Guidelines for Municipal Water Pricing

Social Science Series No. 25

Abstract

A rate structure for water supply and waste treatment should recover all costs and result in efficient use of water by the final consumer. The water utility should recover both fixed and variable costs, as well as the costs of future expansion. Efficient use of water means that water is supplied up to a point where its value to consumers is greater than or equal to the cost of supplying it. A two-part tariff that includes a volume based price and a fixed connection charge can meet both the cost recovery and efficiency objectives. The volumetric portion of the tariff should be set equal to the marginal cost of water. In off-peak periods, the marginal cost is equal to the marginal operating cost, which only includes variable costs. In peak periods, the marginal cost includes both the marginal operating cost and the marginal capacity cost, where marginal capacity cost is the increase in future expansion costs resulting from the marginal increase or decrease in consumption. The fixed connection charge recovers any additional cost not met by the volumetric price.

The first step in the analysis develops a total cost curve based on the utility's operating budget and current expansion plans. The total cost curve shows the relationship between water supply and total cost to the utility. The second step derives the marginal cost curve from the slope of the total cost curve. The third step estimates the aggregate demand curve for water based on information supplied in this report. The analyst then determines the correct estimate or marginal cost for water from the intersection of the demand curve for water with the marginal cost curve.

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Sustainable Water Management
Environmental Stewardship Branch
Environment Canada
Ottawa, Ontario  K1A 0H3
Fax: 819-934-5101 or
H2O@ec.gc.ca