Consolidated Water Rates:  Issues and Practices in Single-Tariff Pricing

Consolidated rates or single-tariff pricing is the use of a unified rate structure for multiple
water (or other) utility systems that are owned and operated by a single utility, but that may or may not be contiguous or physically interconnected. The purpose of this report is to provide policymakers and other stakeholders with an overview of consolidated ratemaking and an appreciation of the complex trade-offs involve in its implementation.

This report provides a review of historical, theoretical, and practical issues related to consolidated ratemaking, implementation data, and key decisions by the state public utility commissions. A detailed survey of state public utility commission staff regarding single-tariff pricing is presented. General commission policies are summarized, along with
citations of specific regulatory decisions concerning single-tariff pricing.

How Consolidated Pricing Works
Under consolidated pricing, all customers of the corporate utility pay the same rate for the same service, even though the individual systems providing service may vary in terms of operating characteristics and stand-alone costs. In many respects, consolidated rates are the conceptual opposite of "zonal" or spatially differentiated rates.

Single-tariff pricing is used by many investor-owned water utilities, with the approval of  state regulators, but it also can be implemented by publicly owned utilities. Single-tariff pricing can be an incentive for larger water utilities to acquire small water systems that lack capacity because it makes it possible to spread costs over a larger service population and maintain more stable and affordable rates for customers of some smaller and more expensive systems. Single-tariff pricing can be used by publicly owned or nonprofit water utilities that operate satellite systems, but few examples are readily available.

Unfortunately, the literature on utility ratemaking, which leans heavily toward the conditions and experiences of the energy and telecommunications industries, yields little theoretical insight or empirical evidence on the implications of single-tariff pricing. Much of the understanding of this issue is derived from case-specific regulatory proceedings. However, an analysis of historical and theoretical perspectives suggests that single-tariff
pricing is not necessarily inconsistent with the prevailing principles of ratemaking.

The Tradeoffs
Single-tariff pricing is a provocative issue precisely because of the tradeoffs involved in its application, including possible tradeoffs among different types of efficiency.  Single-tariff  pricing might lessen some kinds of efficiency (such as those related to spatial allocation of costs and price signals to customers), while improving other kinds of efficiency (such as those related to management and innovation). Of particular importance, but hardest to gauge, is whether single-tariff pricing and related restructuring can lead to long-run efficiency improvements in the water industry. Water utilities and policymakers must consider and weigh the evidence and trade-offs prior to implementing or approving single-tariff pricing.

A variety of theoretical and practical arguments in favor and against the use of single-tariff pricing can be made. Single-tariff pricing tends to stabilize rates and revenues, mitigate rate shock, and make rates more affordable for the customers of the smallest and more expensive systems. While achieving certain capacity-development, affordability, and operation efficiency goals, however, single-tariff pricing also might trade a degree of economic efficiency by ignoring spatial differences in costs and diluting price signals.