UTILITY GHOULS: CONSUMPTION, RATES AND REVENUE… OH MY!
In California, water utilities are being haunted by the revenue impacts of mandatory conservation and are looking to rate increases for salvation. Many water customers in Texas are reeling in horror as they experience significant increases in water bills as the state lurches from extreme drought to extreme flood. While the issues at hand are at extremes of the water availability spectrum, the end result is eerily similar—upset customers.
HOTEL CALIFORNIA — YOU CAN NEVER LEAVE
In large part, utilities recover their cost of operations with rates that are heavily weighted toward volumetric water sales.1 The result is that when customers reduce consumption—either on their own, or in response to drought messaging for resource conservation—the utility’s financial condition is placed in peril. And with the drought and the mandated reductions in water use, California utilities are feeling the pain.
A case in point: “Los Angeles Department of Water and Power fell about $111 million short of its revenue projection in the fiscal year that closed this summer, in part because Los Angeles residents and businesses reduced their water consumption about 10% more than expected.”2 The result: rates will be going up.
The Yorba Linda Water District, required to reduce its water production by 36 percent under California’s emergency drought regulations, is expecting a $9 million revenue shortfall. This has sparked an increase to the basic service charge for single-family residential customer from $16.77 to $41.00.3
TEXAS CHAINSAW MASSACRE — WHO WILL SURVIVE?
Earlier this year, Texas was in the midst of the worst drought the state had experienced in 50 years. In response, the state had been generating years of messaging related to water scarcity and calls for reduced consumption—and the residents listened. However, as the drought drove consumption down in many communities, utility revenues soon fell victim and utilities reacted by raising rates in order to fund their existing operations.
The perception of drought ended in a flash when the massive Memorial Day rains occurred, dumping over 35 trillion gallons of water4 on the state. And with that, many customers rapidly returned to predrought consumption across the state. The town of Sachse in north Texas reported that consumption increased from 82 million gallons in July 2015 to 182 million gallons in August 2015.5 Austin reported that water use jumped 62 percent from the May/June billing cycle to the July/August billing cycle.6
While the rate increases enacted during the drought months did not significantly impact the pocketbooks of residents when their usage was low, with the sudden return to pre-drought consumption patterns, many water customers have seen dramatic increases in their water bills. The screams of customers calling utilities, regulators and news agencies to complain can be heard across the state.
AN AMERICAN HORROR STORY
These situations highlight the continuing tension between rates, water sales, revenue and customers.
Utilities most assuredly need to ensure their financial viability by collecting enough revenue to operate. As vehicles for public health protection, allowing our utilities to descend into insolvency could result in tragic consequences.
Raising rates may solve that immediate issue, but in many ways it simply pushes another problem to the spotlight. In cases where drought conditions retreat and consumption increases again, the customers see very high water bills. This type of problem is brought into very sharp relief when the drought/relief cycle
coincides with periods of traditional high usage like what is currently happening in Texas.
Despite the necessity for full cost recovery for our water utilities, most utility customers feel penalized by this situation. George Tchobanoglous, a professor of civil and environmental engineering at 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.”7
Heather Cooley, Water Program Director of the Pacific Institute, a nonprofit organization that conducts research on natural resources noted that conservation “puts water districts in a pinch in the short term… in the long term it’s a benefit for all of us.”7 While that may be true from a resource perspective, it is a rather simplistic view. Unless we incentivize customers to use less, while encouraging our utilities to adopt the tools necessary to maximize their available revenue, our utilities will not survive. And that is not a long term benefit for anyone.
New infrastructure—including data and data systems—however, can compensate for the inadequacies of our physical infrastructure, and the impact of conservation-driven revenue destruction. But only if we choose to deploy them.
A NIGHTMARE ON ELM STREET
In any situation where someone receives a higher than normal water bill, the customer’s reaction is the same: disbelief and helplessness. Everyone who receives a high water bill automatically assumes that the bill is wrong, the meter read is incorrect, that they could not possibly have used that much water. In short, it must be a utility error. We are, as a society, too far removed from our use of water to truly understand how much water we use or how even infrequent activities, such as the overseeding of lawns, can drive consumption into the highest cost tiers. And utilities do not provide enough information to allow customers to understand their use. The result is aggravated customers, and increased costs for utilities who must answer the call, test the meter, investigate the consumption.
Fundamentally, the problem can be reduced to two significant issues: utilities bill in arrears; and utilities cannot offer any intra-month information to their customers on their consumption. In fact, in many cases, a customer receives a bill 10 to 20 days after the consumption has taken place—a timescale that makes it impossible for a customer to react. Getting a high bill from your water provider is tantamount to saying: “Too bad you used so much water last month. Sucks to be you.”
ON THE ROAD TO HAPPILY EVER AFTER
With the introduction of Advanced Metering Infrastructure (AMI), geo-spatial Meter Data Management (MDM) and advanced customer consumption and financial presentment tools, utilities can become proactive in protecting revenue, encouraging conservation, and keeping customers informed. These systems allow the utility to change a negative conversation with customers to a positive. Effectively, the utility can say: “We recognize the costs of water is increasing—here are some tools to help you manage your costs.”
Most importantly, adopting these tools changes the conversation from a discussion about the past to one about the future. Imagine if rather than simply receiving a bill for $500 ten days after the billing period, a customer was notified daily that their consumption was more than last period, higher than their neighbors, or exceeding financial triggers they themselves set up.
The FATHOM suite of tools allows utilities to let data improve the relationship with their customers. FATHOM MDM and Revenue Assurance Analytics finds revenue hidden in utility data. This “found revenue” can have a significant impact on the financial viability of our utilities, and in some cases can eliminate the requirement to seek rate relief for conservation-driven demand destruction. The FATHOM customer presentment tools provide details of consumption and costs based on near-real time data. That means immediate notification of high usage or high costs. And allows us all to put the horrors of revenue destruction and conservation to bed, once and for all.
1Pitchforks 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)
4Water Volatility in Action, FATHOM Drought Watch Volume 1, Issue 9, 05 June 2015 (http://www.gwfathom.com/wp-content/uploads/2015/06/FATHOM-Drought-Watch-v1.09.pdf)