The Grass is Always Greener.... Building Concensus on Reclaimed Water Pricing for Jointly Operated Municipal Reclaimed Water Systems
Abstract:Reclaimed water rate design is a specialized area within rate-making because of the economic dynamics associated with this particular product. The key factor in differentiating reclaimed water rate methodology from classic water rate-making approaches is the existence of a near-perfect substitute: good, potable water. In economic theory, and just on the basis of common sense, if a commodity of equivalent functional value exists, the customer's decision to purchase will be based on price. In the case of reclaimed water, potable water exists as a near-perfect substitute good. This simply means that reclaimed water cannot be priced equal to or higher than potable water if the customer has the discretion to choose between the two. Since most reclaimed water systems were developed after potable water systems, their amortized cost is frequently higher than potable water costs. Consequently, it is often not possible, as a practical matter, to recover the full cost associated with the provision of reclaimed water services through reclaimed water rates.
In this situation, the rate design process must appropriately allocate those reclaimed water costs not recoverable through reclaimed water rates back to the water and wastewater rates. This can be accomplished by determining, through reasonable estimation processes, the amount of avoided capital and operating costs in each system provided through the use of reclaimed water. For the water system, these avoided costs are represented by the reduced need for water resources development and the cost of additional capacity for water plants, transmission systems, and distribution systems. For the wastewater system, these avoided costs are represented by the reduced need for disposal facilities.
The continued growth and demand for potable water in the Las Vegas, Nevada area has placed a premium on future water supplies. In response to maximize the use of this precious resource, reclaimed water use is being promoted to mitigate these increasing demands.
The challenge facing this study was to determine a reclaimed water rate that recovers the Las Vegas Valley Water District's (District) reclaimed costs, in addition to the other stakeholders' reclaimed water costs that would result in a reclaimed rate that is economically viable to existing and future reclaimed water customers.
Document Type: Research Article
Publication date: January 1, 2006
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