Developing Conservation Water Rates Without Sacrificing Revenue
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Page: 1 Developing Conservation Water Rates Developing Conservation Water Rates Without Sacrificing Revenue Without Sacrificing Revenue October 25 2012 A Presentation to the TWCA Fall 2012 Conference Dan V. Jackson Managing Director Economists.com LLC 5500 Democracy Drive Ste. 130 Plano Texas 75024 (972) 378-6588 (972) 378-6988 fax [email protected] www.economists.com
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Presented by Dan V. Jackson, Managing Director, Economists.com LLC - Presented at the TWCA Fall Conference www.twca.org
Transcript of Developing Conservation Water Rates Without Sacrificing Revenue
Page: 1
Developing Conservation Water RatesDeveloping Conservation Water RatesWithout Sacrificing RevenueWithout Sacrificing Revenue
October 25 2012
A Presentation to theTWCA Fall 2012 Conference
Dan V. JacksonManaging Director
Economists.com LLC5500 Democracy Drive Ste. 130
Plano Texas 75024(972) 378-6588
(972) 378-6988 [email protected]
www.economists.com
Presentation Format
The Increasing Popularity of Conservation Rates
Types of Conservation Rates
Inverted Block Rates – Guidelines and Examples
Tips for Designing Inverted Block Rates That Will Minimize Usage and Maximize Revenue
Summary
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Introduction to Economists.com
Economic and financial consulting services to private and public sector
Serves utility clients throughout USA and Pacific Region
Principal offices in Portland Oregon and Dallas Texas
28 + years experience in water, electric and telecommunications industries
Economists.com Client List
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IntroductionFacts About Water and Wastewater Rates
Water and Wastewater utility rate increases are a fact of life in the 21st Century
However, implementing rate increases can be very difficult for a utility and its management:
Ratepayers likely to vigorously resist any cost increases
Boards and political leaders will fear political implications of rate increases
Many utilities are looking to conservation rates as a means of both minimizing usage and maximizing revenue
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Comparison of USA Cost Increases2000 – 2012
Source: USA Today survey of 100 municipalities;US Bureau of Labor Statistics Energy Information Administration
Percentage of USA Utilitieswith Conservation-Based Rate Structures
Page: 7Source: Raftelis Financial Consulting
What Factors are Leading to the Increased Popularity of Conservation Rates
Three factors are contributing to the increased popularity of conservation rates
Cost – the need to increase revenues to fund rising cost of service
Supply – the increasing supply constraints
Demand – the need to manage demand
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Types of Conservation Rates
Inverted Block
Seasonal
Environmental
Drought Pricing
Rate Surcharges
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Inverted Block RatesInverted Block Rates
Concept: charge higher rates for greater volumes of usage
Most popular form of conservation-based rate
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Advantages
Encourages conservation
Politically acceptable – lowest rates for lowest volume users
Disadvantages
Counter to cost of service principles
Impacts high volume users disproportionately
May cause less revenue stability if not properly designed
Inverted Block RatesRecommended Rate Design Guidelines
Implement block rates for residential and irrigation only, not for commercial and industrial (note: multi-family could go either way)
Have first tier include average usage per residential meter per month
Good rule of thumb – 25-50% increases for each block, maximum 3 blocks
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Examples of Inverted Block Rates
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Revenue Impact of Implementing Inverted Block Rates
To the extent that IB rates reduce usage, this will result in a loss of revenue to the Utility
However, a properly designed IB rate will offset these losses by increasing rates per 1,000 gallons to higher usage levels
The key to designing effective IB rates is to properly analyze and incorporate two critical components specific to each utility:
Individual usage patterns
Utility’s elasticity of demand
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Usage Pattern Analysis
To avoid lost revenue, IB rates must take into account how ratepayers use water
Rate and forecast models must accurately predict how much water will be used in each rate block
These patterns remain fairly stable, but sometimes can be influenced by elasticity factors (to be discussed further later)
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Sample Usage Pattern Analysis -- 2011City of Allen, Texas
Page: 15 NOTE: For residential customer class
Price Elasticity
Definition – measurement of the sensitivity of water use relative to changes in the price of water, after controlling for the influence of other factors
Used to determine how much forecast usage and rates should be adjusted to ensure that targeted revenue levels are met
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Price ElasticityGeneral Considerations
In the past, water usage was generally considered to be relatively inelastic; rate increases did not have significant impact on usage
Many factors in recent years have contributed to a growing sense that ratepayers are more sensitive to increases
The higher the elasticity coefficient, the greater the general sensitivity of a utility’s ratepayers to rate increases
Measurement of elasticity has to account for other demand parameters, such as temperature, rainfall, household income
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Price ElasticityHistorical Perspective
According to AWWA, more than 100 studies of the effects of price on water demand have been conducted in last three decades
General conclusions from these studies:
Price elasticity is greater at higher rate levels
Most likely residential elasticity is -0.10 to -0.30, meaning that a 10.0% increase in rates will lead to a 1.0% – 3.0% reduction in usage
Commercial/industrial elasticity typically higher, up to -0.80 (10.0% rate increase = 8.0% reduction)
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Price Elasticity Studies Other General Conclusions
Higher fixed monthly charges reduce elasticity of demand
Usage sensitivity and price elasticity in Midwest tends to be lower than in Southwest
Demand studies for one utility are not necessarily translatable to other utilities
It is common for incorporation of new rate structures to trigger a substantial one-time usage response
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How to Measure Price Elasticity?
If you have existing conservation rates, prepare a month by month analysis of the impact of last rate increase on usage and revenues
Usage by meter
Adjust for weather/rainfall patterns
If you do not have conservation rates, suggest you use “rule of thumb” to adjust before initial rate calculation
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ExampleTown of Little Elm, Texas
Located in Denton County, north Texas
Experienced significant growth, from 3,000 in 2000 to 25,000 today
Implemented 2 tier IB rate in 2002; expanded to 3 tiers in 2006
Result: marked decline in usage while revenues continue to meet target levels
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Town of Little ElmResidential Monthly Usage by Meter
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2 Tier IB RateEstablished
3 Tier IB RateEstablished
Drought Drought Drought
Summary
Utilities implementing new IB rates must incorporate the following key variables into their rate structures and revenue forecasts:
The specific usage patterns of their residential customers
Calculated or estimated elasticity of demand
Only by understanding and properly factoring in these variables can utilities minimize the potential for revenue shortfalls from conservation rates
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