UW-Madison UW-Madison

Water Pricing for Efficiency
Red hoseEven before California's epic drought, water managers and politicians have worried about how to encourage conservation in the water-scarce state. Pricing is one tool. At a recent REDA seminar, AAE alum, Ken Baerenklau (PhD 2002) presented his research on how to set water rates for efficiency and equity.
Ken Baerenklau
Ken Baerenklau
Now a professor of public policy and associate provost at UC Riverside, Baerenklau, with his collaborators, analyzed a panel of data on residential water use from 2003 to 2014 in a Southern California water district that adopted an innovative pricing strategy in 2009.
The researchers found that household demand dropped 10-15% under the new scheme, called allocation-based water pricing.
"Municipalities traditionally use a uniform rate to price water, which charges a constant price per unit of water. Others have experimented with fixed block rates, which raise prices as consumption increases," Baerenklau explained. His team studied allocation-based pricing, which improves upon fixed block pricing by allowing the volumetric sizes of the blocks to depend on the number of people in a home, the outdoor irrigated space, climate factors like evapotranspiration, and even special medical needs, enabling a utility to estimate a fair "water budget" for each household.
The water district would have had to raise rates by 30% to achieve the conservation we observed in our study The lowest price is charged for the first block, which is designed to satisfy a family's basic needs of drinking, cooking and cleaning. A higher price is charged for the second block, which is for landscape irrigation. The highest prices are paid by households that exceed their water budgets, whereas families who are already using water efficiently are not penalized.
Even though allocation-based pricing is seen as more fair, utilities have been reluctant to adopt it because of the up-front costs of estimating the water budgets and educating customers about the changes. Questions about the legality and conservation outcomes have persisted, even though an earlier study found that outdoor irrigation declined by 61% in a Southern California district that adopted allocation-based rates in the 1990s.
So Baerenklau and his team stepped in to answer the question "how much conservation" by studying 12,000 customers in a panel of 130,000 households over the 11-year period. "We looked at over one million data points for the study," he said, and "we created a model that controlled for weather anomalies, the recession and other factors."
Graph for efficiency By splitting up the sample households based on relative water use efficiency, Baerenklau and his collaborators found that the least efficient households exhibited the largest and most persistent response to the rate change. "What we observe is consistent with households trying to avoid the higher tiers of pricing charged to wasteful customers. And we also find patterns showing slow but persistent changes in water use habits -- for example, realizing that watering the lawn less doesn't cause the grass to turn brown and so continuing to water it less," he said.
What happened to most people's water bills? Before the rate change, the uniform price was $1.85/100 cubic feet. Under allocation-based pricing, prices ranged from $1.73 for efficient users staying within their water budgets to $10.36 for users paying in the wasteful tier.
"The water district would have had to raise rates by 30% to achieve the conservation we observed in our study, whereas the average allocation-based rates rose only about 3% since they were instituted in 2009," said Baerenklau. And the effect on low-income households? "The average prices for these families fell, but their usage also declined."
AAE News
Last updated on Wed, May 11, 2016 7:36am