Tiered Water Rates and Conservation

We have noted in previous blogs that conservation will become much more important over the next few years. This is mostly due to a recent law in California that is known by most as "20% by 2020." It requires water agencies to reduce the per capita water consumption by 20% by the year 2020.

So how does this come about? There are many possible approaches toward attaining this goal, including toilet replacement programs, consumer education, fiscal incentives for water saving actions, among many others. But a little lesson from "Economics 101" also points to another avenue: make water more expensive!

Water remains the cheapest consumer utility in most communities. I know that in my own home, I pay about three times my water bill for cell phone service, about twice as much for natural gas, about twice as much for cable TV, and about ten times as much for electricity. It even costs me about twice as much to soften my water as it does for the water itself!

When the price of gasoline goes up, most of us look for ways to soften the blow, by doing some car-pooling, taking public transit, or walking -- or just staying home. In short, the important lesson from Econ 101 -- higher prices reduce demand -- is very, very real in the real world. So if we need to reduce demand for water, why not increase the price?

A direct increase in price with no reason other than meeting an artificial conservation level imposed by the California legislature would get most water officials un-elected. And if a private water company went in front of the California Public Utilities Commission with such a proposal, it would be immediately rejected. So how can a water utility avail itself of what is almost certainly the most effective path to conservation? Tiered pricing. See the following to view how my water company is planning to implement tiered pricing:

http://www.valenciawater.com/images/ContentImages/VWCRateDecision.pdf

Simply stated, tiered pricing means that the first gallon of water you consume is the cheapest, and the cost per gallon increases as your usage increases. This places a fiscal penalty on those who use the most water. And it does so without officially increasing water rates. In fact, it is possible that water agencies will see less revenue under tiered pricing than they see under their current billing systems -- especially if the expected conservation actually materializes.

While it might sound like a money-grubbing scam, it is a sound way to make people more conscious of their water use -- and to keep them in control of their own household budgets. And this is not a new concept: the power folks figured this out a long time ago. Look at your electric bill to see what I mean.

Will tiered pricing alone enable California water agencies to achieve the 20% by 2020 requirement? Time will tell. But the basic principles of Econ 101, and the history of the electric utilities strongly suggest that this is an approach we should try. And I commend my water agency, the Valencia Water Company, for trying this new approach.