Rate Structures, Fixed Costs, Declining Demand, Reduced Revenues: W...

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Rate Structures, Fixed Costs, Declining
Demand, Reduced Revenues:
What Really Determines
the Price of Water?
Arizona Water...

Brief Bio: Gary Woodard, Montgomery & Associates
Gary Woodard is Senior Water Policy and Economics Consultant with
Montgom...

Supply-demand curves are endemic
in economics and public policy
…but not in this
presentation.

Debate over the key drivers of municipal demand
 Economists – it’s the price, stupid!
 Conservation professionals – our ...

Is water different? Does economics not apply?
Municipal water seems different in that:
• The price is not set by a free ma...

Water is different – it’s a human right
The Human Right to Water and Sanitation
On 28 July 2010, through Resolution 64/292...

Increasing block rates (IBRs) became popular…
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2002 2004 2006 2008 2010 20...

…and many utilities with IBRs intensified them…
Over time, the rates have been modified to:
 Increase the number of block...

…but IBRs are particularly problematic
 They are inequitable, assuming that households that
use more water are being wast...

Increasing block rates are often inequitable
IBRs target and punish large water users, assumed to be
water wasters with la...

IBRs are not aligned with cost of service principles
Households that use more water are often more cost-
effective to serv...

Why aren’t IBRs effective conservation tools?
 Rate schedules are complex, may adjust seasonally, and are
frequently chan...

Sewer, other fees often dominate “water” bill
So-called “water bills” in
Pima County and many other
places have been incre...

Do customers react to MP or AP lagged?
Demand for water by well-informed, rational consumers:
Q = B0 + B1(I + D) +B2MP + B...

Analysis was consistent with uninformed customers
0.7
0.71
0.72
0.73
0.74
0.75
0.76
0.77
0.78
0.79
0.8
0
0.1
0.2
0.3
0.4
0...

What are the consequences of customers reacting to AP?
Decreasing AP Increasing AP
In the cases analyzed,
most customers h...

The real cost of indoor water uses - showers
QUANTITY COST PERCENT TOTAL COST
SHOWER-maximum products
Water 15.8 gal $0.06...

Similar findings for swimming pools
Pecuniary benefits of removing an
unused pool include lower:
• water and sewer bills
•...

Annual total costs of maintaining a pool
Costs by Category
Water/Sewer
Electricity
Insurance
Property Taxes
Chemicals
Pool...

Observed Declines in Demand
0
50
100
150
200
250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ave...

Three factors driving down
residential water demand:
• Active conservation efforts – program-related
• Passive conservatio...

What are the limits to efficiency?
 Toilets – from 5 gpf to 3.5 to 1.6 to 1.28
 Shower heads – from 4 gpm to 2.5 to 2.0 ...

What are the limits to efficiency?
 Toilets – from 5 gpf to 3.5 to 1.6 to 1.28 to 1 to 0.8
 Shower heads – from 4 gpm to...

Decreasing demand forces rate increases
 Water utilities have large fixed costs, typically over 85%
 Energy and chemical...

Actual relationship of price, costs, and demand
Price increases Demand falls
Changing technologies,
tastes, and demographi...

Actual relationship of price, costs, and demand
Price increases Demand falls
Changing technologies,
tastes, and demographi...

Cost of water, sewer began deviating from
all other goods and services post-2000
0.000
50.000
100.000
150.000
200.000
250....

The mystery of CPI-water – solved?
Why have water & sewer rates grown more than twice
as fast as other prices since 2000?
...

Providers are starting to re-think IBRs
Over the past couple years,
rates are being quietly
modified to:
 Decrease the nu...

So are regulators
Last year, the Arizona Corporation approved
new rates for Community Water of Green
Valley that assumed t...

Conclusions:
 The theory of consumer price perception does not hold for
water utilities
 IBRs cause more problems than t...

“Statements of fact and opinion expressed are those of
the author/presenter.
AZ Water, AZAWWA, and AZWEA assume no
respons...

If you have questions or would like more
information…
Gary C. Woodard, JD, MPP
Senior Water Policy & Economics Consultant
...

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