Water services provision is a natural monopoly. This drives a propensity to market failure and economic inefficiency in the absence of robust regulatory measures.
In this context I discuss the appropriate role of the regulator and the advantages and disadvantages of pricing water usage. Beyond subsidies funded from general taxation there are potentially three main sources of revenue for a water utility. These are connection fees, recurrent fixed charges and volumetric charges based on usage.
Water policy pursues multiple objectives and a wide variety of pricing structures are employed within the OECD. These objectives can be structured around four sustainability dimensions: environmental sustainability; financial sustainability; economic efficiency and social concerns including affordability. There are trade-offs between each of these policy objectives. Full cost recovery through usage based tariffs creates affordability and equity concerns, while the most efficient allocation of water may not be consistent with water saving and environmental concerns. This paper considers the main trade-offs as a set of dilemmas and discusses the advantages and disadvantages of a variety of different water charging models.
Water charges for domestic users are being introduced in Ireland in 2014. Based on the premise that water charges remain in place I consider various charging models. Water affordability and water poverty are important concerns in this context. A universal free allowance has been proposed as a means of protecting households from water poverty. However, the proposed system is highly regressive and should be abolished in its current form. A small free universal allowance will not address the affordability issue while a large free allowance undermines other policy objectives – notably economic, financial and ecological sustainability. Instead, a system of income related water credits is described as a potential alternative. Combining a volume based pricing structure with a system of income related water credits may best reconcile the four main policy objectives, would address the affordability issue at a much lower cost to the exchequer than a universal allowance, and if properly designed would ensure that a combination of water charges and low income does not become a barrier to vulnerable households accessing water and wastewater services.