Pricing California’s Water During the Drought: Can Rate Structures Provide an Incentive for Conservation?

By Jeff Hughes, Shadi Eskaf & Liz Harvell

The relationship between water pricing and water use is more nuanced than basic economic theory on supply and demand suggests. That’s what the Environmental Finance Center at the University of North Carolina at Chapel Hill (EFC) found in a recent study on water pricing during the California drought.

California’s severe drought and statewide conservation mandate provided an opportunity to analyze the effects of pricing strategies as a tool to prevent wasteful water use. In 2015, the State Water Resources Control Board was charged with implementing a reduction of 25 percent on the state’s local water supply agencies. One of the strategies the Board suggested to local agencies was to look at ways rate structures could provide a financial incentive, also known as a price signal, to customers to conserve water.