A recent Sonoma County California case brings to light an interesting relationship between conservation and water utility rates. Last October, residents of the local Sonoma users undertook some significant conservation measures and were rewarded with an 8% rate increase. The lead line from a local community radio website then read ”Apparently, conserving water won’t necessarily save you money.” Water Utility Consultants have seen this before.

The relationship between usage behavior and cost structure provides insight into how this happens. Typically, utility customers believe that if they conserve water or cut back on water use, they will save money on their water utility bill. Generally, if the bill is determined by a cost-per-gallon or cost per-unit rate, this may be true. Consumption of fewer units of whatever is being sold should result in a lower bill to the consumer.

The common conception follows then that utilities should also see its costs reduced since fewer units, or in this case, gallons, are sold. In the case of an effective conservation program where consumers reduce consumption, the theory holds that the provider should also see its costs reduced as well. And all should be equitable.

This model falls apart though, when water providers begin to understand and manage their actual costs. Unfortunately for them, many provider costs can be classified as ”fixed” or set costs. These costs do not change in relation to the number of gallons provided or number of units sold. In the case of water providers, these costs generally include maintenance, insurance, debt service as well as payroll and other costs that won’t be reduced if customers consume fewer gallons of water. In short, fixed costs occur at steady levels without relationship to customer use and are required by the utility to provide ongoing service to existing customers.

Water providers receive revenue from consumers based on the amount of water used or delivered. Revenue to the utility then is a simple function of price times cost per unit (gallons) of service. Users conserving water can trim their charges for service, but these reductions only lower the revenue enjoyed by the provider. And because utilities have significant expense obligations that are not tied to level of customer consumption, these utilities can find themselves struggling to meet existing and ongoing costs. Conservation programs then reduce – sometimes considerably – the revenue needed to continue delivering water service.

In the end, water users may enjoy a lower bill for service by cutting back on usage, but the water provider sees its revenue reduced. Because of the provider’s cost structure, the provider cannot remain financially viable in the long term should its expenses be greater than total revenue.

The point where utility expenses threaten to outpace revenues is usually marked by requests for a rate hike. Increases in rates then erase any gain the customer conservation efforts produced. After all, if fewer units are sold, the rate per unit (gallon) is going to have to be raised to a level that provides enough revenue to support the providers’ ongoing operations. This results in a basic conflict between provider revenue requirements and efforts to reduce customer bills.

The real solution to avoiding these events is to have a thorough understanding of the expected tradeoffs between conservation and revenue before going into any kind of conservation program. Rates can be designed in advance to help offset some of the expected losses, thus stabilizing rates to some degree. Skilled water rate consultants can help design these kinds of rates in advance, and that’s a better approach than waiting to see what happens after the fact.

The Water Utility Consultants at StepWise help water and wastewater utilities nationwide improve business processes, improve revenue and expense management as well as manage customer water utility in a challenging economic environment. Contact the Water Utility and Wastewater Consulting Experts at StepWise today!