Water Pricing as an Adaptive Climate Change Policy in

Northeastern Illinois

2010 Illinois Water Conference

Margaret Schneemann

Water Resource Economist

Illinois-Indiana Sea Grant

University of Illinois Extension

Chicago Metropolitan Agency for Planning

Climate Change Impacts on Water and Wastewater Systems

Impacts

Increased Demand

Increased Risk of Drought

Increased Risk of Flooding

Increased Risk of Inundation

Declining Source Water Quality

Increased Regulation

Adaptation Strategies

Identify Utility-specific Risks

Small-scale Climate Data

System Design

Water Efficiency

Reduce Peak Demand

Watershed Management

Asset Management

Full Cost Pricing

Source: Confronting Climate Change : An Early Analysis of Water and Wastewater Infrastructure Costs Association of

Metropolitan Water Agencies October 2009

Multiple Objectives of Water Rate Structures

Demand Management

Send signals to consumers about consumption

Revenue Recovery

Generate revenues covering the costs of service

Resource Conservation

Signals value of service expansion

and More…

Stakeholder driven objectives

Full Cost Pricing: The

Implementation Challenge

Adapted from Rogers et al 1997

Importance of Planningin Northeastern Illinois

Demand Growth Given Current Trends (CT), NE IL demand

increase 36% by 2050 (Dziegielewski and Chowdhury, 2008)

Surface Water Supply Limits Lake Michigan Supreme Court Decree Inland Surface Water

Deep Bedrock Aquifer Falling water table Cannot meet future demand scenarios

(Illinois State Water Survey, 2009).

Shallow Aquifer Contamination vulnerability Interference drawdown Source: CMAP, 2008

Possible Effects of Climate Change on Water Demand in NE IL

Source: Dziegielewski and Chowdhury, 2008

Impact of Price on Quantity Demanded

Price elasticity of demand =

Elasticity Value Definition Price Increase

Impact on Revenue

Greater than 1 Elastic Percent change in quantity

demanded is greater than the

percent change in price

Revenues fall

Equal to 1 Unit

Elastic

Percent change in quantity

demanded is equal to the

percent change in price

Revenues constant

Less than 1 Inelastic Percent change in quantity

demanded is less than the

percent change in price

Revenues increase

Residential Price Elasticity of Demand for Water

Residential water demand is inelastic Residential water demand price elasticity

0.33 to 0.51

→ 10% increase in price leads to 3.3% to 5.1% decrease in quantity demanded

Short-run ~ 0.38 Long-run ~ 0.64Indoor ~ 0.04 to 0.13 Outdoor ~ 0.31 to 0.38

→ Northeastern Illinois Region: 0.15

Pricing Response: Residential Increasing Block Rate

Adapted from AWWA M2 Manual

Pricing Response: Developing Surcharges Establish normal condition rates

Revenue requirementsDemand forecastCost allocationRate design

Forecast demand and supply responses to hydrological conditions

Estimate costs of adaptation strategies, including new supplies

Estimate new revenue requirements

Choose a rate structure and design rates

Public outreach, education, implementation

Pricing Response to Moderate Conditions

Adapted from AWWA M2 Manual

Pricing Response to Severe Conditions

Adapted from AWWA M2 Manual

Pricing Response to Critical Conditions

Adapted from AWWA M2 Manual

Pricing Response: Seasonal Rates Conduct a cost of service study to determine cost

differences between peak and off-peak periods

Allocate operating and capital costs between peak and off-peak periods.

Estimate the demand response to the proposed seasonal rate structure.

Introduce the differential during non-severe conditions in combination with a public education campaign.

Public outreach and education, reminders sent before the start of each peak season.

Single-Family Residential Seasonal Rate

Structure with Individualized Rate Blocks

Implementing Pr icing Response in NE IL

Rate Structure: Volumetr ic Charges

Water Rate Structure Wastewater Rate Structure

Uniform Rate: Volumetr ic Charge = p1x*

Increasing Block (2 Blocks): Volumetr ic Charge = p1x1+ p2(x* - x1) where p1 < p2

Decreasing Block (2 Blocks): Volumetr ic Charge = p1x1+ p2 (x* - x1) where p1 > p2

Flat: Volumetr ic Charge = FC

Long Term Pricing Response Rate structures supporting shortage rates

implementation

Revenue recovery sufficient to cover necessary capital investment

Addressing longer term conservation targets

Periodic demand forecasting based on price response

Risk based panning to forecast probability of a shortage and optimize adaptation response

Water Pricing as an Adaptive Climate Change Policy in

Northeastern IllinoisPresented by Margaret Schneemann

Water Resource Economist

Illinois-Indiana Sea Grant

University of Illinois Extension

Chicago Metropolitan Agency for Planning

Questions?MSchneemann@cmap.illinois.gov

312.676.7456