Conservation Water Rate Statistics from the 2013 North Central Region Utility Rate Survey

Across the region, more and more water utilities have adopted rate structures intended to encourage responsible water use.  Conservation rate structures are particularly common in Minnesota, where the state has taken deliberate steps to encourage conservation measures. In April 2012, Minnesota signed into law revisions to Sec. 3. Minnesota Statutes 2010, section 103G.291, subdivision 4. The revisions require public water suppliers serving greater than 1,000 people to implement demand reduction measures, including either a conservation rate structure or a uniform rate structure with a conservation program that achieves demand reduction prior to requesting authorization for a new water supply well or increase in volume of appropriation. Eligible systems must comply with the statute by January 1, 2015.

Metro Area Survey Respondent Comparison: 6,000 versus 20,000 Gallons

Results of the 2013 AE2S Nexus North Central Region Utility Rate Survey showed that 57 percent of Minnesota survey respondents reported having a conservation rate in place. Of those systems in the Minneapolis/St. Paul Metro area only, 85 percent of the respondents reported a conservation rate structure.   Figure 1 shows the monthly residential water bill for 6,000 gallons for systems defined in the survey as Minneapolis/St. Paul Metro Area, a.k.a. systems provided wastewater treatment through the Metropolitan Council.

Figure 1: 2013 Monthly Residential Water Utility Bill for 6,000 Gallons – Minneapolis/St. Paul Metro Area

For the purpose of illustration in Figure 2, we have assumed that average residential water use equals 6,000 gallons per month and a high-user residential water bill can be represented by 20,000 gallons per month. Looking back at historical rate survey data, we found that in 2010, 70 percent of Metro Area survey respondents reported a conservation rate structure. This indicates a large increase in rate adoption targeting conservation, as only 11 percent of Metro Area respondents reported such a structure in 2009, demonstrating the effect of original efforts by the Minnesota State Legislature to require water conservation efforts.

Working with only the current and historical rate survey data provided by Metro systems, if we compare the average charge for 6,000 gallons of water in 2013 with the average charge in 2009, the average reported charge has increased from $15.21 to $18.06 in four years, a 19 percent increase. This equates to an increase of roughly 4.4 percent per year. Calculating the monthly water charge for 20,000 gallons of usage in 2009 and comparing it to 2013, the average 20,000–gallon charge was $45.40 in 2009, as compared to $56.07 in 2013. This represents a 24 percent increase, an approximate increase in the cost of water for a 20,000-gallon residential bill of 5.4 percent per year. So in the same time period, the total charge for a higher-use residential user increased approximately one percent per year (on average) over the cost for an average residential bill for 6,000 gallons.

Toward this point, survey respondents have indicated a desire to see a water bill comparison for a larger volume of water. Figure 2 shows the calculated 2013 charges for 20,000 gallons of water per month for the 2013 Metro Area survey respondents, based on rate data provided for the survey. The green bar represents the charge for 6,000 gallons of monthly water use reported in Figure 1, and the purple bar represents the charge for the additional 14,000 gallons of water. Based on the assumptions used in this comparison, the data shows that for 2013 Metro Area survey respondents, a higher-use residential bill associated with 20,000 gallons per month is approximately 215 percent higher than an average residential water bill for 6,000 gallons in one month. The percent difference between a bill equating to 6,000 gallons per month versus 20,000 gallons per month for the 2013 Metro Area respondents ranged from a low of 160 percent to a high of 286 percent. *Note that any “fixed” charge components are included in the first 6,000 gallons, whereas the next 14,000 gallons includes only volumetric charges.

Figure 2: 2013 Monthly Residential Water Utility Bill for 20,000 Gallons – Minneapolis/St. Paul Metro Area

To further illustrate the change in cost of water as usage increases, the incremental cost of water from 6,000 to 10,000 gallons and from 10,000 to 20,000 gallons was calculated. Figure 3 shows the volumetric cost per thousand gallons of water for a total of 6,000 gallons (blue bar), an additional 4,000 gallons (red bar) to bring the total bill to 10,000 gallons, and an additional 10,000 gallons (green bar) for a total bill of 20,000 gallons.It is important to note that this analysis did not account for any fixed cost the consumer would pay regardless of total water use. Only the volumetric components of the rate structures were compared to better illustrate the impact of conservation rate structures as water use increases.

Figure 3: Calculated 2013 Volumetric Water Charge per 1,000 Gallons for Metro Area Survey Respondents

Overall Findings

Looking at the broader picture of the region, 83 of 205 survey respondents (40%) reported a conservation rate structure that contained an increasing volumetric rate as usage increased. Of those, 72 percent reported three or more tiers, with 28 percent using two tiers only. Sixteen percent reported four or more tiers, four respondents (5%) reported five or more tiers, and one respondent reported a six-tier structure. Twenty-one percent of respondents with inclining block structures reported including some amount of water use with the base charge. Table 1 summarizes reported rate and flow tier parameters for respondents to the 2013 rate survey that reported use of a conservation structure.

Table 1: Summary of Reported Conservation Rate Parameters – 2013 AE2S Nexus North Central Region Utility Rate Survey

The results in Table 1 demonstrate the fact that there is much variability in rate structure between systems. Some systems have set rate structures that allow as little as 1,000 to 5,000 gallons per tier with a large number of tiers to give customers tight control over water costs, and other systems have established rate structures with fewer tiers and large flow volumes per tier but higher costs per volume. Figure 4 summarizes the reported minimum, median, average, and maximum percent increases between tiers for the rate structures reported by systems indicating the use of a conservation rate structure.

Figure 4: Difference between Reported Rates by Tier – 2013 AE2S Nexus North Central Region Utility Rate Survey
Summary

The results of the 2013 AE2S Nexus North Central Region Utility Rate Survey provided a broad sampling of approaches to conservation pricing currently in use throughout the region. The concept of conservation rate-setting comes with many considerations, including revenue stability. It is both interesting and important to understand the effects of reduced water demands and potentially reduced revenues associated with a particular water rate structure. Though less than half of the 2013 survey respondents reported using a conservation rate structure, systems generally report a decline in monthly water use as statistically shown over the years of collecting rate survey data. In the early 2000’s, AE2S used an average of 7,500 gallons based on actual reported usage and later reduced that value to 6,000 gallons based on actual volumes reported on average bills. In 2013, the average reported monthly residential bill was only 5,600 gallons of water use. So whether concerted conservation efforts are in play in the individual communities or not, the reality is that recent history is showing reduced water use. When considering alternative rate structures, it is important to understand the effects of changing water use on the financial well-being of your utility. Click here to access the U.S. Environmental Protection Agency’s pricing guides as well as publications by entities such as the American Water Works Association.

In our next edition of The Source, we will take a look at revenues and expenses reported by survey respondents, and see how systems are doing in terms of full-cost pricing.