Water Utility Revenue Stability and Conservation Rates in the Triangle of NC

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

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.