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Water Pricing as an Adaptive Climate Change Policy in
Northeastern Illinois
2010 Illinois Water Conference
Margaret Schneemann
Water Resource Economist
Illinois-Indiana Sea Grant
University of Illinois Extension
Chicago Metropolitan Agency for Planning
Climate Change Impacts on Water and Wastewater Systems
Impacts
Increased Demand
Increased Risk of Drought
Increased Risk of Flooding
Increased Risk of Inundation
Declining Source Water Quality
Increased Regulation
Adaptation Strategies
Identify Utility-specific Risks
Small-scale Climate Data
System Design
Water Efficiency
Reduce Peak Demand
Watershed Management
Asset Management
Full Cost Pricing
Source: Confronting Climate Change : An Early Analysis of Water and Wastewater Infrastructure Costs Association of
Metropolitan Water Agencies October 2009
Multiple Objectives of Water Rate Structures
Demand Management
Send signals to consumers about consumption
Revenue Recovery
Generate revenues covering the costs of service
Resource Conservation
Signals value of service expansion
and More…
Stakeholder driven objectives
Importance of Planningin Northeastern Illinois
Demand Growth Given Current Trends (CT), NE IL demand
increase 36% by 2050 (Dziegielewski and Chowdhury, 2008)
Surface Water Supply Limits Lake Michigan Supreme Court Decree Inland Surface Water
Deep Bedrock Aquifer Falling water table Cannot meet future demand scenarios
(Illinois State Water Survey, 2009).
Shallow Aquifer Contamination vulnerability Interference drawdown Source: CMAP, 2008
Possible Effects of Climate Change on Water Demand in NE IL
Source: Dziegielewski and Chowdhury, 2008
Impact of Price on Quantity Demanded
Price elasticity of demand =
Elasticity Value Definition Price Increase
Impact on Revenue
Greater than 1 Elastic Percent change in quantity
demanded is greater than the
percent change in price
Revenues fall
Equal to 1 Unit
Elastic
Percent change in quantity
demanded is equal to the
percent change in price
Revenues constant
Less than 1 Inelastic Percent change in quantity
demanded is less than the
percent change in price
Revenues increase
Residential Price Elasticity of Demand for Water
Residential water demand is inelastic Residential water demand price elasticity
0.33 to 0.51
→ 10% increase in price leads to 3.3% to 5.1% decrease in quantity demanded
Short-run ~ 0.38 Long-run ~ 0.64Indoor ~ 0.04 to 0.13 Outdoor ~ 0.31 to 0.38
→ Northeastern Illinois Region: 0.15
Pricing Response: Developing Surcharges Establish normal condition rates
Revenue requirementsDemand forecastCost allocationRate design
Forecast demand and supply responses to hydrological conditions
Estimate costs of adaptation strategies, including new supplies
Estimate new revenue requirements
Choose a rate structure and design rates
Public outreach, education, implementation
Pricing Response: Seasonal Rates Conduct a cost of service study to determine cost
differences between peak and off-peak periods
Allocate operating and capital costs between peak and off-peak periods.
Estimate the demand response to the proposed seasonal rate structure.
Introduce the differential during non-severe conditions in combination with a public education campaign.
Public outreach and education, reminders sent before the start of each peak season.
Implementing Pr icing Response in NE IL
Rate Structure: Volumetr ic Charges
Water Rate Structure Wastewater Rate Structure
Uniform Rate: Volumetr ic Charge = p1x*
Increasing Block (2 Blocks): Volumetr ic Charge = p1x1+ p2(x* - x1) where p1 < p2
Decreasing Block (2 Blocks): Volumetr ic Charge = p1x1+ p2 (x* - x1) where p1 > p2
Flat: Volumetr ic Charge = FC
Long Term Pricing Response Rate structures supporting shortage rates
implementation
Revenue recovery sufficient to cover necessary capital investment
Addressing longer term conservation targets
Periodic demand forecasting based on price response
Risk based panning to forecast probability of a shortage and optimize adaptation response
Water Pricing as an Adaptive Climate Change Policy in
Northeastern IllinoisPresented by Margaret Schneemann
Water Resource Economist
Illinois-Indiana Sea Grant
University of Illinois Extension
Chicago Metropolitan Agency for Planning
312.676.7456