Factors Driving Water Utility Rate Structure Choice: Evidence from Four Southern U.S. States

Abstract

Water utilities typically set residential water prices using one of three rate structures: increasing block rate (IBR), uniform rate (UR), or decreasing block rate (DBR). Historically, DBR has been the most widely used residential rate structure, but water utilities are increasingly switching to a UR or IBR structure. The literature suggests several possible motivations for rate structure decisions, but provides little empirical evidence to support these suggestions and largely ignores the role of water managers’ attitudes and perceptions in the rate structure decision. The objective of this study is to statistically assess factors that drive rate structure changes, specifically toward UR or IBR, in the southern US. We designed and implemented a survey of water utility managers in Arkansas, Florida, Oklahoma, and Tennessee, including rural to urban water utilities. Survey questions were selected based on water utility manager input and literature review and included rate structure changes, system characteristics, and attitudes and perceptions about factors likely to influence rate structure changes. The rate structure adoption decision is modeled using both multinomial logit and Heckman probit specifications. Our results suggest that different factors drive the adoption of UR and IBR, including fair prices for end-users, qualifying for government grants/loans, revenue concerns, treatment cost increases, and infrastructure investment needs.