Water Resources Research Act Program

Details for Project ID 2020CA309B

Persistence of Rate Structure Effect on Water Consumption

Institute: California
Year Established: 2020 Start Date: 2020-03-01 End Date: 2021-02-28
Total Federal Funds: $7,000 Total Non-Federal Funds: $3,885

Principal Investigators: Mehdi Nemati

Abstract: In an effort to balance supply and demand in the short- and long-term, utilities rely on a portfolio of management strategies, including demand-side management (DSM) strategies. DSM strategies, compared to supply-side management strategies, reduce consumption in a cost-effective manner (Kenney 2014, Kenney, Mazzone, and Bedingfield 2010). DSM strategies include market-based policies (e.g., price level and structure adjustments, taxes), and non-market-based approaches (e.g., rebate programs, and restrictions) (Olmstead 2010, Olmstead and Stavins 2009). Per capita water use in the residential sector has been declining, in part, because water agencies continue to put significant effort into DSM strategies. For example, in California, per capita water use had decreased from 244 Gallons per Capita per Day (gpcd) in 1995 to 178 gpcd in 2010 (Hanak et al. 2016). Price adjustments -- both price levels and price structures -- is one DSM tool to reduce household water demand that might result in uncertainty in revenue forecasting for utilities. With many agencies changing rate structures in response to both short-term supply shocks (e.g., the recent California drought) as well as long-term water use policy targets (e.g., Make Water Conservation a California Way of Life ), there is a general concern over the persistence in the impacts of such interventions on water use. The main objective of this study is to investigate persistence in the effect of a given water pricing scheme on water consumption, with emphasis on conservation-based water rate structures (e.g., tiered water pricing, budget-based pricing). Here we move beyond the estimation of average effects and test for the persistence of water consumption responses to price structure changes. Understanding the dynamics and persistence of price structure effects provides important policy implications for water managers. For example, is rate design change leads to permanent water use reductions by installing efficient appliances (or lawn irrigation technologies) or the effects die over time. In addition, we seek to provide insights on what types of water rate structures lead to only short-run impacts on consumption and what types lead to both short- and long-run impacts. Excluding smaller water utilities, there are more than 400 urban water suppliers in California that serve more than 3,000 customers each. Each of these utilities, based on the characteristics of the service area and supply sources, employ a variety of pricing structure (e.g., uniform, tiered, and budget pricing structures). These price structures and the level of prices evolve based on utility financing requirements and conservation goals that vary over time and among utilities, that provides the opportunity for us to employ statistical models and quantify the persistence in the impacts of different rate structures on water use. Below we summarize the two objectives of the project and provide a summary of the method that we are going to employ to achieve these objectives.