Decoupling can improve conservation, revenue stability, and affordability
all i’m offering you is the truth, nothing more
It’s an El Niño summer, and water systems from Utah to Iowa to Florida are responding to scarcity with water use restrictions and conservation surcharges.* It’s great when those conservation efforts work, but successful conservation campaigns can mean financial peril in a fee-for-service enterprise: water that customers conserve is water that utilities don’t sell. Empty reservoirs and empty bank accounts both threaten a utility’s health.
For decades, the energy sector has used rate decoupling to get out of that environmental-versus-financial sustainability box. This post wades into the tall regulatory grass to examine the implications of decoupling for low-income water affordability. Consumer advocates usually oppose decoupling, arguing that the practice is costly and unfair to consumers. But clear-eyed logic and a quarter-century of water rates data from the California demonstrate that decoupling is a clear winner for affordability. Wanna know how? Swallow that red pill and follow me for a (very long, very nerdy) post.
TL;DR
Rate decoupling allows utilities to price water progressively while maintaining stable revenue. 25 years of California data show that water service got more affordable under decoupling—even as overall utility revenue increased.
What is decoupling?
Utility rate decoupling started in the energy sector back in the 1970s, when an energy crisis drove regulators to find ways to encourage efficiency. The problem was simple: utilities made more money by selling more power, so while it might be good for the country and good for the environment, conservation was bad for business. Decoupling changed the incentive structure by separating a utility’s revenue from how much energy customers use.
Here’s how it works: regulators approve a revenue target for the year based on cost-of-service principles. If customers consume less than expected and the utility brings in less money, a surcharge is added later to close the gap. If customers consume more and the utility over‑collects, customers get a credit. In other words, decoupling relies on a true-up process: the utility gets the amount it needs to run the system, and customers see adjustments—up or down—based on actual use. That process lets utilities support conservation without putting their finances at risk.
Energy utilities have used decoupling across several states for more than forty years, leading to increased efficiency investments and outcomes. The practice is far less widespread in the water sector, where just a few states have provided some form of decoupling for water, including Illinois, Missouri, New Jersey, and New York. But nowhere have water utilities applied decoupling more extensively and to greater effect than in California.
a skeptical ALJ Smith
California’s Water Decoupling Saga
California’s Public Utilities Commission (CPUC) began decoupling water rates in 2008, using a revenue true-up tool called the Water Revenue Adjustment Mechanism (WRAM). A handful of large investor‑owned utilities adopted the approach. Decoupling was controversial, with consumer advocates complaining that WRAM punishes good behavior: when customers conserve water, their rates increase. Swayed by that objection and unconvinced that decoupling bolstered conservation meaningfully, in 2020 the CPUC moved to phase out decoupling.
The Legislature and courts pushed back. In 2022 California lawmakers passed SB 1469, which reaffirmed that decoupling should remain on the table in rate cases. In 2024 the State Supreme Court set aside the CPUC’s 2020 decision on procedural grounds. Those actions effectively restored decoupling as a regulatory tool.
This years-long tug-of-war has left decoupling’s future uncertain in the Golden State. The Legislature and Courts continue to push water decoupling as a matter of policy, while the CPUC continues to reject it case-by-case. This year the CPUC pulled the plug on decoupling for water utilities in its general rate case for California Water Service.
The Commission expressed skepticism that that decoupling drove water efficiency, and rejected Cal Water’s claim that decoupling would improve affordability, declaring that: “the impact [of decoupling] on affordability is unknown.”
With that decision, water rate decoupling in California is effectively dead…
Who pays what? How decoupling helps affordability
Thing is, the impact of decoupling on affordability is known.** Decoupling changes a utility’s incentives and constraints when setting a rate schedule in ways that have predictable implications for affordability. That’s because decoupling isn’t just about conservation—it can also change how much different customers pay.
Most of a water system’s costs are fixed, so utilities like big fixed charges for the reliable revenue they provide. Under those fixed charges, low‑volume customers end up paying more per gallon on average compared with high‑volume users. That puts pressure on both affordability and fairness, since essential indoor use is pretty similar across households, but Californians’ water consumption for lawn irrigation, car washing, swimming pools, and other discretionary uses increases with income.
Because decoupling stabilizes a utility’s revenue, it gives utilities and regulators room to design more progressive rate structures: lower fixed charges and steeper prices at higher volumes. That shift doesn’t mean more or less money to the utility, but it moves more of the revenue burden onto the biggest users and reduces the cost of basic, essential water for everyone else.
That matters because rate structures directly impact affordability. Critics sometimes argue that decoupling raises costs for “the ratepayer.” But there’s no such thing as the ratepayer—there are only ratepayers: millions of individual customers who make individual decisions.
it’s a lot to contemplate
Under progressive pricing, people who use modest amounts of water keep their bills low by staying within the cheaper tiers. High‑volume users pay more because they place greater demands on the system.
A straightforward logic of affordability follows: by enabling rate designs that keep essential water inexpensive and charge more for discretionary use, decoupling can make bills fairer and more affordable for the households that need it most. Decoupling doesn't change how much revenue utilities collect, but coupled with progressive pricing, it changes how much each customer pays.
To summarize, a three-point logic connects rate decoupling to affordability:
- Decoupling largely eliminates utilities’ revenue risk, so…
- Utilities can set prices progressively with confidence, which means…
- Customers pay significantly lower prices for essential service.
Point #1 is true by definition. Whether #2 and #3 are true in practice are empirical questions.
To the Data!
Some California water utilities began decoupling rates in 2008, with more service areas added gradually over time; some utilities never decoupled. To gauge the impact of decoupling, I gathered twenty-five years of rate schedules (2000-2024) for 45 areas served by large, investor-owned California water utilities. I then calculated monthly residential water bills at 4,500 gallons per month (CPUC’s definition of essential service) in each service area each year as the basis for analysis.
Progressivity. To measure rate progressivity, I calculated a Unit Price Ratio (UPR) that compares the average unit price of water at 30,000 gallons (40 ccf, high use) to the unit price at 4,500 gallons (6 ccf, essential use)—a measure that David Switzer and I used in a study on rate progressivity.† A UPR of 1.0 indicates a neutral rate structure, where the unit cost is identical for the high-volume and the essential-volume customer. A UPR less than 1.0 indicates a regressive rate structure (the essential-volume customer pays more per gallon), and a UPR greater than 1.0 indicates a progressive rate structure (the high-volume customer pays more per gallon). If decoupling results in more progressive pricing, then average UPR values should increase following decoupling…
…which is exactly what the data show. Here are average UPRs for decoupled and non-decoupled utilities from 2007-2024:
Average UPR produced from a time series regression model fitted with lagged dependent variable. Shaded areas represent 95% confidence intervals. (Click here for scatter plot of full data.)
In 2007 there was no significant difference in UPR between decoupled and non-decoupled utilities, but rates became dramatically more progressive under decoupling in the years that followed. Progressivity was essentially unchanged for utilities that did not decouple rates over the same period. In plain terms, under decoupling, the mechanism that stabilizes utility revenue also enables fairer, more progressive pricing.
Affordability. To analyze affordability, I recalculated essential water bills for each of the 45 service areas over 25 years as equivalent hours of labor at California's minimum wage (HM)—one of my go-to metrics and one of the CPUC’s official measures of affordability. If the progressive prices that accompany decoupling make water more affordable, then then average HM values should be lower for decoupled utilities compared with non-decoupled utilities…
…which again is exactly what the data show. Here are average HM for decoupled and non-decoupled utilities from 2007-2024:
Average HM produced from a time series regression model fitted with lagged dependent variable. Shaded areas represent 95% confidence intervals. (Click here for scatter plot of full data.)
For utilities without decoupling HM increased gradually (albeit not statistically significantly) from 2007-2024, but for decoupled utilities HM fell by 1.1 hours over the sixteen years that decoupling was in effect. That is, on average, affordability significantly improved over time for utilities with rate decoupling by the CPUC’s own measure—even as overall utility revenue grew and regulatory standards increased! It’s an astonishing success story.
By happy accident, a decoupling policy aimed at fostering conservation had the side effect of driving down bills for essential service. During a period of rapidly increasing cost-of-living for California, water utilities with decoupling didn’t just hold the line, they actually got more affordable! If they’re serious about affordability and sustainability, lawmakers and regulators in the Golden State ought to bring back water decoupling. The rest of the country should give it a long, hard look, too.
The part where Manny chats with himself
so let me get this straight:
with decoupling, the utility gets paid the same
no matter how much water they sell?
That’s oversimplified. But basically, yes.
how on earth is that fair?
Most of the costs of running a water utility are fixed. The utility needs to recover those costs. If revenue falls due to conservation, or because it rains all summer, then the revenue shortfall puts the whole system at risk.
well these are private, investor-owned utilities.
If the owners of these utilities take a profit,
shouldn’t they also have to take on that risk?
Sure, but if revenue risk increases, then the utility’s investors are going to demand a higher rate of return.
That’s how markets work. If they don’t get that higher rate of return, they’re just going to charge higher fixed rates to make sure they get the revenue they need.
if the utility gets paid no matter what,
aren’t they just going to make everything more expensive
and stick it to the ratepayer?
That’s a separate issue. Regulators scrutinize investments and operating costs, then approve the amount of revenue a utility is allowed to collect. Decoupling is about whether and how they collect the revenue requirement the regulators already approved.
It’s not about how much revenue the utility is going to collect, it’s about how much of they’ll collect from different individual customers.c'mon, man. you’re playing word games.
customers are taking it in the shorts here
Ah, but which customers? Imagine a utility with two customers: Customer A has a big house with a big lawn and swimming pool and uses 30,000 gallons a month; Customer B has a small house with xeriscaping and a small brick patio and uses 3,000 gallons a month.
If decoupling allows more progressive pricing, A pays more and B pays less. The utility makes exactly the same amount of money.
yabbut high water use doesn’t necessarily
mean high-income
Of course not. But on average, residential water consumption correlates with income—especially in places like California where a lot of water use is for outdoor irrigation.
Check out the 2021-2022 consumption patterns in Cal Water’s customer base:
Right?
but how about those big, poor families
with a dozen people in a single house?
they probably use a lot of water and will get hosed
by your so-called “progressive” rates
Poverty in 21st century America doesn’t fit that Dickensian image. Most low-income households are small. The big households you’re thinking about are exceptional: 6+ person households are about 3% of the US population. Maybe 15% of those have incomes below poverty…?
We absolutely need to help that tiny minority with targeted assistance, but it’s crazy to build an entire rate structure (and screw all the other low-income families!) to accommodate those outliers.
ok smart guy,
if decoupling is so great why did CPUC dump it?
Maybe they got tired of winning?
haha
for reelz tho
why do the consumer advocates hate decoupling?
I dunno, man. Maybe the adversarial utility-versus-ratepayer framework is just so ingrained that everything becomes a zero-sum game?
Regulators and consumer advocates scrutinize utility costs (as they should!). They’re not used to thinking about the distributional impacts of rate design within a customer class. Maybe nobody has taken the time to think about affordability beyond revenue requirements and assistance programs.
this isn’t an issue for government utilities
you wouldn’t need decoupling without the greedy,
mustache-twirling, cackling capitalists
Easy there, Ché. Government utilities face the same revenue risks, which is why water rates across the country—public and private—have been getting more regressive. Revenue risk just turns into political risk for government utilities. In most of the US, local government utilities are effectively “self-regulated,” so there’s nothing stopping government-run utilities from decoupling rates.
and that will automatically make water more affordable?
No. Decoupling only helps affordability if you price progressively! You gotta minimize fixed charges, keep first-tier volume charges low, and steeply incline the higher tiers rates. That’s why it worked in California. No inclined-block pricing = no improved affordability.
But done right, decoupling is a winner for financial stability, sustainability, and affordability.
i'm not tired of winning
Me either, dear electronic alter-ego. Me either.
gimme that red pill
*My research finds that these restrictions increase conservation—and that the public will respond with gusto when utilities invite them to snitch on their neighbors. 
** And the CPUC knows it, too. Because I told them.
† This is a boring, stuffy version of the Amy Poehler Index.
To the extent water revenues fall short due to weather factors (prolonged lack of snowpack/low reservoir levels and or rainy summer) would it not be more efficient to avoid a true-up surcharge and instead get a payment from parametric insurance?
This avoids customer angst and avoids having a massive reserve fund (earning 0% interest and being a target of City Managers for plundering to support other departments).
This avoid the utility engaging in disruptive budget cuts that stall projects (imposing additional deadweight loss)
Definitely. As you know, I’ve long thought that financial instruments including insurance are a very promising means of managing revenue risk, climate risk, and even political risks that water/sewer utilities face. A revenue risk derivative could be a very smart, efficient, and customer-friendly complement to cash reserves and true-up instruments.