The overall predictability of the three models was compared via a likelihood test to determine if one model was superior to the others, and an alternative water demand model functional form was examined as a test of the analysis. This was not the case. Water price has a significant and negative impact on water use, but water demand is very price-inelastic, more so than has been suggested in other studies. At this degree of consumer responsiveness, water utilities could double their water rates and expect, at a maximum, only a 20-percent decrease in water use during the peak season. Statistical tests to determine whether consumers perceive and respond to marginal prices or average prices were inconclusive.
Consumers appear to be responding to some combination of marginal and average prices.
This makes it more difficult to design effective rate structures because it is not clear which price or prices consumers are responding to. This mixed consumer response is, in part, a result of the service charges so prevalent in current rate structures. The use of fixed service charges with uniform or block rate structures results in declining average prices as consumption increases, even when marginal prices are rising. These results indicate that utilities interested in using price to encourage conservation should reexamine the incentives provided by their rate structures and, specifically, focus on reducing or even eliminating the fixed charge component. Nonprice conservation programs appear to be effective if the water utility achieves a critical mass of programs.