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IPU - MSUIPU - MSU NAME/LOGOSession - 1
What Regulators Need toKnow about Drought
Janice A. Beecher, Ph.D.Director of the Institute of Public
UtilitiesMichigan State University
Summer 2002
IPU - MSUIPU - MSU NAME/LOGOSession - 2
IPU - MSUIPU - MSU NAME/LOGOSession - 3
Drought attention span
Time
Attention
raindrought
IPU - MSUIPU - MSU NAME/LOGOSession - 4
Characteristics of water use Per-capita water demand is flat Significant weather-related
variations Opportunities for growth are limited Fixed cost are high and rising Pressure on rates is significant
IPU - MSUIPU - MSU NAME/LOGOSession - 5
00
200200
400400
600600
800800
1,0001,000
1,2001,200
1,4001,400
1,6001,600
1,8001,800
2,0002,00019
5019
50
1955
1955
1960
1960
1965
1965
1970
1970
1975
1975
1980
1980
1985
1985
1990
1990
1995
1995
Gal
lons
per
cap
ita p
er d
ayG
allo
ns p
er c
apita
per
day
TotalTotalwithdrawalswithdrawals
TotalTotalfreshwaterfreshwater
ConsumptiveConsumptiveuseuse
Public supply Public supply
Daily Per-Capita Withdrawals in the US:1950 to 1995
IPU - MSUIPU - MSU NAME/LOGOSession - 6
Water and weather Water is transient in time and space;
droughts are inevitable Mother nature controls supply and demand;
supply is constrained just when we need it Water quality and water quantity are related Environmental externalities of water usage
are exacerbated during drought For utilities, rainy weather is a problem when
sales are down (“excess inventory”) Drought is a problem when the state
imposes restrictions (artificial “demand repression”)
IPU - MSUIPU - MSU NAME/LOGOSession - 7
Rain
Drought
“Normal”
Sales down
Sales restricted
Sales may be affected by conservation behavior
Weather and water sales
IPU - MSUIPU - MSU NAME/LOGOSession - 8
Residential Water Use per Connection:Residential Water Use per Connection:American Water Works Service Company, Inc. American Water Works Service Company, Inc.
(1980 to 1997)(1980 to 1997)
208.2208.2
202.4202.4199.5199.5
203.9203.9206.1206.1
201.8201.8
208.7208.7207.2207.2
212.9212.9
200.7200.7199.6199.6
201.2201.2
194.3194.3
190.1190.1
204.9204.9
208.6208.6
194.0194.0
200.0200.0
180180
185185
190190
195195
200200
205205
210210
215215
220220
1980
1980
1981
1981
1982
1982
1983
1983
1984
1984
1985
1985
1986
1986
1987
1987
1988
1988
1989
1989
1990
1990
1991
1991
1992
1992
1993
1993
1994
1994
1995
1995
1996
1996
1997
1997
Gal
lons
per
con
nect
ion
per
day
Gal
lons
per
con
nect
ion
per
day
IPU - MSUIPU - MSU NAME/LOGOSession - 9
Water efficiency/conservation Any beneficial reduction in water waste
or water usage; emphasis on efficiency Marginal benefit exceeds marginal cost Broadly defined to include externalities Should not imply an impairment of
lifestyle or economic activity Loss of “excess capacity” or “demand
hardening” should not deter conservation
IPU - MSUIPU - MSU NAME/LOGOSession - 10
Benefits of conservation
1 3 5 7 9 11 13 15 17 19
Planning Year
Sup
ply
Cap
acity
and
D
eman
d
Supply withoutconservation
Supply withconservation
Demandwithoutconservation Demand withconservation
IPU - MSUIPU - MSU NAME/LOGOSession - 11
Conservation v. drought managementConservation Long-term Choices are well
informed Pricing plays a
central role No impairment State role is less
direct
Drought Short-term Choices are
constrained Price is necessary
but insufficient May impair
lifestyles State role is more
direct
IPU - MSUIPU - MSU NAME/LOGOSession - 12
Role of pricing Pricing is a necessary but not always a
sufficient tool of efficiency/conservation Water use in generally price inelastic
Outdoor use > indoor use Nonresidential use > residential use
Even small price responses can be meaningful in terms of revenues
Marginal-cost pricing principles should be applied
IOUs do not have clear incentives for efficiency pricing
IPU - MSUIPU - MSU NAME/LOGOSession - 13
Water rate design in the U.S.
Uniform rate: 36%Uniform rate: 36%
Increasing-block rate: Increasing-block rate: 29%29%
Decreasing-block rate: 36%Decreasing-block rate: 36%
IPU - MSUIPU - MSU NAME/LOGOSession - 14
Cost/Cost/unitunit
Under-Under-pricingpricing
Cost-Cost-based based pricingpricing
Over-Over-pricingpricing
Price/Price/unitunit
EfficientEfficientpriceprice
Efficiency pricing
IPU - MSUIPU - MSU NAME/LOGOSession - 15
Increasing-block rate
Price/Price/unitunit
Quantity consumedQuantity consumed
TierTier
Tier breakpointTier breakpoint
IPU - MSUIPU - MSU NAME/LOGOSession - 16
Seasonal rate
Price/Price/unitunit
Quantity consumedQuantity consumed
Peak seasonPeak season
Off-peak Off-peak seasonseason
IPU - MSUIPU - MSU NAME/LOGOSession - 17
Excess-use andwater-budget based
Price/Price/unitunit
Quantity consumedQuantity consumed
Excess use/use Excess use/use above budget above budget allotmentallotment
IPU - MSUIPU - MSU NAME/LOGOSession - 18
Marginal-cost pricing
Price/Price/unitunit
Quantity consumedQuantity consumed
S1S1
S3S3
S2S2
S = supply S = supply optionoption
Tail blockTail block
IPU - MSUIPU - MSU NAME/LOGOSession - 19
Multi-objective rate (example)
Price/Price/unitunit
Quantity Quantity consumedconsumed
Marginal Marginal costcost
Hi cost
Low costMid cost
Lifeline for eligible customers
Consolidated rate
Affordability >>>> Equity >>>>> Efficiency
Location/season
IPU - MSUIPU - MSU NAME/LOGOSession - 20
Drought pricing Short term implementation Fines and penalties Purpose is enforcement v. efficiency Revenue effect may be negligible May strain customer relations Non-price options (restrictions) may
be more effective and appropriate in severe drought conditions
IPU - MSUIPU - MSU NAME/LOGOSession - 21
Drought and revenues In the long run, all costs variable; in the
short run, many costs are fixed Many water utilities rely on revenues from
variable charges to cover fixed costs Mandated curtailments can impair the
utility’s ability to collect sufficient revenues to cover costs, make needed investments, and earn a fair return
Revenue-adjustment (demand-repression) mechanisms may be necessary
IPU - MSUIPU - MSU NAME/LOGOSession - 22
Demand-repression adjustment May be needed to adjust rates and
revenues to account for revenue effects of: Conservation-oriented prices Drought-management policies (force majeure?)
When water utility revenues are impaired by state-mandated restrictions on usage during drought, the state (PUC) also has a responsibility to consider measures for adjusting rates and revenues
IPU - MSUIPU - MSU NAME/LOGOSession - 23
Adjustment eligibility Long-term water supply plan and
compliance with all state requirements Water-loss management (plug the
leaks!!!) Efficiency-oriented tariff based on
normalized weather Public education effort Subject to proof of impact, audit, and
reconciliation
IPU - MSUIPU - MSU NAME/LOGOSession - 24
Conclusions Water utilities are unique in terms
of drought impacts Regulators must be aware of
potential revenue effects A carefully designed adjustment
mechanism could address revenue issues and utility incentives for conservation and drought management
IPU - MSUIPU - MSU NAME/LOGOSession - 25
Some Publications Compendium on Water Supply,
Drought, and Conservation. (NARRI 1989).
Revenue Effects of Water Conservation and Conservation Pricing: Issues and Practices (NRRI 1994).
Handbook for Designing, Evaluating, and Implementing Conservation Rate Structures (California Urban Water Conservation Council, 1996).
IPU - MSUIPU - MSU NAME/LOGOSession - 26
[email protected]@msu.edu