Short-Run Decision Making for Southwestern Water Utilities: an Example of Price Setting Techniques for Revenue Optimization in Tucson, AZ
This study is partially motivated by the expected effects of climate change, specifically further limitations facing water supply enhancement, which suggest that demand management and conservation efforts will play even larger roles for cities in arid regions. The changing face of the economy and housing market may have implications that affect how water is used within a city. Understanding how climatic factors, demographic changes and changes in the price of water is important to help Tucson Water make the most effective demand management strategies for the future. Understanding the determinants of water demand will also be helpful for the utility to project their future revenue stream. This short-run empirical analysis uses consumption data for single family residential (SFR) water users in Tucson, AZ over the period 1985 to 2012. SFR users were chosen because they are the largest user group in the Tucson Water service area, accounting for 80% of all customers and 56% of the total potable water consumed (TW, 2009). In addition to being the largest water consumer group, single family residences have more control over their consumption behavior than multi-family residences and industrial users. The control over consumption behavior primarily comes from SFR homes being more likely to be owner occupied than other types of housing, giving users more control over appliance and landscape choice. Landscape choice can be one of the most influential decisions a consumer can make with respect to long-term water use, it is estimated that in some desert cities, outdoor water uses account for about 70% of household monthly water consumption (Waters, Klawitter, Paul & Hamilton 2014).
In addition to exploring the contributing factors to changes in demand over time, this analysis produces a revenue stabilization tool, which sets prices for water in a way that optimizes revenue, while promoting conservation and economic equality among users within the service area. Before jumping into the demand estimation and price setting, this thesis has several chapters that build on prior empirical analyses. The chapter immediately following this is a review of the water demand estimation literature to date as well as some examples of industry practice for price setting and revenue optimization. Chapter three presents the theoretical mathematical and economic models most appropriate to explain residential water consumer behavior. Chapter four presents a detailed description of the data used in the empirical demand estimation. Finally, Chapters five and six present the results from the empirical demand estimation and set forth models policy implications respectively. Consistent with the results found in the literature, single family residential water users in the Tucson Water service area are relatively unresponsive to price. The price setting and revenue optimization process conducted in this thesis set prices in a way that increases the expected revenue collected from water deliveries to SFR’s by 20% and decreases total aggregated consumption by 5% during the summer months. The changes in consumption and revenue are both a result of relatively small changes in the marginal price of each block in the
four tiered increasing block rate structure implemented by Tucson Water.
Author(s)
Klawitter, Ronald J.Publication Date
2014