Is water priced to encourage conservation?
Posted: August 30, 2010 Filed under: Miscellaneous | Tags: conservation, sewage, water prices 6 Comments
There have been some quite spectacular reductions in Melbourne’s water consumption in recent years. The latest invoice from my water company proclaims that total water consumed by customers has fallen 36% since 1997.
Most of this gain is undoubtedly due to water restrictions and jaw boning. Pricing doesn’t seem to have been a big influence, even though most economists would suggest that it is one of the most efficient ways to moderate demand.
I just got my water bill for the last three months. Average daily use by my household is 495 litres, or 124 litres per person. That’s not bad compared to the Government’s daily target of 155 litres per person (although admittedly it’s been a pretty wet winter).
What surprises me however is the relatively low profile given to pricing as a mechanism for dampening demand (pun intended). My Consumption Charges only amount to 24.4% of my total bill. The other key items are Parks Charges, Drainage Charges, Service Charges and Sewage Charges.
Of course consumption by my household is modest, so perhaps I shouldn’t be surprised that the usage component is low relative to the fixed charges. But as low as 24.4%? That doesn’t give me much incentive to push for even lower consumption.
In fact even if all four members of my household were total water wallies and consumed 200 litres each, the variable component would rise to just 35.1% of my total bill. So the price incentive is relatively small whether you’re profligate with water or seek to conserve it.
I get the accounting principle that some costs should be charged as a set amount because the water company incurs them irrespective of how much or how little water I consume. For example, the pipes cost the same to construct and maintain whether my household uses 50 litres per person each day or 150.
But that also applies to electricity and gas, yet the utilities who supply me with energy charge entirely according to how much I consume – there are no fixed charges. Thus the full potential of price as an incentive to conserve is exploited.
The water company deserves credit for making some attempt to increase the significance of the Consumption Charges component. There is a progressive Rising Block Tariff which increases the price per kilolitre from $1.53 to $1.80 after the first 42 kilolitres (back in the early 2000s the price of water in Melbourne was a flat $0.70 to $0.80 per kilolitre). And these prices are the product of a quite spectacular 22% increase from the 1st of July this year.
Still, this is a pretty low marginal cost – note that $1.80 per kilolitre is just $0.002 per litre.
In fairness, I should add that a very close reading of the fine print on the back of the invoice reveals a surprise. It shows that the Sewage Charges are actually a function of the amount of water consumed and hence, like water consumption, are actually a variable charge. However this is effectively hidden – it is not labelled as a usage charge on the front of the invoice like water is.
If these sewage charges are also counted, the total variable charges on my latest bill are 49.4% (and 65.1% if we consumed 200 litres each per day). This is a big improvement on 24.4% but still well short of the 100% charging method used by my energy utilities.
It seems to me that water and sewage disposal is not priced to encourage conservation. Much more could and should be done.
NOTE: the figures used above have been amended from the original version to correct some errors in my calculations, as pointed out by commenters, below. These errors were relatively minor and do not change the “message” of this article.
The Melbourne Urbanist 
Hello Alan,
an interesting post. In general, I don’t think people receive a very clear price signal about water. In particular, you’re right on the money that the variable cost of sewerage disposal should be made more apparent.
I am a bit confused, though, by your calculations. I did a similar analysis of pricing schedules, and found that for 495L/day, the variable component of my quarterly bill would be closer to 65% of the bill. This, of course, includes sewerage. It’s worth noting that my water retailer is Yarra Valley Water.
Secondly, I’d note that the percentage of the bill which is variable might not be the best metric to judge the clarity of price signals. This is particularly true for water given the increasing block tariffs. The marginal cost is what we need people thinking about, and to that extent it makes sense to have a higher rate at the top end, and to make this very plain in bills.
Ben, thanks for your comment. The items on my bill are as follows:
Water usage: $66.97
Sewage disposal: $68.50
Service charges: $96.45
Waterways & drainage: $26.31
Annual parks charge: $63.75
TOTAL: $321.98
So as I noted above my household’s water usage is 20.8% of the total (and the combined water and sewage is 42.1%).
I did however underestimate the “water wally” options. The water usage is actually 31.4% (not 20.9%) of the total under this scenario and the combined water and sewage charge is 58.1% (not 42.3%). I’ve amended the text accordingly (unfortunately strike-out doesn’t work).
You’re right that it is the marginal cost that counts and that of course is the point of my post – that the marginal cost isn’t visible enough to consumers because the fixed charges crowd it out.
Don’t forget the parks charge is a one-off; if you amortise that over 4 bills (assuming quarterly), you end up with a combined water+sewage of 49.5%.
The problem is water is treated as petrol is still in some countries; as an ‘essential’ resource that should be available to all, and hence is frequently subsidised rather than costed to its true price. There’s a strong argument, at least for water, that this is true to a point – hence block pricing. However, taking that path, the first block should really be only essential water use, a low volume, then rising steeply to true price after that.
Aha! Didn’t realise the Parks charge was a single fee covering the whole year. So, reducing that to $15.94 per quarter brings my costs for the latest quarter to $274.17. The water charges are thus 24.4% of my total for the quarter (and sewage charges 25%, giving a combined total of 49.4% as you say). Still, not enough of a change to contradict my starting premise. Under my water wally scenario, variable water charge would be 35.1% of the total (and combined water and sewage, 65.1%). I’ve amended the figures accordingly (note that I cannot strike-out the old words because this function does not work with WordPress).
I’ve never seen the sense of the so-called “essential” quota (used to be referred to as “free”). Seems to be peculiar to the water industry – don’t think there’s any similar tradition in the electricity industry. Better to charge real cost via a progressive tariff and then apply any offsets on the basis of need (or whatever criteria).
[…] The other thing is water consumption charges still account for only a small proportion of the bill – in fact our 626 litres make up slightly less than a third of the total amount. The rest of it is made up of standing costs for “drainage”, “sewage” and “service” charges, which customers have no real control over*. So even if we worked harder at reducing our consumption, the financial pay-off would be pretty small. The pricing of water continues to offer little incentive for conservation, a point I made nine months ago. […]
[…] written earlier in the year. The three most-read articles in 2011 were in fact posted in 2010 i.e. Is water priced to encourage conservation?, How big is Melbourne?, and Banging the high rise drum. -37.781700 145.039432 […]