Metering and the market for water
Posted November 28, 2008on:
The DomPost contained an article on the potential for metering Wellington’s water supply. The question is asked: should Wellingtonians pay for their water? This issue is a hot topic, having been discussed at Kiwiblog, Infometrics and TVHE earlier this year.
Historically, water has been provided for by the various Wellington councils out of rates. Water is not currently metered, which implies that regardless of how much water each household takes, their rates do not vary. This arrangement has led many to believe water is in some way ‘free’, as they are not forced to pay for their specific usage and the cost is embodied in rates which cover many council services across many households. With water use of 400 litres per person per day in Wellington, relative to the national average of 160 litres, it appears water users here are not internalising the cost of their water usage.
Current arrangements do not allow for the pricing of scarcity. Water is increasingly becoming a scarce resource in that demand is increasing significantly, through factors such as population growth and drier summers (also affecting supply), while additional supply is particularly costly. i.e. constructing a new $142m dam. “Acute shortages” are likely under the current framework.
Given the increasing scarcity of water, as well as the very costly supply-side response, what demand-side options are there to resolve the problem? Broadly, one can attempt to allocate water through price or quantity. Quantity rationing is the method currently used, as water is not priced, which involves enforced conservation methods (note that voluntary conservation measures have failed).
The more efficient way to tackle the problem is through a price based mechanism. Metering water and forcing those that use the water to pay suggests that consumption could be “slashed” by 20 to 40 per cent. Pricing water appropriately signals to consumers the true cost of their water use and will encourage conservation of water through internalising this cost.
I envisage an eventual water price that ebbs and flows with the state of of the reservoirs, much like in the wholesale electricity market, although this could be the economist in me getting carried away. 😉 A much more likely outcome is a simple flat-tariff per unit of water consumed.
The point is also made that simply through providing consumers with information on their usage, via metering, could encourage savings. However, the savings would not be as much as under an appropriately priced system and hence simply providing information on usage through meters should be seen as a second best response to the scarcity problem. However, introducing meters without pricing could be a necessary initial step towards the eventual pricing of water, given political sensitivities around the issue.