INTRODUCTION

Rita Silva

*Economic and Financial Analysis Department, ERSAR, rita.silva@ersar.pt

Water services are the classic example of natural monopoly, which, along with other market failures, requires economic regulation in order to set efficient tariffs, guiding users towards a more efficient water

use, and thus promote equilibrium and welfare maximization. But, generally, water supply tariffs worldwide haven’t been set in regard to economic principles, failing on achieving those purposes. Water supply

tariffs applied to non-domestic users are no exception and have been defined over time with no common framework, leading to a great diversity of categories of users, tariff structures and values.

This status quo has evolved in the past years, with the increasing attention of public policies towards the theme of water services financing. In Portugal, a major review of water tariff policies is underway,

aiming at the standardization of the tariffs schemes and urging rationality in setting tariffs. The latest developments are the non-mandatory guidelines from the Portuguese Water and Waste Services

Regulation Authority (ERSAR), published in 2009 and 2010, which include specifications for non-domestic tariffs.

This poster surveys water supply pricing policies focusing on non-domestic users. It presents an analysis on non-domestic water supply tariffs applied in mainland Portugal in 2007 and 2011, on which is

assessed the compliance with regulatory guidelines, the existence of cross-subsidization between users, and the relation between charges and a set of variables usually thought to influence water tariffs.

METHODS

RESULTS AND DISCUSSION

Compliance with regulators guidelines in matters related with non-domestic water tariffs has not evolved significantly since 2007 to 2011.

Wide range of categories of non-domestic users, wide disparity in charges and different treatment of non-domestic users: similarity in the charges supported by commerce, industry and agriculture, as well

as the charges supported by local government and non-profit organizations; the costs incurred by central government entities have the higher charges.

Non-domestic users water bill is generally higher than domestic users bill, though price elasticity of water supply service for non-domestic is generally higher than for domestic users, which should leave to

lower charges. Social justification is pointed for this discrimination: the affordability of the service to the domestic users, since it is an essential public service.

But subsidization between users causes a gap between the water bill and the actual cost of providing the service, which undermines economic efficiency.

There is some relation between the water bill for non-domestic users and: management model, the number of costumers, the population density and the geographical location.

The results obtained are not entirely compatible with tariff schemes defined under economic efficiency principles. This means, for instance, that tariffs should be based on the cost of service, that cross-

subsidization is not desirable and that different categories for non-domestic users shouldn’t be considered if the cost of providing the service is the same. The enforcement of a water tariff policy, namely

through mandatory orientations, is a decisive step on the way to efficient tariff schemes.

CONCLUSIONS

inspiring change

The compliance with the regulator’s guidelines on water tariff schemes applied to non-

domestic users has not evolved significantly until 2011, as Figure 1 shows.

Correia, R. and C. Roseta-Palma (2012), Behavioural Economics in Water Management: An overview of behavioural economics applications to residential water demand, Workshop “Consumption – a multidisciplinary point of view”, University of

Manchester.

IBNET (2011), The IBNET Water Supply and Sanitation Performance Blue Book, The International Benchmarking Network for Water and Sanitation Utilities Databook, The International Bank for Reconstruction and Development / The World Bank,

Washington, D.C., http://seawun.org/uploads/Focus%20Programs/IBNet-Blue%20Book.pdf

Ramsey, F. P. (1927), A contribution to the theory of taxation, The Economic Journal, Vol. 37 N.º 145, march 1927, 47-61.

Reynaud, A. (2003), An Econometric Estimation of Industrial Water Demand in France, LEERNA-INRA, Université de Toulouse.

Silva, R. (2012), Os tarifários de água para consumo humano aplicados aos utilizadores não domésticos, ISCTE-IUL, URI: http://hdl.handle.net/10071/6304.

Smets, H. (2000), Mise en oeuvre du droit a l’ eau potable dans les pays de l’OCDE, Académie de l’eau.

www.iwahq.org

Water tariffs applied to non-domestic

users

The analysis of tariff structures and charges here presented is based on the tariff schemes for water supply services to non-domestic users applied in mainland Portugal in 2007 and 2011, obtained from

ERSAR’s database. The information for 2011 compiles 282 water tariff schemes (covering all mainland 278 municipalities – in some municipalities there is more than one tariff scheme), and for 2007 were

considered 270 tariffs schemes.

To assess the compliance with regulator’s recommendations were chosen the most relevant orientations from the Recommendation n.º 01/2009 - “Tariff guidelines” and Recommendation n.º 02/2010 –

“Tariffs calculation criteria”.

Given the large number of categories for non-domestic users identified in the tariff schemes, the water charges analysis was restricted to the following groups of users: Commerce (commerce and services),

Agriculture, Industry, Central Government; Local government and NPO (Non-profit organizations and similar).

To calculate water charges paid by the different kind of users it was considered a monthly bill for 10 cubic metres of water consumption, which is a domestic referential, because of the difficulty of defining a

representative water quantity for non-domestic users, due to their different water consumption profiles. The water charges presented only include fixed and variable charges (other tariffs, like wastewater

tariffs, or taxes, like water resources tax or VAT, are not considered).

Other data used in this study were also obtained from ERSAR’s database, except for the political elections results used to evaluate the relation between political ideology and water charges, which was

obtained from the Portuguese National Election Commission (CNE).

As Table 1 shows, non-domestic users, generally pay more for water supply service than domestic users, a trend

that is also observed worldwide. The application of Ramsey’s price theory (Ramsey, 1927) points out another way,

i.e., lower charges for non-domestic users, since the price elasticity of water supply service for these users is

generally higher than for domestic users. However, existing cross-subsidization is attributed to eminently social

and historical reasons (Smets, 2000).

Most water tariff schemes presents a wide range of categories of non-domestic

users and great disparities in the tariffs defined for these users. When comparing

the charges paid by the different non-domestic users to the charges paid by

Commerce (Figure 2), it can be seen that there are also different treatments for the

same group of non-domestic users, in matters of water tariff policy.

Figure 1 – Compliance with regulator’s guidelines (% of tariff schemes)

Table 1 – Charges supported by users (Portugal, 2011)

Figure 2 – Number of tariff schemes that result in water bills lower/higher than

Commerce water bill for a 10 m3/30 days water consumption (2011)

Local and Central

Government users are

the ones for whom the

water tariff policy is more

inconsistent.

Table 2 – Ratio between the charges supported by non-domestic users and

domestic users (Portugal, 2011)

27%

8%

12%

91%

13%

95%

34%

70%

33%

14%

84%

15%

0% 20% 40% 60% 80% 100%

Variable charge for 10 m3 consumption/30 days within limits (2011: 0,4856/m3 - €5,8275/m3)*

Existence of a single variable tariff

Fixed charge value within limits (2011: 1st level - € 1,55 - €13,99)*

Fixed charge for non-domestic higher than domesticcharge

5 levels for the fixed tariff

Existence of fixed tariff

2 categories maximum for non-domestic users (includingone for NPO or similar)

* In 2007 there was no guidelines for fixed or variable charges

2011

2007

Commerce charges

are generally lower

in the municipalities

in the center of

Portugal.

It was observed some relation between the level of charges

supported by non-domestic users and the following variables:

Management model - lower charges in direct management by

the city council;

Number of costumers and population density;

Geographical location - there is a pattern as Figure 3 illustrates.

It seems that there isn’t a marked relation with the political

ideology prevailing on each municipality, but this conclusion

requires a deeper econometric analysis.

Figure 3 – Charges supported by Commerce users

(Portugal, 2011)

There is similarity in the charges supported by Commerce,

Agriculture and Industry, as well as the charges supported by Local

government and NPO.

In comparison with domestic users, non-domestic paid on 2011, an

average of 1.1 (NPO) to 1.9 (central government) more for water

supply service (Table 2).

The level of distinction is a little higher than the one obtained on a

IBNET similar survey using data from 2008 for several countries,

which was 1.35.

Label

<10€

]10€;20€]

]10€;20€]

>30€

2011 Commerce Agriculture Industry Central Gov. Local Gov. NPO

Mínimum 0.64 0.56 0.64 0.54 0.22 0.04

Maximum 4.26 4.26 4.26 6.13 4.26 3.86

Simple average 1.71 1.72 1.73 1.93 1.34 1.10

Coefficient of variation (%) 33% 33% 33% 41% 48% 40%

2011 Domestic Commerce Agriculture Industry Central Gov. Local Gov. NPO

Mínimum (€) 2.35 2.6 2.6 2.6 2.00 1.90 0.30

Maximum (€) 20.38 34.57 36.43 36.43 56.60 28.91 27.76

Percentile 80%/Percentile 20% 1.9 2.3 2.4 2.3 2.5 2.3 2.4

Median (€) 8.30 13.60 13.74 13.60 15.35 10.20 8.00

Coefficient of variation (%) 36% 44% 45% 44% 50% 46% 50%