A $napshot is a graphic revealing an interesting environmental finance finding accompanied by a short post. This $napshot was created by Shadi Eskaf.
While revenues usually rise as water and wastewater rates increase, revenues generally rise slower than rates. The graphs show how 566 utilities in three states changed rates over a three or four year period, and the subsequent change to annual revenues in the same time period. Four observations can be made. 1) Revenues usually increase when rates increase (i.e.: there is a positive correlation), despite a downward pressure on customer demand due to price elasticity. 2) More often than not, revenue increases are lower than rate increases (i.e.: below the 1-to-1 line). In North Carolina and Texas, more than half of the utilities that raised rates had less than 0.7% increase in revenues for every 1% increase in rates, and the ratio was 0.4% in Ohio. 3) Generally, larger rate increases are associated with disproportionately lower revenue increases. Almost every utility that raised rates by more than 50% had relatively lower revenue increases. 4) The relationship between rate and revenue increases is complicated and differs from utility to utility. Two utilities with identical rate increases may have very different outcomes on revenue increases, even in the same state. A handful of utilities were even in the unfortunate position of having decreasing revenues despite increasing rates. There is no single rule-of-thumb equation that utilities can use to accurately predict the effect of a rate increase on revenues, given that many other factors beyond the control of the utility will affect revenues. These findings are part of the research for Water Research Foundation project #4366.
One Response to “$napshot: Utility Rate Increases versus Revenue Increases”
There is no rule of thumb because there cannot be. To know anything about the reason (causation) behind revenue increase and its rate with regard to rate increases one would have to equally know the increase in the cost base that was (probably) the instigator for the rate increase in the first place. Also, I wonder, how many of these utility companies face regulatory “oversight” that caps their rate increases or delays them or hinders them in apportioning rates pro rata to the causing customers (maybe some cause more costs than others but cannot be priced accordingly?). These statistical calculations are only very loosely connected to the real economics of the case.