Is Water Conservation Cost Effective?
Will water conservation pay off for consumers? "Apparently, Conserving Water Won't Necessarily Save You Money." This headline on a community radio website in Northern California last fall called attention to an interesting relationship in the water utility services industry. It seems that water utility customers in Sonoma County, CA, after endeavoring to save water during a conservation program, found themselves saddled with an 8% service rate increase. Water Rate Consultants deal with this on a regular basis
Significant rate increases after a successful conservation effort at first glance, doesn't seem natural. Customers generally believe that cutting back on their water use should result in a reduced bill for water service. If user's charges are calculated on a cost per gallon or cost per unit of service, this may be true - at least in the short term. Using less water usually does result in lower customer charges for water service.
Most consumers believe that their water service provider should also see its costs reduced since fewer units, or in this case, gallons, are sold. In the case of an effective conservation program where consumers reduce consumption, the theory holds that the provider should also see its costs reduced as well. And all should be equitable.
Many, if not most utility costs are of the 'fixed' variety, meaning that they do not go up or down in proportion to the number of units produced. Fixed costs include expenses necessary for the utility to continue delivering the water and sewer service, and include things like payroll costs, equipment maintenance, insurance, debt service, and many other costs that won't change if customers consume fewer gallons of water or produce a reduced volume of sewage or wastewater.
Water utilities earn revenue based on the amount of water used or delivered. Revenue to the utility then is a simple function of price times cost per unit (gallons) of service. Users conserving water can trim their charges for service, but these reductions only lower the revenue enjoyed by the provider. And because utilities have significant expense obligations that are not tied to level of customer consumption, these utilities can find themselves struggling to meet existing and ongoing costs. Conservation programs then reduce - sometimes considerably - the revenue needed to continue delivering water service.
At the point that income levels are insufficient to support expenses - the utility is naturally compelled to identify new sources of revenue. Most water utilities will then seek rate increases in an effort to cover their fixed costs. If fewer units of product or in this case, gallons of water are sold, the rate per unit or gallon is going to have to be higher to return the utility to its original revenue levels that covered ongoing expenses.
Can this problem be solved? Part of the solution may be to understand the tradeoffs between conservation and provider income prior to undertaking a conservation program. It may be possible to structure rates in advance to assist the utility in covering some unexpected losses.
Avoiding this conflict requires utilities and customers to fully understand the tradeoffs between conservation and utility revenue prior to initiating any kind of conservation effort. Establishing a rate structure in advance of conservation programs can help offset some of the expected revenue reductions and provide some degree of stability to customer rates. Skilled water rate consultants can also help design these rate and fee structures in advance. And that is a better solution than facing down upset customers at the next public meeting.
Article Source: FxTradingStock.com
About the Author
Author Jason Mumm is an experienced Utility Consultants and specializes in water and wastewater utility services. With extensive experience delivering finanical and operational guidance to water utility organizations, Jason assists clients attain financial success while managing consumer rates.
by: Jason Mumm
Total views: 36
Word Count: 597
Date: Tue, 6 Jul 2010
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