Conservation’s impact on water and wastewater revenues

If your utility is like the vast majority of water and wastewater utilities nationwide, your customers are buying less water from you than they have in the past. The magnitude and duration of the reduction varies, but the fact is that customers are continually developing ways to conserve one of life’s most precious commodities and it’s a safe bet that the trend will continue.

As utility personnel, you are tasked with ensuring that you have sufficient revenues to continue providing high quality water at a reasonable price which can be challenging when profits erode due to conservation efforts. One might even say there is a strong disincentive for utilities to promote water conservation. However, knowing that it is the right thing to do for the environment, your challenge lies in determining how to deal with the financial impacts of these efforts. This article will share a few ideas for you to consider.

Fully understand the impact of conservation on revenues and expenses

You can easily calculate lost revenue from reduced sales by multiplying the reduction in gallons used by the rate per gallon to get a general picture of the short-term impacts conservation is having on your utility.

The other side of the equation may not be as easy to determine in the short term. Think about your operating costs—which costs are short-term fixed and which are short-term variable? For many utilities producing their own water, the short-term variable costs are limited (e.g., electricity for running pumps, chemicals for treating water, minor maintenance, etc.). The vast majority of short-term costs are fixed (e.g., production, storage, and distribution; labor and benefits; etc.). It would not be unusual in this type of utility for short-term costs to account for 80% to 90% of the total cost of providing water.

For utilities purchasing their water from another supplier, costs will be mostly short-term variable. If your utility operates in this manner, it’s important to keep in mind that if you buy less water from your supplier, because they aim to recover mostly short-term fixed costs, they will likely increase your rates in order to do so.

For wastewater utilities, the impact of water conservation is similar because many of them base the majority of their customer bills on the metered water volume.

In the long term, conservation efforts will save customers money by allowing utilities to avoid construction of added supply, treatment, storage, and distribution facilities. This should be factored in when evaluating the financial impact of conservation on your utility.

As part of your long-term impact assessment, you should try to estimate how much additional conservation you can expect and when it will occur. How many of your customers have installed conservation devices and, more importantly, how many will be installing such devices and/or taking part in conservation efforts in the future and when? Obviously the result will be a rough estimate, but one critical for developing a long-term strategy.

Develop a strategy

Once you have identified the short- and long-term financial impacts of conservation on your utility, you can develop strategies for dealing with them. It is imperative to prepare both short-term and long-term rate strategies. Conservation efforts will likely result in short-term rate increases, but developing rate strategies that support your long-term goals is key. Do you shift some costs from a variable volume rate to a meter or fixed charge? Do you develop seasonal rates to further encourage peak shaving while not impacting off-season usage as much? Are declining, flat, or inverted rate blocks appropriate for your customer base? If you use declining or inclining block rates, how much price difference is there between the various blocks?

Communicate, communicate, communicate

It’s difficult for customers to accept that because they are performing the socially responsible act of conserving water, you need to raise their utility rates. Developing a full communication plan on the issue is critical for any hope of gaining customer acceptance. A few thoughts for including in the plan:

  • Share the short- and long-term strategies that you have developed with your governing board and customer representation to identify concerns and solution you may not have considered.
  • Explain the economics of providing customers with water, clearly showing your primary costs and drivers.
  • Illustrate how their conservation efforts will allow you to delay future projects while your community continues to grow.
  • Demonstrate how regulatory requirements have increased the cost of providing them with high quality water.
  • Add examples of how the cost of this life-critical element compares favorably to almost any other commodity. In some states, household water usage for a day amounts to less than $1.
  • Enforce that a municipal utility is customer owned and that your strategy is designed to help maintain the long-term integrity of their investment while providing everyone with life-giving, high quality water.
  • Seek feedback from others in your industry to see how they have effectively communicated their plan.
  • Communicate early and often. You will be more successful if you share information up front. Holding off until customers are faced with a significant rate increase will not be well-received.
  • Revisit the strategy from time to time to adjust it based on ideas from others, changes in customer consumptions, new rate strategies, etc.

Water conservation is here to stay. Identifying the short- and long-term financial impact of it, developing a strategy, and communicating that strategy early and often is key to effectively dealing with it.

For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.