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Mary Tiger is the Chief Operating Officer for the Environmental Finance Center at the University of North Carolina.

Under the common residential water use pricing model, utilities face a trade-off between reliance on a stable base charge (a fixed fee no matter what a customer uses) and dependence on a variable volumetric charge (a rate applied to customer water use). With a higher base charge, utilities have a relatively stable and predictable revenue stream (dependent only on the number of customers and payments made) that better matches the expenses of the utility. However, when a utility collects more of its revenues from base charges, it diminishes one of its strongest ways to send a water conservation/efficiency message to its customers.

Various water conservation groups have recognized this trade-off, and are promoting water utilities to build more of their cost recovery into their volumetric charges. In fact, the California Urban Water Conservation Council guides a group of 398 members to increase water use efficiency through the implementation of a series of Best Management Practices, one of which deems a utility’s volumetric rates to be “sufficiently consistent with the definition of conservation pricing” when:

The percent of revenue collected through volumetric charges is greater than or equal to 70% of revenue (base and volumetric) collected from all retail customers (BMP 1.4 found at http://www.cuwcc.org/mou/bmp1-utility-operations-programs.aspx)

The Environmental Finance Center at the University of North Carolina recently conducted an in-depth analysis of customer consumption records from NC utilities was interested in how utilities in the NC Triangle area compared against this best management practice to promote water conservation. To do this, we calculated the percent of revenue collected from residential volumetric charges over total residential charges. The analysis in the table below compares these percentages.

Table 6: Base charges as a percentage of all charges across the NC Triangle

Cary

Durham

Raleigh

Fiscal Year

% of revenue collected from volumetric charges as a percent of all revenue collected from households (base & volumetric)

‘07

91.4%

82.0%

76.3%

‘08

90.8%

82.2%

74.5%

‘09

90.4%

71.0%

74.7%

‘10

91.1%

73.5%

75.4%

‘11*

92.3%

72.1%

78.0%

*FY11 does not include all 12 months in any of the data sets

The range and progression of reliance on volumetric charges throughout time and across the Triangle region of North Carolina reveals the diversity in utility pricing policy in regards to water conservation, as well as changing water demands. Each utility has increasing block rates,which to some call conservation pricing, but they are applying them in somewhat different ways. (To find background on the rates that were in effect during these times, visit http://www.efc.unc.edu/projects/NCWaterRates.htm#annualreports)

The Town of Cary collected over 90% revenue from residential volumetric charges each year throughout the study period, while Raleigh collected between 75-80% of its revenue from them. Meanwhile, the City of Durham moved away from reliance on volumetric charges to reliance on base charges. In FY09, Durham nearly doubled their base rate for water sewer and irrigation while at the same time adopting an increasing block rate structure that increased the price of water at all levels. This transition ultimately decreased the utility’s reliance on volumetric charges from approximately 82% to 72%.

Despite the diversity, all three of the Triangle utilities meet the California Urban Water Conservation Council’s definition of conservation pricing for residential retail customers.

4 Responses to “Water Utility Revenue Stability and Conservation Rates in the Triangle of NC”

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    […] The ratings agencies each use a number of quantitative and qualitative financial health metrics to prepare a utilities’ financial profile and associated revenue bond rating. As part of our research we have studied specific ratings of utilities, particularly those partnering with us on the project, as well as recent general guidance and criteria documents.  In 2012, Fitch Ratings updated the explanation of its “10 C’s” of bond rating criteria by providing in-depth explanation for each of the 10 Cs and the four corresponding credit areas (Scott 2011b). This report explains in detail each criterion, and Fitch’s evaluation of stronger, mid-range and weaker financial profiles. In addition to hitting different variations of key debt service coverage ratios, Fitch Ratings and Standard and Poor’s in particular place high value on utilities whose day-to-day operations are relatively free from political interference (Scott 2011b) and utilities that display “rate flexibility”; that is, they are willing and able to increase rates as necessary to cover costs (Dyson 2011). Fitch Ratings views favorably a utility whose fixed portion (base charge) of the water and wastewater bill makes up greater than 30% of the total bill (Scott 2011b). (See previous blog post on fixed versus variable rate considerations.) […]

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    […] into our exploration of this topic since our first Environmental Finance blog post on May 15, 2012: Water Utility Revenue Stability and Conservation Rates in the Triangle of North Carolina. But now a more complete look at revenue resiliency and the water business model is summarized in […]

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    […] of the drivers of changing demands, the implications of declining total demands are significant. Water utilities have a complicated relationship with customer demands. On one hand, declining demands is great for water resources management, increasing the potential […]

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    […] customer water use). The way these rate structures are typically designed, most utilities generate much more revenues from the variable charges than the base charges, exposing their revenues to declining water demands. However, most of the utility’s costs are […]

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