It's better to be approximately right than precisely wrong!
Evan Vlachos, late water sociologist in Colorado
A recurrent problem with environmental economists is their tendency to idealize solutions that seem obvious, while forgetting their administrative and transaction costs. This is frequently the case with water tariffs: metering is often advocated to stimulate water conservation. When metering allows identification of large users, it is tempting to mix moral with economic considerations. This often leads to the conclusion that the wasters will be the payers in implementing a progressive tariff, also called increasing blocks tariff (IBT). The idea is that the first volume of water metered is cheap or even free; additional blocks follow with higher and higher volumetric prices. Once this idea is picked up by the media and politicians, it is endlessly repeated without any counterchecking. IBTs were even advocated by French President Macron among the 53 measures of the post-2022 drought water plan. Yet in practice, such a tariff system entails high administrative costs, does not reduce consumption in the long run, and has regressive effects on large poor families.
In addition, a significant proportion of the European urban population lives in condominiums with no separate meters: in Paris, there is usually only one meter per building[1], and the collective water bill is allocated between resident families based on the flats' total area (Barraqué, 2011). Retrofitting separate meters is costly. In large and recently built condominiums, submeters are now installed. However, keeping collective billings reduces the amount of bills in arrears. In Britain, the systematic metering policy adopted with privatization results in 40% of customers delaying their bills payments by six or more months.
After decades of expansion in water supply systems, a double crisis is looming: water consumption is declining in cities, while renewal of aging infrastructure requires more investments. Typically, if people conserve water, operators sell less. Since tariffs represent almost all the income while operating costs are fixed and represent most of the expenses, this leads to a financial crisis. Increasing the water price to recover costs then impacts poor customers, who cannot afford to invest in water-saving appliances.
In short, it is very difficult to pursue both consumer justice and social justice with the same water tariff: administration costs can offset the benefits that were initially sought. Typically, the American Water Works Association recommends "think outside the bill", to avoid complexifying the recovery system. Interestingly enough, on tariffs and their social effects in developing countries, Boland and Whittington (2000), as well as Komives (2005), also recommended not to opt for IBTs but rather to provide rebates to people struggling to afford paying their bills.
One reason is that ideally, a progressive tariff should be applied per capita. This requires knowing how many people live behind the meter. Ignoring this is a minor problem if each family has a separate meter, but in the case of collective metering, large multifamily units might end up in the expensive block rates. Conversely, with collective metering, families in condominiums benefit from the fixed part being divided by the number of apartments behind the meter[2]. Adopting separate meters and individual billing for the sake of implementing an IBT will dramatically increase water bills in condominiums, so that progressive water consumption reduction will not be sufficient to offset it, even for small households.
Worse, increasing the fixed part of the bills to make up for the additional costs and/or the reduced income of the operator goes against the initial objective of progressive tariffs, supposed to increase the elasticity of consumption to price.
The latter is low because people do not react to price changes immediately; they replace appliances only when they are out of order. When they do, the new ones use less water, which explains why water consumption decreases slowly, and not in direct response to price changes. A tariff increase, however, often does trigger conservation, but people's motivation frequently fades away after a few months. It is more efficient to visit 'water wasters' and teach them how to save water and control their leaks.
Progressive tariffs are wrongly based on an assumption that poor people use less (indoor) water than rich ones. When the United Nations adopted the right to water, many water experts tried to translate it into progressive tariffs. Was this not to try to save the very idea of cost recovery through bills in places where a large percentage of the population does not have good consumer service, and therefore refuse metering?
In Belgium, where water supply services modernization was relatively late in being implemented, the double project to target the wasters and protect the poor made IBTs quite popular, first in Flanders region. Yet, as early as 1998, Peter Van Humbeeck (2000) wrote a counter-intuitive report for the regional socio-economic council: the initial free volume of 15 m3/year per capita followed by a higher volumetric tariff to reach the same final revenue, resulted in poor families paying more and richer ones paying less. This is due to larger families being those who can afford to bring up more children, for whom the free 15 m3 per capita ends up making the total bill cheaper per person.[3]
Wallonia then opted for a water tariff with only two blocks and no free volume, but with the same will to encourage water conservation and to implement a right to water. Unfortunately, further investigations showed that it failed, for several reasons (Prevedello and Barraqué, 2017): very low elasticity to price increase; inattention of most households to water charges (in particular in collective units); temptation for users to substitute public water supply with other sources (e.g. harvesting rainwater or using a private well), thus reducing the income of the supplier; a tariff increase to cover the costs would impact the poor if made through a higher fixed portion of the bill. In short, a progressive tariff would be self-defeating!
The Brussels Region also adopted an IBT in 2006, and abandoned it in 2021, after a university study showed its ineffective impacts on consumption and social protection (May et al., 2021). In addition, the high percentage of people living in condominiums made it more difficult to find out the real number of people in households, despite this information being legally available in a national register – but usually outdated and inaccurate.
Then imagine the situation in France where operators are not even allowed to obtain this information on household size. Suez then experimented with IBTs per apartment: as many fixed parts as the number of apartments and an application of block charges on average consumption of one apartment. After combining all fixed and variable charges, only one bill is sent to the condominium. However, the redistribution of charges among residents is uncertain.
In conclusion, water supply is not a market good but a club good subject to the constraints of public services. If some pay less, others pay more, or the water supplier loses money! This also shows how difficult it is to design a sustainable tariff given the complexities, often unsuspected by environmental economists. In the end, some cities in France (Nantes, Bordeaux) rejected IBTs, while providing rebates to the limited number of families in condominiums who would pay more than 3% of their revenue with the ongoing tariff.
References
Barraqué B, 2011. Is individual metering socially sustainable? The case of multifamily housing in France, in Water Alternatives 4(2): 223-244. www.water-alternatives.org
Boland, J., Whittington, D. 2000. The political economy of water tariff design in developing countries: Increasing block tariffs vs. uniform price with rebate. In A. Dinar (ed), The Political Economy of Water Pricing Reforms. World Bank – Oxford Univ. Press, pp. 215-235.
Komives, K., Foster, V., Halpern, J., Wodon, Q. 2005. Water and electricity for the poor: Who benefits from utilities' subsidies? Washington, D.C.: The World Bank.
May X, Deligne C. et al. Pourquoi ne pas en finir avec la tarification progressive de l'eau à Bruxelles, in Brussels Studies, 2021. https://doi.org/10.4000/brussels.5494
Prevedello, C., Barraqué, B. 2017. Les tarifications progressives et sociales de l'eau. Contribution au Congrès de l'ASTEE à Liège, Actes, 2017.
Van Humbeeck, P. 2000. The distributive effects of water price reform on households in the Flanders Region of Belgium. In Dinar A. (Ed), The Political Economy of Water Pricing Reforms, Oxford Univ. Press, pp. 279-295.
[1] In Paris' 20 arrondissements, there are only 93,000 meters for a population of 2.2 million, plus an extra million commuting to work in office or commercial buildings.
[2] In Toulon France, we found that single families would pay €100/yr, while a 51-apartment condominium would be charged 600 €/yr, i.e., 12 €/apartment. The fixed part is in fact set on the diameter of the collective meter.
[3] In Belgium, on average, the second child uses 20 additional m3, and the third child even less.