Water tariff


A water tariff. Water tariffs vary widely in their structure and level between countries, cities and sometimes between user categories. The mechanisms to adjust tariffs also vary widely.
Most water utilities in the world are publicly owned, but some are privately owned or managed. Utilities are network industries and natural monopolies. Economic theory predicts that unregulated private utilities set the price of their product at a level that allows to extract a monopoly profit. However, in reality tariffs charged by utilities are regulated. They can be set below costs, at the level of cost recovery without a return on capital, or at the level of cost recovery including a predetermined rate of return on capital. In many developing countries tariffs are set below the level of cost recovery, even without considering a rate of return on capital . This often leads to a lack of maintenance and requires significant subsidies for both investment and operation. In developed countries water and, to a lesser degree, wastewater tariffs, are typically set close to or at the level of cost recovery, sometimes including an allowance for profit.
Criteria for tariff setting
Water tariffs are set based on a number of formal criteria defined by law, as well as informal criteria. Formal criteria typically include:
  • financial criteria,
  • economic criteria and sometimes
  • environmental criteria.
Social and political considerations often are also important in setting tariffs. Tariff structure and levels are influenced in some cases by the desire to avoid an overly high burden for poor users. Political considerations in water pricing often lead to a delay in the approval of tariff increases in the run-up to elections. Another criterion for tariff setting is that water tariffs should be easy to understand for consumers. This is not always the case for the more complex types of tariffs, such as increasing-block tariffs and tariffs that differentiate between different categories of users.

Tariff structures

There are numerous different tariff structures. Their prevalence differs between countries, as shown by international tariff surveys.

Types of tariff structures

Water and wastewater tariffs include at least one of the following components:
Many utilities apply two-part tariffs where a volumetric tariff is combined with a fixed charge. The latter may include a minimum consumption or not. The level of the fixed charge often depends on the diameter of the connection.
Volumetric tariffs can
  • be proportional to consumption,
  • increase with consumption, or
  • decrease with consumption.
The tariff for a first block on an IBT is usually set at a very low tariff with the objective to protect poor households that are assumed to consume less water than non-poor households. The size of the first block can vary from 5 cubic meters to 50 cubic meters per household and month. In South Africa, the first block of consumption of 6 cubic meters per household and month is even provided for free. Average monthly water consumption varies depending on household size and consumption habits between about 4 cubic meters for a single-person household in temperate climate with no outdoor water use and about 50 cubic meters for a four-person household in warm climate including outdoor water use.
However, there is not always a positive correlation between the level of household income and water consumption.
Wastewater tariffs typically follow the same structure as water tariffs. They are typically measured based on the volume of water supplied, sometimes after subtracting an allowance made for estimated or actual outdoor use. In the case of industries, wastewater tariffs are sometimes differentiated based on the pollutant load of the wastewater. In some cases wastewater tariffs are a fixed percentage of water tariffs, but usually they are set separately. In addition to regular bills, many utilities levy a one-time connection fee both for water and for sewer connections.

International tariff surveys

The OECD conducted two surveys of residential water tariffs in 1999 and in 2007-08, using a reference consumption of 15 cubic meters per household and month. The 2007-08 survey covered more than 150 cities in all 30 OECD member countries. The survey does not claim to be representative. The OECD survey was complemented by a survey of the industry information service Global Water Intelligence conducted in 2007-2008 in parallel with the second OECD survey. The 2008 GWI survey covered 184 utilities in OECD countries and 94 utilities in non-OECD countries. GWI has repeated its survey every year from 2009 to 2012, increasing the number of utilities surveyed to 310 in 2012. The data from the OECD/GWI surveys are widely quoted and, unlike the results of other global tariff surveys, have been indirectly made available to the public.
The database of the International Benchmarking Network for Water and Sanitation Utilities includes tariff data from more than 190 countries and territories tariffs.ib-net.org. Another tariff survey has been conducted by the International Water Association. In addition, surveys of tariffs for commercial and industrial customers in selected OECD countries have also regularly been conducted by the consulting firm NUS.

Prevalence of tariff structure types

Linear volumetric tariffs are the most common form of water tariffs in OECD countries, being used by 90 out of 184 utilities surveyed by Global Water Intelligence in 2007 and 2008, either with or without a fixed charge element. Some eastern European countries use pricing systems based solely on volumetric pricing, with no fixed charge element at all. Increasing-block tariff systems are used by 87 of the 184 utilities in OECD countries surveyed, such as e.g. in Spain. Since the late 1980s there has been a trend in OECD countries away from decreasing-block tariffs, which are apparently only still found in some cities of the United States. Where fixed charges exist as part of two-part tariffs, there is a shift toward the reduction or even abolition of large minimum free allowances in OECD countries. For example, Australia and South Korea have both moved in this direction during the 1990s. Flat rates are still reported in Canada, Mexico, New Zealand, Norway and the United Kingdom.
Concerning developing countries and transition economies, in the non-representative GWI sample of 94 utilities in 54 countries, 59 used linear volumetric tariffs and 31 used increasing-block tariffs. However, utilities from Sub-Saharan Africa where increasing-block tariffs are very common are under-represented in the GWI sample with only 6 utilities. On the other hand, utilities from transition economies where linear volumetric tariffs are common are over-represented with 28 utilities. The survey thus probably underestimates the prevalence of increasing-block tariffs in non-OECD countries.

Tariff levels

There are different valid methods to compare water tariff levels. According to one method, the highest water and wastewater tariff in the world is found in Bermudas, equivalent to US$7.45 per m3 in 2017. The lowest water tariffs in the world are found in Turkmenistan and Cook Islands, where residential water is provided for free, followed by Uzbekistan with a water tariff equivalent to US$0.01 per m3 and no wastewater tariff

Difficulties related to tariff comparisons

There are two basic ways to calculate water and wastewater tariff levels for the purpose of comparing tariff levels between cities: One way is to calculate an average tariff for the utility. This is done by dividing total tariff revenues by the total consumption billed across all usage categories and all levels of consumption. Another way is to determine a typical level of consumption and calculate the residential tariff that corresponds to this consumption. Depending on which of these two methods is used the resulting tariff can vary significantly for the same utility.
The comparison of water and wastewater tariffs across countries is further complicated by the choice of the appropriate exchange rate.
Furthermore, providing a global overview of water tariff levels is complicated by the large number of service providers. In urban areas in the United States alone, there are more than 4,000 water utilities. In Germany there are more than 1,200 utilities. Few countries in the world maintain national databases of water and wastewater tariffs charged by utilities. There are few countries that maintain national tariff databases, usually those with a specialized regulatory agency for the water sector such as England, Chile, Colombia or Peru.

Tariff levels

Among the 310 cities in the GWI 2012 tariff survey the average combined water and wastewater tariff was US$1.98/m3 for the 15 m3/month "benchmark" customer used by the survey. Utilities in four of the surveyed cities provide residential water and wastewater services for free: Dublin and Cork, as well as Belfast and Ashgabat in Turkmenistan. The lowest residential water and wastewater tariffs were found in Saudi Arabia and in Havana, Cuba as well as Damascus, Syria. Rates in the United States in Clovis, CA are $0.42/m3. and $1.60/m3 in Seattle The highest water and wastewater tariffs were found in Aarhus, Denmark, Essen, Germany Copenhagen, Denmark, and four Australian cities where the tariff for the benchmark user ranged from US$6.38/m3 - US$6.47/m3.
Concerning wastewater tariffs, in some countries such as there is no wastewater tariff at all. In other countries - such as Mexico, Turkey, Belgium, Portugal and Korea - wastewater tariffs are low relative to water tariffs. Finally, in many OECD countries - such as in Australia, Germany, Italy, the UK and the US - wastewater tariffs are now higher than water tariffs, reflecting increasing cost recovery rates and an increase in the prevalence of wastewater treatment.
Wastewater tariffs from 126 countries and territories can be found here https://tariffs.ib-net.org/sites/IBNET/VisualSearch/IndexCurrentUSD?Weight=0&ServiceId=3&Yearid=0
Many utilities charge higher tariffs for commercial and industrial customers than for residential users, in an effort to cross-subsidy residential customers.