Designing two-part greywater fees: Conceptual framework and empirical evidence from Germany

Abstract

The wastewater sector in Germany – fragmented local natural monopolies under cost regulation and vulnerable to political intervention – comprises roughly 6.900 fee models. Unlike pricing schemes in other network economies, the prevalent fee models are quite simple as customers pay a single fee per cbm. Such a fee results in high incentives to reduce water consumption and greywater discharge simultaneously, which complies with the Water Framework Directive (WFD). However, the fee lacks financial, economic and social sustainability. Implementing an additional fixed fee seems to be a reasonable measure to remedy these shortcomings, although the fixed fee share in overall revenue remains an important control parameter to guarantee compliance with the WFD. Having argued for a two-part fee, two parameters for the fixed fee component must be defined: First, the fee base and second, the fee rate. Out of a wide range of possible fee bases, the ‘Number of dwelling units in a residential building’ is not just stable but also corresponds to the costs-by-cause principle and generates manageable transaction costs. However, transaction costs also depend on the extent to which gains and losses among customers due to the fee model switch occur. Testing different fee models with household data in three German cities of different population size, the authors find evidence that the number of dwelling units combined with a digressive rate structure results in less absolute gains/losses for customers. This finding is model-inherent and can be used to rethink fee models just based on the cbm. The authors recommend the fee model switch when (1) water consumption per capita is decreasing, (2) migration of water consumption is high and (3) resource costs are low.