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Water Pricing - Decreasing Block Tariffs

Author/Compiled by
Martina Ricato (seecon international gmbh)
Executive Summary
Water and wastewater tariffs determine the level of revenues that service providers receive from users in centralised or semi-centralised systems for the appropriate catchment, purification and distribution of freshwater, and the subsequent collection, treatment and discharge of wastewater. Water pricing is seen as an important economic instrument for improving water use efficiency, enhancing social equity and securing financial sustainability of water utilities and operators. Tariff setting practices vary widely around the world. Here, the advantages and disadvantages of decreasing block tariffs as a type of volumetric water charge are discussed.
Advantages
Allows cost recovery if the size and height of the blocks are well designed
Disadvantages
Encourages to consume more instead of less water and puts on more pressure on limited water sources
Penalises those with low level of consumption (usually the poor)
People do not pay according to the costs their water use imposes on the utility

Block Tariffs

Block tariffs are volumetric charges. The prerequisite for setting a volumetric charge is that consumers have a metered connexion to water services. Under a block tariff scheme, users pay different amounts for different consumption levels. Block tariffs have a step-wise structure. The water charge is set per unit (e.g. cubic meters) of water consumed and remains constant for a certain quantity of consumption (first block). As the water use increases, the tariff shifts to the next block of consumption and so on for each block of consumption until the highest one. Block tariffs can be differentiated among consumer categories (e.g. domestic and non-domestic) and are of two main types: increasing and decreasing.

Decreasing Block Tariffs

With decreasing block tariffs,the rate per unit of water is high for the initial (lower) block of consumption and decreases as the volume of consumption increases.

This type of tariff structure was designed because “when raw water supplies are abundant, large industrial customers often impose lower average costs because they enable the utility to capture economies of scale in water source development, transmission, and treatment. Also, industrial users typically take their supplies from the larger trunk mains, and thus do not require the expansion of neighbourhood distribution networks” (WHITTINGTON 2002).

Well-designed decreasing block tariffs allow utilities to recover costs. However, they penalise consumers with low level of consumption and provide a disincentive for reducing wastage of water. There is a trend to move out of these kind of tariffs, essentially because water conservation has found place in the political agenda of many governments and marginal costs of providing water are now relatively high in many countries, hence decreasing block tariff are not any more profitable for utilities. Decreasing block price scheme are still used in some communities of the USA and Canada, though in recent years other volumetric tariffs (e.g. uniform price and increasing block) are more frequently applied.

Design Principles of a Decreasing Block Tariff

In order to design an decreasing block structure, the regulator must decides for each category of water use:

 

  1. The number of blocks.
  2. The volume of water use associated with each block.
  3. The prices to be charged for water use within these blocks.

The graph shows an example of how the price of water to the consumer changes as the quantity of water used increases for increasing block tariff. Source: adapted from WHITTINGTON 2006

The graph shows an example of how the price of water to the consumer changes as the quantity of water used increases for increasing block tariff. Source: WHITTINGTON (2006)

See also other types of water pricing:

 

Applicability

The decreasing block tariff can be applied everywhere where water is provided and/or wastewater is collected. A metering system is required. Block tariffs can be set at the service provider level or by national or local government. However, this type of tariff is not regarded to be sustainable from a social or ecological point of view, as those who consume least (usually the poor) have to pay the highest price per unit. Furthermore, this tariff encourages consuming more instead of less water, which can put limited water resources under pressure.

Library references

Financing and Cost Recovery

This paper provides an excellent overview on financing and cost recovery for the water supply and sanitation services sector in rural and low-income urban areas of developing countries. The document contains also case studies and mini reviews of best publications on financing and cost recovery.

CARDONE, R. ; FONSECA, C. ; (2004): (= Thematic Overview Paper 7 ). Delft: IRC (International Water and Sanitation Centre) URL [Accessed: 20.07.2010]
Further Readings

Financing and Cost Recovery

This paper provides an excellent overview on financing and cost recovery for the water supply and sanitation services sector in rural and low-income urban areas of developing countries. The document contains also case studies and mini reviews of best publications on financing and cost recovery.

CARDONE, R. ; FONSECA, C. ; (2004): (= Thematic Overview Paper 7 ). Delft: IRC (International Water and Sanitation Centre) URL [Accessed: 20.07.2010]

A Framework for Analyzing Tariffs and Subsidies in Water Provision to Urban Households

This paper aims to present a basic conceptual framework for understanding the main practical issues and challenges relating to tariffs and subsidies in the water sector in developing countries. The paper introduces the basic economic notions relevant to the water sector; presents an analytical framework for assessing the need for and evaluating subsidies; and discusses the recent evidence on the features and performance of water tariffs and subsidies in various regions, with a special focus on Africa. The discussion is limited to the provision of drinking water to urban households in developing countries.

BLANC, D. le ; (2008): New York: DESA Working Paper n°63 URL [Accessed: 20.07.2010]
Case Studies

International Statistics for Water Services

This short leaflet presents water international statistics for water services, e.g. major cities’ water bills, abstraction sources for drinking water supplies, or a large comparison of water cycle charges.

IWA SPECIALIST GROUP STATISTICS AND ECONOMICS (2010): The Hague: International Water Association IWA URL [Accessed: 22.04.2012]

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