Water customers are usually charged on a cost per unit, or in this case, a cost per gallon basis. In the short term, a reduction in customer usage does result in a lower water service charge. Many utilities provide water and sewer service to their customers using this cost per unit of consumption standard. To the customer in the immediate term, there is a direct relationship between consumption levels and charges for service.

It would seem that should the water provider deliver fewer gallons of water to customers, the utility should enjoy lower costs for providing fewer units of service. This in the end should save the water utility money as well and all should be equitable, right?

Upon closer examination of the provider’s cost structure, the argument falls apart. A great deal of the utility costs are “fixed” in nature, meaning that costs do not rise or fall in proportion according to the amount of water delivered or sold. These fixed costs include ongoing service expenses for maintenance, debt service and of course, operating payroll. These costs will be incurred at roughly the same level whether the utility sells multiple millions of gallons per month or a much lower amount. If customers consumer fewer gallons of water, it won’t significantly change the provider’s cost obligations.

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 that 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.

When utility expenses threaten to outpace revenues , the provider usually proceeds with a request 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.

Avoiding this conflict requires utilities and customers to fully understand the tradeoffs between conservation and utility revenue prior to initiating any kind of conservation effort. Establishing a rate structure in advance of conservation programs can help offset some of the expected revenue reductions and provide some degree of stability to customer rates. Skilled water rate consultants can also help design these rate and fee structures in advance. And that is a better solution than facing down upset customers at the next public meeting.

Consultant Jason Mumm is a highly respected among Utility Consultants and specializes in water and wastewater services. With many years of experience delivering finanical and operational counsel to water service providers, Jason assists clients achieve financial success while managing consumer rates.

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Will Water Conservation Save Money? is a post from: Manage My Budget