Water Rate Structures
Structuring Water Rates to Promote Conservation
Water rate structures play an essential role in communicating the value of water to utility customers. The value of water includes: (1) the utility’s operation and maintenance costs; (2) costs to procure and develop additional water supplies to meet growing demands; and (3) social and environmental “opportunity costs” of losing other benefits of water in its natural state (e.g. impacts to fisheries, recreational opportunities, and watershed health).
Increasing block rate structures most effectively communicate the true value of water when compared to other types of rate structures. Through an increasing block rate design, the unit price for water increases as the volume consumed increases, with prices being set for each “block” of water use. Customers who use low or average volumes of water are charged a modest unit price and rewarded for conservation; those using significantly higher volumes pay higher unit prices.
Increasing Block Rate
Research has shown that conservation-oriented rate structures that send a strong “price signal” to customers can provide utilities with stable and sufficient revenue and significantly reduce water use – on the order of 10 – 30% based on the experience several Western utilities. There are several key elements that must be properly addressed, however, in order to maximize the benefits associated with this type of rate structure.
- Right-Size the Blocks – Increasing block rate structures will not achieve desired conservation results if the blocks are not properly sized (i.e. if the blocks are too large). For residential customers, the size of Block 1 should be based on an efficient level of monthly indoor use. Block 2 should be set at to represent the water requirements of an efficient landscape, Block 3 for more water-needy landscaping (like extensive bluegrass turf), and Block 4 for excessive and wasteful use. The smaller the block size, the more potent the conservation price signal.
- Make Block Price Differentials Meaningful – Making the difference between block prices meaningful will send an effective price signal to customers when their usage bumps them into a higher rate block. For example, increases of 50% or more between blocks are often effective at achieving this goal. The effect of block differentials can be evaluated by the slope of the customer’s average price curve – a positive slope after Block 1 should be the goal.
- Avoid High Fixed Service Charges – Utilities that set a high fixed service charge each billing period will generally have a more stable revenue stream, but this directly offsets the conservation incentives provided by increasing block rates.
Throughout our region, a variety of water rate structures exist, ranging from progressive, efficiency-based designs to rate structures that actually promote inefficient water use. Although many municipalities have come a long way in instituting efficiency-based rate structures – especially over the past five years – many still have room for improvement. This is precisely why WRA’s Water Program is constantly promoting efficiency-based rate structures throughout the Interior West.
WRA evaluated water rate structures across the Interior West through a series of reports released during 2004 – 2007. We use the information garnered from this research effort to assist utilities in implementing the most effective rate structure options for their community.
- Water Rate Structures in Colorado: How Colorado Cities Compare Using This Important Water Use Efficiency Tool (2004)(310KB .pdf file)
- Water Rate Structures in Utah: How Utah Cities Compare Using This Important Water Use Efficiency Tool (2005) (621KB .pdf file)
- Water Rate Structures in New Mexico: How New Mexico Cities Compare Using This Important Water Use Efficiency Tool (2006) (1MB .pdf file)
- Front Range Water Meter: Water Conservation Ratings and Recommendations for 13 Colorado Communities (2007)