Rising block and seasonal/scarcity tariffs are becoming commonplace in the USA, Canada and Australia
We asked industry experts to share their views on what should be considered for future approaches to water charging. Chad Staddon, Professor of Resource Economics & Policy at the University of the West of England, is the third expert to share his thoughts.
Raised in Western Canada and taking his PhD in the USA, Chad has since 1996 been based at the University of the West of England in Bristol where he is Professor of Resource Economics and Policy. Enduring fascination with water has expressed itself through extensive research and peer-reviewed publications on household water use and also off grid solutions for underserved communities.
Chad Staddon, Professor of Resource Economics & Policy at the University of the West of England
Introduction
Water utilities across the United States, Canada, and Australia employ a range of pricing models to charge for water services. These methods aim to recover costs, promote conservation, ensure equitable access, and maintain infrastructure – but with differing emphases on these priorities in different places according to local conditions. Utilities must address the financial needs of maintaining infrastructure while balancing customer affordability and environmental stewardship, especially in the face of challenges like droughts and increasing demand due to population growth. The specific approach taken often reflects a mix of pressures related to regional water availability, policy priorities, and local factors.
In this blog I briefly review the most common ways different providers in comparator countries (Canada, Australia and the United States) charge for domestic water supply. In particular I discuss some of the complexities related to a commonplace migration towards rising block tariff structures.
Fixed and Volumetric Charges (Two-Part Tariff)
Many US and Canadian towns and cities formerly charged for water using only flat rate pricing, where customers pay a fixed fee regardless of water usage. This approach was common in smaller communities or in areas with consistent water availability, though it has now almost been universally replaced for new build with two-part tariff systems. This system is now the most popular in North America. Such systems charge a basic connection fee or standing charge often linked to the size of the service pipe or meter, plus have a volume metric tariff based on measured consumption. For example, Milwaukee, Wisconsin, the New York City and Tucson, Arizona have all adopted a two-part tariff system. Tucson’s water charging also includes additional fees for maintaining bulk water supply infrastructure (the Central Arizona Project) and for promoting green infrastructure solutions to surface drainage through subsidised lawn replacement, etc.
Some cities commonly used the two-part tariff structure to introduce seasonal or rising block tariffs. The former means that the same unit of water consumption may have different prices charged in different seasons, while the latter is usually designed to encourage conservation through significant increases in costs for consumption above thresholds. Retail water companies in Australia are more likely to be using rising block tariffs than those operating elsewhere. For example, water companies serving Melbourne (there are several) are required to use a rising tier pricing system to encourage conservation during drought conditions. Currently there is about a 2.5x difference between the cost of the first 440 litres used per day (Tier 1) and any use above 690 litres (Tier 3). Brisbane also uses this system for most domestic customers. Water providers in the USA using rising block tariffs include the Los Angeles Department of Water and Power (LADWP) and Seattle Public Utilities (SPU). In both cases this pricing system is combined with cross-subsidised low income and conservation assistance programmes.
While Melbourne’s rising block tariff system is designed to incentivise reduced water consumption by increasing costs with higher usage, studies have raised questions about its overall effectiveness and fairness. In particular it appears that the design of Melbourne’s tariff system results in disproportionately higher bills for small users due to the effect of fixed charges.
The Canadian city of Vancouver has also adopted seasonal adjusted pricing for more recently built residential properties though the vast majority of properties built before about 2010 remain on fixed rate pricing. During High Season (May 1 – October 15) rates per unit (1 unit =100 cubic feet=2,831.6 litres) rise from CA$3.936 to CA$4.934. Interestingly operators contacted by the author were more enthusiastic about the way these tariffs reduce strain on infrastructure and delay the need for costly upgrades then they were about presumptive consumption reductions.
Do Two-Part Tariffs Work?
The most common water charging system in the countries surveyed is two-part tariffs based on water supply metering, reflecting a shift towards conservation and fairness. Flat-rate systems are becoming less common, while tiered rates and seasonal pricing are gaining traction in areas facing resource challenges. Each system is tailored to local needs, infrastructure, and conservation priorities.
In all three countries water pricing schemes are evolving in response to growing concerns about water scarcity, infrastructure needs, and affordability. Several trends identified include application of drought period surcharges, seasonally adjusted tariffs and adoption of more or less complex incentive programmes designed to help customers be more water efficient.
Scientific research suggests that two-part tariffs can drive consumption reduction if significant rising blocks are designed into the system, such as the Australian case where each successive block can cost 2.5 times more than the preceding one. The research to date agrees that price elasticity for water services is quite low, which helps explain why only swingeing increases for successive blocks stand a chance of prompting reduced consumption. This implies that consumers are responding to perceived marginal price rather than average price or total bill – i.e. that additional increment of consumption that costs significantly more and the previous one. This increment would need to be made visible in customer bills to be effective.
Clearly two-part tariff schemes which may include rising block or seasonal pricing elements are much more complex to design and administer then flat rate schemes. Experience in North America and Australia suggests that these schemes need to be part of a broader public conversation if they are to be seen as socially legitimate. In England and Wales, with public trust in water companies at an all-time low, it is likely that introduction of such pricing schemes would be seen as a profit grab more than anything else.
Consumer expert Martin Lewis has repeatedly highlighted another problem with two-part tariff systems generally. Challenging in particular energy companies he argues that these charges function as a “poll tax on energy bills,” disproportionately affecting low-usage households and disincentivizing energy conservation. This is certainly a pitfall we would want to avoid in any rollout of two-part tariffs in England and Wales.