With drought conditions posing serious challenges for water systems in the Southeast, drought surcharges provide a sustainable solution

Given the situation and the expectation for little to no relief in the near term, water utilities in the region must prepare for both operational and financial challenges. Projecting future water availability, ensuring emergency sources are ready and accessible, and confirming that drought management plans are responsive, properly communicated, and adequately enforced are all important details that need to be addressed.

Just as importantly, utilities need to remain financially resilient despite what may be significant and prolonged declines in water use. Spending cuts, delaying capital projects, and/or relying on cash reserves are only short-term solutions – to remain financially resilient through a long drought, utilities need to consider implementing drought surcharges as a supplemental source of revenue.

Here’s why - most water systems generate 60% to 80% of their revenue from volumetric rates, even though most of their costs are fixed. In other words, most of the utility’s revenue varies based on how much water is consumed, while most of its costs do not. This means a prolonged drop in water use can quickly lead to financial strain. Drought surcharges are an effective way to mitigate negative impacts.

Is your utility considering drought surcharges, or are you wondering whether your existing surcharges will get you through this drought? Read on for some key considerations.

There’s more than one type. Drought surcharges generally fall into one of three categories – applicable to all customers (either embedded in rates or broken out separately), class-based surcharges that may be assessed to specific classes, such as residential and/or irrigation-only customers, and individualized usage surcharges. While uniform surcharges applicable to all customers are the easiest to administer, they are often the least equitable. Individualized surcharges, which can factor in household size, lot size, or average winter consumption, are the most fair but can require significant administrative effort to implement.

It’s a balancing act. Balancing equity with administrative effort can be a challenge. Ideally, among residential customers, those with little to no discretionary water use would not be subject to the drought surcharge, while those with at least some degree of discretionary water use would – even if they comply with restrictions. However, distinguishing between essential and non-essential water use can be difficult and time-consuming.‍

It’s about revenue recovery, not demand management. Drought rates are not demand management tools. Communication and enforcement of water-use restrictions should be used to reduce water demand during drought. Drought rates are a source of supplemental revenue. Their primary goal is to recover lost revenue from reduced water use and to pay for the additional costs of supplemental water supplies and the implementation of the drought management program.

Different surcharges for different drought stages. Drought surcharges are a revenue enhancement tool; the scale of the surcharges depends on the water use restrictions in place at each drought stage. As usage declines during more restrictive stages, surcharges must increase to offset revenue losses. This is why utilities should clearly define their drought stages and the expected reduction in water use for each stage.

Presentation (on the bill) matters. Itemize drought surcharges separately from regular water rates on customer bills to improve transparency. This distinction helps customers distinguish between standard rates and temporary drought surcharges, providing clear confirmation when the charges are removed. For the utility, separate line items on the bill can help simplify internal accounting and make it easier to evaluate if surcharges are generating expected revenues.

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Given the drought conditions across the Southeast, what should utilities do next?

If you do not have drought surcharges, now is the time to model the impact of a prolonged drought on your system’s financial health. Ask your finance team:

• What is the projected revenue loss under various drought scenarios?
• To what extent can temporary solutions, such as spending cuts and cash reserves, help?
• How long until prolonged spending cuts eventually impair the ability to meet required levels of service?

If you do have drought surcharges, evaluate if they are the right fit. Consider:

• Are the surcharges providing enough revenue to sustain critical operations?
• Are the surcharges tailored to water-use restrictions at different drought stages?
• Do the surcharges appropriately balance equity and administrative burden?

Don’t wait until it’s too late. Utilities best positioned to navigate severe, prolonged droughts are those that proactively align operational readiness with fiscal preparedness. Reactively cutting costs, deferring capital projects, and/or relying on cash reserves are short-term solutions that, if over-relied on, can have negative consequences. Drought surcharges provide a more sustainable solution, helping utilities continue to provide the essential services their communities rely on during these challenging times.

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