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Balancing Affordability and Conservation in Water Rate Setting
- 1. Balancing Affordability and Conservation in Water Rate Setting David Switzer University of Missouri
- 2. Conservation and Rates Marginal Price Consumption
- 3. Price Elasticity of Demand Price Elasticity of Demand % Change in Quantity Demanded % Change in Price
- 4. Price Elasticity of Demand for Water .1 1
- 5. Conservation and Affordability Marginal Price Affordability
- 6. Conservation, Affordability, and Revenue Marginal Price Consumption Revenue?
- 8. Measuring Affordability ≤ 2% Average Water Bill Median Household Income
- 9. Measuring Affordability Affordability Measured as % Disposable Income (Basic W+S Cost Per Capita)X HH Size Household Income – Essential Expenses
- 10. Measuring Affordability Affordability Measured as % Disposable Income (Basic W+S Cost Per Capita)X HH Size Household Income – Essential Expenses AR20= Affordability Ratio for 20th Percentile of Income
- 11. Measuring Affordability Affordability Measured as Hours Minimum Wage (Basic W+S Cost Per Capita)X HH Size Hourly Minimum Wage
- 12. When Measured Correctly Fixed Prices Affordability Inclining Block Rates Affordability
- 13. Important for Conservation? Fixed Prices Conservation Inclining Block Rates Conservation
- 15. Takeaway Lower fixed rates and higher inclining block rates are better for both conservation and affordability!
- 16. Problems? • Rate Complexity • Revenue? • Revenue Stability
- 17. Simulation • Ratesville, TX • Town of 1,000 • Uses uniform rate structure with fixed water and sewer rates • How do different rate structures impact different outcomes?
- 18. Baseline Consumption Average: 12.8 kgal Median: 10.9 kgal
- 19. Simulation • Evaluating Rates? • HM (target: 8) • AR20 (target: 10%) • %MHI (bad target: 2%) • Gallons Used/Saved • Rate Progressivity • Poehler Index • Revenue (target $125k) • Percent Fixed Revenue • Percent Low Use
- 20. Simulation Assumptions: • Price elasticity of essential use (<6,000 gallons)= 0 • Price elasticity of non-essential use (>6,000 gallons)= .5 • Minimum Wage= $7.25 • Monthly Disposable income= $685 • Median HH income= $52K
- 21. Rate Structure 1- Basic Uniform with Fixed Prices Flat Sewer: $12 Flat Water: $18 Variable Sewer: $3.50 per kgal Water Variable: $4.00 per kgal
- 22. Rate Structure 1- Basic Uniform with Fixed Prices HM AR20 %MHI Gallons Used Rate Progressivity Poehler Index Revenue Percent Fixed Revenue Percent Low Use 10.34 10.95% 2.9% 12.8 mg 0 1 $126k 23% 10%
- 23. Rate Structure 2- Inclining Block with Fixed Prices Flat Sewer: $12 Flat Water: $18 Variable Sewer: $3.50 per kgal Water 1st block (up to 6 kgal): $3.00 per kgal Water 2nd block (6 to 12 kgal): $5.00 per kgal Water 3rd block (over 12 kgal): $7.00 per kgal
- 24. Rate Structure 2- Inclining Block with Fixed Prices HM AR20 %MHI Gallons Used Gallons Saved Rate Progressivity Poehler Index Revenue Percent Fixed Revenue Percent Low Use 9.52 10.07% 3.4% 11.8 mg 1 mg .297 1.62 $147k 20% 8%
- 25. Rate Structure 3- Inclining Block with No Fixed Prices Variable Sewer: $3.50 per kgal Water 1st block (up to 6 kgal): $3.00 per kgal Water 2nd block (6 to 12 kgal): $5.00 per kgal Water 3rd block (over 12 kgal): $7.00 per kgal
- 26. Rate Structure 3- Inclining Block with No Fixed Prices HM AR20 %MHI Gallons Used Gallons Saved Rate Progressivity Poehler Index Revenue Percent Fixed Revenue Percent Low Use 5.37 5.69% 2.7% 11.8 mg 1 mg .297 1.62 $117k 0% 4.5%
- 27. Rate Structure 3- Inclining Block with No Fixed Prices Adjusted Variable Sewer: $3.50 per kgal Water 1st block (up to 6 kgal): $3.75 per kgal Water 2nd block (6 to 12 kgal): $6.00 per kgal Water 3rd block (over 12 kgal): $9.00 per kgal
- 28. Rate Structure 3- Inclining Block with No Fixed Prices Adjusted HM AR20 %MHI Gallons Used Gallons Saved Rate Progressivity Poehler Index Revenue Percent Fixed Revenue Percent Low Use 6 6.35% 2.9% 11.2 mg 1.6 mg .359 1.72 $126k 0% 4.6%
- 29. But What About Revenue Stability?
- 30. Rate Structure 4- Uniform with Fixed Prices and Built in Usage Flat Sewer: $16 Flat Water: $25 Variable Sewer: $3.50 per kgal Water Variable: $6.00 per kgal *Consumption up to 3kgal included in fixed prices
- 31. Rate Structure 4- Uniform with Fixed Prices and Built in Usage HM AR20 %MHI Gallons Used Gallons Saved Rate Progressivity Poehler Index Revenue Percent Fixed Revenue Percent Low Use 9.59 10.15% 2.9% 11.8 mg 1 mg .495 1 125k 33% 8%
- 32. Rate Structure 5- Inclining Block with Fixed Prices and Built in Usage Flat Sewer: $17 Flat Water: $23 Variable Sewer: $3.50 per kgal Water 1st block (up to 6 kgal): $4.00 per kgal Water 2nd block (6 to 12 kgal): $6.00 per kgal Water 3rd block (over 12 kgal): $12.00 per kgal *Consumption up to 3kgal included in fixed prices
- 33. Rate Structure 5- Inclining Block with Fixed Prices and Built in Usage HM AR20 %MHI Gallons Used Gallons Saved Rate Progressivity Poehler Index Revenue Percent Fixed Revenue Percent Low Use 8.62 9.12% 2.9% 11.1 mg 1.7 mg .593 2.06 127k 31% 8%
- 34. What about affordability programs?
- 35. Takeaways • Measurement matters! • Fixed rates are bad for affordability • Inclining block rates are good for affordability • Affordability and conservation not in conflict, but work hand in hand • Even if you keep fixed rates, there are ways of making things more affordable • If you have the resources for affordability programs, you have the resources for careful rate design
Editor's Notes
- Intro Slide
- Start with some really advanced economics
- Price elasticity of demand
- What does this mean? A one percent increase in the price of water leads to somewhere between a .1 and 1 percent decrease in the quantity of water demanded. A couple of things: Depends on level of consumption Depends on income Depends on salience Some people say this is “low”, but compared to what? Comparing the price elasticity of demand for an essential utility is different than a can of coke or a luxury good… It may be “low,” but the reality is that we are dealing with such large units that if everyone decreases their consumption by .1 for every 1% price increase that can lead to a massive change in water consumption… Also… the “low” nature actually means that revenues aren’t extremely at risk by adopting increasing block rates… Usually it is going to mean that even if consumption decreases, the increase in price will mean revenues won’t be negatively affected…
- Price elasticity of demand
- Price elasticity of demand
- Price elasticity of demand
- Price elasticity of demand