Mary Ann Dickinson
The recently released 2015 AWWA State of the Water Industry report paints a troubling picture for water utility managers. The top five concerns identified by respondents includes financing for system improvements, long-term supply availability, and public understanding of the value of water – issues that can often conflict with each other and are not simple to overcome.
Managers are facing a daunting challenge as they seek to cover the rising costs of maintaining infrastructure and stabilize declining revenues, while still encouraging efficient use to stretch scarce supplies. Water rates are at the center of this challenge, providing the bulk of revenue to cover costs and support fiscal sustainability.
Efficiency-oriented rate structures can be carefully designed to cover costs and provide a signal to conserve, while maintaining stable revenue. However, there is no one-size-fits-all rate structure for this conservation conundrum. Instead, utilities must examine their unique objectives and find the right tools. Fortunately, utilities can attack each step of rate design with some key principles in mind and the right tools at their fingertips.
Prioritize Objectives: It is important to identify and prioritize the key objectives that a rate structure should achieve at the outset, such as specific revenue goals, an efficiency target or fiscal sustainability. Rate design is a tricky balancing act, and a framework is needed to evaluate the potential tradeoffs involved. AWE’s handbook on Building Better Water Rates for an Uncertain World is also a helpful guide through this process.
Plan for Efficiency: While efficiency programs deliberately reduce water demand, water use is also declining for a host of reasons, some of which can be quantified. Water use is decreasing as customers replace old plumbing and appliances with more efficient fixtures. Customers are slowly becoming smarter users with greater awareness. These expected reductions can be incorporated into rate design through more accurate demand and sales forecasts, helping to avoid revenue surprises.
For example, the California Water Service Company recently used AWE’s Sales Forecasting and Rate Model to design and analyze drought rates for their 21 districts that could provide stable revenue to the utility even as customer use decreased, by accounting for efficiency targets.
Embrace the Uncertainty: Utilities can embrace the uncertainty around them rather than ignore it. The discipline of probability management, long applied to challenges in healthcare and defense, can help water managers prepare for the future and incorporate uncertainty into their financial planning. Rather than planning for averages, which – on average – are so often wrong, they can analyze volatility in a variety of scenarios over a longer time horizon.
Colorado Springs Utilities recently took this approach to determine the level of reserves they need to weather the potential impact of climate, infrastructure risk and other issues on revenue. AWE’s rate model can help managers conduct a simulation of revenue risks and drivers of uncertainty in diverse scenarios.
Evaluate Diverse Structures: While the increasing block rate structure is the most commonly seen efficiency-oriented rate structure, a seasonal or uniform rate structure can also effectively incentivize sustainable use if designed correctly. Many communities are evaluating and implementing less traditional rate structures. Budget-based rates have been implemented successfully by utilities in California and Colorado. These rate structures establish rate blocks based on specific characteristics of each customer, such as persons per household, lot size, or evapotranspiration requirements of landscaping.
A 2013 study examined a Southern California utility’s water budget-based rate structure and found that demand was reduced by at least 18 percent. Western Municipal Water District has had budget-based rates in place since 2011. All revenue to cover O&M costs is collected from their first and second tiers, creating revenue stability, even as customers become more efficient over time.
Industry leaders are also examining transformations of the traditional utility pricing model and imagining what might make sense for today’s reality. The Environmental Finance Center at University of North Carolina has done research into innovative rate structures based on concepts behind cell-phone plans and cooperative retail corporations, and several utilities are bravely analyzing their potential.
Implement and Communicate: As George Hawkins, General Manager of DC Water, recently noted in a blog post: “Only by communicating to our customers about what it takes to deliver our essential service, the value of our people and the need for infrastructure modernization can we generate the support that’s required to raise the revenue needed.”
The communications challenge around a rate revision will be distinct in each community. Utilities may need to tailor messages for vocal large water users concerned about the impact of a rate increase, or for organizations focused on the effect on low-income customers. Applying a magnifying lens to where challenges may come from will enable managers to engage with the right messages.
Albuquerque’s water utility used an innovative “Customer Conversations” program to invite customers in to educate them on the importance of rates, solicit their input, and generate support for an eventual rate increase.
AWE’s Financing Sustainable Water website has numerous resources to assist with good communications, including a video that explains what it takes to deliver water service, and a Rates Message Plan with consumer-friendly soundbites to help explain that although rates must go up, conservation helps keep rates lower over time.
Effective rate design that achieves multiple – and often conflicting – objectives is by no means simple, but can be done with thoughtful approaches and the right set of tools. Managers today face an unprecedented and unpredictable set of challenges, and therefore need diverse strategies to tackle needs as they emerge.
Staying nimble and ready to deploy the best tool for the job will help utilities solve immediate challenges and build stronger, more sustainable systems for the future.