Tiered Utility Rates: How Electricity and Water Bills Are Calculated by Block
October 29, 2026
Many electricity, gas, and water utilities charge increasing rates as consumption rises. The first block of usage is cheap, the next block costs more, and heavy usage is billed at the highest rate. This is called tiered, block, or inclining-block pricing, and it encourages conservation. The bill is the sum of each block's usage times its price, not the total usage times the highest rate.
Suppose the tiers are: $0.12 per kWh for the first 500 kWh, $0.17 for the next 500 (501 to 1,000), and $0.24 for everything above 1,000. A household using 900 kWh pays 500 × $0.12 + 400 × $0.17 = $60 + $68 = $128. At 1,500 kWh: $60 + $85 + 500 × $0.24 = $60 + $85 + $120 = $265.
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The average price is the total bill divided by total usage: $128 ÷ 900 = $0.142 per kWh at 900 kWh, and $265 ÷ 1,500 = $0.177 at 1,500 kWh. The marginal price is the price of the next unit of consumption: at 900 kWh it is $0.17, and above 1,000 kWh it is $0.24. Decisions to use more or less electricity depend on the marginal price. Reducing usage from 1,100 to 1,000 kWh saves 100 × $0.24 = $24, while the same reduction from 600 to 500 saves 100 × $0.17 = $17, and from 400 to 300 saves only $12. Conservation at the top tier is worth the most per unit.
| Usage (kWh) | Block calculation | Bill | Average price | Marginal price |
|---|---|---|---|---|
| 400 | 400 x 0.12 | $48.00 | $0.120 | $0.12 |
| 900 | 500 x 0.12 + 400 x 0.17 | $128.00 | $0.142 | $0.17 |
| 1,000 | 500 x 0.12 + 500 x 0.17 | $145.00 | $0.145 | $0.17 (next kWh: $0.24) |
| 1,500 | 500 x 0.12 + 500 x 0.17 + 500 x 0.24 | $265.00 | $0.177 | $0.24 |
Water and Gas
Water utilities often use similar tiers, measured in thousands of gallons or hundred cubic feet (CCF; 1 CCF = 748 gallons). A utility might charge $4 per 1,000 gallons for the first 6,000 gallons, $6 for the next 6,000, and $9 above 12,000. A household using 15,000 gallons pays 6 × $4 + 6 × $6 + 3 × $9 = $24 + $36 + $27 = $87. Lawn watering in summer pushes usage into the high tiers, so the cost of an inch of irrigation on a large lawn can be much higher than the average rate suggests. Natural gas can also have seasonal tiers. Fixed charges apply on top of volume charges and do not depend on usage.
Using the Tiers to Save
Know your tier boundaries (on the bill or the utility's website). If your usage sits just above a boundary, small efficiency gains may bring a large savings. Targeted actions: shift laundry and dishwasher loads, fix leaks (a leaking toilet can waste 200 gallons a day), reduce summer lawn watering, upgrade to efficient appliances, and use thermostat settings wisely. Check whether the tier thresholds vary by season or by household size, since some utilities allow larger baselines for medical needs or larger households. Tier boundaries are often set as a percentage of a baseline allowance.
Comparing With Flat and TOU Rates
Tiered rates are sometimes combined with time-of-use pricing. To compare plans, compute your annual cost under each, using your monthly usage. Heavy users usually pay more under tiers than a flat rate, and light users less. Remember that a tier structure affects the payback of efficiency improvements: because your marginal price is high, saving kilowatt-hours at the top tier is worth more than the average price suggests.
Frequently Asked Questions
What are tiered utility rates?
Pricing in which the cost per unit rises as consumption passes defined thresholds.
How do I calculate a tiered bill?
Multiply the usage in each tier by that tier's price and add them up.
What is the marginal price?
The price you pay for the next unit of consumption.
Why do utilities use tiers?
To encourage conservation and to reflect higher costs of supplying peak demand.
What is a CCF of water?
100 cubic feet, about 748 gallons.