Conservation Oriented Rate Structures

The concept of conservation rate structures is to compel the water customer to implement cost effective water conservation measures and practices.  The most important aspect of conservation rates is designing the rate structure so a large portion (two-thirds or more) of the charges are based on the quantity of water the customer consumes.   This strategy must be balanced with the needs of a water purveyor recovering its fixed costs regardless of actual water usage.  In general, an increasing block tier structure, where the cost per unit of water increases as the consumer uses more water, is considered the most effective conservation rate structure.  Also, a few water purveyors have implemented water budgets with punitive tiers when budgets are exceeded; and have found this rate structure to be very effective in motivating customers to be water efficient.  Often the revenue generated from punitive tiers is used to fund the conservation programs; this sets the tone for water wasters to help fund the efforts of customers participating in water utility conservation programs and measures.  The financial justification for conservation rate structures is based on the premise that a large portion of the water purveyor’s infrastructure and distribution costs are to meet daily and seasonal peak demands.  Water efficiency reduces operating costs, and delays the need for system expansion and acquiring additional water supplies and storage capabilities.

Water providers should look to achieve the following goals when they adopt a water conservation rate structures: reduce daily peak usage, reduce seasonal peak usage, and reducing total system demand.   The many community benefits of implementing water conservation rates include: communicating general water conservation need, rewarding efficient users that contain water usage in the lower tiers, and penalizing non-efficient water use.  The rate structure needs to be designed to balance conservation goals with price equity and the water purveyor’s revenue stability.  

Inclining tier block rate structure is the most common conservation rate structure used by water purveyors. The best examples of this residential rate design include the following features: the first tier provides minimal water usage for a typical household at the minimum reasonable price; the subsequent tiers are priced significantly higher (greater than 50%) than the prior tier.  Usually 3 to 4 tiers are adequate for an effective residential rate design.   An effective rate design will have more than half of residential customers exceeding the first tier when the new rate structure is first implemented, and at least 30% and 10% of customers using water in the 3rd or 4th tiers respectively (at least during seasonal peak demand).

Water budget based rate structures are also very effective in promoting conservation, though more difficult to implement.  In this design, each residence has an inclining block rate structure designed according to its individual needs.  The tiers are usually set based upon the quantity of occupants and the square footage of landscape; known to be the two most significant factors in residential water use.  The prices of the tiers increase significantly (greater than 50%) after the base usage tier is established.   This rate system requires a robust billing system to accommodate the quantity of individual rate structures (possibly equal to the quantity of customers); and the system requires a formal process to establish each homes base water usage, and respond to the many customers likely to appeal their base tier allotment.  Water budget based rates are not only an effective water conservation strategy; the rate structure is the most equitable means to base rate on needs of each individual household.  A 2013 study of residential water budgets in Southern California found an 18% reduction in use over three years.  This rate structure can also be adapted for non-residential customers.