A Discussion of Tiered Rate Structures

General thoughts and considerations related to the tiered block rate structures by the Rates & Charges Committee. . .

Definition

The term "tiered" typically refers to a "block" type of rate structure where the unit price of water changes with each of several preset consumption blocks for each billing period.

For example, from 0 to 10 units [generally units are either stated in terms of thousands of gallons (Mg) or hundreds of cubic feet (Ccf)] is one unit price, from 11 to 100 units a different unit price, from 101 to 1,000 units a third unit price, etc.

Measure With an Aim Toward Conservation

Most commonly in such rate structures, there are typically three to five different tiers or rate blocks. Also, the term is most often used in reference to a rate structure where the unit price increases with each higher level, or tier, of consumption. This type of "increasing tier rate" is most often found where the utility desires to send a strong conservation message to its customer base. However, it should be noted that this type of rate structure itself, without a significant accompanying customer information program, will generally not produce the desired conservation, simply because the vast majority of customers do not understand rates and do not have any idea that the more they use, the higher the unit price becomes. Furthermore, the increasing block or tiered rate structure can potentially be "punitive" to large customers, charging them a higher unit rate simply because they are large water users. These customers may, in fact, be very efficient water users, and thus not "deserving" of a higher unit rate. In that regard, it is important to set the tier, or usage block ranges for customer classes, or possibly individual customers in the case of large non-residential customers, relative to their discretionary usage profile. The intent is to set the tiers so as to induce reduced water usage at usage levels where the customer has discretion over usage, not to punish water usage where there is no discretion in usage

On the other hand, a "tiered" or block rate can also be just the opposite -- that is, one in which the unit price decreases with increasing consumption, or with the larger use rate blocks. The decreasing block rates are not a particularly good rate structure to use if conservation is a primary objective of the utility. However, such a rate structure, if you have a single rate structure applicable to all customers within the utility, can approximate recovering the costs of service from each class of customers and is found frequently in those areas of the country with ample water supply and a diverse customer base.

It should also be noted that it is possible to have an increasing block structure that applies to one or more classes to encourage conservation (e.g. residential customers), with a different rate structure applied to other classes where opportunities for conservation are more limited or the increasing block structure is inconsistent with other objectives, including cost of service.

Survey Snapshot

A recent rate survey revealed that of the utilities surveyed for residential customers, 36 percent used declining block rates in 1996, while 30 percent of them used this type of rate structure in 2002. Increasing block rates were used for residential customers by 32 percent of the utilities surveyed in 1996, while 30 percent of them used this type of rate structure in 2002, a somewhat surprising finding considering the relative water scarcity many utilities have experienced in the last several years. The other rate form used, as opposed to increasing or decreasing block rates, was a uniform rate, either for all customers or by user class, which charges the same unit price for all water use, regardless of the amount of consumption.

Geographic Utilization

Inverted or increasing block rate structures are most commonly found in California and the Sun Belt states, where water supplies are generally more limited and conservation is a priority. The decreasing or declining block rate structures are most commonly found in the Midwest and North Central areas of the Country.

AWWA Resources

• AWWA Journal (search for and download these and newer articles from the Journal and Opflow in The Water Library)  

• AWWA Manual M1, Principles of Water Rates, Fees, and Charges, Fifth Ed. Provides total rate structure information to water utility managers and water boards. M1 consolidates information from four previous AWWA rate manuals:

• Forecasting Urban Water Demand, Second Edition (2008). Sophisticated methods for analyzing and projecting urban water requirements, a practical approach to forecasting urban water demand which addresses seasonal and peak usage patterns, the effect of weather on urban water use, treatment plant and water supply system requirements to meet peak usage demands, the impact of rate increases, and much more.
• 2006 Water and Wastewater Rates Survey 
• 2006 Water and Wastewater Rates Survey CD-ROM
• Water Conservation-Oriented Rates: Strategies to Extend Supply, Promote Equity, and Meet Minimum Flow Levels (2005) 
• Thinking Outside the Bill: A Utility Manager's Guide to Assisting Low Income Customers (2005) 
• Avoiding Rate Shock: Making the Case for Water Rates (2004)
• Water Rates, Fees and the Legal Environment (2004)
• Developing Rates for Small Systems (2004)