A Practical Response to Price Elasticity and Demand Management

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A Practical Response to Price Elasticity and
Demand Management
Stephen Estes-SmargiassiDirector of Planning

• July, 19, 2007

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Price Vs. Non Price?

• Even the Form of the Question Betrays the
  Approach
• There are many more questions than simply meeting
  use targets efficiently
• Legally allowable?
• Adequate revenue?
• Tied to Cost of Service?
• Provides other benefits?
• Fair to all customers?
• Politically Feasible?

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Use the right tool for the job at hand

• When all you have is a hammer, all the world
  looks like a nail.
• Diagnosis Precedes Cure
• Emergency Supply, Treatment or Delivery
  Disruption
• Short Term Drought
• Long Term Drought
• Long Term Supply Shortfall
• (annual average)
• (peak periods only)
• Peak Treatment Capacity Shortfall
• Desirable for Some Other Reason

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Equity (Environmental Justice)

• Rates must not only raise sufficient funds, but
  be equitable
• Similarly situated consumers must be treated
  similarly
• Increasing block rates may mean that multi-family
  units get charged more per gallon
• In a crisis, is it ok that richer consumers can
  afford to waste water, while the poor cannot
• Relative inelasticity may mean that lower income
  individuals may pay more for water as price is
  increased
• Not obstacles to use (or understanding of effect)
  of pricing, but should be part of design process

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Perception is Reality

• It is the perception of changing prices which
  alters behavior
• Rates vs. Actual Cost
• Perception favors rates
• Consumers bills show costs
• Frequency of billing, vs. when the consumer can
  adjust behavior
• Maybe being green doesnt pay. In fact, when it
  comes to your water bill, its going to cost you
  more.

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How Is Our Rate Setting Process Perceived?

• Version 1
• Raising Rates to Make Investments in
  Infrastructure and the Environment
• Consumers See Connection Between Rates and
  Benefits
• Incidental Benefit of Elasticity Generated Use
  Reductions
• Version B
• Raising Rates Because Our Poor Planning Means
  There is Not Enough Water for Everyone
• Demand Down
• Consumers Angry

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Higher Prices Certainly Get Their attention
Then what?

• Once you have the customers attention, what to
  you want them to do, and how do you want them to
  feel?
• Enlisting the customer in helping the environment
• Customer satisfaction with utility service
• Controlling costs
• Go away happy or angry?

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Demand is Down by One Third Price Up by 600
2006 1,006
1994 570
1985 143
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Demand Management Strategy
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Want To Know More?

• Website -- www.mwra.com
• Water Quality Info -- [phone]
• Conservation Info -- (617) 242 - SAVE
• Stephen Estes-Smargiassi -- [phone]
• smargias_at_mwra.state.ma.us