Promoting Conservation Via Water Rate Structures

Abstract

As economic growth and nontraditional uses place increasing strain on existing water resources, capturing the true value of these resources and ensuring that consumers understand and respond appropriately to this value is becoming both more difficult and more critical. Water utilities play a key role in the valuation and distribution of precious water resources. However, these utilities often have difficulty fulfilling their social obligation to encourage conservation and efficient use while collecting revenues sufficient to offset their costs. Increasingly, utilities are turning to pricing strategies to balance these two competing objectives. This paper explores how water utilities attempt to manage the trade-offs between water conservation and revenue sufficiency through rate structure design. The paperʼs comparative approach combines a review of the literature with an examination of current practice in several municipalities. The analysis suggests that, in practice, revenue sufficiency concerns often dominate in rate structure design, undermining conservation incentives. However, the literature suggests that water conservation and revenue sufficiency do not necessarily always stand in direct opposition; in fact, utilities can potentially develop rate structures that promote both. However, to do so requires an emphasis on economic analysis and the use of a broader, social accounting stance.