Most water system costs are fixed; those for distribution pipes, treatment plants and labor don't vary with the volume of water delivered. Unless most of the monthly bill is a flat fee (which dims price incentives to consumers to use water efficiently), revenues often cannot cover fixed costs during droughts, when extraordinary conservation reduces water sales and revenues. Utilities must raise rates after the drought.
This practice sends a mixed message to customers, who conserved water as requested and are then rewarded with higher rates.
Anticipating such problems with special drought pricing policies can rectify this situation. The utility establishes a drought rate schedule in advance, which allows it to announce and charge a higher per-gallon rate during droughts.
Drought pricing keeps the utility solvent while providing a special conservation price incentive to consumers. Only a few communities now do this (Roseville and Los Angeles are examples).
It's unclear to me what is preventing so many utilities from adopting drought pricing. Regulatory barriers? Fear of "price gouging" accusations? Menu costs?