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Evaluating Water Savings from Budget-Based Tiered Rates in Orange County, California

Interest in budget-based tiered rates (BBTRs, also referred to as water budgets) has grown across California in response to recurrent droughts, other threats to water supply, and calls for increased water-use efficiency. One major policy question surrounding BBTRs is whether or not they result in greater water-use efficiency relative to other rate structures, which results in water saving. In this paper, we provide a policy overview of BBTRs and their application in Orange County, California. We use fixed effects models to evaluate whether savings in water use occurred in two agencies which adopted BBTRs over the past decade, and the one which did not adopt BBTR but which applied a BBTR framework to provide information about water-use efficiency to consumers while retaining the existing rate structure. We also evaluate savings for three different user groups based on their average water-use characteristics, to assess whether BBTRs may produce greater savings for high-volume users relative to low- or medium-volume users. Our analysis indicates modest savings in single-family residential household water consumption attributable to BBTRs for three Orange County water agencies. Savings were realized for two agencies which converted to a budget-based rate structure at multiple levels of consumption. However, low-volume users in the agency which adopted an “informational” approach increased their water usage over the study period. This suggests that providing information on water budgets in the absence of a price signal may have limited conservation benefit, and may incentivize some low-volume users to increase their water consumption. Savings are generally higher for medium- and high-volume users than for low-volume users. We close with a discussion of our results, avenues for future research, and the limitations of this analytical framework, including the confounding effect of the 2015 historical drought and related government-mandated conservation measures. With ongoing climate change increasing the chances of more severe droughts in the future, research into the effects of alternative rate structures such as BBTRs will be valuable to water agencies and their customers.