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Conservation Doesn’t Always Pay
October 5, 2009
The typical thinking among most utility customers is that if they conserve their water use, they will save money. By extension, they believe also that the utility will save money resulting in lower water rates. The thinking isn’t irrational. After all, one might reasonably think that if the utility provides less of its water service that costs would be lower overall. Unfortunately, the numbers don’t add up that way. Water (and Sewer) utilities have both high operating leverage and, usually, high financial leverage. That means that a big majority of the utility’s costs are fixed and have little bearing on how much water is provided. Utility revenue is a function of quantity times price; when customers cut back on usage it results in less quantity sold and therefore lower revenue for the utility. In the short run, customers benefit by paying less overall, but the utility loses money resulting in increases to rates in order to make up the shortfalls. The unfortunate result is that customers can feel “punished” for conserving.
That’s the case we find here in this Sonoma County story about water rate increases. The residents in this example did a good job of conserving, according to officials, but they were still greeted with an 8% rate increase. The first line from the news story: “apparently conserving water won’t necessarily save you money.”
Conservation Pricing – Presented at the 2009 AWWA Conference, San Diego, CA
June 19, 2009
Check out the presentation given by Jason Mumm of StepWise Utility Advisors and Greg Baird, CFO of Aurora Water; we gave the presentation at the annual conference for AWWA in San Diego on June 18, 2009. The title of the presentation is “Limits and Pitfalls of Conservation Pricing.”
PDF Presentation: Annual Conference for AWWA
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