Measuring fairness: Assessing the equity of municipal water rates

Posted February 2006

By Manuel P. Teodoro

Meaningful, scientific measures of water rate equity are elusive. Without a sound metric for equity, discussions of fairness in water rates are prone to political manipulation, or worse yet, neglect. This study, written up in the April 2005 edition of the AWWA Journal, crafts empirically grounded, theoretically consistent metrics of water rate equity at the individual customer level, based on AWWA's cost-of-service principles. Individual equity measures are aggregated to a utility-level rate equity index for analysis of entire rate structures.

A third metric captures rate progressivity, or the degree to which rate structures favor high- or low-cost-of-service customers. Equity metrics are calculated using financial and billing data from a small municipal water utility. Finally, this article analyzes several alternative rate structures for the example utility and draws inferences about their respective degrees of equitability. The equity metrics developed here provide new tools for managers and policymakers in assessing the equity of alternative rate structures.

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