New Water Rates

South Georgia Fire District (SGFD) water rates are changing once again. Starting with the second quarter 2021 billing cycle (2021-Q2), water service is priced as follows:

• $50 base rate
• $0.00651 per gallon usage rate

The $50 base rate is charged regardless of water usage and is akin to a service/hookup fee.

The new rates were voted on and approved by the SGFD board on June 10, 2021. They are simpler than the original 2021 rates and more usage-based than the 2020 rates. I have updated the water bill calculator with these new rates, but you can still access the calculations for the old rates if you like.

Continue reading to learn about why prices were updated again and the reasoning behind the new rates.

Why Update the Rates Again?

New rates were put in place at the beginning of 2021, but they needed to be updated for the 2021-Q2 billing cycle for two reasons:

1. To correct a pricing error in SGFD’s software
2. To account for lower than expected 2021 water usage

Variable-Rate Pricing Error

In my last post regarding SGFD water rates I shared my concerns over the very unusual variable-rate pricing system, and how it would result in customer billings and system revenue forecasts that are sensitive to small changes in water usage.

Variable-rate pricing systems are so unusual, that when the new 2021 water rates were implemented by the New England Municipal Resource Center (NEMRC), they assumed that SGFD wanted the far more common marginal-rates. But the tier prices for marginal- and variable-rate systems are not interchangeable! This error resulted in a nearly $2,200 (11%) SGFD revenue shortfall for the first quarter of 2021 (2021-Q1). This is a big deal for a small water system running on a lean budget and was not discovered until after bills had been sent to customers.

SGFD customers will be happy to know that the board decided against trying to recoup the lost 2021-Q1 revenue from customers. It was their mistake and they are accepting the loss. If you’d like to know how much this error saved you, scroll down to the Underbillings section of this post.

Lower Water Usage

An estimate of annual water usage is needed to set rates, and SGFD assumed that 2021 usage would be similar to 2020 usage. However, 2020 was an unusual year. Customers were at home far more during the pandemic, and many spent their days on water intensive activities like gardening and lawn care. I suspected that water usage would decrease throughout 2021 as pandemic restrictions and individual risk tolerances loosened.

As water rates become more and more dependent on water usage—which is necessary if they are to be fair to customers—it becomes more important to have accurate forecasts of water usage. If actual usage ends up being significantly lower than the forecast, then water system revenue will be short.

Some of the pricing systems under consideration implemented price tiers, where water is priced higher or lower depending on customer usage. So, a robust usage model needs to be able to forecast for individual customers, not just the entire system. I had access to three years of usage data for the 190 customer accounts on the system, and ended up building 190 customer-level forecast models to produce updated forecasts.

Figure 1: Updated Water Usage Forecast

When the SGFD board asked me to help out, water usage numbers for 2021-Q1 had just been collected. Median household water usage was down 2% year-over-year—which isn’t a a lot, but it was evidence that water usage was beginning to drop.

Water usage numbers for 2021-Q2 are now available and it indeed looks as though water usage is continuing to decrease. The updated forecasts are closer to the actual usage than the original forecasts, which overestimated actual usage by over 200,000 gallons. Left uncorrected, this would have led to another $1,300 revenue shortfall.

Table 1: 2021-Q2 Total System Usage Forecast vs. Actual

Determining New Water Rates

When the board asked me to work on new water rates for the system, they had a few goals in mind:

1. Raise sufficient revenue to cover the costs of operating the system
2. Encourage water conservation
3. Be fair to customers by having prices based on usage

Raising sufficient revenue goes without saying, but the other goals required a bit more thought and discussion.

Fairness

Up until recently, most of the conversation regarding fairness was focused on low usage customers, but the system needs to be fair for everyone.

Under previous pricing strategies, the presence of a base rate meant that low usage customers were paying more per gallon than other customers. Additionally, tiered prices can be unfair to certain types of high usage customers, even if the goal of price tiers is to encourage conservation. A customer might use a lot of water because they are being wasteful, but it might also be because there are more people living at that address (older parents, children, etc.). A family of two using 40,000 gallons per quarter is considerably more wasteful than a family of 6 using 40,000 gallons per quarter.

High occupancy households have higher water bills because they use more water. But it isn’t fair to them that they also pay more per gallon than other customers simply because they have more people in their home.

Since the water system has no knowledge of the occupancy of each home, the only logical thing to do was to scrap the idea of price tiers and have a single per-gallon cost of water (there is still a base rate, more on this in a bit). This also has the benefit of simplifying prices. In the future, if the system wants to further encourage water conservation, it will do so by increasing the per-gallon cost of water, which will affect customers proportionally to their usage (which is fair).

Figure 2: Per-Gallon Water Costs (Incl. Base Rate)

The per-gallon cost of water is shown in Figure 2 for the new 2021 water rates, the old 2021 rates, and the old 2020 rates. Under all pricing strategies, the more water you use the lower the per-gallon cost. The total cost obviously still increases (see Figure 3). Notice the jumps in cost for the original 2021 rates—this was one of my concerns with that pricing strategy.

Some good news regarding conservation: System Manager Jeff Vance has repaired several large underground leaks responsible for a lot of the system’s overall usage. These fixes have resulted in a nearly 50% reduction in water pumped out of the ground!

A Lower Base Rate

The new 2021 water rates reduce the base rate to $50, which is lower than the original 2021 base rate ($80) and the old 2020 base rate ($95). Low usage customers will still pay relatively more per gallon than other customers, but not as much as before. Customers who use less than 6,900 gallons per quarter will see their water bill decrease compared to 2020.

So why even have a base rate at all if it isn’t fair to low usage customers?

The reason is simply because our water system is small and the board would like to have some amount of revenue that does not depend on usage. The 2021 water system revenue budget is $87,600 and a $50 base rate covers about 44% of that. My hope is that that the base rate will continue to shrink over time and possibly be eliminated as I continue to help the board understand their data. This is what other—larger—water systems in northern Vermont do.

In the end, most customers will see an increase in their water bill, but this is entirely driven by the water system’s increasing expenses. The revenue budget increased by 17% to $87,600 for 2021, and the average customer bill will increase by a similar percentage. Figure 3 shows the total cost of water for the three pricing strategies discussed aboved.

Figure 3: Total Water Costs

Underbillings

The Variable-Rate Pricing Error mentioned above had the effect of under-charging customers for their water in the 2021-Q1 billing cycle. The amount that customers “saved” on their water bills due to this error depends on which usage tier they were in for the quarter.

The more water customers used the more they were underbilled. Customers who used 5,000 gallons or less were billed correctly. As mentioned above, SGFD will not try to recover this money from customers.