Innovative Alternative Pricing Models for Utilities

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Since 2010, the EFC at UNC has worked with water utilities to investigate alternative pricing models to improve the resiliency of revenues for utilities. Some of these models are inspired by strategies typical in other industries but can be applied to water utilities. The EFC partners with water utilities and utilities commissions to model these alternative rate structures on actual customer water use records, comparing how a utility's revenues are more resilient under the alternative models versus under the existing rate structures. The EFC also evaluates the effects on individual customers' bills, determining which types of customers would pay less under the alternative rate structure compared to the existing rate structures, and which would pay more.


Why are Alternative Rate Models Needed?

Almost all water utilities charge customers a fixed base charge ("minimum charge") and/or a volumetric charge that is determined by the volume of water used by the customer during the billing period. In most cases, the revenues that are generated by the volumetric charges exceed the revenues that are generated by the fixed charges. Since average water demand is generally declining across the country, many utilities are realizing that their revenues are more vulnerable to demand changes than their short-term expenses. For some utilities, reserves are adequate to mitigate these year-to-year fluctuations. Other utilities, though, may be operating with narrower margins, and revenue stability and predictability is more critical.

There are a few ways to improve the resiliency of revenues for utilities (see Defining a Resilient Business Model for Water Utilities). One way is to design new rate structures for water utilities that increase revenue generation from fixed charges while providing stronger financial incentives (price signals) to customers to reduce peak demands. This can be accomplished by setting fixed base charges that are tied to the water use and needs of the customer. Another way is for a utility to implement a plan that triggers an automatic surcharge or credit (refund) on current rates when utility-wide water use diverges from a range used to set water rates. 

Generally, alternative rate structures can be designed in such a way to vastly increase the utility's revenue resiliency against demand fluctuations, lower the bills for low-using low-peaking water customers, and significantly increase the bills for high-using high-peaking water customers. 


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Examples of Studies Conducted

  • Working directly with several utilities in North Carolina and Colorado, the EFC simulated the use of PeakSet Base, CustomerSelect and various Dividend Models on existing actual residential customer water use data for the past few years. The alternative rates were priced to be revenue-neutral forecasting one year into the future (compared with the actual rates that were set for that year). Those rates were then applied to the actual water use records of all residential customers during the year, and the monthly bills charged to the customers and revenues generated by the utility were compared with those under the actual rates. The difference in the revenues generated for the utility was noted, as well as identifying which types of customers (low-using or high-using customers) would pay less, more, or about the same under the alternative rate structures compared to the existing rates structures. 
  • For the North Carolina Utilities Commission, the EFC modeled the use of a Consumption Adjustment Mechanism to automatically implement surcharges or credit surcharges (refunds) to the water rates approved for Aqua North Carolina, Inc. The surcharges or credit surcharges would be triggered when average water use deviates significantly from the test year average water use assumed when water rates were priced and approved by the Utilities Commission. The EFC simulated the use of such a mechanism on 3 - 4 years of actual water use data for the utility, and demonstrated how customer bills and utility revenues would have changed under this rate mechanism. Similarly, the EFC simulated the use of revenue-neutral volumetric wastewater rates in lieu of the existing flat monthly wastewater charge for residential customers that are water customers of the same utility. 


Considering an Alternative Rate Structure for your Utility?

Any water utility that is concerned about declining demands' effects on revenues may work with the EFC to investigate whether alternative rate structures can improve the utility's revenue resiliency. The EFC meets with the utility management team several times, customizes the alternative rate structure based on the utility's priorities and suggestions, and analyzes the effects of the alternative rate structure on the utility's actual customers' water use records (billing records). Please contact Shadi Eskaf for more information.