Presented by Dan V. Jackson, Managing Director, Economists.com LLC - Presented at the TWCA Fall Conference www.twca.org

1. Developing Conservation Water Rates
Without Sacrificing Revenue
A Presentation to the
TWCA Fall 2012 Conference
Dan V. Jackson
Managing Director
Economists.com LLC
5500 Democracy Drive Ste. 130
Plano Texas 75024
(972) 378-6588
(972) 378-6988 fax
djackson@economists.com
www.economists.com
October 25 2012
Page: 1

2. Presentation Format
The Increasing Popularity of
Conservation Rates
Types of Conservation Rates
Inverted Block Rates – Guidelines and
Examples
Tips for Designing Inverted Block Rates
That Will Minimize Usage and Maximize
Revenue
Summary
Page: 2

3. Introduction to Economists.com
Economic and financial consulting
services to private and public sector
Serves utility clients throughout USA and
Pacific Region
Principal offices in Portland Oregon and
Dallas Texas
28 + years experience in water, electric
and telecommunications industries
Page: 3

4. Economists.com Client List
Texas -- 50+Clients Arizona -- 30+ Clients USA
Allen Avondale Bonneville Power Administration
Arlington Casa Grande Nordstrom
Bellmead Chino Valley Alcoa
Celina Cottonwood Norsk Hydro
Dallas Douglas U S West *
DeSoto Florence United Telephone of Ohio *
Donna Flowing Wells Irrigation District United States Department of Justice *
Duncanville Marana Alstom SA
Garland Mesa
Harlingen Payson Portland, Oregon
Hewitt Pine-Strawberry Water Imp. Dist. Lakeland, Florida
Little Elm Prescott Edmond, Oklahoma
Midlothian Prescott Valley Miami, Oklahoma
Oak Point Queen Creek Lawton, Oklahoma
Princeton Show Low Shawnee, Oklahoma
Rio Grande Valley (10 cities) Somerton Forsyth County, Georgia
Robinson Tombstone Hot Springs, Arkansas
Rowlett Water Infrastructure Finance Authority North Little Rock, Arkansas
Royse City Willcox North Chicago, Illinois
Schertz Yuma Ruidoso, New Mexico
Sonora
Venus Pacific Region
Whitehouse * In affiliation with Deloitte and Touche American Samoa Power Authority
CUC Saipan
Palau Public Utilities Corporation
Page: 4 Guam Power Authority

5. Introduction
Facts About Water and Wastewater Rates
Water and Wastewater utility rate increases are a fact of life
in the 21st Century
However, implementing rate increases can be very difficult
for a utility and its management:
Ratepayers likely to vigorously resist any cost increases
Boards and political leaders will fear political implications of rate
increases
Many utilities are looking to conservation rates as a means
of both minimizing usage and maximizing revenue
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6. Comparison of USA Cost Increases
2000 – 2012
75.0%
80.0%
70.0%
60.0%
50.0% 30.5%
40.0%
30.0%
20.0%
10.0%
0.0%
Infla on Rate Water Cost Increases
Source: USA Today survey of 100 municipalities;
US Bureau of Labor Statistics Energy Information Administration
Page: 6

7. Percentage of USA Utilities
with Conservation-Based Rate Structures
60.0%
49.0%
50.0%
40.0%
40.0%
36.0% 36.0%
32.0%
29.0%
30.0%
20.0%
10.0%
0.0%
2000 2002 2004 2006 2008 2010
Page: 7 Source: Raftelis Financial Consulting

8. What Factors are Leading to the Increased
Popularity of Conservation Rates
Three factors are contributing to the
increased popularity of conservation rates
Cost – the need to increase revenues to fund rising
cost of service
Supply – the increasing supply constraints
Demand – the need to manage demand
Page: 8

9. Types of Conservation Rates
Inverted Block
Seasonal
Environmental
Drought Pricing
Rate Surcharges
Page: 9

10. Inverted Block Rates
Concept: charge higher rates for greater volumes of usage
Most popular form of conservation-based rate
Advantages Disadvantages
Encourages conservation Counter to cost of service
principles
Politically acceptable – lowest
rates for lowest volume users Impacts high volume users
disproportionately
May cause less revenue
stability if not properly designed
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11. Inverted Block Rates
Recommended Rate Design Guidelines
Implement block rates for
residential and irrigation only, not
for commercial and industrial
(note: multi-family could go
either way)
Have first tier include average
usage per residential meter per
month
Good rule of thumb – 25-50%
increases for each block,
maximum 3 blocks
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12. Examples of Inverted Block Rates
Little Elm, Texas Schertz, Texas
Monthly Charge $ 17.46 Monthly Charge $ 18.94
2,000 10,000 (gal) 4.02 - 6,000 2.34
10,001 20,000 5.01 6,001 9,000 2.37
20,001 Above 6.27 9,001 12,000 2.58
12,001 15,000 2.78
15,001 18,000 2.94
Tucson, Arizona 18,001 30,000 3.70
Monthly Charge $ 8.27 30,001 45,000 4.21
45,001 60,000 4.48
- 10 (ccf) 1.26 60,001 75,000 4.64
11 15 2.45 75,001 Above 4.74
16 30 6.45
31 Above 10.45
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13. Revenue Impact of
Implementing Inverted Block Rates
To the extent that IB rates reduce usage, this will result in a
loss of revenue to the Utility
However, a properly designed IB rate will offset these losses
by increasing rates per 1,000 gallons to higher usage levels
The key to designing effective IB rates is to properly analyze
and incorporate two critical components specific to each
utility:
Individual usage patterns
Utility’s elasticity of demand
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14. Usage Pattern Analysis
To avoid lost revenue, IB rates must take into account how
ratepayers use water
Rate and forecast models must accurately predict how much
water will be used in each rate block
These patterns remain fairly stable, but sometimes can be
influenced by elasticity factors (to be discussed further later)
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15. Sample Usage Pattern Analysis -- 2011
City of Allen, Texas
50,001-75,000, 75,001 & Above,
1.50% 0.57%
25,001-50,000,
11.03% 0-1,500, 13.09%
15,001-25,000,
17.60%
1,500-15,000,
73.31%
Page: 15 NOTE: For residential customer class

16. Price Elasticity
Definition – measurement of the sensitivity of water use relative
to changes in the price of water, after controlling for the
influence of other factors
e=
change in usage
original usage level
change in price
original price level
Used to determine how much forecast usage and rates should
be adjusted to ensure that targeted revenue levels are met
Page: 16

17. Price Elasticity
General Considerations
In the past, water usage was generally considered to be
relatively inelastic; rate increases did not have significant
impact on usage
Many factors in recent years have contributed to a growing
sense that ratepayers are more sensitive to increases
The higher the elasticity coefficient, the greater the general
sensitivity of a utility’s ratepayers to rate increases
Measurement of elasticity has to account for other demand
parameters, such as temperature, rainfall, household income
Page: 17

18. Price Elasticity
Historical Perspective
According to AWWA, more than 100 studies of the effects of
price on water demand have been conducted in last three
decades
General conclusions from these studies:
Price elasticity is greater at higher rate levels
Most likely residential elasticity is -0.10 to -0.30, meaning that a 10.0%
increase in rates will lead to a 1.0% – 3.0% reduction in usage
Commercial/industrial elasticity typically higher, up to -0.80 (10.0% rate
increase = 8.0% reduction)
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19. Price Elasticity Studies
Other General Conclusions
Higher fixed monthly charges reduce elasticity of demand
Usage sensitivity and price elasticity in Midwest tends to be
lower than in Southwest
Demand studies for one utility are not necessarily translatable to
other utilities
It is common for incorporation of new rate structures to trigger a
substantial one-time usage response
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20. How to Measure Price Elasticity?
If you have existing conservation rates,
prepare a month by month analysis of the
impact of last rate increase on usage and
revenues
Usage by meter
Adjust for weather/rainfall patterns
If you do not have conservation rates,
suggest you use “rule of thumb” to adjust
before initial rate calculation
Page: 20

21. Example
Town of Little Elm, Texas
Located in Denton County, north Texas
Experienced significant growth, from 3,000 in
2000 to 25,000 today
Implemented 2 tier IB rate in 2002; expanded to
3 tiers in 2006
Result: marked decline in usage while revenues
continue to meet target levels
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22. Town of Little Elm
Residential Monthly Usage by Meter
12,000 2 Tier IB Rate
Established
3 Tier IB Rate
9,861 Established
10,000 9,487
9,093
8,326
8,000
6,841
6,000
4,000
2,000
-
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
Drought Drought Drought
Page: 22

23. Summary
Utilities implementing new IB rates must incorporate the
following key variables into their rate structures and revenue
forecasts:
The specific usage patterns of their residential customers
Calculated or estimated elasticity of demand
Only by understanding and properly factoring in these variables
can utilities minimize the potential for revenue shortfalls from
conservation rates
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