Variation in Water Demand Responsiveness to Utility Policies and Weather: A Latent-Class Model

Water utilities use demand-side management (DSM) policies to incentivize conservation during shortages. However, because utilities often use DSM policies for the first time during drought, it may be difficult to determine the extent to which policy responsiveness relates to an overall conservation culture, and short-term policy responsiveness may not be generalizable to non-drought periods. This research evaluates the impact of drought and utility policies using 10 years of household-level panel data in the first known application of a fixed-effects, latent-class model [Deb, P and PK Trivedi (2013). Finite mixture for panels with fixed effects. Journal of Econometric Methods, 2(1), 35–51] to water demand data. This flexible estimation approach identifies heterogeneity in policy responsiveness over time as it relates to drought conditions and changes in the utility’s billing structure. Two classes of water demand are identified — one associated with responsiveness to weather and a second with responsiveness to policies. In the class of water demand associated with weather, households are less sensitive to policy changes but exhibit increased sensitivity to precipitation both when the utility is actively promoting conservation (during severe drought) and in post-drought years. Implications for long-term effectiveness of utility conservation policies are discussed.