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Is Water Conservation Cost Effective?

By Jason Mumm

Will water conservation pay off for consumers? “Apparently, Conserving Water Won’t Necessarily Save You Money.” This headline on a community radio website in Northern California last fall called attention to an interesting relationship in the water utility services industry. It seems that water utility customers in Sonoma County, CA, after endeavoring to save water during a conservation program, found themselves saddled with an 8% service rate increase. A Water Rates Consultant deals with this on a regular basis

Large increases following a successful conservation effort doesn’t seem natural. Customers generally believe that cutting back on their water use should result in a reduced bill for water service. If user’s charges are calculated on a cost per gallon or cost per unit of service, this may be true – at least in the short term. Using less water usually does result in lower customer charges for water service.

Most consumers believe that their water service provider should also see its costs reduced since fewer units, or in this case, gallons, are sold. In the case of an effective conservation program where consumers reduce consumption, the theory holds that the provider should also see its costs reduced as well. And all should be equitable.

When water providers begin to understand and manage their actual costs, this model no longer holds true. Unfortunately, many provider costs can be characterized as “fixed” or set costs. These costs do not change in relation to the number of gallons provided or number of units sold. In the case of water providers, these costs generally include maintenance, insurance, debt service as well as payroll and other costs that won’t be reduced if customers consume fewer gallons of water. In short, fixed costs occur at steady levels without relationship to customer use and are required by the utility to provide ongoing service to existing customers.

Water utilities earn revenue based on the amount of water used or delivered. Revenue to the utility then is a simple function of price times cost per unit (gallons) of service. Users conserving water can trim their charges for service, but these reductions only lower the revenue enjoyed by the provider. And because utilities have significant expense obligations that are not tied to level of customer consumption, these utilities can find themselves struggling to meet existing and ongoing costs. Conservation programs then reduce – sometimes considerably – the revenue needed to continue delivering water service.

At the point where income levels are insufficient to support expenses – the utility is naturally compelled to identify new sources of revenue. Most water utilities will then seek rate increases in an effort to cover their fixed costs. If fewer units of product or in this case, gallons of water are sold, the rate per unit or gallon is going to have to be higher to return the utility to its original revenue levels that covered ongoing expenses.

Instances where utility expenses threaten to outpace revenues is usually marked by requests for a rate hike. Increases in rates then erase any gain the customer conservation efforts produced. After all, if fewer units are sold, the rate per unit (gallon) is going to have to be raised to a level that provides enough revenue to support the providers’ ongoing operations. This results in a basic conflict between provider revenue requirements and efforts to reduce customer bills.

Rates can be designed in advance to help offset some of the expected losses, thus stabilizing rates to some degree. Experienced water rate consultants can help design these kinds of rates in advance, and that’s a much better plan than waiting to see what happens after the fact.

Author Jason Mumm is a highly respected among Utility Consultants and specializes in water and wastewater utility services. With many years of experience providing finanical and operational counsel to water utility organizations, Jason helps client companies attain financial success while managing consumer rates.

categories: Water Rates,Water Costs,Water Conservation,Conservation,government,management,public services,Business,Finance,Family

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Topics: Management | Comments Off

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Article Citation
MLA Style Citation:
Mumm, Jason "Is Water Conservation Cost Effective?." Is Water Conservation Cost Effective?. 4 Jul. 2010. uberarticles.com. 31 Jul 2014 <http://uberarticles.com/business/management/will-conserving-water-pay-off-for-the-consumer/>.

APA Style Citation:
Mumm, J (2010, July 4). Is Water Conservation Cost Effective?. Retrieved July 31, 2014, from http://uberarticles.com/business/management/will-conserving-water-pay-off-for-the-consumer/

Chicago Style Citation:
Mumm, Jason "Is Water Conservation Cost Effective?" uberarticles.com. http://uberarticles.com/business/management/will-conserving-water-pay-off-for-the-consumer/


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