempting to encourage conservation may consider implementing as many of the following options as desired. Utilities should only embark on implementing conservation oriented rate structures if they are judged to also be financially and economically sound.

25 Rate structure and billing option 1 Set prices that encourage water conservation at the average as well as high levels of residential customer consumption

26 Rate structure and billing option 2 Do not charge residential customers (or usage below 20,000 gallons/month) using a decreasing block rate structure

27 Rate structure and billing option 3 Design a rate structure that significantly reduces total bills for customers that reduce water consumption

28 Rate structure and billing option 4 Use an increasing block rate structure with 3 or 4 blocks within the first 20,000 gallons/month Utilities with residential increasing block rate structures that use substantial rate differentials between blocks should realize a conservation response

29 Rate structure and billing option 5 As an alternative to an increasing block rate structure, use a uniform rate structure with a higher volumetric price or a seasonal rate structure that permanently charges higher rates in the summertime than in the wintertime

30 Rate structure and billing option 6 Charge higher impact fees (system development charges) for irrigation water meters than for standard household water meters and/or create a residential irrigation meter rate structure and charge a higher volumetric price for irrigation water than for standard household water

31 Rate structure and billing option 7 Use a monthly billing period

32 Rate structure and billing option 8 Provide price and use information on customers bills

33 Rate structure and billing option 9 Encourage sub metering in apartment complexes and other master metered multi family residential housing areas

34 Rate structure and billing option 10 Review rates each year and adjust rates as needed to meet both operating and long term costs

35 Rate structure and billing option 11 In concert with the Water Shortage Responses Plans, consider a role for temporary rate adjustments (e.g.: drought surcharges ) that are tied to drought conditions and water storage levels

36 Designing Rate Structures that Support Your Objectives: Guidelines for NC Water Systems Resource blications/2009/guidelinesd esigningratestructures.pdf

37 Questions Shadi Eskaf Acknowledgement: the NC Department of Environment and Natural Resources, the U.S. Environmental Protection Agency, the NC State Water Infrastructure Commission.