Ottawa's water fee increase and the incentive to conserve

water tap and a dropIn an ideal world everyone would conserve our valuable natural resources, like clean drinking water, because it's the moral thing to do. Unfortunately we don't live in an ideal world. Thankfully humankind has created an entire branch of science, economics, to help us figure out how people do consume things.

Let's apply some economics to understanding how the City of Ottawa staff recommendation to increase water usage rates by 7% will affect consumption. Let's also look at how this affects the people in Ottawa who already conserve as much water as they can. Is it fair to make them pay more considering they have already been trying to conserve?

Fairness is too subjective to debate. Instead, let's look at the absolute dollar impact of usage-based billing on a “conserver” vs. a “waster”.

Let's pretend that every six months the City of Ottawa increases the usage-fee for water by 3.5%. The following chart shows the water consumption for two fictional homes. The red one is a “waster” and simply isn't paying attention to how much they pay for water, and so never change their behaviour. The blue one is a “conserver” and each time the price of water goes up, they try to conserve more. Or, every six months they make an effort to cut usage on moral grounds. For arguments sake I've set their reduction at 5% each time their behaviour changes (no matter the reason why).

Charting this out to 2016 we see no change in behaviour at the waster household. They are still consuming 100L of water. Meanwhile, at Chez Conservers, water consumption is down to 86% of their original in 2013. Good for them.

If Ottawa held the water-usage fee steady for all those years the below chart shows what their bills look like over that period. Waster household started at a fictional $1000/mo and is still there years later. Meanwhile the household that is conserving water is paying less over time. In 2016 they are down to $860/mo.

This is where most people expect to be after investing in conservation: spending less money. It's a good place to be, and all things being equal, is a fair assumption to make. If you consume less, you pay less. Unfortunately the real world is not so simple. In Ottawa's case the water and sewer infrastructure needs improvement and upkeep. We have a moral obligation to stop dumping crap in the river. We have a financial obligation to maintain our infrastructure without going into debt to pay for it.

So, what happens if usage-fees go up? Are we unfairly making the conserver household pay more? Again, fair is subjective. Let's follow the money instead.

As usage-fees increase everyone is going to pay more. Households that conserve water (either morally, or as a result of price signals) will pay a bit more. The key here is households that don't make an attempt to conserve water will pay even more. 

The above chart shows how much each household will pay as our fictional Ottawa increases water usage rates every 6 months. Instead of paying the same each month, the waster pays more (a linear increase that matches the increase in water rates). Meanwhile, the conserver household pays more, but not quite as much more. Since they are lowering their consumption at the same time as prices increase, the impact on their pocketbook, in absolute dollars, is smaller.

To the matriarch, or patriarch, in Chez Conserver the water rate increase feels unfair. Weren't they supposed to be rewarded with cost reductions if they lowered their resource usage? Ideally that would be true but in the real world each household needs to consider the counterfactual: how much would I be paying if I wasn't trying to conserve? Which brings me to the final chart.

This last charge shows the net benefit of conservation under both models. In blue is how much money a "conserver" will save relative to a "waster" when water fees are held constant. The best a conserver can do is pay $142 less than a "waster". But if we fund infrastructure improvements with increases in usage-fees, a "conserver" will pay $174 less than a "waster". They will be paying more than they were in 2013, but they will also be saving more than a waster.

I realize this is a brain buster. I've had to recheck my ficticious spreadsheet a few times before having the confidence that my math is right. Even though I'm good with "the maths" I'm still not 100% confident I have the math right.

This is one of the difficulties of public-interest policy. Sometimes you need to explain to taxpayers that costs are going up for everyone. But at least somtimes, you give people the incentive, and tools, to pay less if they are willing to conserve.

But it is an unassailable fact that it's always worth your while to conserve. 

Don't be a waster.

PS: Please feel free to check my math.