The annual AE2S Nexus North Central Region Utility Rate Survey includes a general snapshot of water rate structures reported by survey respondents, as well as a comparison of the total cost for 6,000 gallons of water consumption for each respondent. This article will provide an overview of how the reported rate structures have changed in the last six years and compare the effective cost per volume of water reported for surface water and groundwater systems.
Water Rate Structure Trends – 2008 to 2013
Water systems around the region assess charges for services in a number of ways. Based on a review of data collected for the AE2S Nexus 2013 North Central Region Utility Rate Survey, it is most common for the rate structure to consist of a combination of fixed and volumetric charges, with very few systems charging only a fixed rate or only a volumetric rate. As a quick review, the most common rate structure components include:
- Flat Fee: Each account is charged a fixed monthly fee, regardless of the amount of water used.
- Declining Block: A rate structure in which the unit price of each succeeding block of usage is charged at a smaller unit rate than the previous block(s).
- Constant Block: A structure in which the unit price is consistent, regardless of how much water is used.
- Inclining Block: A rate structure in which the unit price of each succeeding block of usage is charged at a higher unit rate than the previous block(s).
Over the years, systems moved away from flat and declining block structures, with a noted increase in the use of constant block and inclining block structures. This is due largely to pressures related to source water availability, conservation initiatives, and an overall effort to minimize required capital investment in new capacity for systems. Figure 1 below compares the reported percentages of rate structures over the last six years.
It should be noted that the survey respondents vary each year. But overall, greater than 96 percent of survey respondents reported the use of a fixed component within the rate structure in 2013. Survey respondents that reported both a fixed and variable water rate component accounted for greater than 91 percent in 2013. Of the remaining nine percent, two percent reported a constant block volumetric rate only, two percent reported an inclining block rate only, and the remainder reported a fixed rate only. This illustrates the recognition that the bulk of system costs are fixed, requiring utilities to achieve high revenue stability. By including a volumetric component to the rate structure, utilities can strive to generate a stable revenue stream and also provide consumers with control over the portion of the bill correlated with actual water use.
While declining block structures can be beneficial for economic development activities, data from respondents to the AE2S rate survey over the past six years shows that the reported occurrence of the declining block structure has dropped from 9.1 percent in 2008 to 5.4 percent in 2013. This trend has been noted nationwide as climate change, drought conditions, and water conservation have become leading issues for the industry, and as regulatory and funding agencies have encouraged (if not required) water pricing strategies aimed to promote responsible water use and underscore the value of this resource.
Figure 1 shows that the most common rate configurations reported by survey respondents are the combination of a fixed charge and either a constant block or inclining block component. Since 2008, the reported use of the inclining volumetric structure has doubled, and the reported constant block use has decreased, likely as a result of conversion to the inclining block structure that many in the region have adopted.
Based on data trends, it appears that many utilities are proactively making changes to water rate structures to manage water use amongst their users. In recent years we have seen a reduction in rate structures that do not send a price signal to users and an increase in rate structures that impose a constant or increasing rate to each increment of water sold. In this manner, utilities are compelling users to think about water use.
The data indicates that the majority of utilities are choosing to generate both a fixed monthly revenue stream and a volumetric revenue stream that is directly tied to the amount of water that is sold. Potential challenge may be experienced when factors such as decreasing demand and affordability begin to affect water sales. It is important to frequently review demand projections to identify any potential revenue shortfalls due to decreased water sales. It is also advantageous to fund and maintain a healthy operating reserve account to manage periods of revenue shortfalls.
For more information on the 2013 North Central Region Utility Rate Survey, contact Shawn Gaddie at Shawn.Gaddie@ae2s.com.