I am not sure about discouraging demand. I think prices should reflect opportunity cost including scarcity rent. Indeed, water providers in Israel are charged extraction levy that is supposed to to be equal to opportunity cost in their locality.I asked for further elaboration on the number of blocks and whether price covers "cost," to which he replied:
However, Mekorot [the national grid operator] does not pay the levy. Mekorot purchases desal water and the price urban utilities pay Mekorot covers the full cost of desalination.
Consequently, the price urban consumers pay for water is close the the price they would have paid if Mekorot were charged the extraction levy. Urban prices are now $2.7 per cubic meter for the first block and $4.14 for the second.** These charges cover cost of water, local provision and sewage service.
The first block is 3 cubic meters per person per month. Anything over this goes in the second block.After noting that "cost" in Israel includes opportunity cost (i.e., running out of water or buying desalted water), I asked about the mix of fixed and variable costs. Yoav replied:
Payments cover cost; hence prices are average costs. Consequently first price is below cost and second price above it.
You may want to read my book, The Water Economy of Israel [PDF]
Approved costs include depreciation charges, labor, and other fixed items. There used to be a "connection charge" calculated to cover investment in network, but it is supposed to be absorbed into the per unit price. The issue has not settled yet.[DZ's] Bottom Line: Israel has a two tier system of prices that (1) recovers costs, (2) reflects "scarcity" in terms of getting more water from desalination and (3) sets a "human right" price for some water but charges more for use in excess of 98 liters (26 gallons) per person per day.**
The question of fixed vs. variable cost will come to the fore pretty soon; the desalination plants are operating this year in less than full capacity [due to rain]; they were promised coverage of fixed costs. We still have to see how the regulator will set the prices in this situation.
* Israel's water relations with Palestine are not good. Read this, this, this, this or this
** That's $7.70/ccf. Water in Las Vegas is $0.87/ccf, which may explain why they are having a hard time reducing consumption to 199 gallons/person/day.
Speaking of Vegas, I just listened to this interview with John Entsminger, Pat Mulroy's replacement at the Southern Nevada Water Authority. John is a lawyer who has worked his entire career at SNWA. He says "there's no water conservation that we haven't tried," which leads me to fear that (1) he hasn't heard of water prices and (2) Vegas will continue Mulroy's expensive and unsustainable pro-growth policies in the hope that other Colorado River diverters will "share the pain" in subsidizing Vegas's gluttony.
Fun fact: The Strip "only consumes" 3 percent of Vegas water because its wastewater is captured, cleaned, and reused. Where is the other 97 percent consumed? I'd guess that at least half evaporates from all those lawns in the desert. Why do people grow lawns in the desert? It only costs $0.87 for 748 gallons of water!