My water utility just doubled rates to encourage conservation. Can they do that?

by | Nov 29, 2021 | Regulatory Risk Analysis and Compliance

You never miss the water ‘til the well runs dry. According to the Texas Water Development Board, existing water supplies are not enough to meet the state’s future demand for water during times of drought. Along with other water management strategies, a water utility might encourage conservation by using a tiered-rate structure where prices increase by usage and/or by implementing a water conservation surcharge or penalty. These changes may be subject to PUC review if customers file a protest.

Texas’ population is projected to increase 73% between 2020 and 2070—from 29.7 million to 51.5 million. Water demand is expected to increase by approximately 9% during that same period. According to the 2022 State Water Plan, prepared by the Texas Water Development Board (TWDB), existing water supplies are not enough to meet the future demand for water during times of drought.

Source: 2022 State Water Plan, prepared by the Texas Water Development Board

“Texas does not understand shortages,” Dr. Larry McKinney, director of the Harte Research Institute for Gulf of Mexico Studies, told water journalist Circle of Life. “It’s the Texas mentality. Texas is so big we’ve had a hard time coming to grips that resources are finite. We really never had to deal with that. Frankly, we’re reaching that point.”

There’s no question we need to use less water and maximize existing supply—or find new sources of water. TWDB says that, if water management strategies are not implemented, approximately 25% of Texas’ population in 2070 would have less than half the municipal water supplies they need during a drought of record. “Water management strategies” include reduction in water use through conservation or additional water supply from new reservoirs, groundwater wells, water reuse, and seawater and groundwater desalination plants.

The 2022 State Water Plan recommends 5,800 water management strategies. This blog discusses two ways that a water utility can, under the Texas Water Code and PUC rules, encourage conservation—through rate increases and water conservation surcharges/penalties.

One way that water utilities can encourage conservation is simply to raise rates. The Texas Living Waters Project recommends that utilities implement a strong tiered-rate structure with affordable prices for those who use water efficiently and significantly higher rates for customers who use excessive amounts of water, using the additional revenue generated for water conservation programs.

A 2014 study by the Texas Living Waters Project found that higher water prices are associated with lower average residential water use for utilities that:

The Public Utility Commission (PUC) of Texas regulates the state’s water utilities. The PUC generally has no original jurisdiction over a water utility’s rates but will review a rate increase by certain utilities if a required number of customers (generally 10%) file a protest with the commission. Tex. Water Code § 13.043.

In addition to raising rates, a water utility may consider implementing a “water conservation surcharge” to promote conservation on a continuing basis or during drought conditions only.

PUC rules (16 Tex. Admin. Code § 24.43) provide that a “utility” may impose a “a water conservation surcharge using an inclining block rate or other conservation rate structure” upon receiving authorization from the PUC. A “utility” is defined as “Any person, corporation, cooperative corporation, affected county, or any combination of those persons or entities, other than a municipal corporation, water supply or sewer service corporation, or a political subdivision of the state[.]”

A water supply corporation (WSC) is excluded from the definition of “utility,” so cannot implement a water conservation surcharge under 16 Tex. Admin. Code § 24.43. Instead, Chapter 67 of the Texas Water Code (governing WSCs) allows a WSC to assess a “penalty” to encourage conservation.

Tex. Water Code § 67.011(a)(5) provides that, if a WSC is located in a county with a population of less than 3.3M, the WSC may “establish and enforce reasonable customer water conservation practices and prohibit excessive or wasteful uses of potable water.” Specifically, a WSC “may enforce customer water conservation practices . . . by assessing reasonable penalties as provided in the corporation’s tariff.”

A WSC must file its tariff with the PUC showing all rates that are subject to the appellate jurisdiction of the commission and that are in effect for any utility service, product, or commodity offered.[1] The filing of a tariff is for informational purposes only, and the PUC generally has no original jurisdiction over a WSC’s rates—a WSC doesn’t need PUC’s approval to implement a water conservation penalty.[2]

However, a WSC’s water conservation penalty is subject to PUC review if appealed—and it takes just one customer to trigger PUC review, not 10%. The PUC will uphold a WSC’s water conservation penalty if (1) the penalty is clearly stated in the tariff, (2) the penalty is reasonable and does not exceed six times the minimum monthly bill in the WSC’s current tariff, and (3) the WSC has deposited the penalty in a separate account dedicated to enhancing the water supply for the benefit of all of its customers.

Because of the possibility of appeal, a water utility needs to be able to justify increases to its rate structure and any surcharge or penalty. For example, a utility may increase rates based on the cost of having to drill a new well or take other action to meet demand.

Ultimately, for conservation pricing to be effective, customers must be educated on the type of rate structure that the utility uses and be provided monthly feedback through the water bill on their monthly water use. Public involvement in the development and implementation of conservation rates can help assure that the goals of the conservation pricing initiatives will be met and accepted by customers.

[1] Tex. Water Code § 13.136(c); 16 Tex. Admin. Code § 24.21(j).

[2] See Tex. Water Code §§ 13.041; 13.002(23) (definition of “water and sewer utility”).

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