Utilities test new rates, look beyond the ratepayer for revenue.
By Brett Walton, Circle of Blue – May 18, 2017
Belying their reputation as conservative institutions that resist change, large U.S. water utilities, in response to slow-motion social and hydrological shifts that alter water availability and use, are showing signs of creativity.
The inspiration is reflected in their rates, which continue a relentless, but slowing, upward climb. The average cost of residential drinking water service for a family of four using 100 gallons per person per day rose 4 percent last year, according to Circle of Blue’s annual survey of 30 large U.S. cities. It was the smallest increase since the survey began in 2010.
Philadelphia will implement the nation’s first water rate based on household income starting July 1, 2017.
For a family of four using 50 gallons per person per day, the average price rose 4.6 percent. The median increase for both scenarios was 3 percent.
The challenge for utilities today is threefold: earn enough revenue to repair broken pipes, keep water affordable for the poor, and do so while selling less of their product. Those challenges intersect in a utility’s rates. The adjustments that utilities — from Austin and Atlanta to Denver, Philadelphia, and San Antonio — are making are evidence that old formulas are inadequate to meet changing financial and social pressures, be they outdated infrastructure, water scarcity, or affordability.
Rate experimentation “is a really good thing,” Janice Beecher, director of Michigan State University’s Institute of Public Utilities, told Circle of Blue. “We need to learn more about what works and what doesn’t.”
Utilities Raise Rates to Pay for Improvements
Movement in water rates tends to be cyclical. The smaller increases in the latest survey follow years of sharp rises. Atlanta, Chicago, Las Vegas, and San Francisco are among the cities that enacted annual double-digit increases between 2011 and 2014. Baltimore, Charlotte, Detroit, Houston, and Tucson had annual increases in the 9-percent range during those years.
The survey, however, has limits. It looks at 30 large cities — out of roughly 50,000 public water systems in the United States. The prices do not reflect average household bills, for which Circle of Blue has collected a separate data set. Instead, they show the annual change in prices for three consumption scenarios in which monthly water use remains constant.
The Los Angeles Department of Water and Power will invest $6.3 billion in the next five years on a package of water infrastructure projects that are designed to reduce the city’s reliance on water imported from northern California and the Colorado River.
Still, the survey is useful for identifying broad price trends, a sort of Dow Jones index for tap water, and tracking the evolution of urban residential water rates.
Cities that significantly increased rates in the last year will use the money to pay for new infrastructure. Citizens Energy Group, the trust that provides water to Indianapolis, plans in the next two years to invest between $US 95 million and $US 100 million, some 40 percent of which will be spent on replacing aging cast iron mains. After two years without a change, rates will increase 15 percent for a family of four using 50 gallons per person per day.
The Los Angeles Department of Water and Power, one of the nation’s largest water utilities, is preparing for a more comprehensive investment: $US 6.3 billion over the next five years on water infrastructure projects, according to Neil Guglielmo, the department’s chief financial officer. Projects include pump stations, cleaning up contaminated groundwater basins that can be used for underground water storage, water recycling facilities, and controlling dust in the Owens Valley, where the 223-mile Los Angeles aqueduct begins. The goal of the package is to reduce reliance on water imported from northern California and the Colorado River Basin.
“There’s a cost in shifting to more local control,” Guglielmo told Circle of Blue.
Los Angeles residents, even before state-mandated restrictions during the recent drought, have been using less water. Demand is roughly what it was in the late 1970s, even as the city has added more than one million people. Drought restrictions ordered by Gov. Jerry Brown two years ago accelerated that trend. Water use per person is down 20 percent since 2014.
Selling less of their product has proven difficult for some utilities. The reason: revenue is tied to consumption.
An ongoing debate in utility finance is the proper split between fixed and variable charges.
Fixed charges are paid every month, regardless of water consumption. Variable charges are tied to how much water flows through the tap.
Baltimore eliminated a minimum billing model that was seen as harmful to the poor. The city also changed to monthly billing to provide more frequent feedback on water use.
A higher fixed charge, which is a common move these days in response to conservation and an increase in the cost of pipe repairs, means revenue is more stable. But it also reduces the financial incentive to conserve, and it may put a disproportionate burden on households that use little water.
Instead of disentangling revenue and consumption with higher fixed fees, Beecher argues that utilities should focus on conservation actions that reduce peak demands. That way, utilities avoid building bigger pipes and treatment systems than they need, and they reduce the revenue crests and troughs that come from relying on hot weather to bump up consumption.
“A lot of the volatility in revenue has more to do with outdoor use,” Beecher explained. Indoor use — showering, washing, toilet flushing — is consistent and predictable. A graph of monthly urban water demand, in fact, typically resembles the silhouette of a National Park Service ranger’s hat: flat in the winter with demand rising sharply in the summer when residents water their lawns. Demand falls back again as autumn approaches, returning eventually to its winter base, when use is primarily indoors.
Austin Water is at the forefront of a new type of fixed charge, one tied to consumption. The utility has a $US 7.10 per month fixed rate that every customer pays. But it also charges a fixed rate based on consumption. Households that use less than 2,000 gallons in a month pay only $US 1.25 for this charge. Those that use up to 6,000 gallons pay $US 3.55. At this point, the charges start to soar, an incentive to conserve. Households using up to 11,000 gallons pay an additional $US 9.25. If use is above 11,000 gallons, the rate is $US 29.75.
Though the consumption-based fixed charge was instituted to stabilize revenue, Austin Water has seen a decrease in peak demand as well, said Jill Mayfield, a spokeswoman. The decrease could be attributed to higher fixed charges, overall price increases, or conservation programs, she said.
Water use per person in Los Angeles in down 20 percent since 2014.
Variable charges, the other half of the equation, are often set in blocks, the cost of which increases as more water is used. In Las Vegas, for example, the first 5,000 gallons are priced at $US 1.19 per 1,000 gallons. The next 5,000 gallons are priced at $US 2.14 per 1,000 gallons.
Denver also uses an increasing block rate. But Denver bases the size of the blocks on winter consumption. As a result, indoor use, which is fairly constant throughout the fall, winter, and spring, is priced at a low rate, and higher rates are applied to outdoor use. It is a way to personalize water rates and keep a price signal for conservation.
Other experimenters include the San Antonio Water System, which gives customers who use less than 2,992 gallons per month a 20 percent discount on the $US 11.64 fixed charge, and the Philadelphia Water Department, which will introduce on July 1 a water rate based on income.
Baltimore, meanwhile, abandoned a minimum billing model which required residents to pay for a certain amount of water — 7,480 gallons every three months — even if they didn’t use that much.
“That impacted Baltimore’s sizable population of elderly and low-income residents,” said Jeffrey Raymond, water department spokesman. “We heard constantly how unfair it was that they pay for water that they didn’t use.”
Baltimore also shifted from quarterly to monthly billing, a move that will give residents more frequent feedback on how much water they are using. Residents who are connected to wireless meters, in Baltimore, New York, and other cities, can go online and see water usage almost in real-time: by the day or hour, even.
Alternative to Rate Increases Proves Popular
At least one city is looking beyond the meter for water department revenue.
Atlanta voters reauthorized the MOST tax in March 2016, extending the one-percent sales tax for four years. Revenue from the tax is dedicated to water, sewer, and stormwater projects.
Without roughly $130 million in annual revenue from MOST, a one-percent sales tax used for water and sewer projects, Atlanta would have to increase water rates by 25 percent over the next three years.
Without MOST revenue, which averages roughly $US 130 million per year, Atlanta would have to raise water rates by 25 percent over the next three years, estimates Mohamed Balla, the Atlanta Department of Watershed Management’s deputy commissioner for finance. Instead, no increase is expected through 2020, he said.
First approved in 2004, the tax grew out of an immediate need. Atlanta signed an agreement with the federal government in 1998 to reduce the dumping of sewage during heavy rains. Water rates soared to pay for a series of catch basins, storage tunnels, and treatment plants. Debt service quadrupled, to $US 210 million per year. Relying on ratepayers to shoulder the entire bill was deemed too onerous.
Equity is the main justification for the tax, Balla told Circle of Blue.
“There is a lot of stress on our utility because of increased daytime use,” said Balla, who reckons that the city’s population nearly triples during the day when suburban commuters join with tourists and convention goers. “The infrastructure to support the inflow should be supported by the daytime population, too, so that it’s not just the metered customers bearing all the cost to maintain the infrastructure.”
The idea has broad support, garnering more than 70 percent of the vote the three times it has been reauthorized.
Beecher says these attempts to tailor water rates to changing conditions should be both applauded and scrutinized. “We need to study them carefully and collect data to see how they worked out for families, ratepayers, and the utility,” she said.
This story has been updated to reflect that Baltimore uses wireless meter-reading technology.