Metrics and Methods for Comparing Water Utility Rate Structures

Abstract

Utility managers must design rate structures that meet multiple objectives: full cost recovery, fairness, economic efficiency, and resource conservation. To reach these multiple goals, the design of an optimal rate structure would ideally include detailed information on cost of service, demand elasticity, and preferences of the customer base within each utility. However this information is often unavailable, especially when analyzing utilities at regional or national scales. In this absence, the comparison or benchmarking of rate structures across utilities may reveal insights regarding the features, management, or performance of one utility relative to another. We review the metrics and methods available to water utility managers for comparing rate structures with publicly available information. By presenting the full range of metrics available to utility managers, we aim to facilitate the comparison of water rate structures, and ensure that the analysts can select the metric that best fits their needs. To illustrate how these metrics may help generate insight, we use them to compare the rate structures of five municipalities in Canada. Despite the contextual differences, we find that the rates tend to converge at a single metric, the Canadian standard of 25[Formula: see text]m3/month, suggesting that there is a “looking over the shoulder effect” in which managers are probably cognizant of the metrics used to compare them to others. We suggest that the design or re-design of rate structures can be informed by the metrics that compare rates across utilities, despite the limitations of working with only publicly available information.

Solutions to the problem of drinking water service affordability: A review of the evidence

“…A growing number of water utilities have adopted IBT structures in the United States (Chan, 2015; Mack & Wrase, 2017), Europe (Arbués & Barberán, 2012; Vanhille et al, 2018), Africa (Kayaga & Smout, 2014; Ying, Skilling, Banerjee, Wodon, & Foster, 2010), and Asia (Li, Wu, & Tang, 2016; Meran & Hirschhausen, 2017). IBT structures set volumetric rates with higher per unit prices applied at higher consumption levels, with the first block of consumption often designated a “lifeline rate” providing basic water for free or at a very low price (Honey‐Rosés & Pareja, 2019). They are usually paired with a fixed charge component of rates, rather than being a pure variable design, to ensure some revenue stability for utilities regardless of potential changes in consumption.…”

“…Of particular concern is that water systems typically do not employ rate structures that differentiate between households of different sizes. By not doing so, low‐income households with more occupants are effectively penalized by consuming more than the lifeline block (if present) by virtue of their necessarily higher water use (García‐Rubio, Ruiz‐Villaverde, & González‐Gómez, 2015; García‐Valiñas et al, 2010b; Honey‐Rosés & Pareja, 2019; Martins et al, 2012; Meran & Hirschhausen, 2017; Pinto & Marques, 2015). Meanwhile, smaller households have less incentive to conserve since more of their water use falls into the first subsidized block (Wasimi & Hassa, 2012).…”

The Context of Responsiveness: Resident Preferences, Water Scarcity, and Municipal Conservation Policy

“…In the case of municipal governments, the subject of the present study, elected political officials ultimately make rate structure decisions, which can be politically risky due to potential resident backlash (Levin et al, 2002; Teodoro, 2010). Politicians may delay or even halt rate changes due to the political risks (Honey‐Roses & Pareja, 2019). Additionally, although revenue does not necessarily depend on rate structures if rates are designed carefully, the adoption of conservation rates increase financial uncertainty for utilities (Jordan & Albani, 1999).…”

Percent Change as a Measure of Price Escalation in Water and Energy Utilities

“…These competing goals may include economic efficiency, cost recovery, revenue generation, resource conservation, and the equitable treatment of users (Barberán & Arbués, 2009; Dinar, 2000; Thorsten, Eskaf, & Hughes, 2009). When balancing trade-offs, utility managers may turn to various metrics to help them assess if a particular rate structure meets its objective (Honey-Rosés & Pareja, 2018). In this article, we aim to invite deeper thinking on a simple, yet underused metric that measures price escalation with the percentage change of a consumer’s bill.…”