The Equity of Tiered Water Pricing

"In moving away from the idea that water should be cheap for everybody just because it is so essential to life, Santa Fe’s approach to water pricing offers lessons in how other parched cities can balance the societal costs of scarcer, more expensive water in a relatively equitable way," writes economics reporter, Nelson D. Schwartz for the business section of The New York Times in their "Parched West" series. "Because of the huge gap between tiers, the biggest consumers effectively subsidize everyone else, shielding poorer residents from feeling the full brunt of rate increases."

Known as tiered pricing, the system wasn’t new or unique to Santa Fe, but in no major city today are the tiers so steep, with water guzzlers paying three to four times more per gallon than more efficient consumers are charged.

The contrast with Fresno is startling. In April, the largest city in California's parched Central Valley, rated #10 by U.S. Drought Monitor "had imposed a long-delayed, modest rate increase — less than the cost of one medium latte from Starbucks for the typical household, and still leaving the price of water in Fresno among the lowest across the entire Western United States," writes Schwartz. "But it was more than enough to risk what [Mayor Ashley Swearengin] bluntly admits could be political suicide."

“It wasn’t that long ago,” Ms. Swearengin said, “that people here were fighting the installation of water meters.”

"The beauty of tiered pricing is that it doesn’t prevent people from using water, and it doesn’t rely on government regulations," said Robert Glennon, a professor at the Rogers College of Law at the University of Arizona and the author of Unquenchable: America’s Water Crisis and What to Do About It, a 2009 book on water policy. "But it insists you pay more for extra water for your lawn than for basic human needs."

The tiered approach has worked as intended. Since 2001, Santa Fe’s total water consumption has dropped by a fifth, even as the high desert city’s population has increased more than 10 percent. When water costs more as its consumption increases, people respond exactly as an economics textbook would dictate: They use less.

However, an April 20 California Court of Appeal's ruling effectively put an end to talk of using tiered pricing to reduce water consumption. How that ruling will affect many as "two-thirds of California’s local water departments [that] use some sort of tiered-pricing system" is not answered by Schwartz.

The impact of the that ruling is not just impairing Gov. Jerry Brown's ability to tackle the drought, it also eliminates what may be the most equitable strategy to reduce water use.

"New academic research suggests that a tiered system has a twofold benefit: It uses something akin to market pricing to encourage conservation but makes sure much of that burden is borne by those most able to afford it," writes Schwartz.

“Tiered pricing offers a balance between fairness and efficiency,” said Kenneth A. Baerenklau, associate professor of environmental economics and policy at the University of California, Riverside.

Hat Tip: Starbucks news selections.