Policy Note: A Universal Equity–Efficiency Model for Pricing Water

Abstract

Drawing on theoretical, practical, and normative rationales, the analysis presented here calls for revisiting the prevailing water service paradigm, and the values and frames it reflects. As is increasingly apparent, current pricing policies may not be sufficiently responsive, pragmatic, or durable, particularly in reconciling competing objectives often cast as the equity–efficiency conundrum. Water is a social good that confers both private and public benefits. The proposed universal (all-inclusive) pricing model envisions five concurrent elements: recognize public functionality in cost allocation (scope economies), calibrate a minimum bill to property assessment (capacity value), provide an essential-use allowance for all households (public health), design cost-based rates for variable water usage (resource management), and prohibit disconnection and deploy service limiters instead (water security). The model advances meaningful structural progress toward social equity while comporting with generally accepted principles to fairly allocate costs and send economic price signals where they make sense.

Measuring water affordability and the financial capability of utilities

“…However, the underlying raw data are not always made available. Adding to this challenge, there is large diversity in rate structures as each utility is trying to balance several goals, including cost recovery, revenue stability, conservation, regulatory compliance, equity across customer classes, and administrative simplicity (Beecher, 2020;Rothstein et al, 2021). Differences in priorities and state regulations have led to a plethora of rate structures.…”

“…Low-income households pay comparatively more for water services because fee structures are often regressive (i.e., water bills account for a larger share of a lowincome household budget compared to a high-income household budget) and cumulative across each water service (drinking water, wastewater, and stormwater) (Beecher, 2020). This vulnerability highlights the significance of rate design to affordability, particularly when considering the difference in monthly water consumption between households of different sizes.…”

“…This vulnerability highlights the significance of rate design to affordability, particularly when considering the difference in monthly water consumption between households of different sizes. The current paradigm of treating water as an economic good with rates striving to reach economic parity (everyone pays the same amount) could be reassessed in the context of affordability, so that low-income households do not spend a higher proportion of their budget on water services (e.g., Beecher, 2020). Even the term "customer" suggests water services are providing an economic good for those who can afford to pay.…”

“…Since the early 2000s, water utilities have increased rates faster than inflation to cover rising costs needed for infrastructure repair and replacement (i.e., the "infrastructure gap" [AWWA, 2001]), addressing negative externalities (e.g., climate change and emerging contaminants), and meeting regulatory requirements with the expansion of regulations to protect public health (Beecher, 2020;Greer, 2020). The costs of providing water services have increased by 5% annually in recent decades (4.7% from 1996 to 2016 [Bunch et al, 2017] and 5.1% from 2014 to 2018 [AWWA, 2019a]).…”

Water affordability and human right to water implications in California

“…Unaffordable water bills compound and perpetuate water quality problems, leading to a “joint burden” on households [ 15 ]. Disparities in drinking water access persist in part because of inequities in infrastructure [ 16 ], high tap water and bottled water costs paired with low ability-to-pay [ 17 , 18 ], low technical, managerial and financial capacity [ 15 ], and rate-design that inadequately addresses households’ ability-to-pay [ 19 ].…”