My neighbors and I received an attention-catching letter this summer about our water rates. Because we’ve done such a great job at conserving water in the past year, our water rates are going up - a lot.

California continues to experience an historic drought and last year, for the first time in history, Governor Brown mandated cities to reduce their water consumption by 25%. We all had to do our part by curtailing outdoor use of water, taking shorter showers and letting cars go with less frequent washings.

All of these actions were very successful. Cities across the state essentially achieved the 25% reduction goal according to the State Water Resources Control Board’s recent report. Ironically, at the same time many communities in the state have seen their water rates increase despite the reduction in water use. At Stanford, for example, our rates just increased 29% even as we reduced water use by 25%. As a neighbor of mine commented, “Is there anything else that we pay more for when we use less?”

It’s an understatement to say that water pricing is complicated—because it’s a social good and it’s undervalued and tied to outmoded fee structures. It was public policy in America during the 20th Century for federal grants and public works programs to build much of the today’s water infrastructure. These and other political choices led to artificially low, subsidized water rates based on water consumption—or even flat rates regardless of how much water was used.

Payments to water utilities don’t just pay for the water itself. That revenue also pays for people, technology and other infrastructure to ensure our water is available, safe to consume, and delivered where – and when – we need it. Where I live domestic water is imported from the Sierra Nevada Mountains and only about 35% of my water bill goes toward purchase of the water itself. The rest covers local operations such as maintenance and capital improvements to the reservoirs, miles of pipes and other facilities that convey drinkable water from the Sierra to my faucets.

This is the dilemma: how do utilities encourage less use of water when their fundamental operations depend on revenue from selling the very resource requiring conservation?

One answer is a two-part water bill, structured to account for the fixed cost of the water delivery system and the variable costs of water supply, while encouraging conservation without jeopardizing the utility’s financial health or unduly burdening low-volume users. That’s a tall order!

We can fill it by decoupling the price of water infrastructure from the price of the water itself. Also, by restructuring water rates we can account for investing in technologies to tap new sources of water—like purifying wastewater for reuse, capturing stormwater for water supply, and desalination of brackish or salty water. The cost per gallon of these new water supplies is greater than that for traditional, locally available water. That difference can serve as a basis for tiered pricing that recovers cost of providing water to high-volume users without running afoul of “fee for service” legislation.

Most people would think that charging users a higher rate for excessive water use is a simple way to sustain revenues and achieve conservation at the same time. But that runs up against a state law that says fees cannot exceed the cost to provide the service to a property. But, by grouping similar customers in classes and setting rates by customer class, high-volume users can be charged for the higher cost of accessing these new sources of water—a vital way to meet the higher demand of those users without undermining conservation needs.

Los Angeles has taken a bold step in this direction through water rate restructuring. The lowest rate tier covers basic costs of operations, while higher tiers recognize the cost of new water supplies from non-traditional sources like treated wastewater or stormwater runoff. Termed a “water supply adjustment factor,” this aligns rates with water supply costs and level of usage. For low-volume users the rate is low and the need is met by local water, while high-volume users pay for more costly sources of supply from reuse, stormwater capture and imports.

By focusing on the cost of new water supplies and decoupling that from the base rate it’s possible to prepare for the future in ways that encourage water conservation while enhancing water supply reliability. California is out in front of the nation in seeking reliable and resilient water supplies for the future. Our experience shows that water rates need to be restructured to further conservation efforts and expand the water supply portfolio while maintaining revenues.

Note: This is a guest blog post from Richard Luthy. Richard is a professor of civil and environmental engineering at Stanford University, California and director of the NSF Engineering Research Center for Re-inventing the Nation’s Urban Water Infrastructure (ReNUWIt).