Abstracts of Presentations

Successful and Sustainable Water Rate Design: The Art of Revenue Recovery, Water Use Efficiency and Customer Equity
Managing Residential Water Demand with Allocation-Based Rates: Lessons from Two California Water Districts
Integration of Social Sustainability Issues in Water Pricing
Water Pricing in Israel: Various Waters, Various Neighbors
Water Pricing in Chile: Decentralization and Market Reforms
Water Pricing in Canada: Recent Developments
Water Pricing in Spain: Following the Footsteps of Somber Climate Change Projections
Water Pricing in Australia: Unbundled Politics, Accounting and Water Pricing
Water Pricing in Italy: Beyond Full-Cost Recovery
Water Pricing in France: Toward More Incentives to Conserve Water
Water Pricing – The Case of South Africa
Water Pricing Reforms in China
Closing the Gap: Producing Water and Charging for Water in Israel

Successful and Sustainable Water Rate Design: The Art of Revenue Recovery, Water Use Efficiency and Customer Equity

Presentation by Tom Ash

Water providers in the US have experienced years of revenue loss and revenue decline from lower water use and reduced sales per metered account. The decline in water use across the US has been caused by drought, economic recession, increasingly efficient plumbing devices, conservation legislation and changing landscape styles. While customers have responded to the call to use water efficiently, water rate designs have not evolved in conjunction with what is now called the “new normal” in water. Agencies have been reluctant to adapt and fundamentally change water rate design in recognition of water efficiency and the decline in water sales, and traditional rate designs in California (and across the US) do not recognize and account for efficient and inefficient water users. This has produced a combination of significant revenue loss and public relations difficulties for both public and private water providers.

In January of 2014, Californian’s were asked to “voluntarily” cut 20% of their water use. The result was a “0” percent reduction. Due to record high temperatures and record low rain and snowfall, in April 2015 the public was “mandated” to reduce water use 25% or face financial penalties. This mandate resulted in an average of 27% water use reduction in homes across the state.

At the same time, the use of traditional water rate designs, defined here as a low fixed-charge and high and/or increasing fixed-tiered prices for water, have resulted in an estimated $1 billion in water revenue losses by agencies in California for the calendar year (Associated Press, July, 5, 2015). The “new efficiency normal” in California is not only a major financial issue, but is also a momentous political problem for water providers with their constituents…that is years in the making. We (water providers) have communicated to the public that water is expensive. In reality it is the water infrastructure that is expensive to maintain. And, efficiently used water can be relatively inexpensive to provide and wasted or unnecessary water is and should be very, very expensive.

So, our rate structures and our communication to end-users has been backward, the opposite of a public water systems business reality, and has created both a financial and public relations crisis. We need to change not only how we price water, but how we convey the real job of the water agency and the responsibility of the water-user to be efficient with our most precious resource.

This presentation will provide a real-world case study of how several California water agencies have changed their water rate design and their communication to their customers. The agencies have designed and implemented water rate structures that seek to accurately reflect the costs of water and water service, recognize customer by customer water use efficiency, and send a strong economic signal as to the costs of wasted water. These agencies have experienced more consistent revenue recovery, increased water use efficiency and sustained customer relations with the implementation of “water budget-based rates” or what may be more accurately referred to as a “sustainable”, or “allocation-based”, or “balanced-based” water rate design.

This presentation will describe the philosophy that led to changing water rate designs to match California’s climate, California’s legislation, California’s environment and the business reality of providing safe, reliable water to the public. The agency examples will describe the “art” of linking economics, legislation and customer-level characteristics into a “sustainable” water rate structure.

Managing Residential Water Demand with Allocation-Based Rates: Lessons from Two California Water Districts

Presentation by Ken Baerenklau

Increasing block rate water budgets (also known as allocation-based rates) are a type of escalating tiered price structure in which the block sizes are based on household characteristics, environmental conditions, and a judgment by the water utility with regard to what constitutes “efficient” water use. This means that price structures can differ across households at any given time, and through time for any given household. Allocation-based rates are thought to have significant advantages over more commonly used (e.g., uniform, fixed block) rate structures, but so far have not been widely adopted by urban water agencies. A prominent question, and the focus of this research, is the extent to which allocation-based rates can reduce demand without raising the average price paid and without negatively impacting the agency’s fiscal position.

To address this question, this study estimates the effect of introducing fiscally neutral water budget rate structures on residential demand in two southern California water districts. We utilize two datasets that track monthly consumption for more than 13,000 households in each district over approximately nine years. Within each district, we account for socio-economic differences across households with a fixed effects model and through time with data from the U.S. Bureaus of Census and Economic Analysis. We control for climate variability with spatially and temporally variable estimates of evapotranspiration. We include a time trend to capture changes in preferences and technologies, and we hold the housing stock fixed to control for vintage effects. We estimate that one district reduced water demand by 10-15% by switching to allocation-based rates, although the reduction was achieved gradually over more than three years. In the second district, overall savings appear to be both smaller and weather dependent—similar to “peak shaving” in the energy sector. However the reductions by the least efficient households in this district appear to be more sustained and in the range of 5-15%. After considering cross-district differences in customer bases, we find similar qualitative and quantitative effects of introducing allocation based rates and gain a more nuanced understanding of the likely demand effects other districts may experience if/when they choose to adopt allocation-based rates.

Integration of Social Sustainability Issues in Water Pricing

Presentation by Bernard O. Barraqué

While the issue of water access was supposed to concern only developing countries, it suddenly backlashed in developed countries, adding up to a multifaceted WSS crisis. We shall first propose a few explanations of the reasons why. But then we’ll summarise an interesting paper by OECD on the social issues in the provision and pricing of water services, which proposes a couple of affordability indicators: macro-affordability (ratio of average water charges to mean household income) and micro-affordability (impact of water expenses on various income groups, family sizes, and regions).

The OECD also proposes two broad categories of policies, which we discuss successively. Reducing water bills for targeted populations can be done chiefly through rebates on water and waste water bills, or via the adoption of increasing blocks. Another possibility, which is debated, is to limit the available water volume par unit of time.

The other broad form of affordability enhancement is to ‘think outside the bill’ (AWWA), i.e. supporting income of the targeted population, with vouchers, water cheques etc. This strategy meets a difficulty in identifying the eligible families.

A third possibility is to reduce water poverty through reducing all bills and (re-)introducing taxation mechanisms. In countries where WSS services are funded from rateable values, for instance, redistribution in favour of the poor is usually more important.

In the conclusion we address the issue of effectiveness of redistribution in tariffs. Elected officials and operators frequently indulge in ‘cherished illusions’ about the tariff they have in mind as being optimal. It should become normal practice to test ‘who pays more, who pays less’ in a proposed tariff change, and also to include longer-run analyses of behavioural changes induced by tariffs, including those of the water poor: do they conform expectations?

Water Pricing in Israel: Various Waters, Various Neighbors

Presentation by Nir Becker

Israel manages its water scarcity by a relatively unique combination of quantities and pricing tools. As a semi-arid climate country, efficient water pricing might prove to have much more potential welfare implications. The presentation will contain 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. I will cover water pricing schemes in the various sectors and link 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 ones that are characterized by non-market nature (e.g., in-stream value) and ones that should be based on a basin cooperation among different countries (e.g., the Palestinian authority, Jordan and potentially Syria and Lebanon in the future).

Water Pricing in Chile: Decentralization and Market Reforms

Presentation by Guillermo Donoso

The water sector in Chile underwent major changes as a result of decentralization and market reforms. The case of Chile is illustrative of a transition from command and control to market based water management policy, where economic incentives play a significant role in water use rights (WUR) allocations.

The Water Code of 1981 (WC 1981) granted permanent, transferable water-use rights to individuals so as to reach an efficient allocation of the resource through market transactions of water use rights (WUR). Evidence indicates that these markets have helped to (i) facilitate the reallocation of water use from lower to higher value users (e.g. from traditional agriculture to export-oriented agriculture and other sectors such as water supply and mining), (ii) mitigate the impact of droughts by allowing for temporal transfers from lower value annual crops to higher valued perennial fruit and other tree crops, and (iii) provide lower cost access to water resources than alternative sources such as desalination.

Over the last thirty 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. The legal framework of the tariff system establishes that tariffs must satisfy the principles of i) economic efficiency, ii) water conservation incentives, iii) equity, and (v) affordability. A variable tariff is set for periods of high demand, during summer months, (peak variable tariff $/m³) and for non-peak periods (non-peak variable tariff $/m³). Evidence that tariffs send the right signals to consumers is that average monthly household consumption has significantly fallen since 1998 from approximately 25 m³/household/month to 18.6 m³/household/month in 2013.

In 1960, only 6% of the rural population had an adequate supply system water. The national program of Rural Potable Water (APR) has invested in rural potable water systems, reaching in 2014 a 53% water coverage. Unlike urban service providers, rural water supply and sanitation sector has not been subject of regulation like urban services. Unlike urban service providers, rural water supply and sanitation sector has not been subject to regulation like urban services. This has led to tariffs that do not allow for full cost recovery. More importantly, tariffs have not allowed for adequate maintenance and to invest so as to satisfy growing demand. Thus, rural WSS systems are precarious and vulnerable. In rural areas, the Ministry of Health and the Ministry of Economy are responsible for supervising water cooperatives and water committees. Since 1994, the Direction for Water Works (DOH) is in charge of executing the national program of Rural Potable Water (APR).

Water Pricing in Canada: Recent Developments

Presentation by Steven Renzetti and Diane Dupont

This chapter provides 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. It 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. Fees paid by farmers in western Canada typically recover only irrigation systems’ operating costs and, at best, a fraction of capital costs. On the other hand, municipal water prices do cover O&M and some capital costs. Across Canada, however, there is little evidence of municipal water prices equating the LRMC of supply. Self-supplied water users (such as large manufacturing facilities and thermal electrical generation stations) have gained access to water supplies at little cost. In some provinces, users pay only administrative fees for the licence to withdraw and, in those provinces that do levy volumetric charges, the fees are usually less than 1¢ per cubic metre.

In addition, pricing environmental services has never played a strong role in Canadian water management. Sewage treatment fees do not reflect external damages and the failure to price return flows laden with nutrients and pesticides presents another way in which irrigators are subsidized. The implications of these practices are quite clear and derive from substantial sources of inefficiency for Canadian water prices. These inefficiencies have manifested themselves in excessive levels of municipal water use, over-extension of water supply systems, localized groundwater declines, harmful algal blooms in Great Lakes, and stifled innovation regarding water supply and conservation technologies.

There are, however, some recent instances of innovations related to water pricing. Some provinces, irrigation districts and municipalities have raised rates to promote conservation and increase supply network’s financial sustainability. Individual municipalities have moved to increasing block rates and implemented storm water pricing. There are two major ongoing efforts to field test nutrient trading programs (Lake Simcoe in Ontario and Lake Winnipeg in Manitoba).

There are some implications for California in the Canadian experience. First, the lack of direction by senior levels of government has been seen to be contributing to Canada’s water woes. But one positive feature has been that it has created policy ‘space’ for local experimentation and innovation. Second, this innovation is most successful when it is the result of multi-stakeholder efforts supported by strong science and policy analysis capacity. An example of the latter is recent research by the authors identifying the distributional impacts of municipal pricing reforms.

Water Pricing in Spain: Following the Footsteps of Somber Climate Change Projections

Presentation by Marian García-Valiñas

Climate change, growing demand and water pollution are common causes of water stress, shortages and unsustainable water use. Decreasing levels of average rainfall and rising temperatures in many regions of the world, resulting in lower water availability are now taken as planning facts. Spain is not an exception to this trend, as far as important water stress levels are registered in several regions. As a consequence, water demand management is one of the most relevant issues in the Spanish water policy agenda. Pricing reforms are among several measures implemented to change the behaviour of water users, looking for higher efficiency and environmental levels. Additionally, water pricing is also aimed to get other objectives, such as affordability or financial sustainability.

This research includes a wide discussion on some highly controversial topics related to water pricing in Spain. First of all, the Water Framework Directive 2000/60/CE sets that, in order to ensure an efficient and sustainable management of water resources, prices should be fixed according to the principle of cost recovery. In addition, this regulation explicitly states that prices should not be subsidized. This fact could lead to important consequences in terms of affordability for all kinds of water users in Spain. Secondly, water policies are also involved in a serious discussion about changes in the Common Agricultural Policy orientation. The Water Framework Directive has recently been added to the Statutory Management Rules to be complied with in the future by farmers under the Single Payment Scheme. Fulfillment of the WFD will be required for farmers’ to be entitled to direct subsidies in the EU Common Agricultural Policy post 2014. In addition, rural development programs, which are designed by regions and Member States and co-financed by the EU and the national governments, can establish irrigation water objectives. All these upcoming policies will thus lead to setting prices oriented towards environmental protection. Consequently, important reforms related to water price regulation in Spain are included in the future agenda.

Fiscal decentralization in Spain is an additional factor to consider in the implementation of water policies. Both central and sub-central (regional and local) levels of government are responsible for this kind of policies in Spain, including water pricing. The presence of different charges, fees and taxes related to water cycle add complexity to the system. Thus, decentralization in Spain allows adapting the regulation to regional/local conditions, but at the same time it makes more difficult to coordinate water policies in the whole territory.

Definitively, a broad discussion related to these topics will be presented. It is expected that all those policies and reforms have a significant impact on socio-economic features for different users. Moreover, they are likely to face numerous obstacles and to raise strong opposition from most water users. In sum, those reforms emerge as a huge challenge to improve water resources allocation in Spain.

Water Pricing in Australia: Unbundled Politics, Accounting and Water Pricing

Presentation by Gavin Hanlon

The National Water Initiative (NWI) in Australia provides a framework for State and National economic regulators to scrutinize pricing proposals from utilities. While the framework for water pricing in the NWI has been generally applied in most states, local nuances and regional diversity give rise to quite different price outcomes. Whilst the underlying aim is for full cost recovery, there are many factors that influence whether this can be achieved or not. This presentation will provide an overview of the pricing approaches used for urban, environmental and rural water users in Australia. It will also critically look at the state of New South Wales and provide an overview of the key policy and legislative challenges to be addressed to enable water markets to operate more efficiently. Specifically, the presentation will provide an overview of water allocation, markets, delivery institutions, extreme events, investments and how these issues are shaping the New South Wales water reform agenda.

Water Pricing in Italy: Beyond Full-Cost Recovery

Presentation by Antonio Massarutto

The combined effect of climate change and intensifying patterns of water use conspire towards making Europe an increasingly drought-vulnerable continent. This is not necessarily depending on dry climate, but rather on an emerging mismatch between available water resources, desired environmental functions, available management systems and the rules of the game. “The rich cry too” was the title of a popular TV series, and also a very appropriate label to describe the actual situation in many European settings, where water abundance has encouraged an “extensive” approach to water resources management and water service organization.

The research presented in this paper had the aim of:

Identifying a few relevant examples of recent drought events in a number of case-study areas
Examine how the existing institutional setting has managed the event
Assess the economic cost (following a social cost perspective) of drought events in an “ex-post” perspective (damages that took actually place; damages that could have taken place but in the end did not)
Assess the distributive outcomes of each event (inter-regional, inter-sectoral), identifying winners and losers
Assess alternative opportunities to manage actual and future droughts, considering infrastructural development, management innovations, institutional innovations (such as pricing, priority allocation rules, insurance markets etc)
In particular, assess to what extent the implementation of market-based instruments and economic principles could achieve more efficient outcomes, either in allocative or in distributive terms

The case studies covers areas in EU Mediterranean region (Portugal, Spain, Italy and Greece), at different geographical scales and facing different patterns of water availability and use.

While agriculture is always the mostly concerned sector, due to the absolute magnitude of irrigation water demand, impacts are not that obvious. Due to shifting of scarcity cost along the value chain via commodity prices, for example, final consumers have borne most of the welfare losses. Interregional effects also are apparent (some regions gain and other lose). The interplay between agriculture, power generation and sometimes also public water supply also raises very interesting consequences.

The research shows that “dry” regions, already accustomed to manage water scarcity, have already developed more efficient institutional and management systems. On the other hand, “water rich” regions, such as the Po basin in Italy, appear more vulnerable precisely because the existing system was designed to manage abundance, and cannot easily cope with emerging scarcity without significant investments and institutional change, whose cost seems at present neither affordable nor justifiable. More flexible adaptation strategies have been examined and shown to provide more effective and efficient solutions, at least until water scarcity will become a more structural phenomenon.

Water Pricing in France: Toward More Incentives to Conserve Water

Presentation by Marielle Montginoul

Like in many regions of Europe, water is increasingly ‘scarce’ in France, as water demand goes up, environmental standards support larger ecological flows, and pollution reduces available resources. Simultaneously, the cost of producing water rises, as water has to be transported over longer distances and/or to be treated at a cost which has been continuously rising over the last two decades – in particular for drinking water, due to the cost of nitrates and pesticides removal and the strengthening of quality standards.

The presentation begins with a historical overview of the legislative and regulatory framework of water pricing. French water laws address only the case of urban water pricing, letting other uses being regulated by other instruments, like quotas, levies at river basin level, or at local level. Historically, the focus of urban pricing policy evolved from a simple budget balance mandate in the 70’s to additional water conservation incentive (1992 water law), and more recently to social protection objective (2006 water law and subsequent regulations).

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 average price (including VAT) in France in 2013 is 3.73 €/m3, but this hides a high variability because water is priced at a local level taking into account local conditions and the fact that 25% of water units do not have collective sewerage. Two-part tariffs are most frequent. The proportional water part charged to users is mostly constant (61% of the utilities, 72% of the population). 36% of the utilities used a declining block tariff structure in 2003, vs. only 4% in 2013 following the new 2006 regulation which restricts the use of such a pricing system. On the contrary, the proportion of utilities with increasing block structure has drastically increased. Finally the last 10 years have been the arena of multiple tests and implementation of innovative water pricing structures: optional water pricing, seasonal water pricing (sometimes combined with increasing bloc rates) …

The fourth part focuses on water pricing in the agricultural sector at different scales: large public irrigation schemes, smaller Water User Associations and individual irrigation systems. In that case of individual extraction, there is no water pricing, and incentives to save water is done through the Water Agency abstraction levy, energy pumping cost, and the new water license due to a collective water management institution. Farmers’ associations built their water price to cover financial costs contrary to large public irrigation schemes which also try to incite farmers to save water.

The evolution of water abstraction fees collected by river basin authorities is then analyzed: water fees are be modulated depending on the degree of collective management of agricultural water resource. However Water Agencies’ fees would require a sharp increase to provide a real incentive (up to 20 times of the actual level for irrigation use) and then would face the users’ opposition.

The presentation concludes by the fact that water price in France is often associated with other instruments to achieve the different objectives (an efficient allocation, a cost recovery and a water access to all). For instance, quotas are usually the way to share water between uses, defining in each water scarce area the maximum annual abstracted volume. Afterwards it is the responsibility of each use to share it between its members, through water pricing or other instruments.

Water Pricing – The Case of South Africa

Presentation by Barbara Schreiner

South Africa is a water scarce country with a high level of income inequality based largely on race - with a Gini co-efficient amongst the highest in the world – 63.1 in 2009 according to the World Bank. 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 while ensuring that water is affordable to the poor, and to address issues of racial redress and poverty eradication. This presentation deals with the key aspects of water pricing in South Africa for irrigation, municipal, power generation and industrial use focusing in particular how social and ecological elements have been addressed in the pricing policies and legislation since 1994 when South Africa obtained is liberation.

The raw water pricing strategy is governed by four key principles: Social Equity; Financial Sustainability; Economic Efficiency; and Ecological Sustainability.

Historically, the largely white-owned irrigation sector received large subsidies from government, while municipal and industrial water use was charged at full cost. This subsidy has largely remained post 1994, in a manner that has some negative outcomes and raises some concerns, while further subsidies have been offered to emerging black farmers. The country has moved from largely state funded water resources infrastructure to off-budget financing for commercial infrastructure with state funding for social infrastructure.

In terms of municipal water supply, many municipalities developed their own water resources, or were provided with bulk water by water boards. South Africa provides free basic water, with rising block tariffs beyond the basic water amount. Each municipality sets their own tariffs, in line with national regulations, and there is considerable variation in the approaches taken across the country.

While the current pricing model is effective in many regards, there are still challenges that the Department of Water and Sanitation is addressing, including looking at how best to address: the issue of subsidies to the agricultural sector (both commercial and small-scale black farmers), free basic water and sanitation, return on assets for state-funded infrastructure, and charging for waste discharges into water resources.

Water Pricing Reforms in China

Presentation by Dajun Shen

The paper analyzes the water pricing structure, reform process and case studies in China and presents an overall picture of pricing water resources and its services in the past 60 years, particularly after 1980.

China develops a comprehensive water pricing framework. Five types of fees and charges, including water resources fee, water supply tariff from hydraulic engineering, urban water supply tariff, wastewater collection and treatment tariff; and pollutant discharge fees; are related to resources, services and environmental issues; are incorporated in water pricing framework.

Water was supplied free of charge from hydraulic engineering between 1949-1965. The lower service charge was collected from 1965, but was too less to cover the costs. In 1985, the water tariff was required to be assessed based on water supply costs and formulated according to water supply purposes, but was not been realized. In 2003, the new method was issued to replace the existing management methods.

The water resources fee was introduced in 1980s to promote water saving in order to deal with the emerging water shortage in cities in northern China and coastal regions, and then gradually expanded from urban groundwater to all water abstractions, from some provinces to all provinces. The wastewater collection and treatment fee was collected to promote the pollution control in later 1990s, and was required to be regulated step by step to cover network and plant costs, but was not well-implemented and had to be subsidized formally after 2013. After 2000s, the comprehensive system is developed to combine the external factors, and implemented to improve the water pricing structure and levels.

Both Beijing and Shanxi Province demonstrate often regulations in term of increasing tariff standards, changing user group and reforming tariff structure. In future, China will continue struggling in the position of water sector in society and economy, increasing charges for environmental protection, valuing water resources shortages by water resources fee, as well as increasing standard and improving system to meet multi-objectives.

Closing the Gap: Producing Water and Charging for Water in Israel

Presentation by Yacov Tsur

The supply of renewable natural water available in a sustainable fashion in the Jordan River Basin, comprising Israel, Jordan and the Palestinian Authority, will soon drop below 100 m3/person/year. Drawing on recent technological progress and policy innovations, a comprehensive policy to address the region¹s water problems in the long run is offered. The policy has a dual goal: to satisfy the needs of a growing population (domestic, irrigation, industry) and to preserve important environmental amenities, including restoration of the Lower Jordan River and stabilization of the Dead Sea level. The gap between natural water supplies and the basic needs of the growing population will be closed by conservation and desalination; at the same time, all domestic water will be recycled and will be available for reuse in irrigation and environmental restoration. A special focus is given to the recent pricing reforms implemented in Israel, which led to considerable changes in water consumption of the urban and agricultural sectors. We show how these changes, when applied to the entire region, will close the gap between natural water supply (which fluctuates around a stable mean) and the water needs (which grow steadily with the population growth and the rising standard of living).

Water Pricing for a Dry Future