17 Sep 2009

Lessons Not Learned

This story (via DW and TS) recounts a familiar problem:
  1. Water agencies ask customers to use x% less water, often increasing restrictions on water use.
  2. Customers cut use by 2x%, reducing agency sales below projections based on x% reductions.
  3. To cover the gap between revenue and expenses, agencies raise prices, reduce services and/or tap reserve funds -- upsetting customers who feel they are being penalized for cutting back.
  4. Some agencies cut back on conservation programs, hoping that customers will use more water (!) and thus provide revenue...
This cycle of fail (ever hear of this problem at gas stations? restaurants?) is driven by agencies' need to break-even on water sales and inaccuracy in making demand projections.

The solution to this problem is to raise prices (and revenue projections) far above the level required to break even and rebate excess revenue (per capita) to customers. Higher prices (especially for wasteful use) will increase conservation; rebates will please water misers; revenue in excess of costs will please accountants. (Here's my detailed description of how to match variable/fixed revenues and costs.)

Bottom Line: Higher prices (and advertising) will promote conservation, but we have to make sure that those prices are sustainable, i.e, that they encourage conservation while ensuring long-term financial viability to the water agency.