HomeMy WebLinkAbout1977-07-19; City Council; 5146; Water Pricing: inverted rate structure£3CITY OF CARLSBAD ~ ^
><-— / jj / Initial:
AGENDA BILL NO. «3 / "7 & _ Dept. Hd.
DATE: J^ 19' 1977
DEPARTMENT: CITY MANAGER
Subject: WAJER RRICING; INV£RTED RATE STRUCTURE
Statement of the Matter
Council woman Casler indicated that she desired to discuss inverted rates for water
pricing based upon information provided in a memorandum by the Director of Utilities
& Maintenance to the City Manager on June 27, 1977 (Exhibit A). Also provided is an
extract of a chapter from "Community Water Management for the Drought and Beyond">
an OES publication which discusses types of water rates used in California.
EXHIBITS
A. Memorandum to City Manager from Director of Utilities & Maintenance of
June 27, 1977.
B. Extract Article - Rate Structures for Water Management.
RECOMMENDATION
Discussion item only - staff is not prepared to provide recommendation at this
time. Should Council desire additional information or an analysis of a change
in rate structure in the water enterprise, refer back to staff for a report.
Council action
7-20-77 The Council requested this matter be returned to the Council
for consideration at a later date.
8-16-77 Staff was requested to study the inverted rate structure and
bring back a report to the City Council for consideration.
;, ,., 1Q77 --• • 77-120June 27, 1977
MEMORANDUM
TO: City Manager
FROM: Director of Utilities & Maintenance
SUBJECT: Council Questions Relating to Agricultural
Water Service & Inverted Rate Structures.
Council, during discussion of water rates at the meeting of June 21,
requested information concerning the administration of agricultural
water service and inverted rate structures.
1. Agricultural Water - customers make application through
the Finance office for agricultural service. It is
required that an acre or more be under cultivation to
qualify for agricultural service - this is verified
from the assessor book on the parcel and by site inspection
when the meter is installed. It is further verified each
time the meter is read that there is a crop in production.
Should the meter be used for both domestic and agricultural
use, a deduction of .06 acre feet or 26+ units is considered
domestic use and deducted from the agricultural charge and
charged at the domestic rate. It is preferable that a
separate domestic meter be installed, however, this sometimes
is not feasible or it is considered cheaper by the customer
to pay the 26+ units as domestic water and avoid the monthly
domestic meter charge. We have about 90 agricultural customers
which over the past year accounted for '9.8% of our annual
consumption.
2. Inverted Rate Structure - Historically, rate structures have
been developed that reduced the per unit charge as the con-
sumption increased - this was on the basis that the cost of
providing the service decreased as consumption increased since
it costs no more to read a small meter than a large meter, only
one bill is required, maintenance and repair of a small line
is only marginally cheaper than that of a large line, etc.
This rate structure can also be described as encouraging con-
sumption and encourages "waste". An inverted rate structure,
which charges a higher unit cost for water used in excess of a
certain amount counters the "wasteful" argument since it obviously
encourages less wasteful uses. An inverted rate structure is
in vogue for those areas which are suffering water shortages and
appear to be effective in reducing consumption - although there
are arguments that the structure is punitive rather than "Fair
and Equitable" which has been the basis for rate structures in
the past. An example of an inverted rate structure for domestic
EXHIBIT "A1
D
Water Service (continued)-2-June 27, 1977
use which has been in use since April by the Belmont County
Water District, a primarily residential area south of San
Francisco, is as follows:
48<£/unit
91<£/unit
$3.00/unit
FIRST 10 UNITS
SECOND 10 UNITS
THIRD 10 UNITS
The first months experience indicated 90% of sales to be in
the lowest rate category, 1% in the second (91<£) and 9% in
the third group - the trend is towards less consumption and
it is expected that by June the sales will be distributed as
The illustrated rate structure presumes all residents require
the same amount of water. Marin County Water District uses a
similar approach, however, the charges are based upon a house
by house census with differing amounts of water allocated to
the lowest range based upon the number of residents, i.e., a
two person family would be authorized less water at the basic
or lowest rate than a six person family. Another means of
establishing the lowest rate would be authorizing a percentage
amount of the previous years consumption, i.e., 90% of June 76
consumption sold at basic rate in June 77 with anything above
that sold at a higher rate. It should also be
a "life line" rate is in fact an inverted rate
although normally established for social needs
can benefit the weekenders or second-home owner
mentioned that
structure,
reasons - it
which is
normally not the target group for life-line rate purposes such
as elderly or low-income groups.
Inverted rate structures, other than in some seasonal tourist
communities of the east coast, are relatively new and have not
yet been challenged to the degree that other structures have,
as being fair and equitable. They appear to have public acceptance
at this time on the basis of encouraging conservation, however
I am not sure that they will be as acceptable in the future,
when the threat of drought has subsided.
ROGER/$. GREER
Director of Utilities & Maintenance
RWG:pag
cc: Public Works Administrator
Extract Article ~" ~
"L«I... .jnity Water Management for the L jiight and Beyond"
FLAT RATE
The basic pricing system is the flat rate, found usually in unmetered
areas, in which each customer is charged the same amount, regardless of the
amount of water used. This pricing system is the most wasteful of water, not
only because customers do not have to pay for higher consumption, but also
because they cannot monitor their usage. This system is also least equitable
of the pricing systems because there is little relationship between amount of
water consumed and the cost of the service.
DECLINING BLOCK RATE :
The most common system in California is the declining block rate structure.
In any block system, there are different rates per unit of water consumed in
a range of quantities, or blocks. These price breaks are usually in three or
four blocks. In a declining block rate structure, the customer is charged
less per unit of water as the quantity of water increases. Conservation is
not encouraged and this system is not equitable because the customers who use
less water are subsidizing the customers who use more.
UNIFORM COMMODITY RATES
Coming into increasing popularity is the uniform commodity rate. More
and more utilities are converting to this type rate, some accomplishing the
conversion slowly by annually eliminating one discount rate from their
declining block structures thus softening the impact of conversion on the
customers who benefit from the discount rates. The uniform commodity rate is
normally applied so that, irrespective of user class or amount of water used
or size of meter service, the same (uniform) commodity rate is paid by all.
The impact of conversion to this system can be softened for large
customers by phasing it in over a period of months or years.
SEASONAL DEMAND RATE
In a seasonal rate, the customer is charged a uniform rate for a base
quantity of water. This quantity is usually based on household water usage
(versus outside irrigation usage) which is determined by the average demand
over the period October to March. Any water usage above this base amount is
charged at a higher rate. This system is one of the most effective in
conserving water since outside residential irrigation is one of the largest
household uses and is most susceptible to change.
This is one of the most equitable pricing systems because there is a
close match between system costs and usage.
PEAK DEMAND COMMODITY RATES
This type of rate structure is relatively new for water utilities and may
be applied with existing metering equipment but does require a more sophisti-
cated bill calculation operation. It is designed to encourage wise use of
water during the time of year the utility is experiencing its peak service
requirements which coincides with the time outside irrigation demands are
highest. The aim of peak demand rates is to concentrate on that component of
79
EXHIBIT "B1
residential use which is most sensitive to price, namely outside lawn and
garden irrigation. The approach taken in establishing this type rate struc-
ture is to determine inside or household demand (can be approximated by
averaging the demand for October, November, December, January, February and
March) for each class of water use. This then is termed the base allotment.
All water use within the base allotment for each irrigation season billing
period is then levied one commodity rate whereas all water use exceeding the
base allotment within the same billing period is charged a higher commodity
rate. During the non-irrigation season usually only the first (lower) rate
is operative. Since most of the use exceeding the base allotment is for
outside uses, the consumer has an economic incentive to avoid wasting irriga-
tion water.
INCREASING BLOCK RATE
In this pricing system, the customer is charged a certain amount for an
initial quantity of water. Each succeeding quantity or "block" of water
costs more per unit. The explicit purpose of this pricing structure is to
discourage excess water usage. However, the price breaks can be set too high
to have this effect. There is only one increasing block rate structure in
California (as of April 15, 1977), although other water agencies are considering
implementing this system. The City of Beverly Hills established an increasing
block rate structure in October, 1974. The system is not an effective conser-
vation tool in this particular case because the price increases are not signifi-
cant in light of the affluence of the residents. The penalties for consuming
more than one's allocation in some rationing programs around the State could be
considered as similar to increasing block rates, although people rarely go over
their limit.
LIFELINE WATER RATES
Lifeline water service is generally the minimum amount of water per
customer for basic living; with that concept goes a rate structure under which
a customer pays a lower rate for uses within the lifeline amount.
For example, the^California Public Utilities Commission (CPUC) policy is
to establish the first 500 cubic feet of water as the monthly lifeline amount,
and to structure rates so that charges for the lifeline amount are small in
relation to the next increment. The 500 cubic foot lifeline amount means about
128 gallons per connection per day.
The same lifeline amount may place different percentages of customers in
the preferential rate block in different areas, depending on climate and
existing water use patterns. A CPUC study of 12 systems under its jurisdiction
showed widely varying percentages of customers within the 500 cubic foot life-
line amount. For example, 31.6% of California American Water Company's
Monterey customers used 500 cubic feet or less per month, while only 9.4% of
the San Gabriel Valley Water Company's 25,110 customers fell within the lifeline
block.
80