Cars drives by a sign encouraging residents to save water in Rancho Santa Margarita, California. AP Photo/Chris Carlson

They’re losing sales to efficiency and conservation. Here's how they're making up the cost.

It’s not many industries that encourage customers to buy less of the product they’re selling. But that’s the conundrum water utilities have found themselves in, whether they’re a California agency mandated to reduce water use, or simply any one in the U.S. that’s seen use go down as a result of high-efficiency appliances and fixtures.

“Cities are growing in regards to population, but their water use is decreasing or stabilizing,” says Mike Orth, executive managing director for the Americas at Black & Veatch, a global infrastructure consultancy. “We see that occurring pretty widely across the U.S.”

So efficiency is up, but sales are down. How do utilities balance their revenue needs with the standards they’ve set for customers? Coupled with the sorry state of infrastructure across the U.S., it’s a tricky question—and one that pricks a philosophical thorn about our relationship to water.

The tricky politics of public utilities

Public utilities function as what economists call “natural monopolies”: Unless you decide to dig your own well, there’s pretty much no other option for accessing water besides hooking into your city’s system. Pay up, or you might be forgoing service, as we’ve seen happen to great controversy in Detroit. Don’t hook up at all, and your home would likely be deemed unfit to live in.

If public water utilities are monopolies, why don’t they just charge all they want for water? Because they’re quasi-government agencies, subject to regulations on how they can price water, and to the sensitivities of local politics. Utilities often decide to raise rates in collaboration with city or county officials. When customers have to pay more, someone’s political stock risks taking a blow.

Politics are among many factors that utilities take into account when they price water. Sufficient and reliable revenue, equity, and price signaling are others. With many utilities calling on consumers to conserve, and with more efficient appliances using less water in newer homes across the U.S., many utilities are now looking for ways to price water that generate stable revenue.

When you open your water bill, you see a number (or numbers) that reflects the fixed and variable costs of providing water to you. Fixed costs go mostly towards stuff you don’t see: treatment plants, pipes, labor, and so forth. Variable costs depend on how much water you consume, measured volumetrically with your meter.

Most utilities break up these costs on customer bills. In the San Diego sample bill below, you’ll see a “water base fee,” reflecting fixed charges, and a “water used” service, reflecting variable costs.

(City of San Diego Public Utilities Department)

When customers use less water, that means they’re paying less for consumption. This is a good thing, and not just because it’s more ecologically friendly. In the long run, conservation and efficiency are the cheapest ways utilities can avoid needing to develop new supplies in the future.

But in the short-term, conservation and efficiency can put utilities in a pinch, because their sales fall while fixed costs remain the same. Eventually, they need to find a way to make back some of that lost revenue to cover their costs.

As water drops, rates have to rise

Couldn’t utilities simply increase fixed charges to all their customers and charge one big flat rate per month to everyone, like an Internet provider? That way, utilities would have a more reliable income stream, regardless of how much water individual ratepayers use.

Some utilities do function like this. But for large cities that want to promote conservation and provide equitable service to ratepayers of all income strata, it’s not a very smart approach. One big flat rate would hurt low-income ratepayers who, by the way, tend to use a lot less water than wealthier ones. Plus, bumping up fixed charges alone wouldn’t send a price signal to encourage customers to use less water.

That’s why lots of utilities are hiking up the volumetric cost of water itself, even as people are using less of it. But with equity in mind, many water experts advocate for tiered pricing, where customers who use less water pay less per unit. The more you use, the more you climb up pricing tiers. The larger the price increases between the tiers, the more of an opportunity utilities have to make up revenues—and send a message to ratepayers that they shouldn’t ideally be using so much. Likewise, water rates can fluctuate throughout the year, in accordance with use and weather patterns.

(Los Angeles Department of Water and Power)

Besides rate increases or rearranged pricing structures, utilities can also attach “drought surcharges” to customer’s bills. To make up for revenues lost to drought conservation, the L.A. Department of Water and Power, will soon add a “pass-through” charge to customer bills at a rate that’s proportionate to whatever water usage tier they’re in. The utility is also proposing longer-term rate hikes, and the creation of two new pricing tiers, shown above.

A new water model

So should we all tear out our low-flow shower heads and blast the sprinklers? Nope. Conserving water still means you’re probably paying less overall for water than you used to, and again, it’s good for utilities in the long-run.

Plus, the best utilities will do more than continue to pass off budget shortfalls to customers. They’ll plan differently for the future than they have in the past.

Heather Cooley, director of the Pacific Institute’s Water Program, says utilities have long been supply-side oriented, always searching for the next source of water to meet a growing number of connections. But while customers might still be increasing, overall demand is dropping.

Utilities have to get better at forecasting how much water is really going to be required in the future. “They don’t want to overestimate demand and build unnecessary supplies,” Cooley says. “Those are long term risks, and they will serve to increase the revenue requirement, putting more pressure on ratepayers.”

Tied into better forecasting is better asset management. Investing wisely in infrastructure maintenance and improvement is a way to keep costs down in the long run. “I look at it like a car,” says Julie Spacht, LADWP's water executive managing engineer. “When do you decide to change the oil, get new tires, or make a major repair? Or when do you decide the car is too unsafe or is too costly, and you need to buy a new one?”

Public infrastructure—pipes, roads, bridges, etc—is in a failing state all over the country. Corroding, leaking water lines represent a health and safety hazard, as well as a financial problem for utilities. Lost water is lost money. Yet repairing water infrastructure is costly—financially and politically, since it usually requires raising rates.

Between crumbling infrastructure and downhill sales, it’s going to be hard for utilities to avoid bumping up customer fees to manage systems more effectively. But they also need to start thinking differently about their own business model and how they communicate changes to customers, since those changes are going to be reflected in customer bills.

Which is to say that customers also need to adjust their expectations about water. Is water a commodity to be purchased at a given rate? Or is it more like a public service, like the police or court systems? It might be better to conceptualize it more like the latter.

“As customers, I think we have a tendency to look at this like, ‘I’m using less water, so I should pay less,’ ” Cooley says. “But in reality you’re getting the same, if not better water service that lets you shower, wash your clothes, and flush the toilet. We want a reliable, clean supply, independent of the amount of water we’re using, and that’s what we need to evaluate our bill upon.”

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