In April, the San Diego Union-Tribune reported that water customers in the City of San Diego should brace for increased rates as a result of the revenue impacts of California’s regulated, mandatory conservation action:
“This is the time of year when water utilities set their rates, which almost inevitably go up. But this year, the rate hikes are likely to be higher than usual, as water utilities cope with the unexpected impact of mandatory conservation on their budgets.” 1
While it is relatively certain that conservation can drive the consumer cost of water up, it is not correct to say that these impacts are “unexpected”. The revenue impacts of the Governor’s Executive Order can and should have been anticipated.2 With a state-wide mandate for water suppliers to reduce “potable water production” by 8 to 36 percent, there could be only one outcome: revenue shortfalls.
In fact, the California State Water Resources Control Board predicted in May 2015 that statewide water utility net revenues were estimated to decrease between $500 and $600 million, equivalent to $14 to $17 per person.3
And we’ve seen those impacts materialize across all sizes of utilities. In October 2015, the Los Angeles Department of Water and Power, faced with a $111 million revenue shortfall, signaled it was raising rates as a result of decrease in water consumption of 10 percent more than expected.4 The Yorba Linda Water District, required to reduce its water production by 36 percent under California’s emergency drought regulations, expected a $9 million decline in revenue – driving a basic service charge increase for single family
residential customers from $16.77 to $41.00.5
The citizens of California, under the emergency drought orders, have responded admirably. The state met its overall conservation goals. Great for water. Not so good for utilities.
And it’s unlikely to get better for our water suppliers. Despite the anticipated “monster” El Nino conditions that were forecast in fall 2015, the water scarcity situation, particularly in southern California, remains acute. This has led to a continuation of the emergency conservation requirements, originally imposed in April 2015, through at least October 2016.6 The result will be continued pressure on utility revenue.
THE KNEE-JERK RESPONSE
The San Diego response has been to approve a multi-year rate increase schedule in which rates increased 9.8 percent in January 2016, to be followed by a further increase of 6.4 percent on July 1 of this year. These projected rate increases are expected to extend into 2019, with a total increase of 40 percent over the three year period.7
The average customer is perplexed. They see that they are saving water but it’s costing more. The result is dissatisfaction and anger,8 but it is actually reflective of a systemic issue in water rates. George Tchobanoglous of UC Davis put it this way:
“It’s unintended consequences. We never thought [conservation] was a bad thing. Every citizen thinks he or she is saving mankind, and I’m sympathetic, but it just so happens that our basic infrastructure was not designed with that in mind.”9
In many ways, rate increases are a knee-jerk response to the revenue shortfall. One that simply perpetuates this cycle, particularly as we approach elasticity in water costs.
The majority of water companies use inverted tier rate structures that are heavily biased toward consumption. Any decrease – planned or unplanned – translates into lower revenue. However, because the expenses of running a water utility are largely volume independent (e.g. debt coverage, salaries, etc.), costs remain much the same despite decreasing production. The impacts can be dire. Water rates are, it turns out, a zero-sum game.10
DON’T BE A JERK
The consumer costs of water have been rising steadily for many years. In fact, they are increasing at a rate more than twice the average Consumer Price Index (CPI). This trend is projected to continue with the basis of water and sewer costs expected to be more than 2.5 times the overall CPI by 2020.
While this may be seen as good for water utilities, it is actually a worrying trend. Until now, the cost of water was relatively insignificant for many. Today – and in the future – the costs are becoming noticeable in our monthly budgets. Increasing rates under these conditions triggers an elastic response, resulting in even greater conservation, continuing
the death-spiral decline of water utility revenue.
The one revenue-generating arrow in our utility quiver – raising rates – turns out to
fly significantly off course. Indeed we are witnessing this today, with rate increases
not returning the desired revenue results.12
Interestingly, in the case of San Diego, the city has missed an opportunity to restructure their rates to provide resilience in revenue. While the city proposes to increase rates for single family dwellings using 12 HCF13 by an average of 9.1 percent, the proportion of those costs resulting from the volumetric fees remains essentially unchanged (72.2 percent, versus 72.3 percent at the previous rate levels). What this means is that the utility will be back at the gate again as consumption continues to be curtailed causing more revenue shortfalls.
BEATING THE RAP
There are two elements that we need to tie together to break free of this cycle:
- Enjoin our utilities to collect all the revenue that they are due; and
- Enjoin our customers with tools that allow them to maximize the value of data to control their own costs.
In order to survive financially, utilities need to monetize every drop of water – water lost is simply revenue lost. It is imperative that utilities collect all the revenue that their existing rates provide. This means that they must ensure all meters are billed, all services are billed and bad-debt is minimized.
Most utilities, to their own detriment, are simply not billing all their customers. As connections and billing systems grow throughout the evolution of a utility, it is not uncommon for the electronic records used for billing and the physical installations on the ground to become decoupled. Due to this divergence, some connections never make it into the
billing system, resulting in reduced revenue, increased water loss and frustration for the utility manager. Less obvious but perhaps more pervasive are the data errors that result
in incorrect billing: the physical meter size does not match the billing system data; defective, deteriorated or non-functioning meters; incorrect meter classification; incorrectly applied surcharges. The list is endless.
Fixing these problems finds revenue – permanently. And reduces the need for increasing rates. Further, by ensuring fully accurate billing, non-revenue water is significantly reduced. To achieve this, however, requires improved data, improved data handling and improved data management systems.
Increasing price certainly makes people more aware of their usage. When prices increase, city council chambers and public utility commission hearing rooms are packed with concerned customers. For those in charge of prices – city councils, utility commissioners and utility managers – a key message for customers is that while prices may increase, tools exist to allow them to effectively and proactively manage their water use.
For the customer, access to highly granular, time-relevant data, means an understanding of water use and control over use and costs.
A BETTER DEED
Our water utilities are entering an increasingly volatile world. Maximizing the use of data to avoid falling into the revenue shortfall death-spiral, while effectively engaging the customer will be the hallmark of successful utilities. By combining the best in geo-spatial data management with revenue assurance analytics that identify sources of missing revenue in the utility, FATHOM offers a rapid, scalable and flexible platform that has been proven to increase revenue – even in the face of conservation. This allows our utility partners to maximize the collectability of existing revenue, decreasing – and in some cases eliminating – the scope and scale of rate increases.
And that is a deed done well.
1Bradley J. Fikes, “Higher water rates likely due to mandate”, The San Diego Union-Tribune, April 10, 2016 (http://www.sandiegouniontribune.com/news/2016/apr/10/water-conservation-finances/)
2FATHOM, Utility Ghouls: Consumption, Rates and Revenue… Oh My!, FATHOM Drought Watch, Volume 1, Issue 29 October 30, 2015
3Steven Moss, et al., “Executive Order B-29-15 State of Emergency Due to Severe Drought Conditions Economic Impact Analysis”, May 2015 (http://waterboards.ca.gov/waterrights/water_issues/programs/drought/docs/emergency_regulations/econ_analysis.pdf)
8Pitchforks and Torches: The Curious Result of Conservation, FATHOM Drought Watch Volume 1, Issue 16, 24 July 2015 (http://www.gwfathom.com/wp-content/uploads/2015/07/FATHOM-Drought-Watch-v1.16.pdf)
10In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which each participant’s gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). (https://en.wikipedia.org/wiki/Zero-sum_game)
11Janice A. Beecher, TRENDS IN CONSUMER PRICES (CPI) FOR UTILITIES THROUGH 2014, IPU RESEARCH NOTE, IPU-MSU, February 2015, http://ipu.msu.edu/research/pdfs/IPU%20Consumer%20Price%20Index%20for%20Utilities%202014%20(2015).pdf
12Pitchforks and Torches: The Curious Result of Conservation, FATHOM Drought Watch Volume 1, Issue 16, 24 July 2015 (http://www.gwfathom.com/wp-content/uploads/2015/07/FATHOM-Drought-Watch-v1.16.pdf)
13HCF = hundred cubic feet. One HCF = 748 gallons.Download PDF