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The Case Against Volume-Based Water Rates

 

Rick Wood

Content originally published in the Fairfield (CA) Daily Republic, October 10, 2010

pipesIn the last few years, water agencies all over the state have been raising rates like never before. The increases are often “double-digit.” It has truly been unprecedented.

There are many causes, but what explains a large part of these extraordinary increases has been reductions in water use, driven both by recession and drought, coupled with water rate structures that force rate increases when people use less water.

Water agencies have been coerced into this problem, but more on that later.

A water system is something like a car (or maybe a boat). The main cost is in buying it, insuring it, housing it, and otherwise taking care of it, no matter how much you actually drive it. The only costs that are related to the miles driven are fuel and some maintenance. What you are paying for, mostly, is having quality personal transportation available “on demand,” not the actual use.

Water system costs are also mostly fixed—even more than a car. But just as a car provides access to expensive transportation that you must pay for no matter how much you drive, a water system provides expensive access to water no matter how much you use.

It’s pretty amazing when you think about it. Right in your home, you can turn on a tap and have as much safe and healthful water you want, 24-hours per day, 365 days a year.

Making such a valuable service available requires a huge investment in infrastructure and the fixed expenses of maintaining and operating it. The “commodity” cost associated with the water you actually use is secondary, amounting to perhaps no more than 20% of the cost in a water system like Fairfield’s. That cost is almost all in electric power and water treatment chemicals consumed in treating the water and delivering it to you.

Yet in a water system with rates similar to Fairfield’s, typical of many in the state, revenues are generated in the reverse of costs, perhaps 30% based on fixed charges and 70% based on volume. It’s like trying to make your car payments by adding them to the price of gasoline.

So what happens when water use (volume) drops by, say, 10% is this: Costs drop 2% (20% of 10%) while revenues drop 7% (70% of 10%). A 5% rate increase (or a 5% cut in cost) is required to make up the difference— the price of gasoline has to go up to make those car payments. It has nothing to do with inefficiencies or inflation; it’s due entirely to the rate structure not reflecting the cost structure.

Needless to say, when customers have to pay rate increases and they are told it is because they have conserved water, they don’t like it. No one does.

So how did water agencies let themselves get into this situation?

That’s where the “coercion” comes in.

There is a relentless campaign in California to get people to use less water, driven at the state and sometimes also the federal level. Setting aside whether that is good policy at all times and in all places (it isn’t), one way the state gets people to use less water is by requiring local water agencies to charge high volume rates as a “best management practice” to maximize water use reduction. (A practice, incidentally, the state itself does not follow in how it charges for water from the State Water Project.)

So local agencies, which should and usually do know better, set rates that they know are a bad business practice because the state says such rates are needed to show the local agency is “doing right” for water conservation.

The people at the state level doing the coercing, prompted and encouraged by environmental groups that have never actually had to run a water system, either do not know or refuse to accept what we know locally: We don’t need water rates overly weighted to volume to achieve conservation.

Most customers conserve, not just to save money, but because they believe it is good for the environment or society. If a local water agency asks customers to conserve, customers typically respond in a way unrelated to cost savings to themselves, especially in an emergency. Non-rate incentive programs add to the response.

Further, while high volume rates may place the maximum financial incentive on water users to conserve, it takes the incentive away from local water agencies. And it creates “revenue instability” that actually costs local water agencies more when they need to sell bonds.

So, here’s what local agencies should do: Get together and insist on complete local freedom to set water rates based on sound business practices. In response, the state should agree to stop the coercion and actively encourage local water agencies to meet their conservation goals using other methods.

The tools to achieve water conservation today are legion and proven; there is no need to jeopardize a local water agency’s financial and political health by requiring overly volume-based water rates, and the practice should stop. The change can’t be overnight, but it should begin now.