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Show Price Qi % Q^ Q Quantity Figure 8. Efficient pricing under increasing costs. structures, the consumer bears the burden of the charge. He cannot avoid the charge and he cannot shift the burden to others. The increasing block rate satisfies all of the consensus criteria. With respect to its income redistribution effects, the increasing block rate is generally the most likely to be progressive of the charges discussed thus far. The marginal cost to the consumer increases as water use increases. However, as with other block rates, volume of use must increase faster than income for the charge to become progressive. It allocates resources effectively under increasing cost conditions and assesses the user a charge in proportion to his responsibility for the costs to the system. The increasing block rate as are the other rates is not geared toward the distribution of benefits and burdens among households of like income or wealth nor can it effectively meet these criteria. An important characteristic of the increasing block fee structure is that it favors low income user groups. Low volume users are typical in these areas and their rates are low on the block scale. An increasing block generates more consumer consciousness than any of the other fees because of the increasing marginal cost to consumers. Demand Metering and Summer Differential Rates Demand metering is a complex but rational way to cover the extra cost of providing water during periods of peak consumption. Capacity expansion is generally the result of demands during peak use periods. Under the general policy of supplying all such demands, the system must be expanded to meet future demands when no excess capacity remains. Demand metering measures peak flows so that users can be charged proportional to the peak demands they place on the system. A summer differential rate follows the same principles without the metering by charging higher rates during summer months when use is generally higher. A demand metering system is geared to reduce consumption during times of peak demand and raise capital for system expansion resulting from peak demands. It is a complex system to administer, requiring every meter to be set on a time table which allows for calculations to be made monthly. The staff requirements are high and may make this system impractical except for large water users. Both the summer differential rate and demand metering can be designed to meet the efficiency criteria. Fees which charge higher prices to customers during peak periods increase revenues while limiting use. A fee based on peak demand, however, leaves an element of uncertainty to consumers. An individual can be sure that the charge will increase with increased use, but he may be uncertain what the charge will be in consecutive periods. This is not a problem with a differential rate because although the rate is increased or decreased the consumer knows in advance what the rate will be and for what periods of the billing cycle. It is difficult to forecast the progressivity charges based on demand metering policy, but the results may be slightly progressive. On the other hand, under demand metering all customers would be penalized for using water during peak periods even though some users may not use more water than they did during winter low use periods. This effect, at least superficially, gives this rate the appearance of being a regressive charge. The summer differential rate, when increased, penalizes large volume users during peak periods. Individuals with similar use patterns are treated equally, which in essence suggests that this fee scheme satisfies income criteria. The summer differential rate may favor poorer socioeconomic groups. Most of the peak demand can be attributed to sprinkling uses which is not significant in core city areas. Demand metering promotes the most cost consciousness by increasing marginal costs to consumers. They are aware that their charges will reflect their patterns of use and that when they add to peak periods, they will be faced with a higher per unit rate. Conclusions of Rate Structure Evaluation User charges are most effective where the costs of exclusion are low, there are few or no consumption externalities, and any resulting income redistribution is not a major concern. User charges can satisfy economic efficiency criteria without significant effect 22 |