Pricing and Investment Strategies for an Integrated Urban Water Supply-wastewater Utility

Abstract

Water utility pricing and investment planning involves decisions on (1) when and how much to invest in additional capacity, and (2) the determination of fixed charges, volumetric charges, and connection fees for several classes of customers with different patterns of use and demand characteristics. These decisions have to be reached under certain political, financial, and administrative constraints. Given the complexity of the issue, the traditional approach for water utility management has relied on financial rather than economic criteria, with little attention being given to the complementary nature of the services provided by water and wastewater utilities. Conventional practices, therefore, produces inefficiency and less than optimal proportionality in capacity design between the water supply and wastewater treatment systems. Recognizing the drawbacks of conventional practices and the limitations of earlier studies, a theoretical framework for optimum rate design and capacity expansion for a combined water supply-wastewater treatment system has been produced in this research. Several variations of the model have been presented to deal with the specific problems of: (a) administrative and social constraints; (b) financial recovery; (c) the determination of connection fees; and (d) volumetric charges for different classes of customers. In general, practical alternatives to the traditional approach can be classified into (i) marginal cost pricing schemes; and (ii) constant price-capacity expansion strategies. The short-run marginal cost includes the marginal supply cost, marginal treatment cost, and the marginal environmental damage cost; the constant real price is a weighted average of that present value of short-run marginal costs and the marginal annual benefits of additional capacity in both systems. While marginal cost pricing-capacity expansion policy tends to maximize the present value of the social net benefits associated with water utility services, it is not a feasible alternative to conventional practices. The resulting variation in prices overtime is neither administratively feasible nor politically acceptable. The constant (real) price and capacity expansion strategy, on the other hand, seems to overcome most of the deficiencies with the traditional approach, and the shortcomings of marginal cost pricing policy. Finally, a practical procedure for the implementation of constant (real) pricing-capacity expansion strategy has been suggested in this study.