Trends in Water Rate Structures to Encourage Conservation: Evidence from California

Water pricing can be used as a demand management strategy to secure reliable supply in the face of growing populations, variable climate, and costly options for new source development. California represents a relevant case study for water rate decision-making in the context of hydrologic variability and conflicting state legislation. In recent years, some California utilities have shifted their water pricing schemes to be more innovative and encourage conservation, while ensuring adequate revenues. Identifying factors that facilitate transitions to pro-conservation rate structures, as well as barriers, is policy-relevant as California overhauls its approach to conservation and mandates water efficiency targets for all urban water systems.

This study conducts retrospective analysis to identify statewide trends in rate structures as well as factors that can help or hinder transitions to innovative rate types, such as water-budget and tiered rates. We compile a panel dataset of water rates, utility characteristics, and community demographics for 526 water systems in California from 2003- 2016. A multinomial model is used to estimate the probability of a given rate structure as a function of utility characteristics and demographics. Water rate categories include fixed, uniform, tiered, and water-budget rates.

We find that less than half of utilities had pro-conservation rates in 2003, but this increased to 72% of utilities by 2016. Results also indicate that pro-conservation rates are more likely among utilities with larger service populations, better financial health, reliance on water imports, and private ownership. Larger utilities likely have greater technical capacity to implement innovative water rates. Utilities with heavy reliance on water imported likely have additional motivations for conservation. In addition, private operators likely have incentive to use conservation as a means to reduce costs of future supply expansion.

Barriers for adoption of pro-conservation rates include systems with declining service populations. Technical and/or financial assistance might be required to design and implement pro-conservation rates. Overall, this study provides insight into barriers to conservation pricing, which can inform policies to enable transitions in rate structures.