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.[1] 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.[2] 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.
^OECD:Pricing of Water Services, Paris 1987, p. 23-34
^Ariel Dinar: The Political Economy of Water Pricing Reforms, World Bank, 2000
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