Conservation-oriented

Transcription

1 PROTECTING WATER RESOURCES Conservation-oriented water rates Richard W. Cuthbert and Pamela R. Lemoine Conservation-oriented rate structures, implemented in conjunction with an active water conservation program, may significantly reduce water use. T Increasing numbers of water utilities are using conservationoriented water rate structures to help promote efficient water use. Uniform rates, seasonal rates, inverted-block rates, and excess-use rates are used to provide pricing signals that promote water conservation, particularly among residential water users. These rate structures have been used successfully both to convey appropriate pricing signals and to help support broader conservation efforts. This article looks at several water systems that use conservation-oriented rate structures and reviews changes in water use over time. Strategies and suggestions are offered for water utilities that are considering implementing one hroughout the United States, increasing numbers of water utilities are implementing a variety of conservation-oriented rate structures with a goal of promoting efficient water use among their customers. Conservation-oriented rate structures include seasonal rates, inverted-block rates, and excess-use rates. These rates feature pricing information that can convey the marginal cost of new water resources and provide water users with pricing signals that promote conservation. These rates are particularly applicable for residential water users; among this group, conservation-oriented rates have been used successfully to provide a low-cost conservation incentive that reaches the largest group among a water utility s customers. The authors define four types of conservation-oriented rate structures and discuss their use 68 JOURNAL AWWA

2 Residential water use in Phoenix, Ariz., decreased consistently from 1975 to 1994, and much of the reduction is traceable to conservation efforts. by water utilities across the United States. They also consider advantages and disadvantages of using these rate structures as well as various factors that can influence the structures effectiveness. In addition, three specific case studies of water utilities that have long-term experience with these rate structures are reviewed for evidence of water use reductions. The article also offers a number of practical suggestions for water systems looking to implement a conservationoriented rate structure. Four types of rates are conservation-oriented At least four types of rate structures can generally be classified as conservation-oriented: uniform commodity rates, flat seasonal rates, inverted-block rates, and excess-use rates. Uniform commodity rates. In a uniform commodity rate structure, all water use is charged at the same unit rate (Figure 1). For example, a utility with a uniform rate structure could charge $0/1,000 gal ($/1,000 L) for all water use, independent of when the water is used or how much water a particular customer uses. Although not always considered a conservation-oriented rate structure, uniform rates are an improvement over a declining-block rate structure (Figure 2) and provide an interim step for water systems moving away from an existing decliningblock rate structure. In this case, a uniform commodity rate conveys a fairly strong conservation message and incentive by relaying, especially to large water users, that their per-unit charge for water will not decrease with increased use. Flat seasonal rates. A seasonal rate incorporates two or more different uniform volume charges for different seasons during the year (Figure 3). Generally, a higher rate is charged for water during the peak season (often in the summer in the United States) than is charged during the off-peak season. For example, a utility may charge $0/1,000 gal ($/1,000 L) during the winter season and $0/1,000 gal ($3/1,000 L) during the summer season. The number of seasons defined in the rate structure will depend on the utility s water use pattern and may reflect the additional cost of meeting peak-season water requirements. With this rate structure, the conservation incentive is focused on the season or seasons when water use and delivery costs are highest. Consequently, this is usually a cost-based rate, a factor that encourages public acceptance of a change to this rate structure. Inverted-block rates. An inverted-block rate structure increases rates for units of water consumption at higher levels of use (Figure 4). For example, a utility may charge $0/1,000 gal ($/1,000 L) for the first 10,000 gal (37,850 L) a customer uses in a given month, $0/1,000 gal ($/1,000 L) for the next 10,000 gal (37,850 L) that month, and $0 per 1,000 gal ($3/1,000 L) for water use above 20,000 gal (75,160 L). In this rate structure, those water users with minimum use levels will benefit, and those water users with high monthly use will NOVEMBER

3 FIGURE 1 Rate $/1,000 gal Use 1,000 L/month FIGURE 2 Rate $/1,000 gal Uniform rate structure Use 1,000 gal/month Declining-block rate structure Use 1,000 L/month Use 1,000 gal/month pay increasingly higher rates for their water. Thus, the inverted-block rate structure provides a considerable incentive for large water users to reduce their use requirements and avoids charging high rates to users with low monthly use levels. Excess-use rates. In an excess-use rate structure, base water use is defined as the average use during a certain nonpeak period (which is calculated separately for each customer) and is charged at a base rate. During a peak period or season, water use above some percentage (e.g., 100 percent) of this base level is charged at the base rate plus an excess-use rate (Figure 5). For example, a utility may charge $0/1,000 gal ($/1,000 L) during the winter period and will calculate the average monthly use during this period for each customer (e.g., 15,000 gal [56,800 L]/month). Each customer will be charged this base $0/1,000 gal ($/1,000 L) for the first 15,000 gal (56, Rate $/1,000 L Rate $/1,000 L L)/month during the peak summer months and then charged $0/1,000 gal ($0.66/1,000 L) for water use above this 15,000-gal (56,800-L) base level. If the utility wants to provide an even stronger conservation incentive, additional excessuse rates can be established for use that is much higher than average (e.g., $0/ 1,000 gal [$0.79/1,000 L]) for water use that is more than 200 percent of each customer s average winter use). Several variations of the excess-use rate structure exist. Some utilities provide an allowance above the base use level during the peak season to recognize an increase in nondiscretionary use during peak periods for such things as cleaning, recreational, and cooling system water requirements. In addition, a series of excess-use charges can be applied to use above the base; for example, a small additional charge would be assessed for moderate use in excess of base use and a large amount for use that is much higher than average. Most US utilities 0 have some type of conservation-oriented rate structure Normally, utilities focus on residential customers when implementing conservationoriented rates because they make up the majority of a utility s customer base. The residential customer class also is typically a more homogeneous use group than other customer classes. This last characteristic makes implementing a single conservation-oriented rate structure for the residential customer class more feasible than it is for other water use classes or categories. Moreover, the residential customer class normally is viewed as having the greatest amount of discretionary water use. According to survey results reported by AWWA, more than 60 percent of US water utilities have some form of conservation-oriented rate structure (Figure 6). The most aggressive rate structures are typically found among utilities in areas where water resources are limited and new resources are expensive or difficult to obtain, particularly in the western and southeastern United States JOURNAL AWWA

4 Approximately 46 percent FIGURE 3 of the US water utilities surveyed and 75 percent of those utilities using a conservation-oriented rate structure are using a uniform commodity charge. As discussed earlier, this rate structure is not often viewed as strongly conservation-oriented but rather is usually considered a conservation-neutral rate structure. However, a uniform commodity charge is a first step toward promoting conservation for utilities that want to move away from declining-block rates. Of the approximately 60 percent of utilities not using declining-block rates, almost one fourth report using an inverted-block rate structure, whereas less than 1 percent of water utilities report using peak-period rate structures such as an excessuse rate structure. Based on recent trends of the past decade, more utilities will continue shifting away from declining-block rate structures and toward one of these conservation-oriented rate structures as they strive to manage existing resources and equitably recover the costs of new, more expensive resources. To better meet their needs, some utilities have implemented rates that combine some of the rate structures discussed. For example, the Seattle Water Department (SWD) has implemented a combined seasonal and inverted-block rate structure for its residential customers. SWD currently has an invertedblock rate structure during the summer season and a uniform rate structure during the winter season, with the first block of the summer inverted-block rate structure set the same as the uniform rate that exists during the winter period. SWD s experience is examined in more detail later in this article. As more utilities move toward conservation-oriented water rates as part of their overall conservation efforts, they are implementing variations and combinations of the four types of rate structures. A survey conducted by R.W. Beck in early 1995 uncovered a variety of applications of the various Rate $/1,000 gal Flat seasonal rate structure Use 1,000 L/month Summer rate Use 1,000 gal/month At least four types of rate structures can generally be classified as conservation-oriented: uniform commodity rates, flat seasonal rates, inverted-block rates, and excess-use rates. Winter rate conservation-oriented rate structures. 2 Table 1 summarizes some basic characteristics of the residential rate structures obtained in this survey along with information on the use of cost-of-service data in setting rates and the level of public acceptance of the applied rate structures. 2 3 Table 1 illustrates the variety of applied conservation-oriented water rate structures. Most utilities in the survey indicated that although they use cost-ofservice data in their ratemaking process, few use specific cost-of-service data in determining rate levels. As Table 1 also indicates, public acceptance of applied conservation-oriented rate structures can be positive, although several utilities have encountered resistance. Public acceptance of rates is often primarily a function of the overall size of water bills and the way the public is educated about the purpose and equity of these rate structures. The issue of public acceptance of conservation-oriented rate structures is discussed later in this article. Evaluatiion of rate structures depends on their purpose A rate structure can be evaluated in many different ways, depending on the purposes it serves. A rate structure may serve as both a utility tool to assess water charges and as an incentive to encourage efficient water use. In evaluating a specific conservation-oriented water rate structure, the potential advantages of using conservation-oriented rates should be considered. Intrinsically, these rate structures convey the Rate $/1,000 L NOVEMBER

5 FIGURE 4 Rate $/1,000 gal Use 1,000 L/month FIGURE 5 Rate $/1,000 gal Inverted-block rate structure Excess-use rate structure Use 1,000 gal/month Use 1,000 L/month Winter rate Winter average Use 1,000 gal/month message that water is a valuable resource worth conserving and using wisely. A conservation-oriented rate structure can be used to focus rate increases on large water users and customers with the most significant degree of discretionary use (potentially those with the greatest ability to reduce their water use). If a marginal cost-of-service analysis has been performed, the conservation-oriented rate structure can be designed to more accurately and efficiently convey true pricing signals to customers. These rate structures can incorporate a lifeline rate or low-income assistance element that helps to keep water bills low for those who use minimum amounts of water. But a conservation-oriented rate structure may also Summer rate contain potential disadvantages. These negative factors include greater revenue instability for the utility, fairness and equitability issues related 0.79 to charging different rates for an identical commodity, and 0.66 general public relations concerns for the utility. One or 3 more of these disadvantages have been encountered by most of the water utilities that have implemented conservation-oriented rates. Before developing a conservation-oriented rate struc- 0 ture, a utility should be aware of potential disadvantages as well as advantages. To ensure successful implementation of new rate structures, the rate design must take into account the utility s long-term policy objectives and goals. In addition, the utility should establish a strong and carefully crafted 0.79 public involvement and education effort concurrently with the development or significant 0.66 alteration of a conservationoriented rate structure.* 3 A number of factors influence whether or not a rate structure is successful. Full evaluation of a conservationoriented rate structure must consider a broad range of such possible factors, both positive and negative. The success of a 0 conservation-oriented rate structure is difficult to measure because of the variation in these factors over time and the problem of quantifying other factors. Nonetheless, the following criteria are useful in evaluating the effectiveness of a conservation-oriented rate structure: a measurable reduction in the amount of percapita water use, increased awareness of resource availability by customers, the relative stability and predictability of utility revenues, general public acceptance of the rates, perceived equitability of the rates by customers, and Rate $/1,000 L Rate $/1,000 L *For more information on public involvement and education for water systems, see the November 1993 issue of JOURNAL AWWA, So the People May Know A Guide to Water Utility Public Information Practices (AWWA, 1993, catalog no ), and Public Involvement Strategies: A Manager s Handbook (AWWA, 1995, catalog no ). 72 JOURNAL AWWA

6 Since 1976, the Tucson, Ariz., Water Department has had an active citizens advisory committee that has reviewed and promoted the use of conservation-oriented rates. the administrative efficiency of implementing the rates. Most often, it is difficult to fully evaluate all of these criteria for a given utility and its rates. This is especially true in trying to accurately determine whether a reduction in water use associated with implementation of a specific new rate structure has occurred, in large part because conservation-oriented rates are usually only one component of a utility s overall conservation effort. Identifying how much of the resulting water use reduction is due to each of the responsible conservation components is problematic at best. A first step in the evaluation process, however, is to confront the general skepticism that exists surrounding any correlation between water rates and customer use levels. To examine this question, the authors obtained and analyzed data from the AWWA Water Industry Data Base 1 on the residential water use and average cost of water for the 15 water utilities listed in Table 1, along with several utilities that use uniform rate structures. Figure 7 illustrates the association between a utility s water use levels and the utility s average water cost: the more water costs, the lower the average level of water use. Conversely, water utilities with the lowest average cost also tend to have the highest water use levels. A regression analysis of these data was used to estimate a statistical relationship with the expected negative or downward slope representing some level of normal price responsiveness for water demand. In addition to the cost of water, a multitude of factors affects average use levels for individual water systems. Still, the data suggest at least some relationship between water use and its price. To the degree this is so, the potential hazard of assuming no relationship between rates and water use levels is apparent. Judging from the experience of the water utilities shown in Figure 7, the price of water may well have an influence on residential use levels. Many other factors also influence water use, as demonstrated by the considerable variation in water use that occurs for the same average cost level. Water use is influenced by a constellation of complex factors, including changes in weather, seasonal demand patterns, and water use applications.in evaluating a specific rate structure s impact on water use, it is important to examine conditions at specific water utilities in order to develop clear documentation of water savings attributable to rates. Another and perhaps better indicator of a rate structure s success is the level of public awareness about water resource availability issues and the level of public acceptance of the rate structure itself. To the extent that rates and a particular rate structure encourage customers to use available resources more wisely, the rates may be deemed a success from a conservation perspective. Also, if the rate structure is viewed by most customers as being equitable and fair, this perception will help ensure long-term political support for the rate structure and increase the likelihood of its success. Any rate structure that encourages customers to change their use habits, however, will undoubtedly involve some resistance from certain customers, especially those with very high levels of water use. Three utilities examined To get a better indication of how the use of con- NOVEMBER

7 FIGURE 6 FIGURE 7 Declining block 39.5 percent Uniform commodity 45.6 percent Average Cost $/1,000 gal Rate structures used by US water utilities 1992 Residential water use versus cost Average Residential Household Use L/d servation-oriented rates has helped to reduce water use levels, the authors reviewed three utilities that have used three of the conservation-oriented rate structures discussed. All three water systems have had active conservation programs that included the use of rates to help reduce water use. The following examples illustrate the possible effects on water use that may be achieved by a rate structure used in conjunction with an overall conservation program. Phoenix Water and Wastewater Utility (PWWU). Inverted-block 14.7 percent ,500 2,250 3,000 3,750 Peak-period 0.2 percent ,000 Average Residential Household Use gpd Average Cost $/1,000 L The PWWU has a long history of using conservation-oriented water rates to help support its overall conservation program. Prior to 1977, PWWU used a uniform rate structure for its residential class. In 1977, it changed to an inverted-block rate structure for residential customers (Table 2). With two blocks for residential customers and only a small incremental difference between these two blocks, PWWU began a gradual process of promoting water conservation with its rates. In 1982, a third block was added along with summer and winter differentials. By 1989, PWWU had a seasonal, threeblock rate structure with the highest block rate nearly three times as large as the first block rate. In 1990, after an extensive review of water use patterns and with input from its rate advisory committee, PWWU decided to simplify its rate structure. It adopted a three-season, uniform commodity rate structure designating each season as four months long. The uniform commodity rate charged in the peak period (summer) is the highest, the off-peak period (winter) has the lowest uniform rate, and the spring fall rate is between these two. With this new rate structure, PWWU also provides a monthly water use allowance ranging from 1,000 cu ft (28 m 3 ) in summer months to 600 cu ft (17 m 3 ) in winter months. The allowance is included in the monthly service charge. The current rates are unusual in that now the same rates and rate structure are in effect for all customers, including customers that were formerly in residential, commercial, and industrial classes. These rate changes have caused significant increases in average water bills for residential water users in Phoenix. From 1975 to 1995, the overall monthly charge for an average amount of water use in Phoenix increased 335 percent during the summer months and 230 percent during the winter 74 JOURNAL AWWA

8 The Seattle, Wash., Water Department implemented a seasonal, inverted-block rate structure for residential customers in months. As a result of the rate structure changes, the impact of rate increases has been focused on large water users, who see higher bill increases. Small water users have seen less of an effect on their bills. Inflation during this period was also significant; rates would have increased 260 percent to keep pace with inflation. Because water rates increased more than inflation, there were significant inflation-adjusted water bill increases in Phoenix during this 20-year period, particularly during the summer months. As part of the city s overall conservation efforts, how have these rate increases and changes in the conservation-oriented rate structure affected water use in Phoenix? A review of residential water use in Phoenix shows a consistent long-term trend toward reduced water use from 1975 to 1994 (Table 3). Average monthly water use has declined in the summer months nearly 30 percent, and average winter use has declined nearly 25 percent over this 19-year period. Some of this reduction appears to be the result of changing weather and socioeconomic patterns. For example, the late 1970s were very dry in Phoenix, and the 1990s have been much wetter than normal. However, detailed studies of water use in Phoenix indicate that much of this reduction may be traceable to the effects of PWWU s conservation efforts, including its use of conservation-oriented rates. A 1994 study of water use in Phoenix concluded that the new seasonal rate structure implemented in 1990 had been effective in reducing average residential water use between and 1.6 percent over the first three years the structure was in effect. 4 SWD. SWD had a uniform rate structure until 1989, when it implemented a seasonal inverted-block rate structure for its residential customers. The winter rate remained a uniform commodity rate, and the summer rate became a two-step inverted-block rate structure, with a 21 percent higher rate for summer water use above 500 cu ft (14 m 3 ) per summer month (Table 4). The SWD has increased its rates four times in the past six years, still using the seasonal invertedblock rate structure, now with a 57 percent higher rate for summer water use above 500 cu ft (14 m 3 ) per summer month. During this period, SWD, like PWWU, has had an active conservation program in place. SWD conducts a marginal cost-of-service study every two years and bases the rate for the second use block in the summer on the estimated marginal TABLE 1 Examples of water utility conservation-oriented rate structures 2 3 Residential Rate Structure* Use of Cost of Service Acceptance Seasonal Inverted- Excess- COS -based COS-based Reported Location Rate Block Rate Use Rate Class Rate Public of Utility Structure Structure Structure Allocation Design Acceptance Austin, Texas X X Good Dallas, Texas X X Good Denver, Colo. X X Fair El Paso, Texas X X X Fair Irvine Ranch, Calif. X X X Fair Las Vegas Valley, Nev. X Good Los Angeles, Calif. X X X X Good Marin County, Calif. X X X Good Penellas County, Fla. X X Fair Phoenix, Ariz. X Good San Diego, Calif. X X Good San Jose, Calif. X X Good Seattle, Wash. X X X X Good St. Petersburg, Fla. X Good Tucson, Ariz. X X New *As of December 1994 Cost of service Public acceptance often is more a function of the size of water bills, public information about rates, and other issues. Cost-of-service prepared on a meter size basis, not a customer class basis NOVEMBER

9 TABLE 2 TABLE 3 TABLE 4 TABLE 5 Residential summer and winter rates in the city of Phoenix, Ariz. Rates Monthly service charge First 1,000 cu ft (28 m 3 ) /0.34 0* Next 1,500 cu ft (42 m 3 ) Same 5/ /0.89 More than 2,500 cu ft (71 m 3 ) Same 0.88/0.64 Same * First 600 cu ft (17 m 3 ) during winter period Change in residential summer and winter water use in Phoenix, Ariz. Summer Winter Total Period cu ft (m 3 ) cu ft (m 3 ) cu ft (m 3 ) ,330 (94) 1,790 (51) 2,580 (73) ,340 (66) 1,350 (38) 1,840 (52) Percent change Residential summer and winter rates in the city of Seattle, Wash. cost of providing new water resources. The department uses input from its water rates advisory committee to provide public comment and help set policy on its rate proposals. The rate changes in Seattle have significantly increased average water bills for residential water users. From 1975 to 1995, the overall monthly charge for average water use in Seattle increased 460 percent during the summer months and 300 percent during the winter months. As a result, the rate structure changes in Seattle have had an effect similar to that seen in Phoenix when rate structures changed: the impact of rate increases has been focused on summer water users and particularly on customers whose water use was higher than average. Although inflation during this period increased general costs about 260 percent, both summer and winter bills have increased more than the rate of inflation. How has residential water use in Seattle changed during this period of rate increases and adjustment to a conservation-oriented rate structure? A review of residential water use in the city shows a consistent long-term trend toward reduced water use from 1975 to 1994 (Table 5). (The years 1992 and 1993 were significantly affected by drought conditions and have been removed from this impact assessment to avoid biasing the results.) Average Cost $ monthly water use in the summer months declined 4.5 percent, and average winter use declined nearly 8 percent over this 18-year period. Again, much of this reduction may be traceable to the effects of Seattle s conservation efforts, including its use of conservation-oriented rates. Tucson Water Department (TWD). TWD implemented a seasonal invertedblock rate structure in 1977 in a highly publicized effort to help promote its overall water conservation programs (Table 6). TWD first implemented a four-block rate structure for its residential customers during the summer months and a uniform rate during the winter period. Each year thereafter, TWD gradually increased the number of blocks and the differentials of the various block rates; it also implemented a similar inverted-block rate structure during the winter. By 1993, TWD had a twoseason, seven-block rate structure with the highest block rate more than three times as large as the first block rate during the summer months. Since 1976, TWD has had an active citizens water advisory committee that has reviewed and promoted the use of conservation-oriented rates. In December 1993, TWD changed its residential rates from the inverted-block rate structure to an excess-use rate structure. The goal was to increase incentive for all customers to conserve water during the summer while simplifying the rate structure and increasing equitability. Under this rate structure, a base charge was in effect for all winter water use and for summer use at or below the average winter use level for each individual customer. During the summer, water use above this level was charged at one of two higher excess-use rates one for use above the average winter use level and a second for use above 150 percent of the average winter use level. Because numerous customers complained about the new rate structure, Tucson s city council voted in May 1995 to return to a simpler three-block inverted rate structure that is in effect year-round. One effect of these rate changes in Tucson has been a significant increase in average residential water bills. From 1975 to 1995, the overall monthly charge Cost $ Rates Monthly service charge First 500 cu ft (14 m 3 ) /1.333 More than 500 cu ft (14 m 3 ) Same Same 89/1.333 Change in residential summer and winter water use in Seattle, Wash. Summer Winter Total Period cu ft (m 3 ) cu ft (m 3 ) cu ft (m 3 ) ,110 (31) 760 (22) 880 (25) , ,060 (30) 700 (20) 820 (23) Percent change JOURNAL AWWA

10 for average water use in Tucson increased 240 percent during the summer months and 230 percent during the winter months. As a result of the rate structure changes, the rate increases have particularly affected Tucson s large water users, who have received higher increases. Those who use smaller amounts of water have seen less of an impact on their bills. With inflation during this period increasing general costs about 260 percent, however, both summer and winter bills on average have increased less than the rate of inflation over this 20-year period. How have these rate increases and changes in the TABLE 6 TABLE 7 conservation-oriented rate structure affected water use in Tucson? A review of the utility s residential water use from 1978 to 1994 shows an interesting long-term trend toward reduced summer water use but a small increase in average winter use (Table 7). Average monthly water use in the summer months declined nearly 9 percent, and average winter use increased about 2 percent over this 16-year period. Again, much of this reduced water use is believed to be credited to the combined effects of TWD s conservation efforts and its conservation-oriented rates. TWD s rate increases have not kept up with inflation, which may at least partially explain why winter use there has remained relatively unchanged over this period. In comparison with Phoenix s water use, Tucson began this 17-year period with a much lower average residential water use level, perhaps providing less opportunity for conservation savings. These two factors may provide insight into conditions that influence not only the effectiveness of conservationoriented water rates in a particular area but also the potential success of conservation efforts in general. 5 Residential summer and winter rates in Tucson, Ariz. Cost $ Rates Monthly service charge First 500 cu ft (14 m 3 ) In-service charge* Next 500 cu ft (14 m 3 ) Same * Next 1,000 cu ft (28 m 3 ) 0.66/5 1.33/1.15 Same Next 1,000 cu ft (28 m 3 ) 0.77/5 1.64/1.31 0* Next 2,000 cu ft (57 m 3 ) Same 1.85/ * More than 5,000 cu ft (142 m 3 ) 0.88/5 8/1.61 Same *Breaks are at 300, 1,500, and 3,000 cu ft (8, 42, and 85 m 3 ) Summer Winter Total Period cu ft (m 3 ) cu ft (m 3 ) cu ft (m 3 ) ,700 (48) 1,010 (28.6) 1,360 (38.5) ,560 (44) 1,030 (29) 1,300 (37) Percent change Normally, utilities focus on residential customers when implementing conservation-oriented rates because they make up the majority of a utility s customer base. Change in residential summer and winter water use in Tucson, Ariz. Public acceptance determines success Perhaps the single most important factor in determining the success of a conservation-oriented rate structure is not the amount that water use declines but rather the level of public acceptance it receives. If customers are not willing to accept the consequence of a conservation-oriented rate structure (namely, that large water users will see higher water bills), the program typically will not succeed in the long run. Based on the experiences of a number of water utilities, several factors generally affect whether the public will accept a conservation-oriented rate structure. Gradual implementation. Severe and rapid changes in a rate structure can have extreme effects on customer bills, especially those for large-volume water users. In the extreme, rapid changes in rates can result in significant water use reductions, lower-thanprojected revenues for the utility, and sometimes unhappy (and vocal) customers. Therefore, utilities should move gradually into conservation-oriented rates, no matter which rate structure they choose. If a utility currently charges customers according to a declining-block rate structure, a good first step is to reduce the number of blocks and ultimately move to a uniform rate structure. After an initial readjustment period, the utility could implement one of the more aggressive conservation-oriented rates discussed earlier. Phasing in the conservation-oriented rate structures over a period of two to three years may prove most successful. For example, once a utility has moved to a uniform-block rate structure from its prior declining-block rates, it could then later implement inverted-block rates by adding a block with only a slight price increase the first NOVEMBER

11 year and expand on this rate structure in the following years. Regardless of the rate structure selected, gradual implementation is critical. A utility does not want to send its large-volume customers into rate shock, create possible revenue instability, and engender low public acceptance of the rates. Rates should be based on cost of service. Another key factor in ensuring public acceptance of conservation-oriented rates is basing the rates on the actual cost of providing water service. In most cases, utilities should take care to avoid setting penalty rates solely to curtail use. The exception, of course, is when extreme drought makes such measures necessary. Setting rates based on a cost-of-service analysis is a two-step process. The first step is to allocate costs to customer classes based on the types of service provided to each class. This ensures equity among customer classes. The second step is to design rates for each class so that each customer, on average, is paying approximately the cost of the level of service received. Basing rates on a cost-of-service analysis serves two purposes. First, it allows the utility greater financial stability by matching revenues with costs incurred in providing service. Second, it sends an accurate pricing signal to the customer. Public involvement, education critical. Finally, utilities must involve the public in the process. Letting customers know and understand why such a rate structure is needed and letting them feel that they have input into the process may help ensure acceptance of the resulting rate structure. Citizens advisory groups and public hearings are two ways to encourage public involvement and foster the sense that public concerns have been heard. 6 7 Public involvement also provides customers with a sense that the rate-making process has been well thought out and the rates well designed. Conclusion The authors reviewed the use of various conservation-oriented water rates by a number of water utilities and assessed the success of these rate structures as part of an overall conservation program for the utility. An examination of long-term water use by three utilities demonstrates that significant reductions are possible with the support of conservationoriented rates particularly if these rates are implemented in conjunction with an active conservation program. Finally, several options have been suggested for utilities considering implementing such a rate structure. The specific rate structure that is appropriate for each utility will depend on local policy objectives and constraints. Regardless of which rate structure is chosen, the utility can take steps to ensure that the rate structure is successfully implemented and supportive of overall conservation efforts. Key factors that seem to help ensure success include: gradually implementing needed rate increases and new rate structures, 78 JOURNAL AWWA basing rates on specific cost-of-service information, using conservation-oriented rates to focus rate increases on customers that are high-volume users, implementing rates in conjunction with other conservation programs, using an incentive approach rather than a penalty orientation for the rates, and encouraging strong public involvement and education in the rate-setting process. It is vital that the utility address these considerations during the rate-setting process, continue the public education process, and monitor adequacy of the rates. These steps will help ensure that the rates provide customers with financial incentives to reduce use while maintaining reasonable revenue stability and customer acceptance for the utility. Acknowledgment For their help in reviewing portions of this article, the authors thank John O Hare and Craig Blair of the Tucson Water Department; Jerry Allen, Bruce Flory, and Tim Skeel of the Seattle Water Department; and Jeffrey DeWitt and Greg Henfling of the Phoenix Water Services Department. References 1. Water Industry Data Base: Utility Profiles. AWWA, Denver (1992). 2. R.W. Beck Survey. R.W. Beck, Seattle (1995). 3. Ernst & Young 1994 National Water and Wastewater Rate Survey. Ernst & Young, Washington (1994). 4. KIEFER, J.C. City of Phoenix Water Use Monitoring Program: A Multiobjective Study of Single- Family Household Water Use. Phoenix Water Services Dept., Phoenix, Ariz. (1994). 5. CUTHBERT, R.W. Effectiveness of Conservationoriented Water Rates in Tucson. Jour. AWWA, 81:3:65 (Mar. 1989). 6. REED, R. & JOHNSON, R.L. Developing Rates With Citizen Involvement. Jour. AWWA, 86:10:48 (Dec. 1994). 7. ROTHSTEIN, E.P & JONES, E. Public Involvement in Austin s Rate Study. Jour. AWWA, 85:11:47 (Dec. 1993). About the authors: Richard Cuthbert is a director of economics services for the consulting engineering firm R.W. Beck, 2101 Fourth Ave., Suite 600, Seattle, WA An active member of AWWA and the National Association of Business Economists, Cuthbert has specialized in issues related to water and electric rate-making, finance, and economics for utilities nationwide during the last 15 years. He has an MS degree in resource economics from Oregon State University (Corvallis, Ore.). Pamela R. Lemoine is employed at Black & Veatch in Seattle. She has a BS degree in general engineering from the University of Illinois.