Incentives for Residential Water Conservation: Water Price, Revenue, and Consumer Equity in Florida

Economic theory suggests that price incentives can be used to encourage water conservation in residential consumers. Conservation water rates are designed to send price signals that encourage households to reduce discretionary water use in the long term. However, it is not always clear that conservation rates effectively provide meaningful incentives. Utilities themselves may also not have strong incentives to implement conservation rates. If conservation rates have a negative impact on revenue, or if they lead to increased revenue variability, utilities may have a disincentive to use them. In addition, block pricing structures (where unit water rate increases with water usage) may be inequitable, in the sense that the “revenue burden” is borne disproportionately by some customer groups. This may make some rate structures unpopular with consumers and politically unfeasible. Because there is no consensus about what defines conservation rates, they take many forms. In Florida, the two most common are: uniform rates- where customers pay a set fee for each unit of water used, and inclining block rates- where the price per unit becomes progressively higher. Empirical evidence about the incentives provided by various structures is limited. This research has three main objectives. The first is to analyze whether or not the number of price blocks affects the conservation incentives faced by residential consumers. The second is to test for statistical evidence that rate structure effects revenue variability. And, the third is to analyze the impact of different rate structures on consumer equity. Secondary data from sixteen Florida utilities are used to meet the objectives of the study. The sample was originally chosen by Dr. John Whitcomb as a part of his study Florida Water Rates Evaluation of Single-Family Homes (2005). Whitcomb (2005) includes rate information, customer survey results, and empirical data on actual water use for 7,200 households from 1998 to 2003. For the first objective, a descriptive analysis of rate structures is used. Household reductions in water use are compared to corresponding reductions in water bills for all rate structure periods. Larger reductions in corresponding bills indicate stronger conservation price signals. Distribution of utility revenues between volumetric and fixed water and wastewater charges is also examined, and larger share of volumetric charges is linked to a stronger conservation price signal. The second part of the study uses graphical analysis and a simple OLS model to examine rate structure and revenue variability. For the third objective, Gini coefficients and Lorenz curves were used, following Morgan (1987). Households are divided into income groups and usage groups. Gini Coefficients are calculated based on these groups. Lower coefficients indicate a more equitable rate structure. The results indicate that the conservation price signals are strongest for inclining block structures with more than three price blocks. Block structures with three or less price blocks do not send stronger price signals than uniform rate structures. In some cases, the price incentive to reduce water consumption by 40% was stronger for uniform structures than for inclining block structures with three blocks. Within the sample, the price incentive is strongest for inclining block structures with more than three price blocks. Alternatively, the utility revenue distribution results suggest that the number of price blocks is not necessarily a good indicator of how conservation oriented a rate structure is. In several cases, the percentage of revenue from volumetric sources was higher for uniform structures than for block structures. Analysis for objectives two and three will be completed in October 2009. Preliminary results for objective two provide evidence that revenue variability could be a significant disincentive for utilities to adopt conservation rates. While there was no statistical evidence that overall revenue is affected by changes in rate structure, there is some evidence that utility revenue streams are more variable for block structures than for uniform structures. Preliminary objective three results suggest that customer equity is not adversely affected by conservation rates. When divided into income groups, the estimated Gini coefficients for uniform and inclining block rate structures were similar and close to zero, indicating equitable pricing.

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