Connecting The Drops: Pricing Water

How to put a price on the priceless… That’s something that water utilities grapple with as they figure out what to charge customers for this precious resource. As part of Connecting the Drops, our state-wide series on water issues, Maeve Conran takes a look at how water is priced and whether we’re paying enough.

When you turn on the tap to fill a glass of water, or turn on your garden hose to irrigate a thirsty lawn, how often do you think about how much it all costs? Water is different from other commodities in so far as we can’t live without it and therefore it’s priceless…but there is a cost.

“The value of water is frequently considered to far exceed its cost in part that’s because water is important to life, to our economy, to our way of being.”

David La France, the Chief Executive Officer at the American Water Works Association, which writes the authoritative manual on how to set water prices says that’s the conundrum facing water providers.

“So we want our utilities to be run like a business to be efficient but to price the services so the public can afford them.  As a result of that what you see are prices that are based upon the level of the service and  the cost of providing the service as opposed to what the market can demand from it.”

In other words, you’re not paying for the water itself so much as you’re paying for the service to get it to you – the pipes, the treatment plant… maintenance of that entire system. But more and more utilities are re examining their pricing strategies with a view to encouraging people to conserve.

“There has been a lot of research on the price of water and what that means for conservation. And all of that research points to one thing…the price can influence how much water people use and it can promote conservation of water. So as utilities design their plans for conservation, they usually include price as one of the tactics that they use.

Melissa Elliot with Denver Water says the state’s largest water provider recently revamped its water rates with a view to making customers more aware of the cost of the water itself.

They now have a 3 tier system, based on the philosophy that the more you use, the more you pay per gallon.

“The first tier that we have now is actually based on your indoor water usage and we get that by using a winter quarter consumption. That is the amount of water customers are using January through March, when they’re typically not irrigating outside, so that’s their essential use and it’s priced at the very lowest rate.”

The second tier is for 15,000 gallons on top of your indoor usage…that’s calculated for irrigation on an average garden. The third tier is for what is considered excessive use…and that’s when you pay the highest rate. It’s a highly individualized way of tracking water use. The customer themselves sets the base rate by determining that basic essential indoor water use. Using anything above that can mean a pretty significant uptick in your water bill. Something Denver home owner Marsha Holmes has noticed.

“Once you get into the next tier of pricing it goes up pretty rapidly.”

Holmes who lives in the Denver’s Park Hill neighborhood is paying more for water this year under the new rate structure. Looking at her garden, you can see why. She grows 4 or different types of peppers as well as tomatoes, flowers, squash and a variety of greens. Last Summer her average water bill in the hottest months of July and August she paid around $150 up to $185 .  Compare that to about $35 per month in winter water use – that’s the essential indoor use, the first tier. Holmes says there has been a slight increase in this Summer’s bill, but there has also been a decrease in the number of people living in the house from 4 to 2.

“The price is staying the same but we’re using less water.”

Holmes says it’s worth it to pay more for that water that irrigates her garden.

“I guess it’s a luxury to have a vegetable garden and to have a flower garden, but so far it’s worth it.”

This neighborhood is dotted with manicured green lawns, and those too may become a luxury as  water used to irrigate them  rises far above what’s deemed essential by Denver Water.  And it’s that economic component that could ultimately lead to less water use.

 Studies have shown that for every 10% increase in the price of water, residential users reduce their consumption by 1-7%. Melissa Elliot says Denver Water surveyed over 25,000 customers as part of this rate change and she says the results show that customers are already conservation minded.

“About 50% of customers said that if their water bill went up they would reduce their water usage, but the interesting part was that more than 80% of our customers said, well if my water bill went down I would not increase my water usage.”

David La France with the AWWA says it’s likely water bills will continue to rise in the west as utilities grapple with ageing infrastructure in need of upgrade and a diminishing resource. But he says, that’s not necessarily a bad thing.

“As the price goes up in all likelihood demand will continue to come down because of the basic laws of economics. So we’ll start to see some continued reduction in demand for water, which is good, because we want to make sure we don’t waste it, but water bills will continue to increase.”

Denver Water says it’s hard to say exactly how much water is being conserved as a result of the new pricing because they already have a robust conservation program. But water use overall in the city has been down while the population increases.  And as water managers around the western US seek to stretch already tight water supplies, pricing water to incentivize conservation is a strategy we’ll see more of.

Charles Howe, Professor Emeritus in the Department of Economics, Institute of Behavioral Science at the University of Colorado-Boulder has written several articles and books on pricing water and how it might influence consumer behavior.

“We don’t charge enough for our urban water really, because a typical water utility being publicly owned, simply doesn’t not charge the customer for the value of the raw water that they’re treating and then providing to the customer.”

He recently co-authored an (unpublished) report on water utilities not listing the value of the water rights as part of the assets on which they can earn a return. Some utilities like Boulder and Denver own senior water rights worth in the millions of dollars.

“Most urban utilities do have a portfolio of water rights. These water rights typically have very high value, and the value of these water rights greatly exceeds the value of the physical plants and the pipelines and stuff owned by most utilities and yet these water rights are generally not recognized in setting prices for water for urban users.  If an urban water utility is privately owned and falls under the jurisdiction of the PUC, presumably a privately owned for profit water utility is allowed to earn a certain percentage return on the value of their assets and yet these utilities do not list the value of the water rights as part of the assets on which they can earn a return.”

Howe says the value of the water rights is not passed along in terms of cost to the consumer. Rather, water bills reflect the cost of service.

“The prices instead reflect the cost of gathering water, treating it and distributing it but not the value of the raw water itself.”

Howe says as urban areas in Colorado continue to grow, there is little debate on where the water they need will come from.

“There is not much question about where the water is going to come from for our rapid expansion in urban areas…it’s going to come from agriculture, prices of agricultural water are going higher and higher by the month, the shares in the Northern Colorado Water Conservancy district which is an alternative supply for Front Range communities are going up and up. The farmer’s wealth is in his or her water.”

Economic forces will mean increasing prices for water as it becomes increasingly scarce.

“As the resource becomes increasingly scarce, the prices are going to go up and they should go up to guarantee that water is being allocated to high value uses and not dumped on the ground in excessive irrigation of golf courses or whatever.”

For Connecting the Drops and Rocky Mountain Community Radio, I’m Maeve Conran.

Connecting The Drops is a collaboration between rocky mountain community radio stations and the Colorado Foundation for Water Education, find out more at yourwatercolorado.org. Support for this piece is provided by CoBank.

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