Developing Conservation Water Rates Without Sacrificing Revenue

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Presented by Dan V. Jackson, Managing Director, Economists.com LLC - Presented at the TWCA Fall Conference www.twca.org

Presented by Dan V. Jackson, Managing Director, Economists.com LLC - Presented at the TWCA Fall Conference www.twca.org

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  • 1. Developing Conservation Water Rates Without Sacrificing Revenue A Presentation to the TWCA Fall 2012 Conference Dan V. Jackson Managing Director Economists.com LLC 5500 Democracy Drive Ste. 130 Plano Texas 75024 (972) 378-6588 (972) 378-6988 fax djackson@economists.com www.economists.com October 25 2012 Page: 1
  • 2. Presentation FormatThe Increasing Popularity ofConservation RatesTypes of Conservation RatesInverted Block Rates – Guidelines andExamplesTips for Designing Inverted Block RatesThat Will Minimize Usage and MaximizeRevenueSummary Page: 2
  • 3. Introduction to Economists.comEconomic and financial consultingservices to private and public sectorServes utility clients throughout USA andPacific RegionPrincipal offices in Portland Oregon andDallas Texas28 + years experience in water, electricand telecommunications industries Page: 3
  • 4. Economists.com Client ListTexas -- 50+Clients Arizona -- 30+ Clients USAAllen Avondale Bonneville Power AdministrationArlington Casa Grande NordstromBellmead Chino Valley AlcoaCelina Cottonwood Norsk HydroDallas Douglas U S West *DeSoto Florence United Telephone of Ohio *Donna Flowing Wells Irrigation District United States Department of Justice *Duncanville Marana Alstom SAGarland MesaHarlingen Payson Portland, OregonHewitt Pine-Strawberry Water Imp. Dist. Lakeland, FloridaLittle Elm Prescott Edmond, OklahomaMidlothian Prescott Valley Miami, OklahomaOak Point Queen Creek Lawton, OklahomaPrinceton Show Low Shawnee, OklahomaRio Grande Valley (10 cities) Somerton Forsyth County, GeorgiaRobinson Tombstone Hot Springs, ArkansasRowlett Water Infrastructure Finance Authority North Little Rock, ArkansasRoyse City Willcox North Chicago, IllinoisSchertz Yuma Ruidoso, New MexicoSonoraVenus Pacific RegionWhitehouse * In affiliation with Deloitte and Touche American Samoa Power Authority CUC Saipan Palau Public Utilities Corporation Page: 4 Guam Power Authority
  • 5. IntroductionFacts About Water and Wastewater Rates Water and Wastewater utility rate increases are a fact of life in the 21st Century However, implementing rate increases can be very difficult for a utility and its management: Ratepayers likely to vigorously resist any cost increases Boards and political leaders will fear political implications of rate increases Many utilities are looking to conservation rates as a means of both minimizing usage and maximizing revenue Page: 5
  • 6. Comparison of USA Cost Increases 2000 – 2012 75.0%80.0%70.0%60.0%50.0% 30.5%40.0%30.0%20.0%10.0% 0.0% Infla on Rate Water Cost Increases Source: USA Today survey of 100 municipalities; US Bureau of Labor Statistics Energy Information Administration Page: 6
  • 7. Percentage of USA Utilities with Conservation-Based Rate Structures60.0% 49.0%50.0% 40.0%40.0% 36.0% 36.0% 32.0% 29.0%30.0%20.0%10.0%0.0% 2000 2002 2004 2006 2008 2010 Page: 7 Source: Raftelis Financial Consulting
  • 8. What Factors are Leading to the Increased Popularity of Conservation Rates Three factors are contributing to the increased popularity of conservation rates Cost – the need to increase revenues to fund rising cost of service Supply – the increasing supply constraints Demand – the need to manage demand Page: 8
  • 9. Types of Conservation RatesInverted BlockSeasonalEnvironmentalDrought PricingRate Surcharges Page: 9
  • 10. Inverted Block Rates Concept: charge higher rates for greater volumes of usage Most popular form of conservation-based rate Advantages Disadvantages Encourages conservation Counter to cost of service principles Politically acceptable – lowestrates for lowest volume users Impacts high volume users disproportionately May cause less revenue stability if not properly designed Page: 10
  • 11. Inverted Block RatesRecommended Rate Design Guidelines Implement block rates for residential and irrigation only, not for commercial and industrial (note: multi-family could go either way) Have first tier include average usage per residential meter per month Good rule of thumb – 25-50% increases for each block, maximum 3 blocks Page: 11
  • 12. Examples of Inverted Block Rates Little Elm, Texas Schertz, TexasMonthly Charge $ 17.46 Monthly Charge $ 18.94 2,000 10,000 (gal) 4.02 - 6,000 2.34 10,001 20,000 5.01 6,001 9,000 2.37 20,001 Above 6.27 9,001 12,000 2.58 12,001 15,000 2.78 15,001 18,000 2.94 Tucson, Arizona 18,001 30,000 3.70Monthly Charge $ 8.27 30,001 45,000 4.21 45,001 60,000 4.48 - 10 (ccf) 1.26 60,001 75,000 4.64 11 15 2.45 75,001 Above 4.74 16 30 6.45 31 Above 10.45 Page: 12
  • 13. Revenue Impact of Implementing Inverted Block RatesTo the extent that IB rates reduce usage, this will result in aloss of revenue to the UtilityHowever, a properly designed IB rate will offset these lossesby increasing rates per 1,000 gallons to higher usage levelsThe key to designing effective IB rates is to properly analyzeand incorporate two critical components specific to eachutility: Individual usage patterns Utility’s elasticity of demand Page: 13
  • 14. Usage Pattern AnalysisTo avoid lost revenue, IB rates must take into account howratepayers use waterRate and forecast models must accurately predict how muchwater will be used in each rate blockThese patterns remain fairly stable, but sometimes can beinfluenced by elasticity factors (to be discussed further later) Page: 14
  • 15. Sample Usage Pattern Analysis -- 2011 City of Allen, Texas 50,001-75,000, 75,001 & Above, 1.50% 0.57% 25,001-50,000, 11.03% 0-1,500, 13.09% 15,001-25,000, 17.60% 1,500-15,000, 73.31% Page: 15 NOTE: For residential customer class
  • 16. Price ElasticityDefinition – measurement of the sensitivity of water use relativeto changes in the price of water, after controlling for theinfluence of other factors e= change in usage original usage level change in price original price levelUsed to determine how much forecast usage and rates shouldbe adjusted to ensure that targeted revenue levels are met Page: 16
  • 17. Price Elasticity General ConsiderationsIn the past, water usage was generally considered to berelatively inelastic; rate increases did not have significantimpact on usageMany factors in recent years have contributed to a growingsense that ratepayers are more sensitive to increasesThe higher the elasticity coefficient, the greater the generalsensitivity of a utility’s ratepayers to rate increasesMeasurement of elasticity has to account for other demandparameters, such as temperature, rainfall, household income Page: 17
  • 18. Price Elasticity Historical PerspectiveAccording to AWWA, more than 100 studies of the effects ofprice on water demand have been conducted in last threedecadesGeneral conclusions from these studies: Price elasticity is greater at higher rate levels Most likely residential elasticity is -0.10 to -0.30, meaning that a 10.0% increase in rates will lead to a 1.0% – 3.0% reduction in usage Commercial/industrial elasticity typically higher, up to -0.80 (10.0% rate increase = 8.0% reduction) Page: 18
  • 19. Price Elasticity Studies Other General ConclusionsHigher fixed monthly charges reduce elasticity of demandUsage sensitivity and price elasticity in Midwest tends to belower than in SouthwestDemand studies for one utility are not necessarily translatable toother utilitiesIt is common for incorporation of new rate structures to trigger asubstantial one-time usage response Page: 19
  • 20. How to Measure Price Elasticity?If you have existing conservation rates,prepare a month by month analysis of theimpact of last rate increase on usage andrevenues Usage by meter Adjust for weather/rainfall patternsIf you do not have conservation rates,suggest you use “rule of thumb” to adjustbefore initial rate calculation Page: 20
  • 21. Example Town of Little Elm, TexasLocated in Denton County, north TexasExperienced significant growth, from 3,000 in2000 to 25,000 todayImplemented 2 tier IB rate in 2002; expanded to3 tiers in 2006Result: marked decline in usage while revenuescontinue to meet target levels Page: 21
  • 22. Town of Little Elm Residential Monthly Usage by Meter12,000 2 Tier IB Rate Established 3 Tier IB Rate 9,861 Established10,000 9,487 9,093 8,326 8,000 6,841 6,000 4,000 2,000 - FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Drought Drought Drought Page: 22
  • 23. SummaryUtilities implementing new IB rates must incorporate thefollowing key variables into their rate structures and revenueforecasts: The specific usage patterns of their residential customers Calculated or estimated elasticity of demandOnly by understanding and properly factoring in these variablescan utilities minimize the potential for revenue shortfalls fromconservation rates Page: 23