It has become increasingly common to note, under the general law that no good deed goes unpunished, that successful implementation of water conservation measures by utilities and their customers generally leads to higher commodity rates for water. This phenomenon occurs because water utilities have significant fixed costs, and as the amount of water decreases, those costs must be collected by increasing water commodity rates. The concept is simple, but it causes consternation among some who feel that water conservation is a moral good that should be rewarded rather than punished. While I am more inclined to view water conservation in economic rather than moral terms, undoubtedly the phenomenon has an impact on customer attitudes toward conservation and thus water resource management under conditions of scarcity.
An example of this phenomenon was recently addressed by the California Public Utilities Commission (CPUC) for the Penngrove Water Company (PWC) in Sonoma County, California. PWC is a small water company that serves approximately 600 metered connections with water purchased from the Sonoma County Water Agency (SCWA). In 2007, the SCWA mandated that its wholesale water customers, such as PWC, reduce their consumption by 15 percent, and in turn PWC adopted increasing tiered water rates to discourage high-volume water use by its retail customers. During the period July through October 2009, PWC customers reduced their water purchases so that the company collected $56,653 less than authorized by the CPUC to meet its expenses. The company requested to recover the deficiency by collecting a surcharge of $1.85 per hundred cubic feet (ccf) of water purchased during March through June 2010, and the CPUC granted that request in Resolution W-4825 (2010).
This example demonstrates that the CPUC understands the problem posed by water conservation and has devised a mechanism for allowing utilities to recover lost revenues. That is necessary for maintenance of healthy water systems, and a positive development of the past few years. It also shows how difficult it can be for a water company and its regulator to create the proper economic incentives for water conservation. Although a company may attempt to predict the impact that tiered water rates or other incentives will have on customer consumption levels, such predictions will invariably be wrong to some extent because those incentives are set at a single point in time based on defined incentives, rather than being updated on a continuous basis to achieve certain defined impacts. This causes a timing problem, since the water conservation actions during one period of time (here, July through October 2009, the highest water usage season) have an economic impact during that period, but also during a later corrective period (here, March through June 2010, a moderate water usage season). Thus, the full economic cost of water conservation was not accounted for during the period that the incentives were in effect, and the incentives were distorted accordingly. To improve this program, in the short term the water company and regulator can use past performance to refine future predictions. In the long term, hopefully the water industry can develop and implement smart metering programs that allow continuously gathered water usage data to adjust water rates in near-real time to achieve defined conservation impacts.