Cost Accounting in Local Government

The Downside of Water Conservation

This discussion is for the end-user water supplier that is not subsidized with tax dollars.

You are about to start a dance that may take years to fully play-out. The act of raising water rates to discourage consumption or to compensate for higher State water rates will inevitably lead to a decline in water consumed.

A decline in water consumption is good, right?

Well, it is good for everybody but the finance professional whose job it is to balance the water budget. In order to keep the readiness-to-serve charge low, most every water rate model includes part of the utility fixed costs in the consumption charge. Consequently, as consumption decreases, the fixed cost recovery decreases and the water rates have to be increased more which starts the cycle all over again.

An unacceptable financial solution would be to load all of the fixed costs onto the monthly flat charge. This solution is DOA as it would irritate everyone: the flat rate would be burdensome for the fixed income customer and the consumption charge would be too low to encourage conservation.

It is important that you recognize this problem so that you can:

  1. develop a rate model flexible enough to quickly react to the drop in consumption
  2. identify other impacts such as a sewer rate model that is factored on water consumption, and
  3. educate your legislative body to the need for quick rate increases.

A flexible rate model would include a module for consumption tracking which would be sophisticated enough to account for seasonal and weather-related changes in consumption. If the rate model is too primitive to perform this function, the manual tracking of the water injected into the system would be a gross indicator of the change in water consumption. This latter approach would identify the significance of the consumption change but not the impact of the current rate structure on specific user groups.

The law of unintended consequences implies that what we do to water rates will have other impacts that may not have been planned. Many sewer systems base their rate model on the consumption of water for residential users. As water consumption declines, sewer revenues may also decline. If you operate a treatment plant, the effluent may become more concentrated which may impact the operation of the plant. Green belts may become brown belts which will imply less mowing and more sweeping. Recognizing that there will be other impacts will keep you alert to their early signs.

Finally, the hardest part is to educate your legislative body to the possible impacts and the need for either quicker action on rate changes or increased reserves to handle the revenue dips before action can be taken.

Comments are currently closed.