Can New Pricing Models Capture the True Value of Water?

Can New Pricing Models Capture the True Value of Water?

Many water utilities are currently experiencing high sensitivity to demand and revenue fluctuations. As capital expenditures to maintain and upgrade distribution infrastructure become inevitable, many utilities are also facing increasing pressure to conserve resources and maintain water quality. Evaluating potential rate structures may reveal solutions to provide revenue stability while aligning conservation with the need to reinvest in infrastructure. New innovations in water pricing structures may be key to helping utilities engage their customers and keep their revenue positions strong. Utilities with the right analytics to model consumption patterns, and responsive customer relations departments are best positioned to adopt these innovative models.

Stanford Tiered Pricing Model

Among the new models emerging from universities and research institutions is a tiered pricing model developed at Stanford University. In California, where public pressure toward conservation is high, and fluctuations in the water table have been extreme in recent years, economist Frank Wolak’s model provides a series of customized rate tiers, adjusted to specific customer types and demand profiles. Using predictive modeling, the Stanford tool adjusts pricing to match customer bills to average per-gallon costs, while incurring higher charges for non-essential uses like watering and swimming pools. This model allows utilities to encourage conservation while meeting regulatory requirements that mandate retail pricing match the cost of delivery.

Peakset Base Model

The tension between base pricing and volumetric pricing is a familiar issue for many utilities, with larger base pricing hedging against demand variability, but also decreasing incentives for conservation. Variable weather patterns can exacerbate risk exposure for certain utilities, as can increased reliance on volumetric rates for conservation reasons. Determining the right mitigation strategy depends on the characteristics of a given utility’s customer base, but another strategy is to shift conservation signals to base pricing rather than volumetric charges. By adjusting base price rates based on a customer’s monthly peak demand, a utility can still provide conservation incentives while re-balancing base charges to provide predictable revenue. This structure, known as PeakSet Base, was developed in 2014 by the Water Research Foundation and is more reliable than determining base charges on meter size alone.

Capturing the True Value of Water

Each utility faces a distinct set of challenges and each customer base will have a diverse set of expectations. The right mix of water expertise, customer engagement, and analytics skills is required to determine the correct solution for each water utility. Increasingly, the true value of water is being recognized by both commercial and residential customers and water utilities are facing an ever-growing set of demands. Dynamic utilities will need to take advantage of creative pricing models to capture the true value of the critical services they provide.

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