4 Mar 2014

Davis tariffs stabilize finances and reduce use

I am glad to see that Davis, California adopted a change in their tariffs in 2013 (for implementation in 2015) that will align fixed revenues with fixed costs and variable revenues with variable costs.

This reform will reverse the common practice of trying to cover large fixed costs with large variable revenues, which results in financial instability when customers cut back their consumption. I have been advocating this change for awhile now (read this and this), and the Davis reform arrives at it through an interesting method.

As I understand it, customers will continue to pay their normal fixed charges but they will pay an additional "fixed" charge that is based on their prior year's summer (i.e., peak) water consumption. This adjustable charge is made in proportion to the customer's "burden" on the network in terms of peak usage, so it makes sense, but it is also fixed for the entire year, which provides a stable revenue to the utility.

The new fixed charge will also lower variable charges, so customers pay a lot less per unit of water.

The incentives and results of this scheme make sense. A customer who uses more water will be charged in the next year, so there's an incentive to cut back to lower future charges. Those future charges are calculated as a percentage of total fixed costs, which means that the utility will still cover all its costs. Changes in consumption in the current year will not destabilize finances in the current year, since variable revenues are equal to variable costs. Oh, and it is Prop 218 compliant, so customers cannot argue that they are paying a disproportionate tax (or delay implementation because they just don't want to pay more).

Now all they need to do is add a scarcity surcharge in drought, for the times when they want customers to see the cost of scarce water.

Bottom Line: The Davis reform will stabilize utility finances, encourage conservation and charge heavy water users more to use the system.

H/T to ND


BJW Kendall said...

How can there be no comments on this post yet!!?? What a cutting edge idea that addresses my biggest hang-up with fixed-rate billing structures: large water users DO have a direct effect on increasing costs related to peak demand production and water sourcing/management expenses. Therefore they SHOULD pay a premium for the extra energy (mechanical and personnel) and infrastructure capacity their consumption and consumption rate require. Thanks for the heads up on this article David. Great blog, great dissertation, great books = inspiration. P.S. could this be a positive example of "triple-bottom-line-like" economic thinking working for a not-for-profit (of course replacing the "profit" with "revenue stability") as the folks at Davis suggest?

David Zetland said...

@BJW -- yes, it's a big deal. Glad you can see that. No, it's not 3x bottom line, b/c that idea is overused :)

JP said...

From a few web sites it seems like the consumption based fixed fee was defeated by voters in Davis. Do you know if any other water retailers have adopted anything that is equivalent? I have not heard of any other scheme that provides stable and sufficient funds for fixed costs, fairness to ratepayers, and a strong incentive for conservation.

David Zetland said...

It was defeated and the City Council came up with something more punitive: http://www.aguanomics.com/2015/03/flashback-2-8-mar-2014.html

There are many examples of high fixed charges. IBRs are not nearly as common as consultants make out...

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