Water Pricing Experiences and Innovations

This chapter presents a review of water-pricing arrangements in each of Australia’s state jurisdictions. The pricing approaches for urban, environmental, and rural (i.e., agricultural) water uses are scrutinized and compared against the ambitions established as part of the National Water Initiative (NWI). While the framework for water pricing in the NWI has been generally deployed in most states, local nuances give rise to quite different price outcomes. Moreover, there is still opportunity for political influences to shape water prices, even though the NWI is committed to full-cost recovery with regulatory oversight that seeks to objectively align costs and prices. We conclude that there remains scope for improvement that would remove artificial differences in the way water is priced for different water users and thus support the distribution of water to its highest values.

Brazil is marked by its vastness and contrast in terms of availability and access to water. We select and provide a description of the water pricing experiences in place during the past 15 years at the Doce, Verde Grande, Paraíba do Sul, Piracicaba-Capivari-Jundiaí (PCJ), and São Francisco River basins, which are under federal jurisdiction and, thus, under the responsibility of the Brazilian National Water Agency (Agência Nacional de Águas-ANA). The pioneer pricing system of the Paraíba do Sul River basin has been a reference for others throughout Brazil. Generally, water users are charged for water withdrawal and consumption and for effluent discharge in terms of quantity and concentration of Oxygen Biologic Demand per m³. While ANA is responsible as the federal agency in charge, local basin committees were empowered and make the ultimate decision on setting basic unit prices for water, adjustment coefficients, and granting water permits.

The purpose of this chapter is to provide a critical review of past and current practices related to water pricing in Canada’s irrigation, residential, and industrial sectors, as well as water pricing related to the provision of environmental services. The chapter demonstrates that water prices in most sectors have historically been quite low, relative to the costs of supply and relative to international standards. Both residential water users and irrigators have had subsidized access to water distribution networks, and self-supplied water users (such as large manufacturing facilities) have gained access to water supplies at little cost. More recently, some provinces, irrigation districts, and municipalities have raised rates to promote conservation and increase the supply network’s financial sustainability. The chapter concludes by pointing to a number of important emerging issues related to water pricing.

The water sector in Chile underwent major changes as a result of decentralization and market reforms. This chapter focuses on recent pricing experiences in the urban residential and rural sectors. Over the last 30 years, the Chilean government has successfully incorporated private participation in the water and sanitation sector and implemented a regulatory framework that has contributed to cost recovery and affordability of the reform. The service offered has greatly improved in quality and coverage reaching, in 2013, 99.9 % of urban population. National coverage of sewage treatment has significantly increased from 17 % in 1999 to 99.8 % in 2013. However, the privatization and decentralization of water utilities is facing new challenges, such as increasing extreme climatic events and a more informed and organized consumer base. In addition, there are concerns with respect to sustainability of groundwater extraction and deterioration of water-dependent ecosystems due to over allocation of water rights. This chapter also presents an overview of Chile’s national Rural Potable Water (APR) program, which has reached almost 100 % coverage in semiconcentrated rural areas. Unlike urban service providers, the rural water-supply and sanitation sector has not been subject to regulation like urban services.

This chapter briefly introduces the basic information about water resources in China and discusses the price changing trends of irrigation, residential, and industrial water in representative regions or cities. After continuous water price reform, water-pricing mechanisms have become more scientific and rational. Water supply pricing has completed a transformation from public welfare to commercialization, and resource value and waste treatment costs are now included in pricing mechanisms. The prices for irrigation, domestic, and industrial water have increased significantly during the past two decades. During the reform process, China launched multiple compulsive laws and regulations, economic incentives, and rewards to promote water-pricing reform and water-saving measures. At present, the water volume quota system is enforcing industrial water consumption in the country, and a block rate structure mechanism has been established in most cities for regulation of industrial and residential water usage.

Despite having one of the largest water resources of the world, in the early 1990s, the Colombian water and wastewater sector was in a deep crisis, with low coverage, low investment, and financial infeasibility of most of the companies responsible for the provision of these services. Rates were not consistent with the needs of maintenance, operation, management, and investment, and providing companies were almost totally dependent on state resources. The enactment of Law 142 of 1994 and regulations issued by the new (CRA acronym for Comisión de Regulación de Agua Potable y Saneamiento Básico) completely changed the landscape of the sector. In 1995, CRA set a clear methodology for the calculation of costs and charges for water and sewerage services, which aimed to cover the full costs of administration, operation, and investment. The law defined specific levels of subsidy only applicable to the basic consumption of poor families. Implementation of the new tariff scheme began in 2006 and lasted for several years, finally achieving financial viability of most businesses.

With an historical overview of the legislative and regulatory framework of water pricing in France, this chapter first describes how the focus of pricing policy progressively shifted from budget balancing to water conservation then to social protection. The next part focuses on pricing practices in the urban sector. Price levels and the evolution of tariff structures are analyzed using surveys and case studies results. The fourth section focuses on water pricing in the agricultural sector at different scales: large public irrigation schemes, smaller water user associations, and individual irrigation systems. The evolution of water abstraction fees collected by river-basin authorities is also analyzed, and we present how these fees can be modulated depending on the degree of collective management of agricultural water resources. To conclude, we discuss the efficiency of water pricing in urban and irrigation sectors and highlight some limits to take into account several uses.

The debate on growing water scarcity and the need to use the available water more efficiently among different sectors has once again brought in renewed focus in India. In this debate, a large part of the emphasis has been on the pricing of irrigation water, the sector which accounts for almost 80 % of the total water use but for which water is charged at a fraction of the supply cost. Low water rates, apart from encouraging the inefficient use of water, result in low revenue collections and contribute to the growing burden of government subsidies. Efforts to increase revenue collection through institutional reforms motivated mostly by international lending agencies have yielded mixed results. However, given the increasing demand for water and the resulting competition among sectors, there is scope to price water. In this context, the chapter aims to examine the issues relating to water pricing in India with a case study from Andhra Pradesh.

Israel manages its water scarcity by a relatively unique combination of quantitative and pricing tools. As a semiarid climate country, efficient water pricing might prove to have much more potential welfare implications. The chapter contains a summary of the theoretical background of the different water pricing policies and reforms that have been recently implemented. The summary will then be accompanied by an effort to explain the rationale of the reforms. The chapter covers water pricing schemes in the various sectors and links them into one consistent policy vision. Currently, water pricing in Israel is more closely connected to the true scarcity value of this natural resource. Yet the goals and targets faced by water planners in Israel do not allow water prices to be the only allocation mechanism, and as such, a mixture of quantities and prices will be explored. The challenges faced now by the water regulators are new and contain pricing of different water sources (treated wastewater, desalinated water, etc.) for a variety of uses, including those that are characterized as nonmarket in nature (e.g., in-stream value) and those that should be based on basin cooperation among different countries (e.g., the Palestinian Authority, Jordan, and, potentially, Syria and Lebanon in the future).

This chapter provides an overview of the Italian water management system, which is segmented by sectors and characterized by a wide plurality of management systems, operators, and financing patterns. In the last 20 years, Italy has introduced far-reaching reforms of water management, which concerned in the first place urban water supply and sanitation. The most important aim was to create the basis for an autonomous and self-sufficient water industry, driving the sector out of the public budget. Financial equilibrium of water undertakings and access to market-based finance have dominated other possible aims of water pricing. Other sectors, and notably irrigation, continue to follow more traditional schemes. The chapter also discusses further reform opportunities in the search for using water prices as economic incentives for a more sustainable use of water resources.

Mexican water price structure is set to reflect water availability and its economic value. Considering this framework, nine water availability zones have been established, in which the highest price is paid for zones with scarce amounts of water, and the lowest price is paid in zones with an abundance of water. Additionally, different tariffs have been established according to sectorial users, such as industry, households, and agriculture. This chapter develops a brief framework for water management in Mexico as a context for analyzing the pricing system of water actually used in Mexico. Also, the chapter briefly describes payment for environmental services—hydric (PES-H), as an instrument of environmental policy, because of its effects on pricing water from a forest conservation perspective. We conclude that although the water pricing system depends on water availability, the application of intra-regional tariffs for consumption (the largest water user being the agricultural sector) encourages irrational use due to subsidies applied to consumption.

In the Netherlands, about 75 % of monitored groundwater extractions are used for the production of tap water. Water extraction for tap water production is the main consumer. The tap water rate of the various drinking water companies largely depends on the share of groundwater used, which requires lower treatment costs than surface water. In 2014, the tap water rate varied between 1.11 and 2.21 euro/m³. There are various taxes in place on groundwater use, as well as on tap water use. Such taxes can aim to recover costs, trigger water-saving technologies, or reduce water demand for environmental purposes. In 1995, the national groundwater tax was implemented—a so-called “win–win, green” tax that aimed to reduce the income tax burden and to have an environmental impact in terms of reduced groundwater extraction. From 2012 onward, the Dutch government, however, revoked it, as it was fiscally inefficient and environmentally ineffective. It increased distortions by taxing only a narrow base and by interfering with groundwater management programs funded by an existing provincial groundwater fee. In 2014, the national tap water tax was increased. But given the fact that only 0.6 % of a household’s budget on average is dedicated to tap water, it is not likely that it will substantially reduce water demand. This increase in the tap water tax contradicts the low rate of the value-added tax (VAT) on tap water.

Methods of charging, water use, and cost comparisons were made for municipal, irrigation, and hydropower generation uses of water. For municipal use, city size and water metering influenced per capita use, with larger cities and metered use being associated with lower per capita use. Drinking water quality (for smaller councils), demand management (for growing cities), and long-term asset management are the developing issues for municipal water supply. For irrigation, the cost of entitlements related to the age of the scheme (older schemes with capital paid off had lower costs), recent capital investment, and operating costs. Investment in irrigation schemes was being undertaken to improve reliability of supply (through storage) and water use efficiency (through conversion of flood to spray irrigation and replacing open distribution channels with pipes). Water used for hydropower generation was driven by electricity markets. Water values were imputed with rivers with multiple hydro stations, capturing more of the head in the river system having higher values.

South Africa is a water-scarce country with a high level of income inequality, based largely on race. The issue of water pricing for water services and raw water has been shaped over the years to try to address both of these issues and to ensure a revenue stream that, with the parliamentary appropriation, is sufficient to fund the management and infrastructure-related costs of providing water and protecting water resources. This chapter deals with the key aspects of water pricing in South Africa for irrigation, municipal and industrial use, and power generation. It outlines the legal framework for water pricing and how this has been interpreted since the current legislation was promulgated in the late 1990s. It also outlines some of the key debates currently being addressed, such as how to deal with irrigation subsidies, how to address issues of equity, the possible adoption of a national charge for water, and how best to structure infrastructure-related charges.

As many other countries, Spain has to cope with, and be prepared to address, major water challenges: climate change, growing demand, and water pollution. Climate change projections indicate significant reductions of runoff and water recharge and more unstable climate regimes. Improving water allocation has become an urgent need. Water demand management is now one of the most relevant issues in the Spanish water policy agenda. The chapter discusses the controversial topic of water pricing, focusing on Spain. The Water Framework Directive (WFD) foresees that, in order to ensure an efficient and sustainable management of water resources, prices should be fixed according to the principle of cost recovery. But our analysis of all policy-relevant drivers and likely scenarios suggests that reforming water-pricing policies is likely to face numerous obstacles and to raise strong opposition from most water users. And yet, pricing policies in Spain are already innovative and fully implemented for all sectors. So the way to reform is already paved, and we expect that more progress will be made in next WFD planning period (2015–2020).

This chapter analyzes the water pricing structure, reform process, and case studies in China and presents a overall picture of pricing water resources and its services during the past 60 years, particularly after 1980. China now implements a comprehensive water pricing framework and develops it step by step. The water resources fee was introduced in the 1980s, and the wastewater treatment and collection fee was developed in the late 1990s. By the 2000s, a comprehensive system was developed. Two case studies, involving Beijing and Shanxi Province, are discussed, which demonstrate increasing tariff standards in both regions. In the future, China will continue struggling with its water sector’s increasing tariff levels in order to meet its multi-objective water pricing.

The social dimension should be addressed in the sustainability of water services provision, but it is less well studied than the economic and environmental ones. The debate between pros and cons of water privatization led the Organisation for Economic Co-operation and Development (OECD) to publish a seminal paper on social issues in water pricing, back in 2003. Relying on this document and other literature review, we successively present various solutions to support “water-poor” people in the payment of their charges: reducing bills for targeted populations (rebates, increasing blocks), supporting the income of targeted populations, reducing bills for all customers, and reintroducing taxation as a source of income. A general outcome is that social tariff design entails administrative costs that may offset the benefits it is supposed to generate. Lastly, we advocate the development of new software to assess the redistributive effects of ongoing tariffs, and tariff changes between categories of residents and with the water utilities’ capacity to invest.

Water providers in the United States have experienced years of revenue loss from lower water use/sales. The decline in water use has been caused by water restrictions, extended economic recession, and continued water conservation programs. When water users become more efficient, traditional rate designs cannot recognize and accommodate water conservation and/or a decline in water sales without a financial hardship to the agency and ultimately the end user. The impact of traditional water rate design when water is saved is a financial, political, and public credibility problem for water providers. However, a group of agencies in California have implemented rate structures that accurately reflect the costs of water and water service, recognize customer-by-customer water use efficiency, and also provide a strong economic signal as to the future or environmental costs of water. These agencies have experienced accurate and stable revenue recovery, increased customer awareness, and have seen more conservation (user behavior change) without a negative economic impact on the agency. The rate structure is referred to as “water budget-based rates” or, more accurately, as a “sustainable” rate design. This chapter will describe the evolution and the philosophy of a “sustainable” rate structure at the Western Municipal Water District and provide a glimpse into the agency motivation, design, and the impacts on finances and water efficiency.

Guayaquil, the largest city in Ecuador, offers a pragmatic and successful approach to pricing urban water services in the developing world. This chapter discusses the underlying principles and lessons learned to finance operations and investments from tariff revenue and subsidies, under a 30-year concession contract awarded in 2001. It reviews price-adjustment mechanisms to account for inflation and meet investment and service targets. It presents strategies followed to cover financing shortfalls to meet poverty and environmental goals. Finally, it summarizes strategic recommendations for other cities of the world.

This chapter analyzes the pricing of bulk water extracted from the Tucano aquifer in the semiarid region of Bahia, Brazil, using the optimizing economic behavior agent model. The starting point is a set of demand and supply equations on groundwater that is pumped from the aquifer and used for domestic supply. The main goal of this chapter is to offer bulk water tariff levels through a methodology especially adequate to a region that, due to the scarcity of this natural resource as well as the level of poverty that characterizes the region, demands more and more application of mechanisms that contribute to the efficiency of its use, while ensuring adequate prices to be paid by poor families.

The cost of reclaimed water and the tariffs paid by water users illustrate that the principle of cost recovery is not met in the majority of water reuse projects. However, such projects may also generate positive externalities, contributing to improved welfare of the entire society. This chapter describes the case of the Valencia region of Spain, referring to agreements among water stakeholders. It also includes a proposal of pricing for reclaimed water to be implemented in this area as a pilot case in order to develop a framework for costs and financial, institutional, and social arrangements for water reuse projects. A two-part tariff with a combination of a decreasing and increasing rate structure is proposed. This experience will help water associations and water companies to focus on new water reuse projects and opportunities they introduce. The chapter also explains why the cost-recovery principle is not met for almost all water reuse projects and identifies the major constraints hindering the implementation of this economic principle.

This chapter uses data from the International Benchmarking Network for Water and Sanitation Utilities (IBNET) to assess the progress utilities are making toward financial sustainability while ensuring that the services remain affordable. The analysis finds that many utilities are only recovering operation and maintenance (O&M) costs and fall far short of achieving full financial cost recovery. The level of (O&M) cost recovery has, on average, barely changed between 2006 and 2011. Over the same period, with incomes rising in many parts of the world, water supply and wastewater services have become more affordable. This suggests that many utilities may be able to increase water prices. The analysis also shows that the differences in utilities’ performance between and within countries are large. Better understanding of how the differences in costs affect revenue sufficiency and affordability is needed to improve pricing policies.