13 Mar 2009

Decoupling Water Rates and Use

Joseph Romm posts on decoupling in the electrical power industry, i.e.,
regulations actually motivate utilities to encourage their customers to overuse electricity, because not only do they make more profits then, but if demand rises enough, they can get the Public Utility Commission to approve a new power plant and higher rates -- and thus more profits.
So decoupling means that utilities can make MORE money when customers use LESS energy. With such an incentive scheme in place, utilities would have an incentive to reduce overall power consumption.

Does decoupling matter for water? Yes -- most water sellers operate as non-profits (investor-owned water companies have regulated profits), so if they sell less water (because consumers listen to them and cut back), they need to raise prices to prevent financial losses. Because it's hard to raise prices (hearings, etc.), and higher prices are merely revenue-neutral, utilities dislike water conservation.

How would decoupling work for water? I think that the easiest way to promote conservation while maintaining "profits" (or break-even) is to allow water utilities to raise prices FIRST. When customers reduce their water use, total revenue will go up because demand for water is inelastic, and total costs will go down (but not by as much, because most costs are fixed). That means that utilities will be sitting on "profits."

If some of these profits are retained (for distribution to shareholders or greater capital spending), then utilities will be happy. If remaining profits are returned to customers on a per capita basis, the program will be "progressive," which is politically popular.

Bottom Line: Utilities will NOT promote water conservation unless it's profitable. That's why current conservation efforts are so ineffective. If you want a revolution in conservation, you have to allow the utilities to make money from it.

5 comments:

  1. The Calif. Public Utilities Commission decoupled energy utilities revenues from power sales in 1981, and as a result ratepayers have saved over $5 billion in avoided costs for new powerplants since then. California's per capita energy demand has remained flat while the rest of the country's doubled during the same period. I agree that we need to find a way for water agencies to earn money other than selling more water they don't have.

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  2. Decoupling indeed! DW is right on! David, why don't you blog us about the Berkeley First Program. You could walk out of your office and interview Francisco DeVries, the brilliant bureaucrat.
    As reported at Science,
    http://blogs.sciencemag.org/scienceinsider/2009/03/did-a-berkeley.html

    and,
    http://www.ci.berkeley.ca.us/ContentDisplay.aspx?id=26580

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  3. Feed-in tariffs, in today's NYT.
    "...the idea is to pay homeowners and businesses top dollar for producing green energy."

    Yet another way to decouple,
    http://www.nytimes.com/2009/03/13/business/energy-environment/13solar.html?ref=science

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  4. The PUC Commissioner spoke recently at the Imagine H2O Showcase and highlighted how they are piloting some decoupling activities for water utilities in CA. That was news to me and was wondering if you knew of where this might be occurring.

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  5. @Rob -- you're right that PUC has implemented decoupling for IOUs, but that is often limited to preventing losses with lower sales, NOT with rewarding them for selling less.

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