GUIDELINES FOR SETTING WATER TARIFFS
With a Focus on Industrial, Commercial and other Non-Residential Consumers
Report No 992/1/00

Executive Summary

Commerce and industry represent a major grouping of water consumers in most local authorities, consuming up to 50% of the water supplied in larger municipalities. These enterprises also have significant impacts on the local economy, society and the environment. Yet surveys have revealed significant inconsistencies in the manner in which municipalities set tariffs for these consumers.

The Water Research Commission has already established a guideline on setting water tariffs, in the form of a module in the Management guidelines for water service providers. However, this module concentrates mainly on water tariffs for residential consumers. These guidelines have therefore been developed to assist Water Managers in setting tariffs for non-residential water use, focusing specifically on commercial and industrial water tariffs.

The guidelines have been written for water managers in Water Services Authorities (WSAs) and Water Services Providers (WSPs) who are involved in setting retail water prices, that is, water prices to the end-user. They propose the following tariff reform process:

1. Understand the national context. The roles of various institutions involved in water supply are described, together with the relevant national water pricing policies.
2. Understand the local context. A broad range of factors are outlined which tariff reformers may wish to consider to better understand their local context. These include the local institutional, historic, economic and water resources context, the consumer market, the costs of supply, revenues and current tariffs. Given the political nature of tariff-setting practitioners are strongly advised to undertake a stakeholder analysis.
3. Set pricing goals, establishing principles and develop performance indicators. Practitioners are advised to define pricing goals and to prioritise or weigh these as far as possible. A basic set of principles are proposed for good tariff practice. Various practical indicators are proposed with which to measure organisational performance.
4. Make some preliminary choices. The possible components of the water tariff are described, including development charges, connection charges, fixed fees and volumetric tariffs. Two approaches are described for determining tariff levels: the revenue requirements approach and the marginal costs approach. The user is advised to consider the impact of future supply costs and climate and to examine the scope for cost reductions when determining revenue requirements. A set of guidelines are provided to assist with these choices, covering universal cases and specific conditions.
5. Define the tariff structure and set tariff levels. Users are advised to establish a tariff policy framework on the basis of the selected goals, and to use this for further consultation.
6. Undertake consultation and evaluation exercises. The likely impacts of tariff reform should be evaluated before approval is sought. Depending on the outcome of the stakeholder analysis, and the extent of the proposed tariff reform, it may be necessary to consult stakeholders prior to seeking political approval. Long term evaluation procedures should be set up to establish whether the tariff reforms are achieving the desired pricing goals.
7. Refine tariffs. Users are advised to undertake incremental reforms to tariff structures and levels until they achieve desired goals and adhere to best practice principles.

A key conclusion of the research is that there is no practical system to implement inclining block water tariffs for non-residential consumers.

The guidelines also describe some tariff refinements for special cases, such as the use of new development charges; seasonal pricing; drought pricing and commodity price- linked tariffs.

Finally, the guidelines review a number of international and local case studies as a means of offering insights into the circumstances of other local authorities. Source documentation for these case studies is available at Palmer Development Group.