A water tariff (often called water rate in the United States and Canada) is a price assigned to water supplied by a public utility through a piped network to its customers. The term is also often applied to wastewater tariffs. Water and wastewater tariffs are not charged for water itself, but to recover the costs of water treatment, water storage, transporting it to customers, collecting and treating wastewater, as well as billing and collection. Prices paid for water itself are different from water tariffs. They exist in a few countries and are called water abstraction charges or fees. Abstraction charges are not covered in this article, but in the article on water pricing). Water tariffs vary widely in their structure and level between countries, cities and sometimes between user categories (residential, commercial, industrial or public buildings). The mechanisms to adjust tariffs also vary widely.
Most water utilities in the world are publicly owned, but some are privately owned or managed (see water privatization). 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 [ref]. 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[ref].
Criteria for tariff setting
Water tariffs are set based on a number of formal criteria defined by law, as well as informal criteria.OECD:Pricing of Water Services, Paris 1987, p. 23-34 Formal criteria typically include:
financial criteria (cost recovery), economic criteria (efficiency pricing based on marginal cost) and sometimes environmental criteria (incentives for water conservation).
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.Ariel Dinar: The Political Economy of Water Pricing Reforms, World Bank, 2000 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:
a volumetric tariff, where water metering is applied, and a flat rate, where no water metering is applied.
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 (linear tariffs), increase with consumption (increasing-block tariffs, IBT), or decrease with consumption (decreasing-block tariffs, DBT).
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 (free basic water). 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 (e.g. in Germany) with no outdoor water use and about 50 cubic meters for a four-person household in warm climate (e.g. in the Southern United States) including outdoor water use.
However, there is not always a positive correlation between the level of household income and water consumption.Celine Nauges and Dale Whittington. Oct 2016. “Evaluating the Performance of Alternative Municipal Water Tariff Designs: Quantifying the Tradeoffs between Equity, Economic Efficiency, and Cost Recovery” World Development 91, 125–143 , accessed on 21 November 2019
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 (GWI) 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.OECD:Managing Water for All:An OECD perspective on pricing and financing, Chapter 3:The Central Role of Tariffs, p. 73-94, 2009 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 (IB-Net) for Water and Sanitation Utilities includes tariff data from more than 190 countries and territories tariffs.ib-net.org.International Benchmarking Network for Water and Sanitation Utilities:[www.ib-net.org], accessed on May 30, 2017 Another tariff survey has been conducted by the International Water Association.International Water Association:International Water Association Task Group on Tariffs and Financing, accessed on January 24, 2010 In addition, surveys of tariffs for commercial and industrial customers in selected OECD countries have also regularly been conducted by the consulting firm NUS.NUS Consulting , accessed on January 24, 2010
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 (Hungary, Poland and the Czech Republic) use pricing systems based solely on volumetric pricing, with no fixed charge element at all.OECD: The Price of Water: Trends in OECD countries, 1999, accessed on January 21, 2010 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 (consumption of 15 m3 per month). 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 (nominal exchange rates for a given year or over the average of several years, or purchasing power parity exchange rates).
Furthermore, providing a global overview of water tariff levels is complicated by the large number of service providers (utilities). 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 (OFWAT), Chile (SISS), Colombia (CRA) or Peru (SUNASS).
Tariff levels