A Cost of Business: Water Pricing for Business in North Carolina

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Municipal water systems across the state serve a wide range of customers. In the industry, retail water customers are typically classified as residential and non-residential –  the bulk of which are referred to as CII (commercial, institutional, industrial) customers. Each year, the UNC School of Government’s Environmental Finance Center and the North Carolina League of Municipalities conduct a survey of the water and wastewater rates charged by public water systems across the state. Predominantly, this survey is used to discuss and compare residential charges for water and wastewater service. This focus on residential rate occurs perhaps because newspapers, board members, and subsequently, staff focus on these rates to discuss and compare the impact of rate adjustments on the “average” household served. But there are a number of economic development and utility cost recovery considerations in how water utilities set rates for “CII” customers less commonly compared. Below is a summary discussion of how water systems in the state are currently charging their non-residential retail customers.

The majority (approximately 75%) of the water systems surveyed do not have separate rates for water consumption for commercial customers. As a result, these utilities apply the same rate to all residential and commercial customers alike. Despite this level playing field, some utilities construct certain rates and charges to target customers with very different water uses. Forty six (46) of the 383 water systems that do not explicitly distinguish between residential and commercial customers with a rate structure have a structure that either

(a)    Increases at lower levels of consumption to target residential water wasters with higher rates and then decreases beyond a point to target large commercial customers with lower rates (labeled as increasing/decreasing block rates in the survey report) (n=11) or

(b)   Is uniform at lower levels of consumption to target residential water users and then decreases beyond certain point to target large customers (n=35).

 Another way that utilities differentiate charges for different customer types is to apply different base charges against the size of the meter (large commercial, industrial, and institutional customers typically have larger meters than residential customers). Seventy-five of NC water systems charge non-residential customers with higher base charges based on the size of their meter.

One quarter (n=130) of the water systems in the state simply have separate rate structures for commercial customers. These utilities tend to be a bit larger than the utilities that don’t distinguish between the two customer classes in their billing, but there are still some very small utilities. (Lansing, NC serves a population of 150 and has a separate base charge and consumption charge for commercial customers.)

Water systems with separate commercial rates Water systems that do not distinguish between residential and commercial customers …also have industrial rates* …also have institutional rates*
Number of systems 130 383 69 26
Median system size (population served) 9,654 3,125 8,875 3,756
Minimum system size 150 66 175 175
Maximum system size 776,071 486,377 776,071 79,058

 *These two sets of utilities are sub-sets of the two on the left, not mutually exclusive.

Rates for other types of non-residential customers (i.e. industrial and institution) are much rarer. Only 69 water systems of the 548 surveyed have industrial rates, and only 26 have separate institutional rates. Interestingly, the utilities with separate institutional rates serve smaller populations, in general.

There are a number of different reasons why some utilities charge the commercial, industrial, and institutional retail customers in their service areas different rates. In some cases, they might be charging higher rates to non-residential customers because they require more capacity. On the other hand, they might be sending a price break to large commercial customers whose demand is relatively steady throughout the year and does not contribute to system peaks that typically drive costs for the utility. Also likely, is that some water systems are using water rates to attract/maintain businesses to/in the area  for economic development purposes. And while there are some general trends between utilities that do and do not distinguish different customer classes with different rate structures, it is not a practice that is overwhelming associated with system size. What does seem apparent is that, just as with residential customers, there is a range of philosophies and assumptions of “system impact” behind how utilities bill non-residential retail customers  for water across the state.

The impact of commercial, industrial, and particularly, institutional customers present another set of challenges and opportunities for wastewater management and billing. Exploration into wastewater billing differences throughout North Carolina might make good fodder for another blog post!

Mary Tiger was formerly on staff with the UNC Environmental Finance Center.

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