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Time to Change Water-Pricing Schemes

Changing how water is priced can help utilities manage the challenge of balancing high fixed costs with high levels of variable revenue. There are several countries that California can look to for ideas, including Israel and Australia, as well as a few nearby states.

Written byKirsten James Published on Feb. 29, 2016 Read time Approx. 4 minutes
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The way we pay for water in California has to change. Despite a wet winter this year, California still faces serious drought conditions, and the forecast for the longer term is that this is likely the new normal. Balancing a growing population’s water demand with economic and environmental needs will require a shift in business as usual.

Water-pricing schemes can be devised to address water scarcity and ensure that our water infrastructure funding needs are met. California does this on a limited scale already, but it could expand its efforts to bring balance back to the state’s water resources.

Designing pricing schemes can be complicated and contentious, but fortunately we don’t have to reinvent the wheel. We can learn from other countries that have already grappled with the challenge. A recent event in Sacramento brought leading thinkers from Israel, Australia and other arid lands to talk about the strategies those countries have used to thrive even in the driest times, and water pricing was a common factor in their success.

In Australia, which suffered a devastating 10-year drought starting in 2000, the federal and state governments in 2004 joined in signing the National Water Initiative, which implemented a framework for consistently managing water use, and water pricing, across the country.

Gavin Hanlon, New South Wale’s Deputy Director General for Water, explained the lessons the country and its states learned as they developed a successful water-pricing program.

First and foremost, Hanlon said it is important to set an efficient water price, one that reflects the costs of access to water, while also balancing fixed costs (that is, infrastructure maintenance) and variable costs (actual water use).

Setting an efficient price that balances fixed and variable costs evens out volatility in pricing and keeps water users focused on using water efficiently. Just as high gas prices lead people to drive less (and buy more fuel-efficient cars), making water’s price tag more visible – and more impactful for higher-using customers – invariably encourages conservation.

Second, Hanlon emphasized the importance of not subsidizing agricultural water use through too-low pricing, even though Australia’s urban users often pay more for water.

Israel faces an even drier water forecast than California or Australia: Yacov Tsur of the Hebrew University of Jerusalem explained that, in 2010, the country’s water supplied 0.10 acre-feet (135 cubic meters) per person per year, a number that is expected to be halved by 2050. That’s well below the United Nations definition of absolute water scarcity, which is set at 0.4 acre-feet (500 m3) per person, and even less than subsistence water levels according to Shur.

With a growing population trying to survive on dwindling freshwater replenishment, Israel relies on a twofold approach: demand management through pricing and conservation, and supply management that includes recycling and desalination. Most important, Tsur said, is designing water rates that reflect the true cost of water, which sends a clear signal to users. Israel’s water-pricing program is gradually increasing the costs that farmers pay for water use, so that the price will eventually cover the full cost of supplying the water, while giving farmers time to adapt.

But California can look even closer to home for guidance on water pricing: Ceres is already working on water pricing with utilities in Colorado, Utah and Texas through our CFO Connect project.

CFO Connect helps utilities develop new pricing structures and financial practices that encourage their customers to use less water and enable them to secure water supplies through channels outside of the centralized system – and even to encourage their customers to undertake these activities through pricing and financing activities.

Many western water utilities are like California’s – plagued with cost and revenue structures that are nearly inverted. While many California systems have 80 percent of their costs fixed, nearly 80 percent of their revenue is variable and highly dependent on water consumption. In an era of rising costs, imminent capital expenditures and declining per capita water use, these inverted cost and revenue structures are a significant challenge. Revamping pricing schemes can remedy this problem.

But first California must ensure that water utilities can employ pricing tools that incentivize conservation and allow for reduced water rates for low-income customers, such as tiered pricing. Last year, the California Supreme Count upheld a decision from the Fourth District Court of Appeals that tiered water rates used in the City of San Juan Capistrano were illegal because they did not reflect the actual cost of providing water as required by Proposition 218. In other words in the court’s opinion, users in the higher tiers were paying more than the actual cost of supplying the water. Although developing new water supplies needed fully to service high-using customers often costs more than existing supplies, it is difficult to establish a clear link that the higher-using customers created this extra expense.

Many of the state’s water utilities use tiered water rates already, but this court decision is likely going to slow their uptake by others – and prevent the state from saving much-needed water.

A ballot measure recently submitted to the state Attorney General for consideration on the November 2016 ballot – The California Water Conservation, Flood Control and Stormwater Management Act of 2016 – would remove barriers to conservation pricing and life-line water rates once and for all.

As California starts to take these steps to improve how it measures, prices and uses water, we are on the path that other water-stressed nations have followed to a more sustainable water future.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Water Deeply.

Top image: A water meter is installed at the site of a new home under construction in Fresno, California, in September 2014.