An Implicit Model for Water Rate Setting Within Municipal Utilities

Abstract

It is estimated that at least $1 trillion will be required over the next 25 years to maintain the current level of water service in the United States. A pay‐as‐you‐go approach is expected to allow water utilities to pay for these expenses using water price increases. These price increases encourage water conservation, decreasing overall water demand. Financial forecasts that fail to consider this effect will therefore overstate anticipated system revenues and potentially lead to realized shortfalls. Therefore, understanding changes in water demand is crucial for accurate price forecasting. This article combines simple relationships that are relevant to water supply services to develop an implicit model of time‐dependent system revenues, water prices, and water demand. The implicit model provides a theoretical basis for water rate–setting to generate financially sustainable water utility revenues. Results suggest that a comprehensive physical infrastructure model is critical for precision and accuracy in model forecasts.