Design of Increasing Block Tariff (IBT) for Pricing Domestic Water: A Simulation Approach

Abstract

In recent times, urban water utilities have shown increasing preference for increasing block tariff (IBT) for pricing domestic water. Although appealing at the outset, IBT’s can fall short of achieving its goals such as adequate cost recovery and effective cross-subsidization when water utilities arbitrarily design the IBT structure without any rational basis. To solve this problem, this study presents a simulation method to design an IBT for Bangalore, taking into consideration the nature of distribution of monthly consumption of domestic households and the revenue requirements of the water utility. The simulation method aims to find the best set of IBT parameters that simultaneously satisfies goals such as cost recovery, affordability, cross-subsidization and most importantly, fairness of marginal prices in the higher blocks of IBT. The study presents the design of a 3 block IBT for pricing domestic water in Bangalore and finds that an increase of the marginal price in the primary IBT block increases the likelihood of achieving the IBT goals simultaneously, when compared to marginal prices in the higher blocks. At the same time, the block sizes have a negative significant influence on achieving the IBT goals simultaneously. The relative influence of the 3 block IBT parameters on achieving the IBT goals simultaneously is assessed using logistic regression and the IBT parameter solution set is represented using a decision tree. In addition, the study analyses the IBT block switching characteristics of domestic households in Bangalore, during the time periods (2006-2009 & 2016-2018), using a steady state model and also reports the price elasticity of IBT. In contrast to previous studies that have assumed the positive association between household income levels and household consumption, a pre-requisite condition for effective implementation of an IBT, this study clearly demonstrates the positive influence of the household income on the monthly average household consumption by developing water demand models at aggregate municipal ward level and household level. First, the aggregate water demand model is developed for 198 municipal wards of Bangalore, using average monthly household water consumption as dependent variable and a set of demographic variables namely population density, household density etc. and infrastructural covariates such as average built-up area, property density, road density, per capita park area etc. Results suggest that average built up area and per capita park area have a significant positive influence on the average monthly household consumption. Owing to the availability of few extra covariates in the 39 municipal wards of South Bangalore, the study also develops an aggregate water demand model for the 39 municipal wards in South Bangalore. Analysis reveals that average household water consumption is higher in municipal wards, where the fraction of houses with more than 3 rooms is higher. Second, the study develops a household water demand model for Bangalore city, using survey data from 300 households in different regions of Bangalore. Analysis reveals that the household domestic consumption increases with respect to demographic variables such as household income, family size, educational level and infrastructural variables such as number of bedroom, bathrooms and presence of washing machine. The study also finds that the practice of sharing of water meters by multiple households increases the average household water consumption.