Inclining Block Rate Structures as a Price Incentive for Conservation in the North Central Region – Part I of a Two-Part Series

As a result of the trend toward water conservation, one area of interest targeted in the 2010 North Central Region Utility Rate Study was the use of inclining block rate structures. In recent years, conservation measures have been widely implemented throughout the country. In our region, we have seen many communities offer plumbing and appliance rebates, restrict outdoor water use, initiate programs aimed to increase public awareness of conservation issues, and utilize other non-price conservation strategies to promote reduced water use. We’ve also seen many systems rework utility rate structures to discourage excessive water use. Most notably, this rate structure change has occurred throughout Minnesota in response to a mandate by law for the establishment of conservation water rate structures.

This article is the first in a two-part series on inclining block rate structures. Part I reports the prevalence of inclining block structures in our region and touches on considerations for the implementation of such a structure. Part II, which will appear in the first monthly email version of The Source in October 2010, will further address inclining block rate design considerations and design characteristics of such structures currently in use in the North Central Region.

Definition and Occurrence in the North Central Region
Sometimes referred to as inverted or increasing block, the inclining block rate structure is designed such that the cost per unit of water increases with consumption. The objective of such a rate structure is to discourage unnecessary water use by reducing both average and peak water demand, thus making it an important tool in a broader conservation plan. A properly designed inclining block structure will not necessarily increase all customer bills. For those users whose usage pattern is reflective of average water use for the associated user class and who do not have a large peaking factor, the cost of water should remain the same or decrease (in the absence of increased overall revenue requirements). By increasing the charge per unit of water over a certain threshold, those users whose average usage pattern is higher than the average for its user class and/or who help to create the peaking effect will incur higher charges as a signal to indicate the cost of expanding the system to account for the users’ level of water use. The objective of an inclining block rate design are to generate revenue that reflects the cost of increasing the supply and collect such revenue from those that create the need to consider expanding supply. Ideally, this concept would result in a reduced monthly bill for users such as “lifeline” users, who require service at a minimal level.

Looking back at the past four years of the North Central Region Utility Rate Survey data, the percentage of rate survey respondents reporting the use of an inclining block rate structure has generally increased each year.


Are Inclining Block Rates the Conservation Answer for Everyone?

Each water utility is unique, with its own challenges and distinct user base. When compared to uniform rate structures, inclining block rate structures are considered to be complicated and therefore may not be appropriate for all systems, unless mandated by law. For example, although inclining block rates have been found to be very successful in reducing water use for systems in which the user base is homogeneous, a generally homogeneous makeup of users may not require a complicated rate structure. Prime candidates for use of an inclining block rate structure are those where the excess water users can be easily identified, as they will often make up a very small portion of the user base but a disproportionate percentage of the water use for the class. The degree to which a utility desires to or needs to reduce water use is also important to understand. Further, knowledge of whether or not excessive water use is an issue across all user classes or for targeted users is an important consideration when determining whether an inclining block rate structure is appropriate for a system.

There are many factors to take into account when considering the use of an inclining block structure to promote conservation. A discussion of major considerations, tips for design of a successful inclining block structure, and an analysis of inclining block rate design in our region will be found in Part II of this article, which will appear in the October issue of The Source.