Residential Water Demand Under Increasing Block Rate Structure: Conservation Conundrum?

Water utility managers must balance conservation and revenue goals. A conservation conundrum occurs if price increases lead customers to reduce consumption so much that utility revenues fall. We investigate whether a large increase in water rates in Norman, Oklahoma led to a conservation conundrum. Norman uses a common increasing block rate (IBR) structure which sets higher volumetric rates at higher ranges of consumption. IBRs are believed to encourage conservation. Estimating demand responses is challenging under IBRs due to co-determination of volumetric rate paid and consumption choice. We address this empirical challenge by estimating panel regressions using detailed monthly water bill data for consumers grouped by pre-change consumption. We find heterogeneous responses where high-volume users respond more to rate increases than lower-volume users but do not observe a conservation conundrum.