# Introduction to Incentive Pricing

Incentive pricing involves setting water rates that provide motivation
to use water efficiently. Pricing can consist of a fixed charge (a
constant fee assessed to landholdings or acres in production), a water
rate (a price per-acre-foot of water delivered), or some mixture of the
two. The combination of fixed charges and water rates is the district's
rate schedule.

Incentive pricing moves away from rate schedules based solely on
per-acre fixed charges and toward rate schedules that incorporate both
fixed charges and charges based on the amount of water that the farmer
actually uses. Thus, conservation-oriented rate schedules allow
individual farmers to be accountable for their own water applications.
For example, under a per-acre-foot water rate the costs of an individual
farmer's inefficient water applications are no longer shared by other
landholders within a district; rather, the farmer is solely responsible
for paying for his or her water deliveries.

Revising rate structures is a complex process. Rate structures should
reflect the conditions and overall objectives of the particular
District. For example, the split between fixed and variable costs may
vary according to the type of water year, or the district's groundwater
conditions.

For more detailed information on incentive pricing, see Appendix A.

This document discusses incentive pricing for agricultural irrigation
districts. There may be other programs in addition to the ones discussed
here that meet the incentive pricing criteria. A useful companion to the
document is the *Incentive Pricing Handbook for Agricultural Water
Districts* available through U.S. Bureau of Reclamation (Reclamation).
Municipal and industrial water districts are encouraged to consult the
California Urban Water Conservation Council\'s *Handbook for the Design,
Evaluation, and Implementation of Conservation Rate Structures* for
incentive pricing information.

Section 210 of the Reclamation Reform Act requires that most districts
contracting for water with Reclamation prepare and submit Water
Conservation Plans (Plan) with appropriate goals, measures, and
timetables. Districts are asked to submit updated Plans every five
years.

In addition, Section 3405(e) of the Central Valley Project Improvement
Act (Title XXXIV of Public Law 102‑575) (CVPIA) directs Reclamation to
develop \"criteria for evaluating the adequacy of all water conservation
plans developed by \[Central Valley Project\] contractors.\" In response
to this directive, Reclamation has published and revised \"Criteria for
Evaluating Water Management Plans\" (Criteria). The most recent version
of the Criteria was published in September, 1996.

The Criteria identify a number of \"Best Management Practices\" (BMPs)
for efficient water use. For the purposes of the Criteria, \"Best
Management Practice\" means a policy, program, practice, rule,
regulation and/or ordinance, or the use of devices, equipment or
facilities that meets either of the following items:

-   An established and generally accepted practice among water districts
    that results in more efficient use, conservation or management of
    water.

-   A practice for which sufficient data are available from existing
    water management projects to indicate that significant efficiency
    improvements or management related benefits can be achieved; that
    the practice is technically and economically reasonable and not
    socially or environmentally unacceptable; and that the practice is
    not otherwise unreasonable for most water districts to carry out.

Reclamation has identified \"Critical\" and \"Exemptible\" BMPs.
Districts are required to implement Critical BMPs. Reclamation
recognizes that the Exemptible BMPs may not make sense for district
implementation. Districts are required to implement Exemptible BMPs
unless the district provides adequate documentation to Reclamation to
justify for an exemption (see Step 5 of the 1996 Criteria). Upon
acceptance of such a demonstration, Reclamation will issue an exemption
from the requirement.

Volumetric pricing is a critical BMP that involves a water pricing
structure for district water users \"...based at least in part on
quantity delivered...\". Three simple rules on volumetric pricing are as
follows:

1.  Farmers must pay a per-unit price for water (volume charge),

2.  The district can use a combination of fixed and volume charges for
    revenue, and

3.  The district must do volumetric pricing---it cannot file for an
    exemption.

In addition to volumetric pricing, Reclamation identified Incentive
pricing as an exemptible BMP. Incentive pricing is a pricing structure,
such as tiered-block pricing, which promotes one or more of the
following goals:

-   Encouraging more efficient water use at the farm level,

-   Supporting planned conjunctive use of groundwater,

-   Increasing groundwater recharge,

-   Reducing problem drainage, and

-   Improving management of environmental resources.

Incentive pricing is an [additional]{.underline} element to volumetric
pricing. There are numerous misunderstandings about incentive pricing;
it is not just the implementation of a price tier (though this is one
category of incentive pricing). Incentive pricing:

1.  Is pricing water in a way that, through rewards or penalties,
    encourages farmers to manage water efficiently.

2.  Should not significantly increase the efficient farmer's water bill.
    (Incentive pricing can be designed to provide a disincentive for the
    above average user, without penalizing the average or below average
    user.)

3.  Is actually a very broadly defined concept that can accommodate many
    specific district programs. Reclamation has outlined six programs
    that can be used to comply with the incentive pricing BMP. (There
    may be other programs that meet the incentive pricing BMP.)

4.  Districts must either have in place, or planned for the near future,
    at least one effective incentive pricing program *or* they must
    apply for, and receive, an exemption.

It is important to remember that the "Incentive Pricing" guidelines are
not a "how to" manuscript, and that a district needs to carefully study
and plan price changes that are conservation oriented, but are
consistent with other district objectives.

# Basic Elements of Incentive Pricing

Reclamation will evaluate a proposed or existing incentive pricing rate
structure to determine if it is a qualifying program. Reclamation will
apply the following guidelines.

## 1. PROVIDES AN EFFECTIVE SIGNAL TO WATER USERS

Incentive pricing programs must provide an effective signal to water
users that encourages efficient use of water. Thus, *pro forma* programs
will not be accepted. Examples of unacceptable programs are:

-   Insignificant incentive pricing adjustments---price adjustments that
    are small or set at levels out of range of practical water use so
    that the farmer is not even aware that incentive pricing exists.

-   Internal water trading among farmers in water surplus
    districts\--water trading is meaningful in water short districts but
    does not result in conservation when all farmers have surpluses.

## 2. PROVIDES ADEQUATE DOCUMENTATION

An effective plan must be formalized and documented, so that water users
and Reclamation understand the program and so that it is consistently
implemented.

The following areas should be documented:

-   Water management objective\--the objective of the incentive pricing
    program should be clearly stated. For example, a program may address
    seasonal water use, dry-year water use or drainage, among others.

-   Board resolution\--implementation of an incentive pricing program
    will require a board resolution. The resolution should be included
    in the proposed plan. If the incentive pricing program is only
    contemplated a draft resolution should be provided. Reclamation\'s
    approval of an incentive pricing program will be conditional until
    the resolution is fully adopted.

-   Water rate schedule\--a detailed list of water prices or the terms
    and conditions of trading programs should be provided.

-   Procedures\--the procedures required to implement the program should
    be spelled out, for both water users and Reclamation.

-   Annual reporting\--Reclamation reviews water conservation plans
    annually. Districts should include in their annual update a report
    that documents the operation of their incentive pricing program and
    describes any adjustments to it. As part of the annual review,
    Reclamation will be evaluating the program's effectiveness.

-   Third-party impacts\--any impacts to third parties or the
    environment must be addressed.

## 3. PROVIDES ADEQUATE MEASUREMENT, ACCOUNTING AND BILLING SYSTEMS

Effective incentive pricing programs will be continually monitored and
adjusted to adapt to changing conditions. In addition, an incentive
pricing program cannot be effective unless the price signal is actually
delivered to farmers in their water bills. Thus, an effective program
will include the ability to measure water, maintain relevant water and
financial accounts and produce understandable and accurate bills.

Effective water measurement and accounting is necessary for developing a
sound water management program. A district's measurement and accounting
systems should be capable of tracking the amount of water delivered to
individual water users (or leaving a field as drainage). These systems
are effective water management tools because they help inform both the
water user and the district about the quantity, timing, and location of
water use or drainage.

An effective accounting system will track the transactions that take
place under the program as well as the management objective of the
program.

Water bills must convey to the farmer information about the amount of
water delivered (or drainage flows if this is the objective of the
district). If a tiered-block price structure is used the bill should
include a breakdown of pricing according to the block structure.

Additional information on measurement and accounting can be found in *A
Guidebook for Preparing Agricultural Water Conservation Plans, Achieving
Efficient Water Management*, available from Reclamation.

## 4. IS CLEARLY COMMUNICATED TO WATER USERS

For an incentive pricing program to be effective, water users must be
aware of it and understand it. A qualifying program must include
measures to make farmers aware of the program on an ongoing basis.
Initially, the district should provide all farmers with a written copy
of its policy. The written policy document should be accompanied with
appropriate explanatory materials that address common questions or
expand on commonly misunderstood aspects of the policy. Farmers should
be kept up-to-date on the evolution of the program by way of bill
inserts, newsletters or other means.

5\. RESPECT EXISTING ENVIRONMENTAL, THIRD PARTY LEGAL IMPACTS

Incentive pricing programs must not be in conflict with existing local,
state, and federal laws and ordinances. In addition, environmental and
third party impacts in the district and surrounding areas must be
considered prior to the implementation of a newly developed incentive
pricing program. For example, the district needs to consider the
potential impacts of an incentive pricing program on groundwater
overdraft and water quality.

# Examples of Incentive Pricing Programs

Any [one]{.underline} of the following examples -- implemented by the
district -- will meet the requirement of the incentive pricing BMP.
There may be additional qualifying programs. A district, of course, can
have more than one program depending on its objectives.

-   Formal district clearing house for internal water trades,

-   District acts as water broker for water trades across districts,

-   Rate schedules for multiple water management goals,

-   Bilateral farm trades,

-   Tiered pricing structure, and

-   High volumetric price.

## 1. FORMAL DISTRICT CLEARING HOUSE FOR INTERNAL WATER TRADES

Intra-district trading programs may qualify as an incentive pricing
programs. The key consideration is whether farmers are using the trading
program. This will only happen in districts that do not have an overall
water surplus. Some acceptable programs include:

-   Trades between farmers within the district\--prices must be set by
    buyers and sellers.

-   Release pools\--farmers may release water to pools for subsequent
    purchase by other farmers within the district.

### Measuring Effectiveness

To be considered as a qualifying incentive pricing program, the
following conditions must be met:

-   The district must facilitate formal transactions,

-   Farmers must be aware of the program,

-   The water supply is in-adequate to meet crop requirements and a
    cheaper alternative water supply is not available, and

-   The program must provide, on an annual basis, documentation that
    includes trading data\--records of water trades, including date,
    amount and price (if available, but it is not necessary to identify
    individual farmers); and district price schedule\--update as
    necessary.

### Impacts of the Program

The decision to sell water by the farmer is voluntary. The farmer who is
above average in water use efficiency can obtain additional revenue by
such sales, or achieve other benefits.

## 2. DISTRICT ACTS AS WATER BROKER FOR WATER TRADES 

Districts provide the service of finding willing buyers for their
farmers' water. Districts may aggregate small amounts of water from
individual farmers and sell to outside buyers in larger amounts. The
district may not charge unreasonable brokerage fees.

### Measuring Effectiveness 

-   A farmer should be allowed to lease his or her entire allotment of
    water or some percentage thereof, to a willing buyer outside the
    farmer's district.

-   A farmer who intends to sell water outside the district should not
    be asked to pay a different water price to the district than what
    would have been paid had the farmer used the water.

-   The district must ensure that leased water is not delivered to the
    lessor farmer.

-   The district must be willing to transport and deliver water leased
    by its farmers to sellers outside the district for no more than
    average cost of distribution on its current deliveries. If a
    district incurs additional expenses in wheeling water, then the
    district can recover the additional expenses through wheeling
    charges, but the district must document such expenses.

-   The district may not charge unreasonable brokerage fees.

-   The district must address third-party impacts.

### Impacts of the Program

The choice to lease water is made voluntarily by the farmer, who will
not do so unless the deal is profitable. Since the district is brokering
the trades it can restrict trading to those exchanges that do not
adversely affect district programs.

## 3. RATE SCHEDULES FOR MULTIPLE WATER MANAGEMENT GOALS

If, in addition to managing water use efficiency, the district is using
water pricing for conjunctive groundwater uses, reduce drainage from
pre-irrigations or other purposes, it may qualify for the incentive
pricing BMP. Examples of qualifying programs include:

-   Seasonal price structures that encourage efficient use of water for
    pre-irrigation,

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-   Wet-year/dry-year pricing that encourages conjunctive use,

-   Volumetric price structures with standby charges that encourage
    conjunctive use,

-   Pricing that achieves reduced return flow drainage, and

-   Pricing that encourages water use for environmental purposes\--such
    as providing water for wildlife habitat.

### Measuring Effectiveness

Because programs of this type are highly specific to the district\'s
characteristics, it is important to provide sufficient documentation to
Reclamation to support the proposed qualifying plan. Documentation must
include:

-   A specific statement of the management objective, and

-   A description of how the proposed price structure will help the
    district meet the management objective.

### Impacts of the Program

The distribution of impacts depends on the specific program.

## 4. BILATERAL FARM TRADES

Here, an individual farmer enters into a direct lease with a willing
buyer who resides outside the selling farmer's district. The district
may retain the authority to concur or disapprove any specific bilateral
trade, if it can document that the bilateral trade will harm district
members. The following principles apply to a qualifying program.

### Measuring Effectiveness

-   A farmer should be allowed to lease his or her entire allotment of
    water, or some percentage thereof, to any willing buyer outside the
    farmer's district.

-   A farmer who intends to sell water outside the district should not
    be asked to pay a different water price to the district than what
    would have been paid had the farmer used the water.

-   The district must ensure that the farmer is not delivered the leased
    water.

-   The district must be willing to transport and deliver water leased
    by its farmers to sellers outside the district for no more than
    average cost of distribution on its current deliveries.

-   The water price (net of distribution fees) paid by the outside buyer
    is determined solely by the two parties to the bilateral contract.

-   Documentation should include a statement of terms and conditions,
    records of trades, a current price schedule, and distribution costs.

### Impacts of the Program

The choice to lease water is made voluntarily by the farmer, who will
not do so unless the deal is profitable.

## 5. TIERED PRICING SCHEDULE

In a tiered pricing schedule, farmers buy water in specified quantities
(blocks). Each successive block has a higher volumetric price of water
per unit. For example, a district might have the following tiered price
schedule:

  ------------------- -------------------- -------------------------------
  **\                 **Block Size\        **Water Price\
  Category**          (acre-feet/acre)**   (\$/acre-feet) or Charge**

  Fixed Charge        0                    \$30 per acre

  1^st^ Block         2.5                  \$50 per acre-feet

  2^nd^ Block         \>2.5                \$75 per acre-feet
  ------------------- -------------------- -------------------------------

The second block price is a higher water rate giving farmers using that
much water more incentive to use water efficiently. If there is
excessive revenue from the implementation of the second block price, the
first block price and fixed charge can be adjusted to achieve the
district revenue goal. Specific block structures may be considered for
the various crop types grown in a district. More detail about setting
block sizes and tiered water rates is presented in Appendix B.

### Measuring Effectiveness

-   The size of the first block can be no greater than the district
    average use.

-   The price of the first block must capture all district variable
    costs.

-   The price of the second block must be at least 50% greater than the
    price of the first block unless it can be demonstrated that a lower
    volumetric price can send a significant signal to the water user.

### Impacts of the Program

With a tiered-block price structure the farmer manages water use and
thus the total cost of water. If it is profitable to do so, a farmer is
free to consume in a higher-priced block. When consuming in a
higher-priced block is not profitable, a farmer can change water
management practices to reduce total water costs.

## 6. HIGH VOLUMETRIC PRICING

If the district has a volumetric price structure and if the water rate
is sufficiently high to encourage efficient use of water, then the
district may qualify for the incentive pricing BMP.

### Measuring Effectiveness

In order to be considered as incentive pricing, the district\'s water
situation must meet the following two conditions:

-   Water supply (groundwater, Reclamation surface water, and other
    surface water rights) is less than ET (potential), and

-   Irrigation technology currently in use results in an average on-farm
    efficiency greater than 80%.

Or:

-   The district has volumetric water rates greater than \$75 per
    acre-foot, unless it can be demonstrated that a lower volumetric
    price can send a significant signal to the water user.

## 7. Guidelines for Evaluating Exemption Requests

Exemptions from the incentive pricing BMP may be granted. In order to
qualify for an exemption, the district must show, for each type of
qualifying program identified above, that the programs are not
cost-effective, are not financially feasible, are not legally permitted,
or cause unacceptable environmental impacts.

The language from the Guidelines describing the exemption process and
standards is set out in Appendix C.

# Appendix A - Incentive Pricing

To encourage efficient water use, a district's pricing and billing
procedures should be based, at least in part, on the quantity of water
delivered. Quantity-based charges can be incorporated into various
existing pricing structures to provide some degree of economic incentive
for efficient water use. Fairness in water billing is an additional
benefit of quantity-based pricing structures.

When evaluating water pricing structures, it is important to consider
potential effects on revenues generated through water sales. Under the
new pricing system, will there be sufficient revenues to cover district
operating costs? Will modifications to the pricing structure result in
supplemental revenues that could be used to develop more improvements?

Districts can encourage efficient water use by increasing the unit price
of water as deliveries increase. With incentive pricing, a base price
per unit of water is charged for all water deliveries up to a certain
amount, or block. Water use in excess of this block is then charged at a
higher unit price. One or more pricing levels (or "tiers") may exist
within a pricing structure. The specific design of these structures will
depend on individual district objectives. Figure 1 depicts some
different types of water pricing structures.

![](media/image1.emf)

*Figure 1: Types of Water Pricing Structures*

The demand for water within an irrigation district is based on crop
production and planning decisions made at the farm level. It also
depends on crop selection, irrigation technique and land
characteristics. The change in water demand in response to a change in
water price is termed "demand elasticity." Factors affecting demand
elasticity include:

-   Crop values,

-   Crop tolerance to water shortages,

-   Ability to change crops,

-   Ability to change irrigation methods, and

-   Availability of alternative water sources.

Typically, changes in water prices lead to only small changes in the
quantity of water demanded. Therefore, the water supply and demand
relationship is fairly "inelastic." Water demand, price elasticity, and
potential changes in district revenues resulting from price changes are
important considerations in evaluating the use of incentive pricing as a
water management measure.

Incentive pricing programs may be structured to optimize conjunctive
use. For instance, a program may be designed to encourage surface water
deliveries and groundwater recharge in wet years by lowering the price
to the farmer. In dry years the surface water price can be increased to
encourage increased groundwater extractions.

Incentive pricing has successfully been implemented in California's
Broadview Water District. The purpose of this structure is to motivate
farmers to improve the efficiencies of their on-farm irrigation
operations and to reduce the quantity of drainage water. The district's
increasing block rate pricing structure has two components,
crop-specific price levels and field-level accounting of water
deliveries. Crop-specific price levels are required because the volume
of drain water generated from water application varies from crop to
crop. Crops with higher ET rates are permitted to receive more
irrigation water before reaching the higher price level. Without these
concessions, farmers could be limited in the kinds of crops they plant.

Field-level accounting of water deliveries encourages the farmers to
carefully monitor their irrigation supplies.

Incentive pricing may be an appropriate water management measure if the
district's existing pricing structure is based on a fixed rate or if
water charges are not linked to the amount of water delivered. To
evaluate incentive pricing and other rate structures for your district,
refer to the information and methods presented in Reclamation's
*Incentive Pricing* *Handbook for Agricultural Water Districts.*

# Appendix B - Tiered Pricing

This appendix provides a step-by-step process for setting a tiered-block
rate structure. There are a number of things you should consider as you
set your rate structure and as you introduce it into your district. For
example, it is important that you communicate effectively with all
stakeholders throughout the process of changing water rates. The
*Incentive Pricing Handbook for Agricultural Water Districts*, available
from Reclamation, can assist you in setting your rates. We recommend
that you read the *Handbook* before you try to install a tiered-block
rate structure.

In order to calculate your tiered-block price schedule, you will need to
know the following:

-   Total district water deliveries (see Table B.1),

-   Total district acreage (see Table B.2),

-   District fixed costs, and

-   District variable costs.

Table B.1: District Water Deliveries Worksheet

  ----------------------------------------- -----------------------------
  Total Annual Deliveries (acre-feet)       

  ----------------------------------------- -----------------------------

Table B.2: District Acreage Worksheet

  ----------------------------------------- -----------------------------
  Total District Acreage (acres)            

  ----------------------------------------- -----------------------------

##  

## Fixed Costs

Fixed costs stay the same regardless of how much water your district
delivers. Examples of fixed costs are repayment or amortization
obligations (but not per-acre-foot charges under a supply contract),
fixed payments under a water supply contract, administrative costs,
maintenance costs (but not operational costs), insurance, interest on
capital improvements and payments to a replacement reserve fund. Fixed
costs for an example district are given in Table B.3.

Table B.3: Fixed Costs Worksheet

  ------------------------------------------------------- ---------------
  Total Repayment/Amortization Cost (\$/year)             

  Administration & Maintenance Cost (\$/year)             

  Replacement Reserve Fund (\$/year)                      

  Other Fixed Costs (\$/year)                             

  Total District Fixed Costs (\$/year)                    
  ------------------------------------------------------- ---------------

## Variable Costs

Variable costs are costs that are pegged to the amount of water the
district delivers. Examples are operational costs like pumping or water
treatment, or per-acre-foot charges (water rates) from water supply
contracts. State variable costs in the amount that would be incurred for
the average conditions for your district.

Variable costs for an example district are shown in Table B.4.

Table B.4: Variable Costs Worksheet

  ------------------------------------------------------- ---------------
  Total Annual Pumping Cost (\$/year)                     

  Total Annual Water Treatment Cost (\$/year)             

  Other Variable Costs(\$/year)                           

  Total District Variable Costs (\$/year)                 
  ------------------------------------------------------- ---------------

## Setting a Qualifying Tiered-block Water Rate

In the following worksheet you will set a qualifying tiered-block water
rate (Table B.5).

Table B.5: Tiered-block Price Worksheet

  ------ ----------------------------------------------- ----------------
  1\.    Fixed Charge (\$/acre)                          

  2\.    Maximum First-Block Size (af/acre)              

  3\.    Minimum First-Block Price (\$/af)               

  4\.    Minimum Second-Block Price (\$/af)              
  ------ ----------------------------------------------- ----------------

Line 1. **Fixed Charge** is calculated by dividing the District\'s total
fixed costs by the district acreage.

Line 2. **Maximum First-Block Size** is determined by dividing the
district total water deliveries by the total district acreage. This is
the maximum block size for a qualifying program.

Line 3. **Minimum First-Block Price** is obtained by dividing the total
district variable costs by the total district deliveries. If parts of
your district have significantly different variable costs (due to
pumping) you may need to make this calculation separately for each part.
This is the minimum first-block price for a qualifying program.

Line 4. **Minimum Second-Block Price** is calculated by multiplying the
Minimum First-block price by 1.5. The result is the minimum second-block
price for a qualifying program.

# Appendix C - Exemption Process

## Intent

To demonstrate in a clear and concise manner that a BMP is either not
cost-effective, not financially feasible, not legal or not
environmentally possible for a district to implement.

## Evaluation

These Criteria recognize that some BMPs are not appropriate or possible
for some districts to implement. To document an exemption, provide the
basis, rationale, and details for excluding a BMP; such documentation
shall address, as appropriate, cost-effectiveness, financial
feasibility, and environmental or legal constraints to BMP
implementation. Reclamation will consider exemption requests prepared
using the final AB-3616 exemption process.

## Detail Expected in an Adequate Plan

### Legal Constraints

In order to justify a BMP exemption because it would not be legal for
the district to implement, provide the following:

-   A list of any known laws, regulations, court decisions, or other
    legal constraints that make it illegal for the district to implement
    the BMP,

-   A list of steps that would be required to remove these constraints,

-   A description of steps the district has taken to remove these
    constraints, and

-   Documentation of efforts by the district to work with other entities
    that would have the legal authority to carry out the BMP within the
    district\'s service area.

### Environmental Constraints

In order to justify an exemption due to known adverse environmental
impacts, the Plan must document the critical environmental issues and
known (qualitative and/or quantitative) negative impacts of the BMP and
an explanation of why effective mitigation of these impacts is not
possible. If mitigation of the environmental impacts is possible, the
practice must be implemented unless it can be exempted by another
exemption category. For example, if the mitigation costs make the
project economically infeasible, a discussion of the mitigation plan and
necessary mitigation costs should be included as a part of the economic
analysis.

### Economic Constraints

In order to justify an exemption due to economic constraints, the Plan
must document a benefit-cost analysis that demonstrates that the costs
to the district outweigh the benefits to the district over the life of
the measure. Districts must perform the analysis by comparing the
present value of all benefits to the present value of all costs and
document the projected/estimated benefits and costs and the methodology
for analysis (benefits and costs should be quantified to the extent
possible). The analysis performed for each excluded BMP (from the
district perspective) must include, but is not limited to, the following
benefits and costs.

#### Benefits

-   All capital costs avoided by the district that include, but are not
    limited to, the costs associated with the development of new
    supplies (e.g., studies, construction, labor, etc), transportation,
    and the required increase in storage, distribution capacity, and
    wastewater facilities and treatment capacity, etc.

-   Operation and maintenance costs avoided by the decrease in
    production and distribution of water or the treatment and disposal
    of wastewater; including, but are not limited to, energy, labor,
    treatment, storage, drainage treatment and disposal, etc.

-   Water purchases avoided by the district

-   Environmental costs avoided by the district

-   Environmental enhancements

-   Revenues from other entities that include, but are not limited to,
    revenue from the sale of water made available by the BMP, financial
    incentives received from other entities, etc.

-   Other benefits to the district customers that include, but are not
    limited to, hydropower, improved crop yields, improved crop quality,
    labor savings, fertilizer savings, increased farm income, etc.

#### Costs

-   Capital expenditures incurred by the district for implementation of
    the BMP that include, but are not limited to, equipment, supplies,
    materials, construction, etc.

-   Operation and maintenance costs to plan, design, implement, enforce,
    and evaluate the practice

-   Financial incentives to customers

-   Losses in revenues

-   Costs to the environment

-   Other costs to the district

Several accepted benefit-cost analysis methodologies exist (e.g.,
California Energy Commission\'s Integrated Resource Planning
Methodology, generally accepted accounting principles, etc.). Districts
are considered to be the best suited to evaluate their own economic
situation with an appropriate methodology.

### Financial Constraints

In order to adequately justify an exemption due to financial
constraints, the Plan must clearly document the following:

-   The benefits and costs of the BMP to the district,

-   The district funding needed to implement the cost-effective BMP,

-   A discussion regarding why the district cannot finance the BMP
    through rate adjustments, assessments, etc.,

-   A discussion of the district\'s reasonable efforts to secure funding
    from other entities that include, but are not limited to, lending
    institutions and bonding authorities and an explanation of why these
    entities would not provide funding, and

-   The required amount of a grant or subsidy that would be needed to
    feasibly implement the BMP if financing or partnerships could not be
    obtained.

# Appendix D - References

*Incentive Pricing Handbook for Agricultural Water Districts*. U.S.
Bureau of Reclamation, April 1997. Available through U.S. Bureau of
Reclamation. Contact your area water conservation specialist or Julie
Spezia at the Mid-Pacific Region.

*Guidebook for Preparing Agricultural Water Conservation Plans,
Achieving Efficient Water Management*. U.S. Bureau of Reclamation,
December 1996. Available through U.S. Bureau of Reclamation. Contact
your area water conservation specialist or Julie Spezia at the
Mid-Pacific Region.

*Handbook for the Design, Evaluation, and Implementation of Conservation
Rate Structures.* California Urban Water Conservation Council, 1996.
Available through American Water Works Association.

# Table of Contents

Introduction to Incentive Pricing 1

Basic Elements of Incentive Pricing 4

1\. PROVIDES AN EFFECTIVE SIGNAL TO WATER USERS 4

2\. PROVIDES ADEQUATE DOCUMENTATION 5

3\. PROVIDES ADEQUATE MEASUREMENT, ACCOUNTING AND BILLING SYSTEMS 6

4\. IS CLEARLY COMMUNICATED TO WATER USERS 7

Examples of Incentive Pricing Programs 8

1\. FORMAL DISTRICT CLEARING HOUSE FOR INTERNAL WATER TRADES 8

Measuring Effectiveness 9

Impacts of the Program 9

2\. DISTRICT ACTS AS WATER BROKER FOR WATER TRADES 9

Measuring Effectiveness 9

Impacts of the Program 10

3\. RATE SCHEDULES FOR MULTIPLE WATER MANAGEMENT GOALS 10

Measuring Effectiveness 11

Impacts of the Program 11

4\. BILATERAL FARM TRADES 11

Measuring Effectiveness 12

Impacts of the Program 12

5\. TIERED PRICING SCHEDULE 12

Measuring Effectiveness 13

Impacts of the Program 13

6\. HIGH VOLUMETRIC PRICING 14

Measuring Effectiveness 14

7\. GUIDELINES FOR EVALUATING EXEMPTION REQUESTS 14

Appendix A - Incentive Pricing 15

Appendix B - Tiered Pricing 18

Fixed Costs 19

Variable Costs 19

Setting a Qualifying Tiered-block Water Rate 20

Appendix C - Exemption Process 21

Intent 21

Evaluation 21

Detail Expected in an Adequate Plan 21

Legal Constraints 21

Environmental Constraints 22

Economic Constraints 22

Financial Constraints 24

Appendix D - References 25

**[Incentive Pricing]{.smallcaps}**

**[Best Management Practice]{.smallcaps}**

**[For Agricultural Irrigation Districts]{.smallcaps}**

June 1998

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Prepared by

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**HYDROSPHERE**

**Resource Consultants**