Reclaimed water rate design is a specialized area within rate-making because of the economic dynamics associated with this particular product. The key factor in differentiating reclaimed water rate methodology from classic water rate-making approaches is the existence of a nearperfect substitute: good, potable water. In economic theory, and just on the basis of common sense, if a commodity of equivalent functional value exists, the customer’s decision to purchase will be based on price. In the case of reclaimed water, potable water exists as a near-perfect substitute good. This simply means that reclaimed water cannot be priced equal to or higher than potable water if the customer has the discretion to choose between the two. Since most reclaimed water systems were developed after potable water systems, their amortized cost is frequently higher than potable water costs. Consequently, it is often not possible, as a practical matter, to recover the full cost associated with the provision of reclaimed water services through reclaimed water rates.
In this situation, the rate design process must appropriately allocate those reclaimed water costs not recoverable through reclaimed water rates back to the water and wastewater rates. This can be accomplished by determining, through reasonable estimation processes, the amount of avoided capital and operating costs in each system provided through the use of reclaimed water. For the water system, these avoided costs are represented by the reduced need for water resources development and the cost of additional capacity for water plants, transmission systems, and distribution systems. For the wastewater system, these avoided costs are represented by the reduced need for disposal facilities.
The continued growth and demand for potable water in the Las Vegas, Nevada area has placed a premium on future water supplies. In response to maximize the use of this precious resource, reclaimed water use is being promoted to mitigate these increasing demands.
The challenge facing this study was to determine a reclaimed water rate that recovers the Las Vegas Valley Water District’s (District) reclaimed costs, in addition to the other stakeholders’ reclaimed water costs that would result in a reclaimed rate that is economically viable to existing and future reclaimed water customers.
In 1998, District entered into joint operating agreements with the City of Las Vegas (City) and the Clark County Water Reclamation District (County) to establish a reclaimed water system to convey reclaimed water from the City’s and County’s Water Resource Centers (WRC) to golf courses in the service areas of each WRC. The City operates the Durango Hills WRC, and the County operates the Desert Breeze WRC. The District operates the reclaimed water distribution system (RWDS) that delivers reclaimed water produced at both WRC facilities. The distribution system includes pump stations, wells, recharge water, and other related facilities. The reclaimed water system is designed to provide service to large turf irrigation sites such as parks, schools, and golf courses. The reclaimed water system currently provides service to 13 golf courses, with more expected to connect in the future. Durango Hills serves 9 courses and the remaining 4 are served by Desert Breeze.
The Goal and Objective
The primary goal for this study was to evaluate criteria of the existing reclaimed water rate and develop a rate that would be “market acceptable” and provide for adequate cost recovery. The study identified the differing cost structures between the entities to arrive at a reclaimed water rate that successfully recovered an appropriate amount of reclaimed water costs. This included:
- Developing the fully allocated cost of reclaimed water.
- Incorporating “credits” in the form of grants and subsidies as well as a credit for normal treatment costs already borne by existing wastewater customers.
- Incorporating a reduced volume rate for potable water needed to supplement reclaimed water during high reclaimed demand periods.
- Avoided costs due to reduced potable demands by existing reclaimed water customers.
Critically important to the cost data analysis, was reviewing the non-empirical issues surrounding the reclaimed system, i.e., each stakeholders’ policies and practices, and incorporating these into a rate that benefits all parties involved.