A California Multi-Agency Analysis of the Relationship between Water Sales and Pricing during the Drought

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Project Overview

On the heels of one of the worst droughts in California’s history, a group of the state’s water agencies asked the EFC at UNC to design a basic study that would provide insight on the relationship between pricing, conservation measures, and a range of other factors and water usage curtailments during the drought. 

See a summary of results in this article from Source Magazine, official publication of the California-Nevada Section of the American Water Works Association.

What We Learned

The EFC at UNC research team found that for water agencies in California, while pricing can impact water usage, pricing played a relatively minor role in helping most agencies meet their aggressive curtailment targets during the last drought. The study found an enormous variation in the pricing signals that water customers in California experience and that the type of rate structure an agency chooses to deploy is a weak determinant of whether their pricing signals promote conservation relative to their peer utilities. The study found multiple factors that influenced the ability of agencies to induce significant usage reductions over a short period of time and that the diversity of agency-specific conditions defied a single one-size-fits-all approach to driving short term conservation.

What Does That Mean?

The relationship between water pricing and customer behavior is complex, in part because the process of paying for water is quite different from the process of paying for other goods and services. Water agencies commonly set prices which result in economic “signals” that can influence the behavior of customers, but the way a customer experiences and responds to the signals is far from straightforward.

Not only do billing practices make it challenging to send strong clear pricing signals, the impact of that signal on customer behavior is highly dependent of customer characteristics and can be difficult to discern. Pricing is only one of a range of tools that water agency managers can use to influence water use. Common strategies include irrigation restrictions, enforcement of restrictions, local messaging and education, and implementing pricing changes. There are also influences outside an agency’s control, like local weather conditions, economic conditions of their customers and exposure to statewide or external messaging (e.g. statewide news stories).

The fact that rate structures alone were not the main tool for weathering the drought, does not mean that price is unimportant. The study did find evidence that price along with other factors like weather did influence how much an average customer used in different parts of the state. This suggests that agencies should be aware of pricing signals and the role they play on customer usage. But for many agencies, changing rate structure will not guarantee meeting short term curtailments. The study underscores that water agencies should consider demographic, geographic, and local climate conditions when making determinations about how to encourage conservation through pricing and non-pricing strategies.