The Theory of Water and Utility Pricing - Global Drinking Water Management and Conservation - page 106

Table 5.9 Share of different ownership regimes for the provision of urban water services in
Andalusia (Garc í a-Vali ñ as et al. 2013 )
Municipalities (percent) Population (percent)

In-house 48.80 11.60

Public company 27.80 49.60

Institutionalized PPP 10.40 15.10

Contractual PPP 13.00 23.70

we estimated Shadow Ramsey Prices to demonstrate that actual water pricing policy
can indeed be integrated with the new public economics.
Equity and redistribution looms large in the new public economics and it is
indeed not only feasible but possible to have a two-part water price such that for
some minimum quantity of water required for health and survival, a zero or a lower
price is justi able, followed by a steeply rising price for outdoor water use. In a

“ ”

best world, the water utility could do worse than utilize marginal cost
pricing. In the water utility sector, this form of pricing is called

third

“

pricing based on

cash needs. it is

clear that it is precisely the same as marginal cost pricing. Of course accountants
disapprove of pricing based on cash needs and political authorities tend to support
the accounting point of view. For example, full cost accounting for water is the law
in Ontario. In Alberta, marginal cost pricing survives in the form of

” When we consider the details of “ pricing based on cash needs, ”

in
some small communities but this practice is due to be phased out as the government
of Alberta also supports the accountants on how water should be priced. That is,
water should be priced as in any other private business, based on full cost
accounting.
Can water be under-priced? Yes it can, as when consumers pay a

“ cash needs ”

fixed annual
charge irrespective of the amount of water consumed. In the UK, there were a
number of areas without water meters and where water was distributed for a xed

charge. But that is now changing. By 2015, up to 92 percent of consumers in the
south-east of England who get their water from

will be metered
in line with the rest of Europe. From a public economics point of view, it can also
be over-priced, when the price is way over marginal cost, but the higher price (in
the public sector) may have a different social objective such as conservation. It is
the need for conservation and reduction in waste that explains the high water prices
in some northern European countries like Germany, Denmark, and the Netherlands.
If the water utility is in the private sector, then pricing decisions will be governed
by pro

“ Southern Water ”

t maximization, with no regard to social objectives.
From the point of view of the new public economics, equity and redistribution,
as well as conservation can be social objectives driving pricing policy. We note that
Australia uses Ramsey Pricing, as they rely on pricing water on the basis of long
run marginal costs; in the US, there are jurisdictions that take equity issues into
consideration; Germany and other northern European countries emphasize con-
servation and price water accordingly. Thus in the new public economics, social