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The Winners and Losers of New Utility Rate Models

Shadi Eskaf Environmental Finance Center at the University of North Carolina WRRI 2015 Annual Conference March 18, 2015 McKimmon Center, Raleigh, NC

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Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective, and financially sustainable ways through:

• Applied Research • Teaching and Outreach

• Program Design and Evaluation

How you pay for it matters

Typical Utility Rate Structure

Base charge (might include a consumption allowance)

+

Volumetric rates (uniform rates or block rates)

Challenge of Current Rate Structures

Source: Hughes, J. et al. (2014). Defining a Resilient Business Model for Water Utilities. Water Research Foundation report, Project #4366. www.waterrf.org or www.efc.sog.unc.edu

Fixed versus variable expenses and customer sales revenues

National WRF study on current utility practices and alternatives for enhancing financial resiliency of water utilities

http://www.waterrf.org/Pages/Projects.aspx?PID=4366

What if We Change the Way Utilities Charge Customers?

Base charge (might include a consumption

allowance)

+

Volumetric rates (uniform rates or block rates)

?

Alternative Rate Designs

1. PeakSet Base Model 2. CustomerSelect Model 3. WaterWise Dividend Model

Described in the WRF report and EFC blog posts, and studied and simulated for four large urban utilities in NC (via WRRI)

Whiteboard Video http://www.waterrf.org/Pages/Projects.aspx?PID=4366

Rate Setting with Current Rate Structures

Customer water use and billing records of last year(s)

Projections for next year;

adjust rates

Next year, bill customers and track

revenue shortfalls/gains

Typical rate-setting process

Planned to generate this much… but got this much because customers used less water

Simulating Alternative Rates for 4 NC Utilities

Customer water use and billing records of last year(s)

Projections for next year;

adjust rates

Next year, bill customers and track

revenue shortfalls/gains

Typical rate-setting process

Projections for next year using alternative rate

models

Model customers next year using new

rates, calculate revenue shortfalls/

gains, and who paid more/less

EFC’s simulation of alternative rates

Set rates to project same revenues

(revenue-neutral) Compare

CustomerSelect Rate Model Individual customers choose plan that best works with their consumption and pay an overage fee if the household uses more than the plan

Generated more revenue (and more fixed revenue) even though water use declined

&

Equal portions of customers would have “won” or “lost”

If Utility Had Implemented CustomerSelect

Winners and Losers under CustomerSelect

Low water users (low average) & low peaking users would have reduced their water bills High users & high peakers would pay more

PeakSet Base Model

Graphic: Eskaf, S. et al. (2014). Measuring & Mitigating Water Revenue Variability: Understanding How Pricing Can Advance Conservation without Undermining Utilities’ Revenues Goals. Ceres report. www.ceres.org or www.efc.sog.unc.edu

A customer’s base charge for next 12 months would be individually set based on their individual historic peak demand

Generated more revenue (and more fixed revenue) even though water use declined

&

More customers would have lowered their bills

If Utility Had Implemented PeakSet Base

Winners and Losers under PeakSet Base

Low water users (low average) would have increased their water bills on average, but… Customers with low peaking ratios would pay less and customers with high peaking ratios would pay more

• Customers are “members” of utility • Utility clearly defines its total revenue needs

(including O&M, debt service, capital reserves, etc.)

• Charge full cost prices, plus additional rates to guarantee revenues (add to base charge)

• At end of the year, keep the revenues that are needed and then return any excess funds to the customers

• Can be combined with most rate models

WaterWise Dividend Model

Calculating the Dividend

Simple Dividend: • Equally among customers (per

month/service) or Return more to WaterWise customers: • Proportional to reduction in demand from

last year • Customers who meet a water budget target

How Customers would Fare Under: Simple Dividend Model

How Customers would Fare Under: WaterWise Dividend Model

Conclusions

Revenue Target using “Next Year’s Rates”

• Alternative rate models increase revenue resiliency

• Can protect low-using customers while increasing bills of high-using or high-peaking customers

• Require new way of thinking and implementation

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Acknowledgements

35

North Carolina Urban Water Consortium

EFC Team: Shadi Eskaf, Mary Tiger and Jeff Hughes

http://efc.sog.unc.edu @EFCatUNC

Shadi Eskaf eskaf@sog.unc.edu 919-962-2785

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