Electricity Pricing Practices Offer Lessons for Water Sector in Promoting Conservation and Efficiency

September 11, 2013, Oakland, CA: Because water utilities are dependent on the sale of water to recoup costs, reduced sales can result in deficits – and per capita water demand in California has been stagnant or decreasing for the past several decades. Over the coming years, California municipal water utilities are required to reduce water use by 20%. Thus, the “new normal” or an era of declining demand and rising costs is a trend that is likely to continue. Water utilities can learn from a number of electricity pricing practices to help adapt to this “new normal” while staying fiscally solvent and providing fair prices.

“California’s energy sector has implemented many pricing policies that seek to balance a commitment to energy conservation with utility financial health,” said Kristina Donnelly of the Pacific Institute, lead author of the report. “Both water and energy utilities are coping with similar financial challenges related to demand reductions and stand to benefit from a greater exchange of information and lessons learned.”

In order to understand how some of these practices might be relevant to the water sector, the Pacific Institute examined a range of electricity pricing practices and policies that California electric utilities use to remain financially stable even when per capita demand is decreasing. The paper, Pricing Practices in the Electricity Sector to Promote Conservation and Efficiency: Lessons for the Water Sectorhelps inform discussion at the local, regional, and state level about water pricing in light of recent and future reductions in water demand.

“It is important to remember that there are some significant differences between the energy and water sectors,” said Dr. Juliet Christian-Smith, co-author of the report. “For instance, there are only a handful of major electric utilities in California, which are privately owned. The state provides a regulatory framework that clearly defines how these utilities must calculate customer prices. On the other hand, there are thousands of water utilities, most of which are public entities subject to state and local regulations and governed by local, publicly elected boards. This can set up different rules, expectations, and motivations.”

Although rate-setting processes for electric utilities and water utilities differ, the study finds that a number of promising electricity pricing practices could be implemented, or further implemented, in the water sector. Some of these practices are already common in the water sector (e.g., tiered rates), while some are becoming more widespread (e.g., seasonal rates, rate stabilization funds). Others have not been widely applied to water (e.g., demand response contracts and the calculation of an inherent commodity cost for water in the utility’s revenue requirement). In the case of marginal cost pricing, there is little known about the extent of adoption in the water sector as there is no single, standard approach to marginal cost pricing or reporting requirement.

This white paper is the third in a series covering critical issues for water service providers as they deal with the “new normal,” including water rates basics and water affordability. All three papers can be downloaded free of charge on the Pacific Institute website at www.pacinst.org/publication/water-rates-series/. Pricing Practices in the Electricity Sector to Promote Conservation and Efficiency: Lessons for the Water Sector is available directly at www.pacinst.org/publication/water-rates-pricing-practices

The Pacific Institute is one of the world’s leading independent nonprofit research organizations working to create a healthier planet and sustainable communities. Based in Oakland, Calif., the Institute conducts interdisciplinary research and partners with stakeholders to produce solutions that advance environmental protection, economic development, and social equity – in California, nationally, and internationally. www.pacinst.org