The Price of Water

Ashley Ice

Introduction

• The average American uses 183 gallons of water per day, less than 5% is used on drinking and cooking.– Toilet: 27.4 gallons– Laundry: 17.2– Shower: 14.1– Faucets:10.2– Bath: 7.8

• The average American household spends $523 per year on water/wastewater charges and $707 on carbonated soft drinks and other beverages

• You can refill an 8oz glass of water 2,500 times from the tap for less than the cost of a single Coke

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• Water levels in the Ogallala aquifer, which underlies 8 mid-west states, have fallen by 30% since the 1940s

• The Colorado River barely makes it to the Gulf of California.

• As water levels have steadily decreased over the past 50 years the real price of water has also decreased.

Price vs. Non-Price Conservation

• In a recent study of 12 U.S. and Canadian cities replacing 2 day/week watering restrictions with an increase is price could achieve the same level of water savings with welfare gains of $81/household

• Political reasons for non-price conservation!– Eliminating subsidies and increasing price is

unpopular

Full Cost Pricing

• While it is important to ensure that all citizens have access to clean water this does not imply that water should be free of charge

• Prices signal value to customers and it is important for the price to reflect the inherent and increasing scarcity of water.

• The full cost of water should account for:1) The utilities operation and maintenance costs2) The cost to develop additional capacity3) The social and environmental opportunity costs

Flat Rate Pricing

• Customers pay the same fee regardless of how much they consume

• When demand is high the revenue may not be enough to cover additional treatment costs

• Low overhead costs

Increasing Block Rate Pricing

• Customers pay marginally more as they consume more water

• Customers who consumer at or below the average level are rewarded

• Those who consume above average are forced to pay for the extra burden they place on the system

• May deter large businesses

Decreasing Block Rate Pricing

• As consumption increases water becomes marginally less expensive

• Those that consume average levels pay higher per unit costs

• May result in insufficient revenue if demand is high

Seasonal Pricing

• Charge higher rates in months of peak demand

• Seasonal rates account for the increased marginal extraction costs during dry months

• Brings in additional revenue in times when costs are higher

Costs of Full Cost(Conservation) Pricing

• Promoting water conservation may run contrary to utility companies self-interest

• Decreased revenue/short-term revenue instability• Underutilized capacity in the water treatment system

would cause inefficiencies • Potentially high switchover costs• Conservation focused water pricing would be less

attractive to business• The majority of water companies rely on revenue

from water usage to cover fixed costs

Benefits of Full Cost Pricing

• Due to decreased consumption to life of existing capacity could be extended

• Enhances long-term financial stability• Full cost pricing eliminates the need for subsidies

for utility companies, saving taxpayer money• Specific trade-off between an increase in price

and a decrease in consumption-utility companies could price water at a rate that eliminates revenue loss.

Case: Tucson vs. Phoenix, AZ

• Both traditionally dry, drought prone areas that have experienced population growth in recent years

• Phoenix has a flat price structure and Tucson has an increasing block structure

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Conclusion

• The average residential water price elasticity in the United States is between -0.3 and -0.4 this indicates that water is price inelastic but not price un-responsive.

• As stated earlier, less than 5% of daily water usage is for cooking a drinking- This leaves room for utility companies to increase the price of water to full cost without taking away a basic necessity

• If consumption continues to increase extraction costs will also increase

• Important to take the future into account- evaluate the trade-off between short term revenue instability and long-term stability

How you can help!

• Turn Off the Faucet While Brushing Your Teeth• Bring Your Water With You• Buy Recycled-Paper Products• Install a Low-Flow Showerhead• Water Your Lawn in the Early Morning or Evening• Water Your Lawn With a Hose, Not a Sprinkler• Eat One More Vegetarian Meal a Week• Use a Lower Setting on Your Dishwasher• Install Faucet Aerators

Questions????