Water and Sewer Pricing

Pricing Water From a Utility Perspective

Water is usually a scarce commodity but not in all situations, such as in Virginia, which is characterized by plentiful ground water supply. However, the relevant agencies in this state incur costs relating to drilling and pumping water from the ground, procurement and infrastructure costs. Because of this, pricing of water has become an important factor in water management. For utility companies in Virginia and other states, selling the water at the appropriate price is increasingly important since low costs do not cover operational costs, whereas high costs contribute to inadequate sales. The determination of the most suitable pricing model or scheme requires critical evaluation from a utility perspective and whether this commodity is affected by the same principles of economics as other goods and services or utilities.

Price Sensitivity of Water

From a utility perspective, water has seemingly weak price sensitivity as compared to other commodities because it has traditionally been managed by non-price demand management techniques. The current trend for water utilities has been classified as one of decreased sales and ever-increasing costs.

The relatively weak price sensitivity of water is attributable to the widely used non-price-based policies like education campaigns, technological initiatives, or rationing. According to the findings of several studies on water conservation, price responsiveness or sensitivity to water is low with regards to residential water use on an annual basis (Gaudin, 2004). The other reason for the weak price sensitivity of water unlike other commodities or utilities is the intrinsic nature of water as a necessity. As a result, consumers are increasingly unwilling to respond to price changes for the use of this utility.

Economic Principles in Water and Sewer Pricing

In light of the relatively weak price sensitivity and responsiveness of water, pricing water and sewer does not respond to similar principles of economics like other goods and services. In most cases, the management of goods and services entails the use of price-based instruments, which results in high price elasticity. Water does not respond to similar principles of economics because its management and conservation largely entails the use of non-price instruments. Secondly, when demand increases in other goods and services, there is always a price increase to capitalize on the increased demand. Water utilities have generated declining sales and increasing costs for the water industry, which implies that it does not respond to similar principles of economics like other commodities (Water Research Foundation, 2014).

Experts' Opinions on Water and Sewer Pricing

Water conservation and management have generated considerable attention among the various stakeholders in the water industry Some experts argue that the widespread low price elasticity in residential water and sewer services implies that the use of price signals or price-based instruments as conservation tools is limited with regards to desirability and effectiveness (Gaudin, 2007, p.383). However, others have argued that price-based initiatives to water and sewer management are more cost-effective than non-price-based techniques. Moreover, others have stated that the weak price sensitivity and responsiveness to water and sewer pricing by customers is partly attributable to lack of adequate price information on water bills.

Upward Graded Scale v. Pay per Unit

The current weak price sensitivity and responsiveness to water and sewer pricing by customers demonstrates that charging per unit fee is most suitable for consumers of more water. The use of an upward graded scale to charge customers who use more water would end up penalizing them for their use and contribute to decreased demand for the services. Moreover, large price increases have relatively low impact on water use or consumption since price elasticity becomes even marginal at lower quantities of water consumption per capita (Gaudin, Griffin & Sickles, 2001).

Even though an upward graded scale for consumers of more water would be ineffective for a utility company, higher consumers of water are good for a utility company. Private utility companies thrive from increased sales of their products and services, which require them to have more customers. Since the higher consumers of water are part of the company's customer base, they play a crucial role in its productivity and are therefore good for the company. The utility company should not penalize these consumers by implementing upward graded scale for their consumption since such a measure could force consumers to search for another avenue for these services, significantly affecting the company's future productivity.(Alternative septic systems may be efficacious methods for treating sewage but likely the reason for its rapid adoption is that it's a more attractive option for the builder.) However, the company should consider other ways of pricing water and sewer such as providing more pricing information on water and sewer bills rather than penalizing these customers using upward graded scale pricing.

Suitable Pricing Model or Scheme

As previously mentioned, this utility company needs to identify a suitable pricing model or scheme for water and sewer According to Howe & Linaweaver (1967), a suitable pricing model or scheme is one where the prices of the utility are related to costs of the system in order for the utility to be financially viable and economically efficient. In light of these factors, the most suitable pricing scheme for this utility is where the prices or rates are derived from dividing the costs of the system or operation by the volume of water provided to the customers.

The suitability of this pricing model emanates from the fact that price has minimal significant impact on quantities of water demanded by customers. The strategy should be combined by including price information on the water bills.

Since water has relatively weak price sensitivity and responsiveness, it does not respond to the same principles of economics like other goods and services. The most appropriate pricing model or scheme for this utility requires critical evaluation of price sensitivity and elasticity and underlying economic principles from a utility perspective. Considerable financial investment is made by utility companies into these water and sewage assets. Underutilizing these assets deprives the company from potential revenue and maximizing return-on-investment, ROI. However, an overutilization can prove harmful in other ways. Given these factors, the most suitable pricing scheme or model for this company is one in which prices are determined by dividing operational or system costs by volume of water provided to customers.

Utilizing Existing Assets