NAME/LOGO Session - 1 IPU - MSU What Regulators Need to Know about Drought Janice A. Beecher, Ph.D....

IPU - MSUIPU - MSU NAME/LOGOSession - 1

What Regulators Need toKnow about Drought

Janice A. Beecher, Ph.D.Director of the Institute of Public

UtilitiesMichigan State University

Summer 2002


Drought attention span

Time

Attention

raindrought


Characteristics of water use Per-capita water demand is flat Significant weather-related

variations Opportunities for growth are limited Fixed cost are high and rising Pressure on rates is significant


00

200200

400400

600600

800800

1,0001,000

1,2001,200

1,4001,400

1,6001,600

1,8001,800

2,0002,00019

5019

50

1955

1955

1960

1960

1965

1965

1970

1970

1975

1975

1980

1980

1985

1985

1990

1990

1995

1995

Gal

lons

per

cap

ita p

er d

ayG

allo

ns p

er c

apita

per

day

TotalTotalwithdrawalswithdrawals

TotalTotalfreshwaterfreshwater

ConsumptiveConsumptiveuseuse

Public supply Public supply

Daily Per-Capita Withdrawals in the US:1950 to 1995


Water and weather Water is transient in time and space;

droughts are inevitable Mother nature controls supply and demand;

supply is constrained just when we need it Water quality and water quantity are related Environmental externalities of water usage

are exacerbated during drought For utilities, rainy weather is a problem when

sales are down (“excess inventory”) Drought is a problem when the state

imposes restrictions (artificial “demand repression”)


Rain

Drought

“Normal”

Sales down

Sales restricted

Sales may be affected by conservation behavior

Weather and water sales


Residential Water Use per Connection:Residential Water Use per Connection:American Water Works Service Company, Inc. American Water Works Service Company, Inc.

(1980 to 1997)(1980 to 1997)

208.2208.2

202.4202.4199.5199.5

203.9203.9206.1206.1

201.8201.8

208.7208.7207.2207.2

212.9212.9

200.7200.7199.6199.6

201.2201.2

194.3194.3

190.1190.1

204.9204.9

208.6208.6

194.0194.0

200.0200.0

180180

185185

190190

195195

200200

205205

210210

215215

220220

1980

1980

1981

1981

1982

1982

1983

1983

1984

1984

1985

1985

1986

1986

1987

1987

1988

1988

1989

1989

1990

1990

1991

1991

1992

1992

1993

1993

1994

1994

1995

1995

1996

1996

1997

1997

Gal

lons

per

con

nect

ion

per

day

Gal

lons

per

con

nect

ion

per

day


Water efficiency/conservation Any beneficial reduction in water waste

or water usage; emphasis on efficiency Marginal benefit exceeds marginal cost Broadly defined to include externalities Should not imply an impairment of

lifestyle or economic activity Loss of “excess capacity” or “demand

hardening” should not deter conservation


Benefits of conservation

1 3 5 7 9 11 13 15 17 19

Planning Year

Sup

ply

Cap

acity

and

D

eman

d

Supply withoutconservation

Supply withconservation

Demandwithoutconservation Demand withconservation


Conservation v. drought managementConservation Long-term Choices are well

informed Pricing plays a

central role No impairment State role is less

direct

Drought Short-term Choices are

constrained Price is necessary

but insufficient May impair

lifestyles State role is more

direct


Role of pricing Pricing is a necessary but not always a

sufficient tool of efficiency/conservation Water use in generally price inelastic

Outdoor use > indoor use Nonresidential use > residential use

Even small price responses can be meaningful in terms of revenues

Marginal-cost pricing principles should be applied

IOUs do not have clear incentives for efficiency pricing


Water rate design in the U.S.

Uniform rate: 36%Uniform rate: 36%

Increasing-block rate: Increasing-block rate: 29%29%

Decreasing-block rate: 36%Decreasing-block rate: 36%


Cost/Cost/unitunit

Under-Under-pricingpricing

Cost-Cost-based based pricingpricing

Over-Over-pricingpricing

Price/Price/unitunit

EfficientEfficientpriceprice

Efficiency pricing


Increasing-block rate


Quantity consumedQuantity consumed

TierTier

Tier breakpointTier breakpoint


Seasonal rate



Peak seasonPeak season

Off-peak Off-peak seasonseason


Excess-use andwater-budget based



Excess use/use Excess use/use above budget above budget allotmentallotment


Marginal-cost pricing



S1S1

S3S3

S2S2

S = supply S = supply optionoption

Tail blockTail block


Multi-objective rate (example)


Quantity Quantity consumedconsumed

Marginal Marginal costcost

Hi cost

Low costMid cost

Lifeline for eligible customers

Consolidated rate

Affordability >>>> Equity >>>>> Efficiency

Location/season


Drought pricing Short term implementation Fines and penalties Purpose is enforcement v. efficiency Revenue effect may be negligible May strain customer relations Non-price options (restrictions) may

be more effective and appropriate in severe drought conditions


Drought and revenues In the long run, all costs variable; in the

short run, many costs are fixed Many water utilities rely on revenues from

variable charges to cover fixed costs Mandated curtailments can impair the

utility’s ability to collect sufficient revenues to cover costs, make needed investments, and earn a fair return

Revenue-adjustment (demand-repression) mechanisms may be necessary


Demand-repression adjustment May be needed to adjust rates and

revenues to account for revenue effects of: Conservation-oriented prices Drought-management policies (force majeure?)

When water utility revenues are impaired by state-mandated restrictions on usage during drought, the state (PUC) also has a responsibility to consider measures for adjusting rates and revenues


Adjustment eligibility Long-term water supply plan and

compliance with all state requirements Water-loss management (plug the

leaks!!!) Efficiency-oriented tariff based on

normalized weather Public education effort Subject to proof of impact, audit, and

reconciliation


Conclusions Water utilities are unique in terms

of drought impacts Regulators must be aware of

potential revenue effects A carefully designed adjustment

mechanism could address revenue issues and utility incentives for conservation and drought management


Some Publications Compendium on Water Supply,

Drought, and Conservation. (NARRI 1989).

Revenue Effects of Water Conservation and Conservation Pricing: Issues and Practices (NRRI 1994).

Handbook for Designing, Evaluating, and Implementing Conservation Rate Structures (California Urban Water Conservation Council, 1996).


[email protected]@msu.edu

NAME/LOGO Session - 1 IPU - MSU What Regulators Need to Know about Drought Janice A. Beecher, Ph.D....

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