The struggle with municipal water rates in response to conservation

The downside to the remarkable water conservation I’ve been writing about (see yesterday’s Albuquerque numbers, for example) is revenue. Water utilities sell water. If people use less water, water utilities make less money. One option is to shift to more fixed-costs pricing, charging a flat rate for service, but then you lose the behavioral incentive of price.

Tony Davis’s latest story out of Tucson is an example:

Tucsonans conserve so well that their usage — and Tucson Water’s revenue — has plummeted over the years, and that’s something the utility’s new director wants to fix. A specific proposal is a year away, but a new rate structure likely would reduce the utility’s dependence on revenue coming from monthly charges based on how much water a home or business uses. Under a scenario outlined by newly hired Tucson Water Director Timothy Thomure, a greater portion of customers’ bills would shift to the utility’s fixed charges, which stay the same regardless of how much water people use.

There’s pushback from water conservation advocates, who think that would lead to an increase in water use. Albuquerque used a similar approach a couple of years ago (higher fixed cost on my bill) and conservation continued, so maybe not? But the details matter. There’s a lot of room here for some detailed house-by-house, neighborhood-by-neighborhood number crunching to try to get a better understanding of the elasticity of demand and how that interacts with various pricing structures. Call in The Economists!


One Comment

  1. This is interesting. In a supermarket, you can’t keep the cost of your monthly egg bill high just because you are selling fewer eggs. People will shop elsewhere. Similarly, if your fixed costs are a large fraction of your total costs, as happened in the steel industry, you are replaced by competitors with lower fixed costs.
    For water, it would seem reasonable to let water revenues fall and figure out a new business model if you want to attract and keep residents and businesses.

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