Price Elasticity’s Role in Municipal Rate Setting

Decades of water conservation campaigns, advances in water efficiency technologies, and adoption of conservation-oriented rate structures have led to an uncomfortable new normal where water service providers can’t sell enough water to offset the costs of providing service. This is referred to as a “conservation conundrum”, or the need to remain solvent while advocating for conservation and considering customer equity. The intuitive strategy for addressing shortfalls in water sales revenue is to raise the prices, or rates, for the water sold. However, if customers are sensitive to price, then this approach may consistently come up short. Quantifying the level of price sensitivity is therefore an important step in beginning to address the issue.