14 May 2012

Cost recovery versus conservation incentives

MV writes with this description of his water bill:
Calculating over the last five years and including taxes, VAT, and the connection, I paid about EUR 3.66 per m^2. (The water price is EUR 1.26 m^2, so EUR 2.44 is administrative crap/overhead.) I do not use a lot of water, so I pay an awful lot for the water I use. There is no incentive to use very little water. There is just a small incentive to not use an awful lot of water.
This is a good description of two factors. First, of the importance of fixed costs in a water system. Second, of the small importance of variable costs for reducing consumption. As I showed in Table 3 of my book [PDF], a higher variable price per unit of water (say EUR 3.00 per m^3 instead of EUR 1.26) would increase the incentive to conserve water without endangering revenue dedicated to fixed costs. The resulting surplus of fixed and variable revenues could be refunded, per person, to reward people who use less water. This post has more details, but remember that a higher variable price does NOT need to include any sort of increasing block rate structure.