Mike Young on Droplet 10: Pricing your water
Podcast from Lit Fuse - 19th December 2007. For more information subscribe to our podcasts at http://feeds.litfuse.com.au/litfuse
For more information on the Droplet Series, visit http://www.myoung.net.au/water/
I interviewed Professor Mike Young on his latest “Droplet”, Pricing your water - is there a smart way to do it? In this Droplet co-authored with Jim McColl from CSIRO, they propose a pricing model for urban water which varies depending on supply. Currently, there are many different pricing models for water in Australia. The majority are based on an “inclining block” model (this is not something you would find at Stonehenge, but is a system where the price of water increases in steps, the more you use). About half include a fixed charge. When water supplies are not enough to meet demand, water utilities reduce demand by imposing restrictions on water use. See the water restrictions I am living under in my home town of Adelaide.
Mike and Jim argue that a better pricing model would be to remove the fixed charge, and charge more for water when supply is lower (such as in the current drought) and less when water is more abundant. Equity issues could be addressed by providing people with low incomes a rebate on their water bill, or other government assistance. In their view, such a system would achieve a match between supply and demand, ensures an equitable access to water and would encourage greater innovation and investment in more water supply.
While this Droplet on water pricing certainly asks important questions, it does not seem to me to answer them particularly sensibly nor effectively. Several alternative views seem especially pertinent.
First up, nowhere does it mention what must surely be the only logical starting point for any rational discussion of water pricing policy, namely the establishment of a price for the water itself. Every one of the customers supplied by Australia’s 57 urban supply systems is charged, admittedly in a bewildering variety of different fashions, for the collection, treatment and supply of water, but (with the possible exception of Canberrans) not a cent for the water itself. The very pertinent question of who owns the water in the first place, and thus who deserves to be paid for its extraction, is totally ignored. Even a small per kilolitre payment, if made by everybody, to some form of national water authority would, if appropriately handled, provide a direct source of major funds for critical environmental works, research and so on. There would be no need, as the Droplet implies, for some vague and ill-defined mechanism to “force” the various authorities to pay for so-called “environmental externalities”.
Coupled with this problem for the Droplet, nowhere does it – nor for that matter does any other discussion that I have seen on this topic – address the crucial question that if we are to pay “more” for water, then to whom does this more go? If everyone, except of course the environment, is currently being paid an adequate fee-for-service, then who gets the extra. Or does it just become increased revenue for the authorities doing the charging – and thus simply increased general revenue for the various governments concerned?
This in turn raises the question of a “fixed service charge”, an especial bete noir for Young and McColl. While this may indeed in practice help provide, even guarantee, the authorities concerned a fixed revenue base, this hardly seems likely to be the primary reason for it. It seems to me that water authorities charge a fixed fee because they have fixed costs, fixed costs that directly benefit the consumer. If I want the privilege of being connected to a supply main so that I can have water whenever I want it, then I should have to pay appropriately for the infrastructure that makes that possible – irrespective of whether I use a lot, a little or no water at all during any particular billing period. Again a clear argument for separating the cost of the water itself from the cost of supplying it. Especially since this supplying is now so often provide by a veritable smorgasbord of government and private entities.
Similarly Young and McColl seem to me to make no sustainable case for their opposition to block tariffs. Admittedly water, along with electricity, must be about the only commodity for which different charges might apply for different amounts used, nevertheless if we wish to use a pricing mechanism to help us (the nation, that is) conserve a “valuable resource” then it seems highly logical to me to charge less for the fundamental, personal needs of the nation’s citizens and more for their entertainment needs. I can’t see this as an equity issue at all. As someone once famously said, “of course the rich are different from the rest of us; they have more money.”
Finally, what surprised me most about the discussion of pricing in this Droplet is that there is no real consideration of just how a shift in price, however determined, will in reality cause a shift in behaviour, given that at the point of actual use – when the tap is turned on – there is absolutely no price signal at all, large or small. We use the water and then have to worry about the specific cost of that specific water only some months later. Surely the most effective price signal is received only when we have to hand over our cold, hard-earned cash for whatever it is we want.
The “system” suggested by Young and McColl in this particular Droplet might “achieve a match between supply and demand, ensure(s) an equitable access to water and would encourage greater innovation and investment in more water supply”, as Dr. Dalby seems to believe, but personally I can’t see it. Their argument seems to be on the wrong track altogether.
[...] Discussion with Mike Young (and other comments) [...]
Should we be able to water our lawns « LitFuse said this on February 9, 2008 at 6:45 am
I agree with Mike Young that water should be priced.Whilst it seems logical to increase the price in times of scarcity, as happens to all commodities, there are problems.This has been shown up in the recent Queensland floods. Do some people pay for a scarce commodity, whilst others less for their flood waters. And do South Australian’s pay more for water almost all of the time?
I would like to see income from the sale of water be spent on the purchase of water for the environment until the M/Darling Basin is restored to health.
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