Recommendations: The Rhode Island Water Rate

The current rate setting methodology is not conducive to encouraging conservation, especially the drastic conservation that might be needed during times of stress. These recommendations attempt to rectify this conclusion.

Legislation

  • Establish a statewide goal for conversion to an inclining block rate structure with inclining steps sufficient to encourage water conservation.

    Chapter 46-15.3-21(c) of the Rhode Island General Laws states:

    "Notwithstanding the provisions of §§ 39-2-2 and 39-2-5, all rates and charges made by water suppliers which decline as quantity used increased are hereby declared to be no longer conducive to sound water supply system management designed to properly conserve, develop, utilize, and protect this finite natural resource. The public utilities commission may order rates for suppliers of water which either do not vary with quantities used or when there is evidence of increasing costs to either the utility or to society, rates which increase as the quantity used increases. If the commission finds that changing rates to comply with this section will cause a hardship to a class of customers, the commission may order that rates for that class of customers be changed to comply with this section over a period of time not to exceed five (5) years."

    Here legislation states that uniform and inclining block rates may be ordered by the PUC. The results presented in this thesis reveal that in some cases, inclining block rates seem to have a positive impact on consumption, yet in other instances, some systems with uniform or even declining block rates have lower water use per service connection or per capita. Where this is true, the systems have fairly high rates. Therefore, the secret to an effective rate system must be a combination of rates and structure. For example, an inclining rate is useless if the steps for consumption are very small. Likewise, a uniform rate might lead to conservation if the rate is set very high. Yet neither of these two scenarios are as efficient as a proper inclining block rate structure has the potential to be.

    An inclining rate system should be used to reduce excessive water use. Therefore, in order to be most effective, the steps or thresholds should be set just below the average annual consumption levels for each target category. For example, if the average annual household water use is 55,000 gallons of water per year, the first step should be set just below this amount. This encourages conservation within the average household. The same should be done the rest of the way up the ladder with the assumption that each category of user has a potential to reduce water consumption.

    Associated with these thresholds, the rates need to be set sufficiently high enough to reduce consumption. If the first threshold is 50,000 gallons of water, then those that go over 50,000 gallons of water will need to see the impact of taking the step over that threshold. If they don't, then the existence of the inclining rate is meaningless. As water use increases on the way up the staircase, so should the rates. People should be able to use water however they want to, but they should also have to pay for it. An inclining block rate structure is the most efficient way to make sure that they do.

  • Mandate that the emergency rates be exempt from local approval and only require approval from the state.

One pitfall to conservation is that it often does not allow for full cost recovery for water suppliers. Furthermore, when a rate change needs to be made, the change needs to be approved by either the PUC, a town council, water supply board or the voters of a water supply district. This can take time. Time is something that is often not available in times of emergency. RIGL Chapter 46-15.3-21(b)(3) calls for the consideration of drought and seasonal surcharges, but there is no suggestion of a drought or seasonal rate. Amendments to this section of the RIGL should call for a special drought rate setting method to be approved in advance for each water system by the PUC and the Water Resources Board. These rates should be set to encourage conservation in times when conservation may be needed the most. Keeping this in mind, the rates should be inclining and set sufficiently high enough so that water use is reduced.

Regulation

  • Water Suppliers should include specific information regarding all rates and fees charged to all categories of users.

    Section 8.09(b)(2) of the Rules and Procedures for Water Supply System Management states the "existing rate structures shall be described" in each water suppliers' WSSMP (4). Yet, specific rate information is not required. In order to make a correlation between water use and rates, this information is needed. Therefore, the regulations should be amended to read:

    • "Existing rate structures shall be described for each category of user. In the case of systems operating under uniform block rates, the rate for each category shall be provided in a table. For systems operating with an inclining block rate structure, a spreadsheet shall be provided that includes the water use thresholds for each category of user and the rates associated with the thresholds."

  • Set seasonal rates according to individual water supply system drought triggers.

The Drought Management Plan defines four levels of drought based on precipitation, reservoir and groundwater levels, and streamflow. These four levels are linked to recommended actions that should take place, such as water bans or pressure reductions. These levels should also be linked to percent capacity reductions, percent reduction goals and rates. There are two ways this can be done.

  1. Currently, rates in Rhode Island are set prospectively. Yet, when rates are set prospectively and water suppliers encourage their consumers to reduce consumption, they risk losing revenue and not covering their operating costs. With this first method, rates could continue to be set this way. Water suppliers could calculate in advance what percent reduction should be associated with each trigger level of drought. (For example, a 70% capacity of supply might trigger a 10% water use reduction goal.) At the point that the percent capacity level of the supply is detected, a predetermined corresponding rate would be triggered to encourage water users to reduce consumption the desired amount, while enabling the water supplier to continue to cover its costs.
  2. A second method of rate setting could be done retroactively to insure that costs are covered. With this method, the water supplier informs consumers that the supply has been reduced by a certain percent of capacity (70%, according to the previous example) and that the state requires the water supplier to associate that level of capacity with a certain reduction goal (10%). At the point of notification, the water supplier does not know what the rate will be. However, customers are notified that if they reduce their water use by the specified amount (10%) their overall bill should not increase. At the end of the drought period, water use will be calculated and a rate determined.

It is important to note that in these examples rates will increase for everyone. In both cases, if the consumer reduces his water use by the target amount, his overall bill will be the same. If he does not, his bill amount will increase. Furthermore, in some systems, these rates may be triggered annually, therefore, these rates would act like "seasonal" rates rather than "drought" rates. Consequently, if demand is truly inelastic of price (2), then these rate setting methods will not work if the water supplier does not couple them with water use restrictions.

The seasonal rates shall also be included in the WSSMPs. The requirement for this should be added to the Financial Management Section of the Rules and Procedures for Water Supply System Management. Text in Section 8.09(b)(4) should be inserted to read:

"Seasonal/drought rates shall be described for each category of user. This information shall be provided in a spreadsheet format and shall include the percent capacity levels and the associated percent reduction goals that trigger each rate. All rates shall also be provided."

Water Resources Board

  • The Water Resources Board should work closely with water suppliers to insure that rates under normal and drought conditions are "conducive to sound water supply management (4)."

    The term "conducive to sound water supply management" can have different meanings in different situations. Obviously in times of drought, water conservation is a bigger necessity than under normal conditions. The rate structure for water consumers should reflect this. The WRB is in the position to approve or disprove WSSMPs based on whether or not their rates reveal sound water supply management. The Water Resources Board should reinforce the legislation and regulations and make it clear to water suppliers that conservation is not an option under drought conditions and that rate tools should be developed that permit both full cost recovery and significant water conservation under drought conditions.