The Water Pricing Problem

The business case for improving water efficiency is not easy to make, especially in comparison to energy efficiency improvements which typically produce positive ROI in the form of energy savings. Although water is widely regarded as a valuable resource, water pricing does not reflect its full importance. Water is currently distributed at an artificially low price as if it were virtually worthless and not the life-sustaining and increasingly scarce resource that it is.

The artificially low price of water means that water utilities can’t afford to upgrade critical infrastructure. Individuals, businesses, and farms have little incentive to conserve water and implement more efficient technology, except perhaps to avoid drought-shaming.

What is the “true” cost of water and why is it important?

According to a white paper published by Truecost, “the failure of the market to internalize the full economic value of water has led to the overconsumption” of water resources. Overconsumption of water resources occurs largely because users are not accustomed to paying—and are largely unaware of—the true cost of treating and delivering clean, safe water. Additional research conducted by Trucost reveals that the environmental and social costs of global business water use is around $1.9 trillion per year.

In this economic context, water rates can differ significantly in parts of the U.S. Recently the New York Times reported that “yearly water costs for a family using 400 gallons a day in Fresno, where less than 11 inches falls a year, is $28.26. The same family using the same amount of water in Boston, where the rainfall is over 40 inches, would spend $77.73.”

Additionally, production and consumption of water can cause pollution and excessive withdrawals that have negative economic impacts, which are usually not paid for by the users causing them. For example, a steel producing firm might pump pollutants into a river near its facility. While the firm has to pay for electricity, materials, etc., the individuals living around the factory will pay for the pollution since it will cause them to have higher medical expenses, poorer quality of life, reduced aesthetic appeal of the river, etc. Externalities such as these result in the undervaluation of water resources.

Solutions: Full Cost Pricing and Decoupling

Two solutions appear to be at the forefront. The first, full cost pricing, factors in all costs—
past and future, operations, maintenance and capital costs—
into the price of a water delivery and wastewater treatment. In terms of the water sector, full cost pricing also:

  • Fully recovers the cost of providing that service in an economically efficient, environmentally sound, and socially acceptable manner
  • Promotes efficient water use by customers by charging a higher price and incentivizing conservation

The second solution is called revenue decoupling, which separates a utility’s profits from its sales of the commodity. Revenue decoupling links profits to the number of customers served and creates a system of periodic tune ups in base water rates either to restore to the utility or give back to customers the dollars that were under or over collected as a result of fluctuations in water consumption and water sales. This corrects for disparities between the utility’s actual fixed cost recoveries and the revenue requirements approved by utility regulators. Decoupling water rates promotes promotes efficient water management in several ways:

  • Water utilities no longer have an incentive to maximize the sale of water and therefore discourage the adoption of new conservation technologies
  • Water utilities have increased financial sustainability and therefore greater ability to invest in new technologies
  • Utilities have enhanced long-term access to capital