Toilets, Governments and Incentives

In my morning newspaper, I came across a hardware store flyer advertising a great new innovation – toilet with pump!  Essentially, along with your regular toilet, an additional water storage tank and pump is installed that allows you to store recycled water used from your sink, tub, or shower and then use it when you flush. 

It is an excellent idea for promoting additional stewardship and environmental responsibility with respect to our water resources.  I actually think I recently saw something about it or something similar on Dragon’s Den.  In that episode, the innovator promoting the device said it would save you about 250 dollars a year on your water bill by reducing the water consumption.  Given that this device appears to retail from 870 to 1000 dollars, it means that it could pay for itself in about four years. 

However, the problem is that most of my water bill these days does not consist of consumption charges but rather fixed charges.  I suspect it may be the same in a lot of other places in Canada.  Take the example of the water bill.  I decided to go back and look at my household water bills and usage for the period 2000-2011.  Figure 1 shows my total household usage over the period 2000-2011.  Figure 2 shows the component charges for my water bill while Figure 3 is the total bill.

The bill is divided into three components – a consumption charge, a sewer charge and a fixed charge which it turns out has been anything but fixed lately.  Despite the overall downward trend (we actually consumed less in 2011 than 2000 even with growing teenagers during this period), our household consumption of water has grown since 2004.  The overall downward trend is especially being driven by the 2002 outlier observation.  In 2002,  there was a leaky toilet which we then fixed.   We’ve averaged about 241 cubic meters per year over the period 2000 to 2011 (including 2002). Over the period 2000 to 2011, consumption declined by 8.4 percent though from 2004 to 2011 it rose 18 percent. 

Over the period 2000 to 2011, my consumption charge has increased 62 percent, my sewer charge 152 percent and my “fixed charge” by 337 percent.  Figure 3 adds all the charges up and between 2000 and 2011, my annual water bill has increased by 134 percent.  In 2000, the proportion of my water bill emanating from consumption/usage was 48 percent while in 2011 it was 34 percent.   Given that the charge for consumption alone in 2011 was 278 dollars out of a total of 824 dollars, I have my doubts I can save 250 dollars on my total bill – about 30 percent - by installing this device and reducing my consumption.

Figure 1

Figure 2

Figure 3

It’s not that the toilet pump water recycling device is not a good idea.  It’s just that over the long term I have not been ramping up water consumption to the point where there can be substantial savings from reducing water consumption.  The need to replace aging water mains and associated infrastructure – look at what happened in Montreal the other day – will result in escalating fixed charges and other special charges that divorce the water bill from consumption.  This however actually erodes the incentive to conserve.   The fact is that there is little economic incentive for installing devices that conserve water if most of the charge is “fixed” and there is relatively little correlation between use and what you pay.  Moreover, I don’t know about you, but I’m almost afraid to consume less water.  If we all used less it could result in municipal revenue drop that I think would be dealt with either with a rate increase or would result in yet another fixed charge.   No doubt, our municipal overlords could creatively title the new fee a “Revenue Retention Charge”. 

Comments

[Ian Lee]

Livio - this is merely another example of backdoor taxation by the three levels of government. Same issue with our electricity bill - provincially driven by several fixed charges or assessments - and our airline tickets with the cumulative taxes and airport surcharges (imposed by DOT or the airport authorities) often greater than the value of the actual travel portion of the ticket.
Surely, it is time to revisit i.e. undertake fresh examinations, of the superb Economic Council of Canada deregulation and privatization research series of the mid 1980s (over 200 working papers) to analyze and estimate if the privatization of airports, electrical utilities and sewer and water would be cheaper under private ownership than under municipal or provincial or federal ownership.
BTW, I recall that the privatization of the major airports in Canada by Mulroney 1993 was cancelled by the incoming Chretien Government who paid $600 million in cancellation fees to abrogate the contracts and instead provide us with the completely unaccountable airport authorities and the highest landing fees in the world in Toronto.

[RPLong]

I concur with Ian.

Also:

Environmental conservation is, in my opinion, best analyzed as a form of consumption. The idea that a $1000 toilet "pays for itself in 4 years" is wholly unattractive. I was speaking with a person who used to sell solar panels, and he informed me that his panels would pay for themselves in 15 years after an initial $15,000 investment.

One certainly gets the feeling that those who buy or sell such things have no concept of the discount rate I apply to a $15,000 investment. Breaking even on a $15K expenditure in the same time frame it takes a student to complete all years of primary, secondary, and higher education is not AT ALL an attractive "investment."

But of course, that's not why people invest in water conservation or solar power. They do it because of the utility they derive from their sense of environmental stewardship. In that case, I can easily see the appeal of filling one's house with conservation-savvy gadgets, if that's what appeals to a person. No different than spending money on nice furniture.

[Mark_H]

No idea how it is in your municipality, but where I'm from the sewer charge is calculated as a proportion of your water usage in winter (winter because in summer a lot of water is used for gardens and doesn't go to the sewer). Depending on how your sewer bill is calculated it might be a mistake to exclude it from the "variable" cost in your calculation.

[Whitfit]

Ian Lee says: "this is merely another example of backdoor taxation by the three levels of government. Same issue with our electricity bill - provincially driven by several fixed charges or assessments - and our airline tickets with the cumulative taxes and airport surcharges (imposed by DOT or the airport authorities) often greater than the value of the actual travel portion of the ticket."

Well, these are user fees. Maybe they are structured poorly, maybe you think the delivery is inefficient, but the difference between a tax and a user fee is pretty clear. Unless there is a surplus of the user fee over the cost of delivering the service. If you are going to be critical, at least use appropriate terms. Question: do you think it is not appropriate for a government to charge user fees for certain services as a way of paying for them (ratepayers vs. taxpayers, especially for those things that are scarce and good to conserve like electricity and water/sewer capacity)? I think you believe that the government should probably just not be in the business of providing these things. I would almost be there with you for electricity generation (though not distribution), but for water and sewer, it is pretty hard to imagine that government could get out of that business.

RPLong says: "In that case, I can easily see the appeal of filling one's house with conservation-savvy gadgets, if that's what appeals to a person. No different than spending money on nice furniture."

Except that the furniture, nice or otherwise, has fewer externalities associated with it. Of course, you sound like the kind of guy that might think that it is just a personal choice whether to believe that the environment is being affected by people in a negative way, and that as a society we have no right or obligation to care whether anyone makes a choice to harm the environment.

[Livio Di Matteo]

Hi Mark:
Good comment. I checked it out and it appears the Thunder Bay sewer charge is a bit of a hybrid. It is 75% of the volumetric charge and the fixed cost. That would raise the volume/use based portion of the bill.

[michael]

Let's do some math. Your water + sewer charges appear to be about $500 together (from Fig 2 for 2012; for simplicity, I'm not factoring out the 25% fixed part of the sewer charge). Your consumption from fig 1 in 2012 is ~250 m3 (1 m3 = 1000 L so that's 250 000 L), so you pay $2/m3 (or 2/10 of a cent per L). You want to save $250 with this toilet by recyling water.
First, in your case, that may be the maximum you can save -- you can't cut the variable part of your bill by more than half by recyling grey water unless the toilet uses less water per flush than the one it replaces. (If the efficiency of the toilet is better than the one it replaces, then you can cut more though.)

Back to the $250. At $2/m3, that's 125m3, or 125000 L, that you need to recylce instead of drawing fresh. At 4.8L/flush (typical value for a high-efficiency single-flush toilet), that's 26 042 flushes per year, or about 71 flushes/day.
Your water needs to be a lot more expensive before this works in Thunder Bay. (In Ottawa, I'm paying about the same -- ~$2.50/m3, but including the fixed part.)

That said, if you need a new toilet anyway, the price difference (if any) between this and a good alternative probably pays off quickly. And if you're replacing a high-consumption toilet, the math changes *significantly* -- what do you figure your leaky toilet cost you in 2002?

[RPLong]

Okayyyyy, I'll try this again...

@Whitfit - I agree that negative externalities are an important aspect of environmental economics. I am actually not "the kind of guy" who views "belief" in negative externalities as any kind of choice. I am, however, aware of the fact that economic behavior is often driven by subjective values, which means that some people value having nice furniture over and above the value they place on environmental stewardship - even in cases when they value both things very highly. And this valuation is an important determining factor in the choice to purchase water-recycling toilets. This remains economically true, regardless of where the morality might fall.

[Neil]

@RPLong: Do you know what discout rate you apply to an investment?

"Pays for itself in 4 years" is only unattractive if you assume that after it has paid for itself, it stops providing a return. If you expect the infrastructure to last for 10 years, paying a $250 annual dividend, you're looking at a 21% return, which is tax free since it comes in the form of reduced spending instead of increased income.

Is that 10 years reasonable? I'm not sure, the life expectancy is an important piece of missing information.

Similarly, your solar panel example is missing the critical component of future value to determine its return. It's clearly not a great investment, but if it has a residual value of $5000 after 15 years of paying $1k/year, then the 3% return (again, tax free), is at least better than government bonds. Certainly on this one, you need to added bonus of saving the world, but it's not an example of throwing your money away.

[Livio Di Matteo]

Michael & Neil:
I can't remember what my toilet cost me in 2002 but it was severely malfunctioning again (I will not go into the sordid details but they involve a significant negative spillover) and I just replaced it with a 6L flush toilet which cuts the consumption in half on that toilet. I got a higher end toilet this time which ran me about 350$. That said, it would appear my toilets to date only last about a decade - the life expectancy. I have not done the math but a new low use toilet may be a better deal than the more expensive toilet pump if you are replacing an older higher use toilet.

[Joel W]

Steve Renzetti at Brock had a good policy paper about water pricing in Canada:

http://www.poliswaterproject.org/publication/344

[Shangwen]

Livio, do you know if the device came with a gov rebate/subsidy, or if you get a tax break for using it? My own experience with this is a cousin in Winnipeg who built a house in an area where a percentage of the homes were mandated to have geothermal heating. There were huge subsidies to vendors from the govt, and if your preferred lot was geothermal you weren't allowed to switch it to gas. The additional cost to the homeowner was $30,000, with the usual promise of payback after 20 years. Of course one has to conclude that the bureaucrats and vendors who said this must be making billions in the futures markets, with their deep foreknowledge of energy prices into 2023.

My cousin's neighbor went geothermal, but his triple garage holds two SUVs and a sports car. The largely upper-class appeal of environmental products leads to behavioral effects that often defeat the claim. I'm not saying this to mock concern about the environment, but promoting these kinds of products does not seem very effective.

[Livio Di Matteo]

Shangwen:
Don't know if there is a rebate or subsidy but I do not think there is as if there was it would be well advertised in the ads for the product.

[RPLong]

Neil - agreed that those are all worthy considerations with respect to the environmentally friendly technologies. However, in investment decisions, it is not usually a matter what merely produces payoff for the investor, but rather what produces the highest payoff. Hence my reference to the discount rate.

If we look at it from the standpoint of an investment, it might be good, but it is not necessary *best*. This is why I think it might be useful to consider the consumption value here. I think buyers of water-saving toilets are getting x% R.O.I, which may be sub-optimal, but also a utility value U.

I am suggesting that (x% + U) is probably larger than an alternative with a higher R.O.I., but which lacks the all-important value of U.

[Mark]

All I know is that when I look at what I get when I flush that bowl, my R.O.I. is VERY positive.