A fair price for water - a radical proposal

The problem

Water utilities around the world are struggling to make ends meet, particularly in the developing world, and as a result have trouble providing basic services to ever growing populations.

The price of water is a highly political and emotional subject and some people will argue in the same breath for free or cheap water for all on the one hand, and for environmental conservation on the other.

I intend to show that this position is both illogical and irresponsible, and to propose a solution to make water affordable to all to ensure access and expensive to all to ensure conservation.

Before going any further, it is important to point out that one rarely pays for water itself, but rather for water service. The distinction is important: you pay for the convenience of having water come to your taps (hopefully 24/7/365), not for the resource itself, which is not for sale. In some cases, the government applies a water tax or levy that is meant to compensate the state/community for the uptake of raw water - this is a good idea that promotes conservation, but it is a tax, and not a fee levied by the service provider, be they public or private.

The reasons behind the problem

In a previous post, I discussed the technical elements of a water/wastewater system. In theory, the price of water/wastewater, as paid by consumers, should reflect the expense of constructing/replacing, maintaining, and operating a water/wastewater system on a per volume basis over the long term. This is to say that each consumer should pay according to the amount of water consumed, and to the amount of pollution produced. This has the following advantages:

• transparency: it is clear what the water tariff pays for
• water service pays for water service: there are no subsidies and water/wastewater service operator is encouraged to be efficient, both technically and financially.
• polluter-pays principle: applies to wastewater and states that each should pay according to the level of damage done to the environment (a brewery does not pollute like a house)

Unfortunately, in the real world, this is not what happens.Water service regulators put customers into categories (domestic, industrial, institutional, etc...) and apply different tariffs to different categories, sometimes using one to subsidize the other for political gain. Politicians also subsidize the construction of infrastructure, or even (gasp!) the operations of utility companies so that they can keep tariffs artificially low - again for short-term political gain and at the expense of long-term management best-practices. Sometimes, they'll even take what little cash has been collected by the utility to fund other projects (nobody's ever taken a publicity photo in front a buried pipe) - particularly if the utility operates as a city department rather than as a company (public or private).

It gets worse...

With artificially low prices, consumers are encouraged to over-consume, which in turns leads to the construction of needlessly large (and expensive) new infrastructure. Starved for revenue, the utility does not have the resources to maintain its growing infrastructure, which slowly falls apart. This negative cycle is completed when service quality is reduced, leading to the impossibility of raising tariffs to right the situation. This is something that I have observed first-hand in countless places around the world.

To break this cycle, we need a solution that will:

• guarantee that the utility company has the revenue necessary to meet its technical obligations and maintain high-quality service to all
• ensure that everyone can afford to meet their basic water and sanitation needs, including (and in particular) the poorest who tend to consume the least.
• encourages conservation by all members of society, including (and especially) the richest who tend to consume the most

The issue of affordability of water/wastewater services has been extensively researched by the likes of the World Bank. The consensus is that people (and the poorest in particular) can afford to pay up to 4-5% of their income for 24/7 water/wastewater service.

To ensure that the poorest meet their needs, a variety of tools have been imagined, the most common of which are block tariffs, whereby the price of a cubic meter (or gallon) of water increases as consumption increases. In this way, those who consume more water (typically the rich) subsidize those who consumer less (typically the poor).  This is a good-but-not-perfect system that does not guarantee that the very poor will be able to afford water/wastewater or will have an incentive to conserve water.

My proposal

I propose that the tariff each household is charged for water should be on a strict volumetric basis (per cubic meter or gallon) and proportional to this household's taxable income divided by household size. 

This is, I realize, a radical proposal that is sure to anger libertarians will not want a utility having access to their revenue information. However, it is the best way to ensure that each household pays a "fair" price for water/wastewater service, according to its ability to afford it. The volumetric price would be set so that each household would pay 4-5% of their income to meet their basic needs (roughly on the order of 100-150 liters per person and per day), no matter what their income level might be. Any surplus revenue to the water utility could be used to for water conservation or resource protection projects, or paid as tax to the government - other taxes can be lowered as appropriate.

Unlike for many other goods, nothing can substitute for water, and so there is no way for the poor to consumer 'cheaper' water without risking their health. At the same time, the ability of the rich to pay for and use water for non-basic needs is an issue that concerns everyone, not just  those 'wasting water'. We all have a stake in preserving common water resources and in setting prices sufficiently high so that all have an incentive to save water.

There is no inalienable right to consume large amounts of water just because one can afford it. At the same time, it is morally and politically necessary to ensure that even the poorest can consume the water they need.

Because all societies have income disparity, the only way to meet our two objectives (affordability by all and conservation by all) is to index the price of a unit of water on income. In Finland, the penalty for traffic violations is indexed on one's income, and that is where I got this idea.