UTILITIES HAVE LITTLE INCENTIVE TO PROMOTE WATER CONSERVATION

COLUMBUS, Ohio -- Most water utilities have very little incentive to promote conservation among their customers, according to a new report.

"Water conservation can be very beneficial to society, but not necessarily to water utilities, especially in the short term," said Janice Beecher, a senior research specialist at the National Regulatory Research Institute at Ohio State University.

"Utilities are concerned, sometimes rightfully so, about threatening their revenues. Reducing water usage could lead to less short-term revenue."

Beecher is co-author of the recent NRRI report Revenue Effects of Water Conservation and Conservation Pricing: Issues and Practices.

According to the report, water is marketed like most other products -- the more water that utilities sell, the more money they make. Even though many water utilities are government-owned and operated, they look to increase revenue to pay for their ever-increasing costs. And for privately owned water systems, economic regulation by states reinforces the lack of incentive to

promote conservation.

But Beecher said state regulatory commissions can adopt policies that reward regulated water utilities for promoting conservation, as some agencies have done for energy utilities. That is beginning to happen, but progress is slow, according to a survey included in the NRRI report.

The NRRI surveyed 45 state public utility commissions and found that fewer than half (18) had general water conservation policies. Only four states provided economic incentives to utilities for promoting water conservation.

That's not surprising, Beecher said, because cutting demand can create problems for utilities, especially in the short term. The biggest problem of promoting water conservation is the "potential instability of revenues" for utilities, according to state commission staff participating in the survey.

"Utilities are uncomfortable trying to reduce demand for water because they have less control over the results of demand management than they do over regulating the supply of water. When utilities introduce conservation policies they have to depend on thousands of customers to behave in certain ways," Beecher said.

"Regulatory commissions and utilities have to approach conservation policies experimentally and be prepared to make adjustments as they go along. Better utility planning is also essential."

There are several types of policies that state commissions can adopt to promote conservation and protect utility revenues without burdening water consumers, Beecher said. One method used with electric utilities in some states is revenue caps. This would allow utilities to collect a certain level of revenue even if demand for water falls as a result of conservation.

Conservation-oriented pricing is getting increased attention as a means of managing demand. Price structures can be changed so that customers pay more for each unit of water after their consumption reaches a certain level. Prices can also be increased during the summer, when water demand increases for lawn watering and other activities.

Of course, utilities can also promote the use of water-saving toilets, faucets and showers, Beecher said.

Water conservation policies can't be adopted uniformly all around the country and with all utility companies. Utilities that serve areas with stable or declining populations may face severe financial problems if customers cut water use too much, she said.

But conservation policies can be especially beneficial in areas with growing populations and chronic water shortages. "Cutting demand can be more profitable and less risky for utilities than trying to build new facilities to provide additional water," Beecher noted.

She predicts that water conservation policies will become more common among state regulatory commissions and other policymaking bodies.

"We should be managing our demand for water more effectively and using water more wisely," Beecher said. "We need to address the short-term problems that conservation policies will cause utilities, but look for the long-term advantages of efficiency."

Beecher wrote the report with Youssef Hegazy, a senior research associate, and John Stanford, a graduate research associate at NRRI; and Patrick Mann, professor of economics at West Virginia University.

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Contact: Janice Beecher, (614) 292-1834

Written by Jeff Grabmeier, (614) 292-8457

EDITOR'S NOTE: Copies of the report are available at no charge to members of the media only. For a copy of Revenue Effects of Water Conservation and Conservation Pricing: Issues and Practices, please call (614) 292-9404.