28 August 2012

Rates, consumption and utility revenues

(via MG) "On 30 Aug, 25 prominent economists and rate experts will hold a national gathering or “summit” to discuss the root causes of the current problems with water utility rates and revenue collection, outline progressive steps for reform and produce a white paper [PDF overview]."

I am Burning Man, so here are my answers to their main questions:
  • Identify and discuss the problems with current water rate collection, particularly when water efficiency programs can lead to under-collection of fixed costs.

    Current rates mismatch fixed and variable revenues with fixed and variable costs, putting too much weight on variable revenues. In water-rich areas, match them up; in water-scarce areas, add a surcharge on consumption and rebate the (resulting) excess revenue per meter. Oh, and forget increasing block rates.

  • Parse out the root causes of utility under-collection of revenue. What proportion is due to the recessionary economy, to relocation of industry out of the service area, or to inflation and other cost factors? What has been the impact of the plumbing standards and codes on lowering nationwide consumer demand and therefore revenue? What has been the actual role of implemented water conservation programs?

    Utilities need to charge the full cost of water service, i.e., water resource charge, operations & maintenance, and capital expansion & replacement. Water is neither a charity nor a human right. It's a service that should be paid for.

  • Evaluate the pros and cons of rate decoupling such as has been done in the energy utility sector.

    Rate decoupling is a terrible idea. It may remove a utility's incentive to sell more water, but it also removes the utility's incentive to reduce costs and the customers' incentive to use less. Sell water like you sell gasoline -- per unit -- and raise prices if you want to reduce consumption AND increase revenue without initiating a "death spiral."

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