Developing Affordable Water Rates: A Guide for Utility Leaders

Water Affordability Interventions

At the local level, water affordability can be addressed through several categories of interventions. These include:

• Assess the need, using billing data and community input to understand and target assistance;
• Rate design, such as tiered pricing structures and lifeline rates;
• Recurring assistance, such as bill discounts, either a specific dollar value, a percentage of the bill, or a percentage of household income;
• Crisis relief, such as one-time financial assistance, shutoff protections, and flexible payment plans; and
• Water efficiency measures aimed at lowering bills, such as rebate programs or direct installs for water efficient faucets and fixtures.

In this article, we discuss the process and considerations for rate design. Be sure also to check out the article on Customer Assistance Programs. Also, learn about using rate increases to pay for lead service line replacement.

What is an Affordable Water Rate Structure?

An affordable water rate structure is one that ensures all residents can access essential water services without financial hardship—while maintaining vital revenue for the utility. It’s about designing rates that reflect the reality that water is a basic need and that some households struggle to afford rising bills. (And a note before continuing, Chicago’s Utility Billing Relief Program, Evanston’s Affordable Water/Sewer Rate, and Philadelphia’s Tiered Assistance Program are examples of bill discount models. For more information on bill discounts, refer to our article on Customer Assistance Programs.)

The term “affordable rates” can encompass a variety of strategies. It starts with determining the utility’s revenue requirements and then allocating costs among users. 

Common Water Rate Types

First, let’s consider some of the different rate types.

Often Works Against Affordability

1. Uniform Rate: Many utilities have a single volumetric rate, where all users are charged based on the volume of water consumed. This is straightforward and easy to administer but offers no built‑in mechanism to protect low‑income customers, making it harder to advance affordability.

Can Help Affordability If Designed Well

2. Multi-Part Rate Structure: Utilities can also split the bill into two or more parts. The bill may include a base charge (or fixed charge) and a volumetric rate-based charge. The first can cover administration, infrastructure maintenance, debt service, and so on, and the second, actual consumption. A well-balanced structure keeps fixed fees low to protect affordability (and financial sustainability for the utility) and uses volumetric pricing to promote equity and conservation.
3. Class-Based Rates: Another option is to have different base charges and volumetric rates for different customer classes, such as one rate for residential accounts and another for commercial, industrial, and other high-volume water users. The latter customer class is often served by a single, large-diameter pipe as opposed to the many water mains and service lines required in a residential neighborhood. Accordingly, a lower base charge or volumetric rate may make sense.
4. Increasing Block Rates: Various “tiered” rate structures exist to help utilities address competing priorities. Increasing block rates are often used to incentivize water conservation for residential accounts. Consumption of a specified volumetric block of water—such as the first 8,000 gallons per monthly billing cycle—is billed at a low rate, and the next block is billed at a higher rate, and so on. This keeps essential residential use affordable, while higher tiers discourage excessive consumption.
5. Humpback Rates: Increasing block rates may result in high bills for commercial, industrial, and high-volume customers. This can be addressed through a rate that increases after the first block(s) but then subsequently decreases as the volume increases past typical residential consumption ranges, promoting both water conservation and economic development.

Strongly Promotes Affordability

6. Lifeline Rates: Utilities may offer a lifeline rate for the amount of water required for essential use. For example, the first 5,000 gallons per monthly billing cycle may be very inexpensive or free. The specified “lifeline” volume can be included as part of a base charge or offered as a separate program with its own eligibility requirements. It is important to consider household size in the calculation of essential use, and these households will often benefit from water efficiency measures to make sure every drop counts.

Example – The “Equitable Water Rates” module in NRDC’s Water Affordability Advocacy Toolkit discusses Washington, D.C., as an example where all residential customers receive a lifeline rate for the first block of water. In Norman, Oklahoma, by contrast, the lifeline rate is only available to income‑qualified households, who also receive a reduced fixed charge.

Bonus

7. Unbundle Utility Billing: Households should not lose drinking water access from unpaid garbage pickup fees and other unrelated charges. By decoupling water and wastewater charges and aligning fees with actual impact—like stormwater charges based on impervious area or fire protection charges tied to property value—rate structures become fairer and more transparent.

“We Can’t Afford That”—Or Can You?

How can a municipality with tight budgets possibly afford to lower water rates? It’s a fair concern. NRDC tackled this question head-on in its Water Affordability Business Case blog and downloadable tool, including two municipal case studies where the numbers make a compelling case. NRDC’s free, downloadable business case tool aims to help utilities estimate the benefits of affordability interventions on their own and weigh the potential costs.

The business case for assistance programs is commonly understood among energy utilities, recognizing that along with the lower bills come lower administrative and operational costs. Likewise, for water utilities, well-designed and well-targeted water affordability interventions can actually strengthen utility finances by reducing shutoffs, improving on-time bill payment, and building public trust. 

How to Get Started

1. Understand the Process

The steps will differ depending on a utility’s goals and priorities, but establishing an affordable rate structure may involve the following steps.

• Revenue Requirements Study: This analyzes operations, maintenance, and capital costs for the utility, and the sufficiency of the existing rates for debt service, cash reserves, and so on. This study also considers what service(s) the rates need to cover (e.g., water only, water and wastewater, a stormwater utility fee, and others).
• Cost-of-Service Study: This determines how much it costs to provide water service, broken down by function—such as treatment, distribution, and customer service—and allocates those costs among customer classes.
• Rate Design: This evaluates how to recover those costs through rate structure alternatives and are assessed for equity among customer classes, financial sustainability, and alignment with policy goals, such as the impact of bills on residential affordability.

These studies are often conducted by a certified public accountant or ratemaking specialist and form the technical foundation for any affordability program. Additional considerations to discuss with a consultant may include whether fees will be included in the analysis, such as a tap/connection fee, whether to benchmark against peer water utilities, and more.

And, yes, a revenue requirements study and a cost-of-service study sound like the same thing. Think of revenue requirements as, “How big does the pie need to be?” and the cost-of-service as, “How should the pie be divided among customers?” After that, the rate study figures out the best way to split those costs between base charges, volumetric-based rates, and fee structures.

2. Explore Rate Design Options

There are several ways to structure rates to improve affordability, as discussed earlier. For more information, check out:

• Water Affordability Advocacy Toolkit by NRDC and the National Consumer Law Center, especially the “Equitable Water Rates” module
• Water Affordability Resources for Utilities from U.S. Environmental Protection Agency
• Understanding Conservation Pricing by Illinois Section American Water Works Association (ISAWWA) Water Effi­ciency Committee in partnership with Illinois-Indiana Sea Grant, Purdue Extension, ISAWWA, and University of Illinois System
• Full-Cost Water Pricing Guidebook by Chicago Metropolitan Agency for Planning, Illinois-Indiana Sea Grant, and University of Illinois Extension

For utilities interested in diving deeper into rate setting, the American Water Works Association’s M1 Principles of Water Rates, Fees, and Charges manual is a widely recognized industry standard. While not the only methodology available, it offers a comprehensive framework that many utilities rely on to ensure transparency and financial sustainability.

3. Engage Your Community

While technical studies are essential, input from residents and local businesses ensures your program reflects the real needs and priorities of the community. It may be possible, for example, to set rates such that all maintenance and reinvestment needs are covered, but this may result in unaffordable water bills for many ratepayers. 

Local stakeholders should inform what is an acceptable level of service—e.g., “two or three water main breaks per winter are fine, but 10 is too many.” Or maybe one is too many! Community members can help you find the balance between the needs of the water system and other priorities, and they can encourage cooperation between the utility and the community served. The public support you generate will be essential when it’s time to adopt the new rate structure, having arrived at those rates together. Consider:

• Plain-language materials to explain how rates are set and why changes are needed
• Surveys and listening sessions to understand infrastructure priorities, affordability challenges, and more
• A community advisory committee to review rate options and provide iterative feedback
• Partnerships with community-based organizations, neighborhood associations, block clubs, and other resident groups to co-design and collaborate on outreach and engagement

4. Weigh the Benefits and Risks

Potential benefits of a well-designed water rate:

• Improved payment rates and revenue stability
• Reduced shutoffs and administrative burden
• Stronger public trust and support for infrastructure investment

Potential pitfalls:

• Poorly targeted rates that miss those most in need
• Insufficient funding or legal barriers to implementation
• Lack of staff capacity to conduct outreach to eligible consumers and manage enrollment

These challenges are real—but manageable with the right planning and partnerships.

Conclusion

Utility leaders play a critical role in shaping solutions that work for their communities. Water affordability is a growing concern—and one that cities can address with the right tools and commitment.

By grounding decisions in proven rate design principles, exploring potential rate structures, and engaging the community, leaders can ensure that water remains affordable and accessible for all.