What Drives Water Utility Selection of Pricing Methods? Evidence from California

Water pricing is a demand management strategy to address the looming challenge of greater water scarcity in arid regions. Much of the literature on residential water rates focuses on evaluating the impact of pricing on household conservation. A separate, but rarely addressed question is what motivates a water utility to select a particular rate structure and the timing of doing so. We assess utilities’ decisions to adopt pro-conservation rate structures, such as increasing block rates and water budget rates. We develop a conceptual model of utility decision-making regarding the transition to pro-conservation rates and apply it to California. We examine the relationship between rate adoption and characteristics of utilities and customers using logistic regression and a balanced panel dataset of 323 California water systems from 2006-2015. We find a notable shift towards pro-conservation rates, which 71% of California utilities had by 2015, compared to 44% in 2006. Capacity factors associated with adoption include size of service population and customer income level, while motivating factors include peer adoption, greater customer engagement, and special district governance. Overall, this study provides insight into barriers to pro-conservation pricing, which can inform policies to enable transitions and advance conservation goals.