Not your typical rate structure change: Heterogeneous water demand responses

Abstract

This paper investigates behavioral responses to a complicated and peculiar change in a municipality's water rate structure. In 2006, the City of Norman, Oklahoma Water Utility added a four-dollar fixed fee, reduced the number of block-rate tiers, and changed the rate structure from one that decreased and then increased across higher consumption block groups, to a strictly increasing rate structure. The changes in the volumetric rates were not uniform across the block rates. Customers at ultra-low volumes of consumption faced a one-penny reduction in their volumetric rate but experienced a large increase in total and average cost of water due to the addition of the relatively large fixed fee. In contrast, higher-volume users faced a less severe increase in the total and average charge per gallon consumed. To address the co-determination of average water charge and consumption choice, we estimate separate regressions for households grouped by pre-price change demand and the block group of last gallon consumed. Using detailed, monthly panel data for 23,408 residential water customers from 2002 to 2010 and a variety of model specifications, our results highlight heterogeneous responses across consumption groups. Ultra-low users responded to the price-regime change by increasing consumption whereas higher-volume users reduced consumption. Behavioral responses were found to be greater in the longer-run than shorter-run as expected.