3.3: Water Rates

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Learning Objectives

In this section, you will:
Differentiate among types of water rates
Classify rates according to whether they encourage conservation

You can look at the ways that water suppliers can organize a volumetric rate structure:

Type of Rate	Description	Benefits	Drawbacks
Uniform Rate	a constant unit price for all volumetric water sales	Simple and perceived as equitable; easy to implement (not a lot of math!); some revenue stability	Not much of a conservation signal
Declining Block Rates	the unit price for each block of water use is charged at a lower unit rate than the previous block	High-water users benefit from lower rates than in other structures	Perceptions of inequity, does not encourage conservation; complicated to design
Increasing Block Rates	the unit price for each block of water use is charged at a higher unit rate than the previous block	Encourages conservation	Perceptions of inequity; complicated to design
Seasonal Rates	the unit price varies by time period (generally a higher price during peak demand months)	Encourages conservation	Complicated to design and administer

The common wisdom is to encourage conservation, you need to make people aware of how much water they use, and increase the price as they use more. In this way, customers get a price signal to be conscious of their water use and are intentional about their water use and conserving.

You can see in the chart above, two rate types (uniform and declining block rates) do not encourage conservation. They actually could encourage an increase in demand. Why do these rate types exist? A uniform rate exists for one reason: equity (or perceptions of equity). A uniform rate treats the smallest customer and the largest customer exactly the same with the same volumetric rate. A declining block rate exists when the agency wants to increase water use, presumably by commercial and industrial users who would benefit.

Why not increase rates across the board to increase conservation? Rates are considered governed by Proposition 218 and have to go through a public process that ties the rates to actual costs from the water retailer. In general, Proposition 218 is intended to make sure that additional taxes are brought to the public for a vote. In short, a water retailer cannot charge more than proportional costs of the water per parcel served. This means that the water retailer can’t charge high fees just because it wants to decrease consumption overall.

In the case of Capistrano Taxpayers Association v. City of San Juan Capistrano, the trial court decided that the City of San Juan Capistrano had not provided enough justification for their costs for the higher tiers. This has been interpreted by some as making tiered rates illegal, but this isn’t really the case. Rate calculations need to be able to be justified by the cost of service. If it is costing a significant amount more to purchase an additional source of expensive supply because of high water users, these costs can be passed on to the high water users. But you can’t simply charge high water users more because you want to decrease their consumption.

Misconception Alert!

Many people disregard the fixed charge on their bills and focus on the volumetric charges. While the volumetric charges are a measure of how much water is used, they may not actually be the bulk of the cost. Much of the cost may be in the fixed charge. There is just very little you can do about the fixed charge.

Try It!

Check out your water bill. How are you billed? Is there a fixed and volumetric rate? What type of rate is the volumetric rate?
What types of rates will encourage conservation? Why?

Glossary

Declining block rates—The unit price for each block of water is charged at a lower unit rate than the previous block
Increasing block rates—The unit price for each block for water use is charged at a higher unit rate than the previous block
Proposition 218—The legislation that governs the public process for rate setting. In general, Proposition 218 is intended to make sure that additional taxes are brought to the public for a vote.
Seasonal rates—The unit price varies by time period, generally with a higher price during peak demand months
Uniform rates—A constant unit price for all volumetric water sales