Background
Water pricing has always been a very difficult task, since it is considered as a “general interest” and therefore must satisfy the needs of many parties. Water is considered differently depending on its scarcity. At the Vital Minimum Quantity (VMQ) of water, where it is used to satisfy the most basic need, this, it is considered a necessity. At the next level, Essential Minimum Quantity (EMQ), water is used for other basic purposes: cooking, showering, washing clothes, etc. This amount maintains the standard of living mandated by the World Health Organization (WHO) [1]. When water is abundant and beyond the EMQ, it can be treated as an economic good. The key to water conservation is to recognize the scarcity of water at its different levels; otherwise the value of water is zero [1]. This misconception is very problematic, especially in a world where many areas where water is already extremely scarce. The general goal of the pricing scheme explained here is for water to be affordable to all at least up to the EMQ. This will be difficult, since there are often the conflicting goals of recovering operating costs and providing water to those who cannot afford it [2]. Other conflicts include economic efficiency, cost recovery, financial sustainability, environmental sustainability, and affordability [2].
Problems
Right now, there are many problems concerning water distribution and pricing. These include the lack of universal affordability of water, the increasing scarcity of freshwater, and wasteful usage of water, mostly from industrial use.
Increasing Block Tariff
A potential solution is the increasing block tariff (IBT). This scheme divides water use into tiers, or blocks, where the price per unit of water increases with increased consumption. The price of water is the lowest for the amount in the first block. Once water usage hits the second block, the amount of water exceeding the first block will be paid at the second block’s price, and so on. There are several defining features of an IBT; the number of blocks, the volume of water used, and price for each block. Usually these are determined based on the water usage of a specified region. The first block, also called the social or lifeline block, is often set equal or slightly greater than the VMQ and must be relatively inexpensive in order to protect the neediest households [4]. The price is often set below the actual cost of water. Higher blocks would serve as an incentive to conserve water and compensate for the first block’s price. The poor would benefit from the first block’s subsidized price. People who use more water will need to pay more for higher blocks, which will even out the lower price of the first block [3].
Implementation
An IBT is a relatively simple solution to these problems and with the right features, can greatly help with water distribution. The first block should have a minimum of the VMQ specific to the region and should not extend past the EMQ [3]. The number of blocks should be based on consumption patterns of the region or the industry. On average, the prices for domestic use should be lower than those for industrial use, since domestically used water called for a greater need. The money collected can be funding for additional water conservation activities, or even serve as a subsidy for the poorest households [4].
A big problem is that quantities such as the EMQ and VMQ are determined by the water used by individuals, while block rates are based on households. Therefore, the most important part of an effective IBT would be to base the pricing on the number of people in a household. In developed countries, the population of a household may be determined using information from tax reports. However, in less developed nations, information may be less clear and it may be hard to systematize way to take such information into account [4]. Therefore, IBT would work best for developing or developed countries with a sufficient infrastructure to accommodate a system that calculates the needs of each household based on the number of people in it and any special needs it has. In countries where such a system can be implemented, each household can then pay based on the IBT and their specific household’s characteristics. For example, a family of 6 should be able to pay for twice the amount of water as a family of 3 in the first block of an IBT. Unfortunately, countries with poor infrastructure would simply have to deal with this issue until a reliable information system is developed.
Case Studies
IBT was implemented several years ago in La Paz, Bolivia to reduce the cost of water for those using the least amounts of water. One of the issues was that homes not connected to the distribution system could not benefit from the system, and in some occasions, were paying more. In addition, administration costs were higher for such households since they needed to be identified. However, La Paz did find that the new system of rates promoted water conservation and ensured the profitability of water [1].
IBT is also commonplace in Portugal, where there are over 308 water municipalities. Over 84% use the IBT system, but there is great diversity in structure of these systems [1]. One problem Portugal water municipalities have is the lack of universality – even though on average the first block covers the EMQ, there is actually a great variety in pricing. This highlights a potential problem of IBT: the lack of universality. To avoid this problem, there should be a limit to the number of water municipalities and abundant collaboration between them should be encouraged. This will prevent such a range in prices and lessen the burden and confusion on consumers.
This tariff structure is the the one most used in Africa [4]. Since prices of water are rather high in this region compared to those in other nations, IBT’s ability to charge more from users who can pay more is crucial here. This allows the poorer residential consumers, who rarely exceed the average first block in Africa [4], to receive water at a lower cost. Unfortunately, in practice, many customers without need also receive the subsidy. In addition, the EMQ rate is may still be too expensive for some households. The lack of a connection to the distribution system may also blocks homes from IBT’s benefits.
Some developing countries have shown success in in their use of IBT, despite inconsistent water metering and less than ideal supplies of information [4]. This shows that it is feasible for underdeveloped nations to implement IBT, though much care would have to balance the rates for each block [2].
Conclusion
IBT, when tailored to the region it serves, can be extremely effective without needing too much political involvement. The administration of an IBT system would be more intense than fixed charge or fixed rate systems. Deciding on the features of an IBT would require careful analysis. However, once it has been done correctly, administration would be straightforward and residents having lower income would have access to the water they need. Since it may be difficult to keep track of every household’s information, an average can be used if necessary as long as it is updated regularly. In conclusion, IBT is effective at giving incentive to decrease wasteful water usage and to increase affordability to all households.
References
1. Martins, Rita, Luís Cruz, Eduardo Barata, and Carlota Quintal. Assessing Social Concerns in Water Tariffs. Water Policy. 2013, Vol 15. Issue 2, p. 193 – 211.
2. Whittington, Dale, John Boland, and Vivien Foster. “Water.” Water and Sanitation Program. http://web.mit.edu/urbanupgrading/waterandsanitation/resources/pdf-files/WaterTariff-1.pdf.
3. Ricato, Martina. “Water Pricing – Increasing Block Tariffs.” Sustainable Sanitation and Water and Management. http://www.sswm.info/category/implementation-tools/water-distribution/software/economic-tools/water-pricing-increasing-bl.
4. Banerjee, S., Foster, V., Ying, Y., Skilling, H., & Wodon, Q. Africa Region, Sustainable Development Division. (2010). Cost Recovery, Equity, and Efficiency in Water Tariffs (WPS5284). http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2010/07/28/000158349_20100728131236/Rendered/PDF/WPS5384.pdf.
