17 Jul 2014

Pricing tap water for efficiency and fairness

I've opposed increasing block rates for some time, but I don't think I've got a simple post on how I WOULD price water.

This is from Living with Water Scarcity:
Reliable service and fair pricing

Utilities should collect fixed and variable revenues in direct proportion to fixed and variable costs so their finances are stable. All customers should pay the same volumetric prices to be fair. A surcharge can be added when water is scarce and demand needs to fall. Excess revenue from that surcharge can be rebated to each household --- without respect to their water use --- to ensure that the utility uses higher prices only as a temporary means of preventing shortage.

These ideas are summarized on the next page below, which illustrates how utilities can price water services for fiscal and environmental stability. The figure shows how water costs usually arrive (left column), the way that water is typically mispriced (center column), and how to price water correctly (right column). The light grey areas show the lopsided impact of conservation: A 50 percent drop in use reduces variable costs and revenues by 50 percent each, but total costs fall by much less than total revenues because variable costs are a small share of total costs while variable revenues are a much larger share of total revenues.

Copy, snip and distribute this sheet [PDF] at your next cocktail party. People love talking about realistic ways to live with water scarcity.
Bottom Line: Forget fancy pricing structures with dozens of customers classes. Recover costs to protect the utility's financial stability. Raise prices when water -- the cost of which is usually zero -- is scarce.