39. Pricing for efficiency. On efficiency grounds water should be considered a different product depending on i) the location where it is produced and consumed, on ii) its quality including the effects water or sewage quality has on parties other than the consumer, and on iii) the time of day or year when it is supplied and consumed. For example, consumer demand and therefore willingness-to-pay may be high at certain times (peak periods) of the day or it may be high during dry seasons when plants need extra watering. The cost of supplying water obviously depend on the desired quality of water, the costs of transportation and the total volume to be transported at any given time.
40. Prices that balance demand and supply efficiently should, therefore, ideally vary by location, quality and time of use. For example when there are short peak periods the water supplier needs to build extra capacity into treatment plants and water pipelines to supply demand at these peak periods. Those who want water during these periods should pay for the extra cost of capacity expansion. If they are not prepared to do so, demand will be smaller – as it should be. By pricing water correctly the community will save on unnecessary investment and operating costs. These pricing principles and various methods of providing subsidies are discussed in more detail in Brownand Sibley (1985) and OECD (1987).
46. Metering. To be able to implement schemes under which prices vary, metering is required.
Page 26 (Footnote) – When new regulatory authorities are established it is often argued by the old water company that people with experience in the company should join the new regulatory body. While a level of technical expertise is clearly necessary, there are many cases where such “old-timers”have effectively undermined the effectiveness of the new system. The key in regulation is mastery of politics while respecting sound economic principles. Technical expertise can more easily be hired from outside.
In many cases governments prescribe uniform prices for certain customer classes in a service territory. Even if the uniform price covers costs on average it may be insufficient to cover costs for outlying customers. In this case it would not provide any incentive to the company to provide the required service for all.
Pricing policies need to be carefully designed to obtain the right incentives for metering.For a discussion of issues arising and ways to deal with them see Warford (1966) and OECD (1987). One promising way of providing appropriate incentives to customers for metering would be to offer a menu of contracts to customers that reflect the costs and benefits of metering. Customers can then decide whether to purchase meters or not.