In this video, I will show you the main types of water tariff structures. You can think of these as policy options. Selecting different tariff structures is one way to improve water and sanitation services. The first important distinction among tariff structures is between a single-part tariff and a two-part tariff. A single-part tariff means that a customer's water bill is determined by just one calculation. There are two main possibilities for how this one calculation can be done. First, a customer's water bill can be determined by a fixed charge that is independent of how much water a customer has used. Second, a customer's water bill can instead be determined by the actual measured quantity of water that a customer has used. If a customer's water bill is calculated based on a single-part tariff that uses a fixed charge, there are several ways the fixed charge can be calculated. For example, a fixed charge could be the same for all households, or for all firms of the specific type. Alternatively the fixed charge could vary based on how household size, or on a house as market value, or based on the diameter of the pipe connecting network to the house. Fixed charges based on household size are hard to implement. This requires that the utility determine how many people live in a household, and that utility has to keep this information up to date in case the number of people changes over time. A more common approach is to charge a higher fixed charge for providing water services to properties with higher values. There are two rationales for this, first, households with higher value properties may use more water, charging them more seems equitable and fair because it costs more to provide service to households that use more water. Second, higher fix charges may see affordable to households that live in properties with higher values. Note that to implement this approach, the water utility needs to know the value of properties in its service area. These data may be available from other local government authorities. They may or may not be updated over time. Another approach is the set different fixed charges depending on the diameter of the pipe that supplies the house. Houses with larger diameter connections would be assigned a higher fixed charge. This is because it is assumed that the larger diameter pipe would enable the household to use more water. It would be fair and equitable to charge households that use more water more than households that use less. Note that none of these approaches to setting a fixed charge provide an incentive to the customer to conserve water. The monthly water bill is the same regardless of how much water they actually use. Note also that when fixed charges determine a customer's bill, it's not necessary to meter the customer's actual water use. The water services provider will not know how much water customers are actually using. The second way a single-part tariff can determine a customer's water bill is to calculate the bill based on the volume of water used. Here, there are three main options. The first is a uniform volumetric tariff, here, the customer is charged the same amount for each cubic meter she uses. So if the price is 50 US cents per cubic meter, and the customer uses 5 cubic meters, her water bill will be 5 times 50 cents, or $2.50. Similarly, if she buys 10 cubic meters at the same unit price, her water bill will be 5 US dollars. A uniform volumetric tariff will be very familiar to you. This is how most businesses price the goods and services they sell to you. The second option is a block tariff. Now, the unit or volumetric charge is constant over a specified range of water use. Then, at a specified amount of water, this volumetric charge changes. There are two types of block tariffs, an increasing block and a decreasing block. With a decreasing block tariff structure, the volumetric price starts high and then falls as you use more water. So say you use up to 10 cubic meters of water in a month, an example unit price would be 1 US dollar per cubic meter. But if your water usage exceeds ten cubic meters per month, just the amount of water above 10 cubic meters is then billed at say 50 US cents per cubic meter. Imagine your household uses 12 cubic meters per month. Your monthly household water bill in this example would be $11. The first 10 cubic meters of water you used cost you $1 per cubic meter. This cost you 10 US dollars for that month. The next 2 cubic meters you used was charged at 50 US cents per cubic meter. That cost you an additional 1 US dollar. So your final monthly bill is 11 US dollars. When you're shopping, stores will often offer you a discount if you agree to buy more of a certain product. A decreasing block tariff is like this. Your water utility is offering a discount to customers who use more water. The increasing block tariff, or IBT, is the reverse of the decreasing block tariff. With an increasing block tariff, the volumetric price starts low and then increases as you use more water. Say you've used any quantity of water up to 10 cubic meters a month. Let's take an example unit price of 50 US cents per cubic meter. If you then use more than 10 cubic meters per month, the amount of water used in excess of 10 cubic meters, is then billed to you as 1 US dollar per month. So in this example, say your household used 12 cubic meters per month. Your monthly water bill would be $7. Your first 10 cubic meters cost you 50 US cents per cubic meter. That part cost you 5 US dollars. Your next 2 cubic meters was charged to you at 1 US dollar per cubic meter. This extra usage cost you an additional 2 US dollars per month. So your total is 7 US dollars. A variation of the standard IBT is to charge the volumetric rate associated with the highest block, into which your water use falls, for the entire quantity of water used. So for the example we've just done, with this variation of the standard IBT, your water bill would be 12 US dollars per month, 5 more than you just pay. This is because all 12 cubic meters would be billed to you at $1 per cubic meter leading to a total bill of $12 per month. This terra structure has been widely used by water utilities in Egypt. They call it a Ratchet IVT because the water built ratchets up as water use increases. This terra structure creates a strong and center for you to keep you water use below the breakpoint between two blocks. The third option is an increasing linear tariff. In this case, the unit charge increases linearly as water use increases. This tariff can be a bit difficult to follow but one way to think about it more clearly as to imagine it is in increasing block tariff with infinitely small blocks. Again, there are two variants of the increasing linear tariff. In the first case, the volumetric rate associated with the incremental, the last unit used applies only to the last unit of water used, not all the previous units. In the second case, the volumetric rate associated with the last incremental unit used applies to all of the water used, that is all the intramarginal units. This finishes our discussion of single-part tarrifs. Now, we turn to two-part tarrifs. With a two-part tariff, your water bill is calculated using both a fixed charge and a volumetric charge, based on your water use. The fixed charge can be either positive or negative. A negative fixed charge is effectively a rebate. It is a subtraction off your water bill. Your water bill is calculated by adding or subtracting the fixed charge, the first part to the volumetric charge, the second part. The volumetric charge can be calculated using a fixed volumetric charged, a decreasing block tariff, an increasing block tariff, or an increasing linear tariff. The approaches we've just discussed. In the next several slides, I will show you some specific examples of two-part tariffs, these use different approaches to calculate the volumetric charge. Then, I will show you graphically how the price per cubic meter and the water bill change as the quantity of water used by a household per month changes. And these figured, the price per cubic meter is shown on the vertical access on the left. Imagine that your household's monthly water bill is shown on the vertical axis on the right. The quantity of water used by your household per month is on the horizontal axis. Here's an example of the two-part tariff with a uniform volumetric price and a positive fixed charge. Here, your positive fixed charge is 5 US dollars per month and the uniformed volume metric price is 50 US cents for cubic meter. This start blue line shows that your uniformed volume metric price of 50 US cents per cubic meter does not change as your households monthly water use increases. The pink line shows that the volumetric component of this two-part tariff increases linearly as water use increases. Finally, the yellow line shows your total monthly water bill increasing linearly from the starting point of 5 US dollars. That's the fixed charge that you have to pay regardless of the amount of water you use each month. In effect, the fixed charge shifts the pink line up by a fixed amount of 5 US dollars at ever quantity of water used. The next two-part tarrif will examine as one with a positive fixed charge and an increasing bland volumetric price. With this two-part tariff, you again have a positive fixed charge of 5 US dollars per month. However, the volumetric component of your tariff is different. For quantities up to the first 10 cubic meters per month, you're only charged $0.10 per cubic meter. If your water use exceeds 10 cubic meters a month, and you're charged $0.50 per cubic meter for all the water use in excess of 10 cubic meters per month up to 20 cubic meters per month. If your water use exceeds 20 cubic meters per month, then you will be charged 1 US dollar per cubic meter for all water used in excess of 20 cubic meters per month. This orange line shows that the volumetric price is $0.10 cents per cubic meter for the first 10 cubic meters. It then increases to $0.50 cents per cubic meter for the next 10 cubic meters. Finally, it increases to $1 per cubic meter for quantities above 20 cubic meters per month. The pink lines shows that the volumetric component of the water bill increasing as the water use increases. The rate of increase in the water bill increases at the two points in the block structure where the volumetric rate shifts up. Finally, the yellow line shows the total monthly water bill increasing at an increasing rate, from a starting point of 5 US dollars. Again, this is the positive fixed charged. In effect, the fixed charge shifts the pink line up by a fixed amount of 5 US dollars at every quantity of water use. Next, I will show you a two-part tariff with a positive fixed charge and a decreasing block volumetric component. A two-part decreasing block tariff, again, has a positive fixed charge of 5 US dollars per month. For the volumetric component of the tariff, for quantities up to the first 10 cubic meters per month, you're charged 1 US dollar per cubic meter. If your water use exceeds to cubic meters per month, then you're charged 50 US cents per cubic meter for all water in excess of 10 cubic meters per month up to 20 cubic meters per month. If your water use exceeds 20 cubic meters per month, then you're charged 10 cents per cubic meter for all water in excess of 20 cubic meters per month. In this figure the orange line shows that the volumetric price is 1 US dollar per cubic meter for the first 10 cubic meters. It then decreases to 50 US cents per cubic meter for the next 10 cubic meters. Finally, it decreases to 10 US cents per cubic meter for quantities above 20 cubic meters per month. The pink line shows that the volumetric component of the water bill increasing as water use increases but in a decreasing rate. The rate of increased drops at the two points in the block structure with a volumetric rate shifts down. Finally, the yellow line shows the total monthly water bill increasing in a decreasing rate from a starting point of 5 US dollars, the fixed charge. Again, the fixed charge has the affect of shifting the pink line up by a fixed amount of 5 US dollars at every quantity of water used. Finally, I'll show you a two-part tariff with one variant of the increasing linear tariff. For this increasing linear tariff, the intramarginal units are billed at the price associated with their water use as shown in the blue line in this figure. The pink line shows the monthly water bill rising nonlinearly as water use increases. Finally, the yellow line shows the total monthly water bill increasing at a nonlinear rate from a starting point of 5 US dollars. That's the fixed charge again. Here, once again, the fixed charge shifts the pink line up. By a fixed amount of 5 US dollars at every quantity of water use. There are number of variants in these basic tariff structures. The first is to provide a specified amount of water for free every month. This is sometimes called the free service allowance. This is really an example of an increasing block tariff, where the volumetric rate in the first block is provided at no charge, for free. The second variant involves a minimum bill for the volumetric component of the tariff. At first glance it might appear that a minimum bill is simply a fixed charge, but it works slightly differently. A minimum charge for the volumetric component of a two-part tariff refers to the amount of money that the volumetric component cannot fall below. Typically a minimum charge is implemented to raise the water utility's revenues. A minimum bill for the volumetric component effectively penalizes you if you are a small water user, and you perhaps do not use the full quantity of water associated with a minimum bill. A third variant is seasonal water rates. Seasonal water rates are rarely used in low income countries, but they should be. When there is a large seasonal peak in water use by the utilities customer base, seasonal prices can be used to reduce peak demand. The idea is to charge higher prices during peak use periods to reduce total water Water use. This approach has the important advantage of decreasing the utility's need for costly capital expansions. A fourth variant is to use a negative fixed charge, or rebate, instead of a positive fixed charge. Negative fixed charges have been common in telecommunications and mobile phone rate structures. But today, as far as I'm aware, they have not been used in the water and sanitation sector, although they could be. Like seasonal pricing, negative fix charges have important advantages in some circumstances. I'm next going to show you two possible tariff structures. I want you to think about which one you would prefer for the water utility in your city or community to use. Option 1 is a two-part tier for the positive fixed charge and a low uniform volumetric price. Here, let's say the positive fixed charge is US$10 per month and the uniform volumetric charge is US$0.25 cents per cubic meter. Say your household uses 20 cubic meters per month. Your water bill would be US$15 per month, that's US $10 for the fixed charge and US$5 for the volumetric charge for a total of US$15. Option 2 is a two-part tariff with a negative fixed charge or rebate of -US$5 per month, this amount is subtracted from he volumetric component of your water bill. Here, the uniform volumetric charge is US$1 per cubic meter. Let's say your household uses 20 cubic meters per month. Your water bill would still be US$15 per month. That's a negative fixed charge of US$5 and US$20 for the volumetric component equaling US$15. In both cases your household uses 20 cubic meters per month and you pay a water bill of US$15 per month. But Option 2, with a negative fixed charge provides a much stronger price signal for you to conserve water. This is because each additional cubic meter raises your water bill by US$1. In Option 1, with a positive fixed chart, each additional cubic meter you use instead only increases your water bill by US$0.25. You live in a water scares region and are concerned that the household use water wisely Option 2 is a much more attractive tariff structure than option one. The negative rebate allows you to address affordability concerns, and at the same time you send a volumetric price so you know that water is scarce and should not be wasted. In this video, we have reviewed the main water tariff options. The challenge of designing water tariffs is to determine which of these different tariff structures is best at a given time and place. I like to think of best as meaning the best compromise between the four primary objectives, cost recovery, economic efficiency, social, and simplicity.
