Driving Efficiency Through Price

Transcription

1 Driving Efficiency Through Price Georgia Association of Water Professionals 2011 Water Efficiency and Pricing Workshop February 17, 2011 Bill Zieburtz, Jacobs Engineering Group

2 This Topic The conservation imperative Rates were for cost recovery Price as a tool? Price elasticity The cost-of-service idea Illustrating cost-based conservation rates

3 From whence we come

4 Conservation Accepted as a first-order priority in many situations today In many cases this prioritization is reflective of long term costs facing the utility

5 Rates were for (partial) cost recovery Water is free Local government use of the general fund Monthly flat rates per month Federal grant programs Competition to have the lowest metered rate Political ceilings on monthly charges

6 Price as a tool? Humans do respond to price signals Even when we feel captive Even when we fret that we have no alternatives Even when we say our consumption of an item is fixed Price responsiveness is not uniform nor mechanical But price responsiveness is real

7 Price elasticity in your household Depends on: Income The number of substitutes Perceived luxury status of the product Percent of your budget devoted to the item Permanence of the price change Silly human price point reactivity Moral-suasion t And even if all of these are constant, you will differ from your neighbors

8 Price elasticity Measures the responsiveness to changes in prices One of many types of elasticity Simply put, price elasticity of demand is: % change in demand % change in price

9 Arc elasticity (Q2 Q1) (Q1 + Q2) / 2 (P2 P1) (P1 + P2) / 2

10 Understanding price elasticity helps to forecast revenues more accurately to anticipate customer reaction to price changes to understand the second order equity implications of your cost allocations to drive efficiency through price

11 Elasticity in quiz form If the price elasticity of demand is: % change in demand % change in price Which is greater: % change in demand? % change in price? What is the sign of elasticity? positive? negative?

12 Example Utility A: % change in demand % change in price Combined W & WW price increase of 10% Demand decreases 2% Elasticity (place, t, as estimated) = -2% / 10% = -0.2 (call it.2)

13 Another example % change in demand % change in price Average use was 5,000 gallons/month Rates increase by 15% Assume elasticity =.2 (-0.2) The change in demand = -0.2 * 15% = -3% So average usage is estimated as: 5,000 * (1 0.03) = 4,850 gal/mo

14 Product What do price elasticity estimates look like in the wild? Estimated approximate price elasticity of demand Salt.1 Water.2 Coffee.3 Housing 1.0 Airline travel, business 1.15 Cars 1.2 Airline travel, leisure 1.5 Restaurant meals 2.3 Specific brand of coffee 5.6

15 What about water? Author (year) Estimated approximate price elasticity of residential demand for water Agthe and Billings (1980) Billings (1982) Howe (1982) Neiswiadomy and Molina (1989) Howe and Linaweaver (1967) Martin and Wilder (1992) Nieswiadomy and Cobb (1993) Pint (1999) Danielson (1979) [indoor].31 Danielson (1979) [outdoor] 1.38

16 Estimates from Florida WMDs Property Profile (value / size sqft) Estimated approximate price elasticity of residential demand for water 1 ($60k / 1,350).39 2 ($85k / 1,727).51 3 ($130k / 2,197).84 4 ($200k / 2,841).56 John Whitcomb, PhD; July 2005; for SWFWMD, SJRWMD, SFWMD, and NFWMD

17 So what do we use? So what is your quest? I seek the grail of water supply adequacy! I seek the grail of revenue adequacy!

18 Really? Ok, ceteris paribus, A good starting range could be.3 to.4 If your rates are low, discretionary use by your customers is low, or a million other things you could work with.1 to.2 If your rates are high, discretionary use by your customers is high, or a different million other things you could work with.4 to.6

19 Cost of service The AWWA Rates and Charges Subcommittee* believes that the costs of water should be recovered from classes of customers in proportion to the cost of serving those customers. However, the subcommittee also recognizes that other considerations may be equally or more important in determining rates and charges and may better reflect emerging objectives of the utility or the community it serves. -- M1, fifth edition *now an AWWA Committee

20 Cost allocation The basic premise in establishing adequate rate schedules that are equitable to different customers is that rates should reflect the cost of providing water service. A sound analysis of the adequacy of charges requires that the costs be allocated among the customers commensurate with their service requirements. - M1, fifth edition

21 Two steps Allocation of costs to functional cost components Distribution of costs to customer classes according to the responsibility of each for each cost component

22 Two primary methods Base-extra capacity Base costs - tend to vary with the total quantity of water used, reflecting average load conditions Extra capacity costs - associated with meeting rate of use requirements in excess of average Maximum day Maximum hour Customer costs Direct fire protection costs

23 Two primary methods Commodity demand Commodity costs - tend to vary with the quantity of water produced Chemicals Power reservoir Demand costs - associated with facilities to meet peak rates of use Customer costs Direct fire protection costs

24 Cost allocations and conservation rates Following is an illustration of cost allocations Hypothetical situation Over-simplified allocation, neither base-extra capacity nor commodity demand Supportive of conservation rates

25 Example allocations - commodity

26 Example allocations - capacity

27 Example allocations - customer

28 Example allocations fire protection

29 Example allocations - plant

30 Functionalization & classification

31 Functionalization & classification

32 Functionalization and classification

33 Summary of allocated costs

34 Unit costs

35 Cost based rate tiers

36 Example 1 Cost based tiers

37 Example 2 New facilities

38 Example 2 New facilities

39 Example 2 New facilities

40 Example 3 Add a drought

41 Example 3 Add a drought

42 Comparison of tiers

43 Price conversation take homes Humans respond to prices Price responsiveness can be a powerful tool The price elasticity of the demand for water is inelastic, but greater (in absolute value) than zero Price elasticity is not a mathematical constant Cost allocations can support conservation rate design Wise managers are cautious, deliberate, methodical

44 - 44 Remember Why This is Important Nobody in your community does more for public health, prosperity, and the environment than you and your co-workers. Nobody.