The Secret to Water Pricing During a Drought

Many water agencies are hiking water rates in response to declining revenue after customers began conserving water. Tom Ash talked to Water Deeply about how agencies can change their rate structures to increase conservation, cover their costs and make sure that their rates are equitable.

Written byTara Lohan Published on Feb. 11, 2016 Read time Approx. 7 minutes
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As the drought endured last year, Californians were mandated to cut urban water use by 25 percent. As a whole, the state has been mostly successful in its conservation efforts. But decreasing water use has also meant decreasing revenue for many water agencies. And now some customers are facing rate hikes, like Stockton, which just announced a plan for a 26 percent increase in water rates beginning this summer.

Residents of Stockton cut water use by 28 percent since June in response to drought conditions. Last year the city reported $3 million less in revenue from water sales. Other communities are in a similar situation.

But Tom Ash knows it doesn’t have to be this way. Ash is senior environmental resources planner with the Inland Empire Utilities Agency and has been instrumental in helping numerous water agencies adopt rate structures that can withstand a decrease in water use – whether that results from economic recessions or droughts or other factors.

Typically there are two kinds of rate structures. The first are flat rates where there is one rate per unit of water. The second are tiered rates, where usually each step up the price of water increases, so the more you use, the more expensive the price becomes. But there’s also a third, and what Ash advocates for, called a water budget rate or a conservation-based water rate.

This involves setting a budget for both indoor and outdoor water use that is based on state water efficiency standards and takes into consideration the number of people in a household, the landscape area and weather conditions (namely the evapotranspiration rate). The rate reflects not how much water the household uses, but how efficiently it uses it.

Ash talked to Water Deeply about the benefits of water budget rates, why more water agencies are choosing them and how they can promote conservation while keeping agencies from going into the red.

Water Deeply: You recently attended and spoke at the Water Pricing for a Dry Future conference put on by the University of California, Riverside. What did you learn there?

Tom Ash: What I learned is that it doesn’t matter where in the world – China, Chile, Spain, France, Italy, Israel – we all have the same problems in terms of water rates. We all have droughts, we all are facing climate change, we all have population growth. And in most countries they are having trouble recovering the cost of service.

Agencies in California in the last year probably will have lost about half a billion dollars in water revenues.

Water Deeply: Are those losses related to the governor’s conservation mandate?

Tom Ash: It is and it isn’t. Losing money doesn’t have to be related to people saving water.

How agencies lose money is with the design of their rates. It’s a self inflicted wound that their rate structures themselves can’t accommodate water savings without losing money.

But there are some agencies that have designed rates where they do not lose money when less water is used and it’s equitable to customers.

Water Deeply: What are examples of those places and how have they designed their rates?

Tom Ash: My talk Successful and Sustainable Water Rate Design: The Art of Revenue Recovery, Water Use Efficiency and Customer Equity [at the Water Pricing conference] was on the Western Municipal Water District, but the lead in to that story was that 25 years ago the Irvine Ranch Water District implemented the first water budget rate structure.

There are now about a dozen agencies that have water budget rate structures and there are probably 15 to 20 moving to it, mainly in Southern California.

How they work is recognizing the business of the water agency comes first. Its job is to deliver clean, safe water, 24/7. Most of those costs to do that are fixed and the fixed costs are put into the cost of water. On average, let’s say 75 percent of costs are fixed for most public water agencies – it’s not the water that is expensive. Water falls out of the sky almost for free. Almost because you have to treat it a bit and move it around. But it’s the infrastructure that costs a lot.

We want to provide water to everyone at the lowest cost possible – that’s a public agency mantra. But an agency starts losing money because they are not selling enough water. In 2008 to 2012 it was the economy. Today it is the drought mandate.

But it’s really rate design that is causing this not the drought mandate specifically.

Water Deeply: How hard is it to restructure rates?

Tom Ash: It can take anywhere from six months to a year if an agency is very serious about changing the design of a rate. The first step is to answer the question ‘why?’ Why would we chose to change our rate platform? It really comes down to economics and it comes down to equity for the customers.

On the economic side, we are losing money when people save water. That is a pretty good reason to figure out why and change the style of rate to make sure it matches business, which is mostly fixed cost.

Getting past why is how to talk to customers. Agencies are afraid to talk to their customers about why they have to change. It’s because we’ve told our customer for a long time the wrong story. We’ve told them that water is expensive but it’s the infrastructure to make sure water is available 24/7 365, that’s what costs money.

I have found that when we talk straight to our customers and tell them what we do and what is on their bill and what it’s related to, customers get it. In Irvine Ranch for example, people get it. They understand what the bill is telling them – I’m an efficient user, I’m an inefficient user. If you’re inefficient you’re going to pay more and if you’re efficient you’ll pay less. So the rates can accommodate efficiency.

In Irvine Ranch and Western Municipal Water District and Eastern Municipal Water District and Palmdale and other agencies that have these budget-based rates, customers are more efficient, they don’t have the revenue instability, their customers are satisfied – that’s kind of the trifecta.

Water Deeply: Can you explain more about how the rates work in terms of efficiency and not simply how much someone uses?

Tom Ash: It’s more detailed. There are high water users and low, but what if you have a big family or a large yard or you live someplace hot? All those could contribute to high water use. So what’s high, what’s low, what’s efficient, what’s inefficient?

The state actually has legislation that has been on the books for a dozen years that describes what is efficient indoor use – 55 gallons per person per day. Outside is more difficult to calculate, but you need to know the size of the landscape area and the weather (evapotranspiration), which is available so we have that data. There is an efficiency standard for outdoor use based on those measurements.

You have an indoor and outdoor budget and can apply that to a rate structure that gives a signal if you are efficient or inefficient. If they are efficient they have the lowest bill possible. If you go over that budget, those tiers start to go up in price and that’s the signal about how efficient or inefficient you are for your property based on impartial state standards and science.

Water Deeply: What can the state do to help water rates work the best for agencies and the customers they serve?

Tom Ash: I think it’s education and can start at the state level. The State Water Resources Control Board and the Department of Water Resources could host workshops.

The state does not really interfere with local agency rate-making. Every local agency wants to have their own authority to do that, however the state could provide a lot of education and data to help agencies make changes.

Proposition 218 is a requirement about how agencies go about notifying the public and holding hearings whenever there is going to be a rate change.

Water Deeply: Recently an Orange County water agency lost a case against them because of their tiered rate structure. What happened there?

Tom Ash: That was San Juan Capistrano and they had tiered rates not water budget rates and they had increased the rate on the last tier to a very high price. What they did is they violated Prop 218 by charging more than the cost of the service in that tier. They should have stopped after the first court decision and just fixed their rates. And it wouldn’t have been a statewide issue.

I was thrilled when I read the decision because it touted water tiers as a good conservation method. It did not outlaw or make illegal tiered rates or water budget rates, you just have to do them in accordance with Prop 218.

Water Deeply: Considering the drought and other water pressures we have, do Californians as a whole pay enough for water?

Tom Ash: I think that wasted water should be expensive and efficiently used water should be inexpensive. What researchers have found about water budget rate structures is that they aim the economic signal at the right targets, perhaps people with larger lots, perhaps people with high water-use landscapes. They also can benefit – studies have shown – customers that might be low income but have large families. It’s designed to meet their water needs at the lowest price.

It’s a balancing act, no question. That is why a lot of time and effort needs to go into creating that rate structure. A successful rate structure covers all the costs, it drives conservation and it is as fair and equitable as possible.

With the typical rate design most agencies aren’t able to get all three of those targets and that’s why so many are losing so much money.

We are not out of this drought yet. You don’t know when the drought will end until it ends. So being efficient all the time is important. And this is the kind of rate structure that can do that.

Top image: In this photo taken June 23, 2015, Cat Kaslan displays one of her monthly water bills that shows the temporary drought surcharge for her home in Roseville, Calif. Californians who thought their water bills would be reduced as they conserve water have found local water agencies are charging more for water and charging “drought surcharges” to make up lost revenue. (Rich Pedroncelli, Associated Press)