Louisville Water Co. officials never talk about conservation — not that it has mattered. Water use has declined on its own.
While that may sound like a good, green development for a city seeking a more sustainable future, there’s a downside to the declining consumption: It’s helping to drive up customers’ rates — raising them more than 80 percent since 1999.
As Louisville’s economy has shifted from a water-needy industrial base to a service-based one, and as water efficiency increasingly has become a national priority, the declining consumption has helped raise rates even faster than the rate of inflation.
And that’s an issue, since the water company still must maintain its basic infrastructure, including treatment plants and distribution system, even as increasingly stringent water-quality standards require upgrades, said James Brammell, the new water company president.
So now, water company officials are looking at other ways to hold down rates, including cutting costs and looking to add more customers farther away. ...
Water rates have risen a combined 81.6 percent since 1999, while the Consumer Price Index (measuring inflation) during that same period has risen just 38.3 percent, according to a water company analysis.
Last November, the company’s board approved its third straight year of 3.75 percent rate increases, which followed rate increases of 5 percent to 6.5 percent annually for much of the past decade.
Only with a natural monopoly could we see a decrease in demand lead to higher prices. Firms that compete end up charging prices equal to marginal cost, even if price falls below average total cost so that they aren't covering all of their fixed costs (e.g., infrastructure). Natural monopolies can try to cover their total costs with higher prices.
Water conservation (i.e., the moving away from water-intensive industry) has caused water demand to fall from D1 to D2. Consumption falls from Q1 to Q2. Water revenues fall by area A. The water company raises price and, since water demand is inelastic, the revenue increase (area C) is greater than the revenue decrease (area B) [note: It would be easier to see if I drew a steeper demand curve]. Yet, C < A + B, so they keep raising rates.