2009 NARUC Annual Conference in Chicago, Illinois © Janice A

EFFICIENCY, EQUITY, AND SUSTAINABILITY:THE ROLE OF MULTI-OBJECTIVE WATER RATES

2009 NARUC Annual Conference in Chicago, Illinois© Janice A. Beecher, Ph.D.

Institute of Public Utilities - Michigan State [email protected] 517.355.1876

Do not cite, reproduce, or distribute without permissionPresented November 17, 2009 (Revised February 1, 2010)

MICHIGAN STATE UNIVERSITY

Institute of Public Utilities IPU is an independent unit of Michigan State University

“Advancing knowledge, transforming lives” IPU has served the national and international regulatory policy communities since our IPU has served the national and international regulatory policy communities since our

founding 1965 “Camp” NARUC since 1972 University sponsor of the NARUC Utility Rate School University sponsor of the NARUC Utility Rate School

IPU adheres to university-based values of academic freedom, integrity, peer review IPU’s mission is to support informed, effective, and efficient regulation of utilities

providing essential infrastructure networks and services – in the electricity natural providing essential infrastructure, networks, and services – in the electricity, natural gas, water, and telecom sectors

IPU provides neutral, comprehensive, and integrative educational programs and interdisciplinary policy researchp y p y

IPU takes a principled approach to regulation, an empirical approach to regulatory analysis, and a reasoned approach to structural and regulatory change

IPU promotes ethical governance and the ideal of “regulation in the public interest”

Beecher - 2NARUC 2009

p g g p

Household expenditures on utilities (U.S.)*Consumer expenditures on utilities for a four-person household in 2007

[$4,481 and 6.8% of total expenditures]

Natural gas ($644, 1% of

Fuel oil and other fuels

($147, .2% of expenditures)

Water and other public services ($582, .9% of ($644, 1% of

expenditures)15%

3%(expenditures)

13%

Electricity ($1,586; 2.5% of

expenditures)37%

Telephone ($1,439; 2.3% of

expenditures)33%


*Aggregate data for all households including those without these services, which understates expenditures for affected households.

Utilities as a percentage of income (regressivity)*

1 2%10%

11%Consumer expenditures on utilities by income quintile (all consumers %2007)

Water and other $243

$669

$4,000

$5,000

Consumer expenditures on utilities by income quintile (all consumers $)

Water and other public services

1.3%

1 2%

0.4%

0.4%

1.2%

1.1%

1.0%8%

9%public services

Fuel oil and other fuels

$848 $1,104 $1,285 $1,145$1,831

$640

$903$1,101 $1,320

$1,584

$273

$369

$428$559

$773

$82

$123

$127$177

$242

$328

$417$512

$0

$1,000

$2,000

$3,000

$4,000Fuel oil and other fuels

Natural gas

Telephone

Electricity

3.1%2.9%

1.2%

1.0%

1.0%

0.3%

0.3%0.9%

0.7%5%

6%

7% fuels

Natural gas

Lowest quintile 2nd quintile 3rd quintile 4th quintile Highest quintile

4 1%

2.6%

2.3%1.6%

0.8%0.3%

2%

3%

4%

Telephone

4.1%3.5% 3.0%

2.0% 1.9%

0%

1%

2%

L t i til 2 d i til 3 d i til 4th i til Hi h t i til

Electricity


Lowest quintile 2nd quintile 3rd quintile 4th quintile Highest quintile

*Aggregate data for all households including those without these services, which understates expenditures for affected households.

Consumer price trends for utilities (U.S.)

105

145

Difference between CPI for utilities and overall CPI (1983-1984=100)

Cable/sat. television

375

Trends in consumer prices (CPI) for utilities [1978 to 2008]

Fuel oil

Garbage

-175

-135

-95

-55

-15

25

65

1978

1982

1986

1990

1994

1998

2002

2006

Water and sewer

Local phone

Natural gas

Electricity

Interstate phone275

325g

Cable/sat. television

Water and sewer

Natural gas

175

225

Natural gas

Local phone

ALL ITEMS (CPI)

125

175Postage

Electricity

Internet (1997=100)

25

75

8 1 4 7 0 3 6 9 2 5 8

Wireless (1997=100)

Interstate phone


1982‐1984 = 100 except for cellular (1997=100)

1978

198

198 4

198

199 0

1993

1996

1999

2002

2005

2008

Beecher IPU-MSU

Pressure on water costs and prices Combined water, wastewater, storm-water infrastructure costs, driven

primarily by high-cost replacement needs Quality and compliance costs (e.g., new contamination threats)Quality and compliance costs (e.g., new contamination threats) Impact of energy markets and prices Costing and ratemaking mechanisms (including cost tracker) Loss of public subsidies (public systems) Loss of public subsidies (public systems) Historic under-pricing (“willingness to charge” by some systems) Physical and economic “scarcity” (supply and demand)

Fl t d li i it d d d t l d l ( i ) Flat or declining per-capita demand and net load loss (varies) Recessionary influences Price induced effects on discretionary usage (elasticities) Standards, codes, and incentives for conservation and efficiency Commercial and industrial processes Demographic shifts (e.g., population, household size, growth policies)


g p ( g , p p , , g p )

Global water scarcity


The problem of water “scarcity” All of the water that has ever been on earth is still on earth Economists prefer “supply and demand” metrics to the concept of “scarcity” Water is abundant but

Finite in quantity locally and costly to transportT i t i ti i Transient in time in space

Variable in quality (contamination, salinity) Water utilities bear special responsibilities toWater utilities bear special responsibilities to

Manage water resources Control water costs and prices

Water is sometimes susceptible to crisis rhetoric Access to safe water and sanitation is a global problem

I th U S t d it d d b t bili i


In the U.S., aggregate and per-capita demand may be stabilizing

U.S. water withdrawals and population (USGS)


Per-capita water usage (Seattle)

225

250

1990 Forecast with No

150

175

200

GD

1990 Forecast with NoConservation

Actual Demand

75

100

125

Ann

ual M

Unattributed SavingsTransitory SavingsConservation Programs

Demand

2007 Forecast with Conservation

0

25

50Plumbing CodeRate ImpactsSystem Operation Improvements


01975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Controlling water costs and prices Technical and managerial innovation Operational efficiency (including administrative costs) Optimization of infrastructure replacement and asset management Competitive practices (e.g., bidding) Energy management (water as energy storage systems) Energy management (water as energy storage systems) Water loss control (water, energy, chemicals) Structural change (e.g., regionalization)g ( g , g ) Integrated resource management Cost allocation and rate design

R l t dit d d i Regulatory audits and prudence reviews Regulatory incentives (positive and negative) Sustainability policies and practices


Sustainability policies and practices

Genetic algorithm optimization


http://www.optimatics.com/opt.htm

camp08 ‐ 12

Systems and sustainability

Systemd idesign

(optimal?)C t f

Demand(efficient?)

Cost ofservice

(sustainable?)(efficient?)

P i

(sustainable?)

Price(affordable?)


What is sustainability? A sustainable water system operates for the long term within an

ecologic and economic budgetTh l i l b d t i d fi d i t h d t The ecological budget is defined in watershed terms Imports and exports The economic budget is defined in financial termsThe economic budget is defined in financial terms Subsidies and transfers Importance of appropriate unit of analysis – time and space (e.g.,

i t ti l i )intergenerational issues) Sustainability includes both efficiency and conservation practices on

the supply and demand sidesthe supply and demand sides Efficiency – doing more with less Conservation – using less


Is “green” the new “prudent”? A cautionary note…

Ecological sustainability


http://sst.rncan.gc.ca/ercc-rrcc/theme1/t9_e.php

Recommendations of the Aspen Dialogue on Sustainable Water Infrastructure in the U.S. (2008-2009)*

1. “Infrastructure” should be redefined to include the natural environment2. Watershed-oriented entities should play a management role3. Federal, state, and local officials should adopt a watershed approach4. Water utilities should lead in integrated resource planning5 G t h ld d b i t t i bl t5. Governments should reduce barriers to sustainable management6. Utilities and regulators should ensure that prices reflect true costs7 Utilities should adopt practices consistent with a sustainable “path”7. Utilities should adopt practices consistent with a sustainable path8. Government aid should help systems build capacity for sustainability9. Federal funding should target 21st century priorities such as efficiency10. Utilities and agencies should direct assistance to households in need

*summary by Beecher


*summary by Beecher

Pricing for sustainability

Expenditures relative to optimal service level

Prices relative toexpenditures

<1expenditures are too

low relative to optimum

= 1expenditures are

optimal

>1expenditures

exceed optimum(“ ld l ti ”)optimum

(“cost avoidance”)optimal (“gold plating”)

<1 prices are below expenditures Failing system Subsidized system Budget deficit

s stemp(“price avoidance”)

g y y system

=1 prices are at expenditures

Under-investing system

Sustainable system (ideal)

Over-investing systemexpenditures system system (ideal) system

>1 prices are above expenditures

(“profit seeking”)Revenue diverting

systemSurplus generating

system Excessive system


( profit seeking )

Pricing and resource efficiency Efficient prices reflect the value

of water and support efficient resource allocation and use Effi i tresource allocation and use

Prices too low encourage excess (wasteful) usage, which in turn can lead to too much investment

Efficientprice

can lead to too much investment in capacity Under-pricing = subsidy

P i t hi h di

Cost/unit

Price/unit

Prices too high discourage use and can be harmful to consumers and the economy

O i i t f Over-pricing = transfers Demand for nondiscretionary use

is less price-elastic than for di ti

Under‐pricing

Over‐pricing


discretionary use

Pricing and equity “Water is cheap for those who have it” Rates must be high enough to cover costs but also low enough to be

affordable so that customers can financially support the system over timeaffordable so that customers can financially support the system over time Consumer affordability is good for business and related to the utility’s

obligation to serve Rates for utility services have distributional consequences Rates for utility services have distributional consequences Universal service and lifelines are ongoing policy issues Unaffordability leads to unhealthy and unsafe choices and behaviors When utility rates are not affordable, three options are available

Sacrifice of service quality Subsidization via taxes Subsidization via taxes Abandonment

Pricing is not the only answer (e.g., assistance, targeted conservation) See also IPU note on utility expenditures and income


See also IPU note on utility expenditures and income

The water pricing paradox Water is essential

Should water be more expensive to promote efficiency?N ti t liti i t d ith t i t• Negative externalities associated with resource constraints

• Concern is with discretionary use Should water be less expensive to promote equity?

• Positive externalities associated with health and well-being• Concern is with subsistence use and water as a “right”

Conservation pricing and programs – both play a role Conservation pricing and programs – both play a role Pricing moves usage up and down the demand curve (demand response) Programs attempt to shift the entire curve (can be targeted)

Values and policy goals can and should play a role in ratemaking, although sound economics and principles should guide the process

Pricing reforms can address both efficiency and equity in the interest of


sustainability

Pricing reforms for sustainability Promote cost knowledge, sound accounting, and smart ratemaking

Does not require a smart meter, multiple meters, or time-of-day pricingS f f ( ) Set revenue requirements at the full cost of service (including depreciation)

Limit subsidization of systems and direct assistance toward households in need Three ratemaking strategiesg g

Forecasting and cost modeling with demand repression adjustment Future test year with marginal-cost pricing principles

Frequent and thorough rate cases Frequent and thorough rate cases Explore multi-objective pricing and rate-design options

Reform taxation by exempting basic usage if taxed (tax discretionary usage) Allocate some fixed costs based on property values for fire-protection capacity

(rationales: cost-of-service related to density, value-of service related to property, and ability-to-pay related to income, as well as long-term growth-management)


Differentiate commodity prices based on a hierarchy of needs

Human water needs (World Health Organization)


Five products, one pipe

Usage Gallons/month(4 person household)( p )

Consumption: drinking and cooking 1,000

Personal hygiene: washing and sanitation 1,000

Home hygiene: dishes and laundry 1,000

Discretionary usage: outdoor applications > 3 000Discretionary usage: outdoor applications > 3,000

Community fire protection NA


Illustrated price differentiation

Usage Rate option Gallons/month(4 people)

Metering fee Nominal fixed customer charge NA

Consumption:drinking and cooking

Tier 1 lifeline rate block (tax-exempt ) 1,000

Personal hygiene:washing and sanitation

Tier 2 commodity rate block (tax-exempt ) 1,000

H h i Ti 3 dit t bl kHome hygiene:dishes and laundry

Tier 3 commodity rate block(tax-exempt ) 1,000

Discretionary uses:outdoor applications

Tier 4+ commodity rate blocks based on marginal costs > 3,000outdoor applications on marginal costs ,

Community fire protection Portion of fixed capacity costs based on property value NA


Hypothetical rate design (composite)*

$64

$80

$90

$100

$0.020

$0.022

$0.024

Monthly commodity charge (variable based on usage)

$47

$56

$60

$70

$80

$0.014

$0.016

$0.018 Total monthly w

Monthly capacity charge (fixed based on property values)

Monthly customer charge ($4 fixed per customer)

$

$27

$33

$40

$30

$40

$50

$0.008

$0.010

$0.012

water billmo

dity c

harg

e

$4 $4 $4 $4 $7 $9 $11 $13$16

$20$24

$5$10

$16

$21

$10

$20

$30

$0.002

$0.004

$0.006

Per g

allon

com ‐‐‐‐‐‐‐‐‐‐‐‐‐Lifeline rate‐‐‐‐‐‐‐‐‐‐‐‐‐

$4 $4 $4 $4 $4 $4 $4 $4 $4 $4 $4$4 $4 $4 $4

$0$0.000

0 gal.

First

1,000

gal.

ext 1

,000 g

al. =

2,0

00

ext 1

,000 g

al. =

3,0

00

ext 1

,000 g

al. =

4,0

00

ext 1

,000 g

al. =

5,0

00

ext 1

,000 g

al. =

6,0

00

ext 1

,000 g

al. =

7,0

00

ext 1

,000 g

al. =

8,0

00

ext 1

,000 g

al. =

9,0

00

ext 1

,000 g

al. =

10

,000


*Illustration is reflects graduated capacity charges that are based on property values (not usage).The variable commodity (per gallon) charge is shown in green (left axis); its impact on the total bill is shown in blue (right axis).

Ne Ne Ne Ne Ne Ne Ne Ne Ne

Hypothetical rate design: bills

$92.00$90

$100

Low property value: $4 capacity charge

$72.00$77.00

$70

$80Moderate property value: $9 capacity charge

High property value: $24 capacity charge

$40.00$43.50

$55.00

$40

$50

$60

$23.50

$35.00

$28.50

$20

$30

$40

$0

$10

L 3 000 l @ $ 0055 M d t 5 000 l @ $ 0060 Hi h 10 000 l @ $ 0085


Low use: 3,000 gal. @ $.0055 Moderate use: 5,000 gal. @ $.0060 High use: 10,000 gal. @ $.0085

Hypothetical rate design: bills (detailed)

$80

$90

$100

Customer charge

$60

$70

$80

ter bi

ll

Capacity charge

Commodity charge

$30

$40

$50

Month

ly wa

t

$0

$10

$20

Low

value

: 0 ga

l.Me

d valu

e: 0 g

al.Hi

value

: 0 ga

l.

Low

value

: 1,00

0 ga

l.Me

d valu

e: 1,0

00 ga

l.Hi

value

: 1,00

0 gal.

Low

value

: 2,00

0 ga

l.Me

d valu

e: 2,0

00 ga

l.Hi

value

: 2,00

0 gal.

Low

value

: 3,00

0 ga

l.Me

d valu

e: 3,0

00 ga

l.Hi

value

: 3,00

0 gal.

Low

value

: 4,00

0 ga

l.Me

d valu

e: 4,0

00 ga

l.Hi

value

: 4,00

0 gal.

Low

value

: 5,00

0 ga

l.Me

d valu

e: 5,0

00 ga

l.Hi

value

: 5,00

0 gal.

Low

value

: 6,00

0 ga

l.Me

d valu

e: 6,0

00 ga

l.Hi

value

: 6,00

0 gal.

Low

value

: 7,00

0 ga

l.Me

d valu

e: 7,0

00 ga

l.Hi

value

: 7,00

0 gal.

Low

value

: 8,00

0 ga

l.Me

d valu

e: 8,0

00 ga

l.Hi

value

: 8,00

0 gal.

Low

value

: 9,00

0 ga

l.Me

d valu

e: 9,0

00 ga

l.Hi

value

: 9,00

0 gal.

Low

value

: 10,0

00 g

al.Me

d valu

e: 10

,000

gal.

Hi va

lue: 1

0,000

gal.


L M

Property values and monthly usage

Considerations Numbers used here are for illustration only Graduated fixed capacity charges based on property values

E h t bilit f t tiliti Enhance revenue stability for water utilities Enhance bill stability for low-income customers Promote equity based cost, value, and ability-to-payq y y p y

Lifeline component assumptions Poverty income = $22,050 for four-person household (2009) 1% = $220 per year or $18 33/month (water only) 1% = $220 per year or $18.33/month (water only) Reflected in rate tier for 2,000 gallons per household (500 gallons per person)

and corresponding to first two WHO tiersH h ld i i t li itl i t d i th t t t Household size is not explicitly incorporated in the rate structure

All assumptions are subject to policy debate and many variations are possible based on social values and preferences


No rate structure is without imperfection or controversy

Some implementation issues Variations and choices about usage and rate tiers Validity and level of fixed customer charges at no usage Estimation and allocation of fire-protection costs Property value data, usage, and privacy Revenue neutrality and stability Revenue neutrality and stability Rates and rate impacts for industrial and commercial customers Rates and rate impacts for multi-family housingp y g Determination and reconciliation of affordability and rate thresholds Special cases (very small, homogeneous, impoverished, wealthy, and

vacation communities)vacation communities) Change, complexity, administration, and communications Perennial debate over the regulatory role in addressing social issues


e e a debate o e t e egu ato y o e add ess g soc a ssues

Policy reforms for sustainability Define sustainability in appropriate temporal and geospatial terms Adopt meaningful but rational externalities policies at the appropriate level Promote regional coordination and organization on a watershed basis Manage growth and (re)development consistent with goals

C di t t t t d t t t Coordinate water, wastewater, and storm-water management Promote integrative water-energy technologies and practices Encourage water system operational efficiency and asset management Encourage water system operational efficiency and asset management Use subsidies strategically and on a limited basis to avoid price distortion Leverage financial assistance to achieve long-term sustainability Direct financial assistance to households not water systems in most cases Prohibit diversions or transfers of funds collected through water rates

A l i t d i t d d f i ( d )


Apply appropriate and rigorous standards of review (e.g., prudence)

Political reforms for sustainability Recognize that utility ratemaking reflects values and goals Adopt sustainability policies and standardsp y p Communicate with and engage the public Consider a sustainability-based universal service policy for water Recognize water’s role in energy resource management Invest in both economic and environmental regulatory capacity and

coordinate jurisdiction and decision making (intra and inter state)coordinate jurisdiction and decision-making (intra- and inter-state) Expand economic regulatory jurisdiction and (at a minimum) regulate

publicly owned water utilities in the absence of local political will to publicly owned water utilities in the absence of local political will to price water in a manner consistent with sustainability policy goals (efficiency and equity)


ipu.msu.edu [email protected]


2009 NARUC Annual Conference in Chicago, Illinois © Janice A

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Transcript of 2009 NARUC Annual Conference in Chicago, Illinois © Janice A