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Optimal water tariffs and supply augmentation for cost-of-service regulated water utilities

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  • Grafton, R. Quentin
  • Chu, Long
  • Kompas, Tom

Abstract

We describe how a common method for regulating water utilities, cost-of-service regulation, can both in theory and practice result in the premature and economically inefficient water supply augmentation. Using a dynamic model calibrated to demand and supply conditions in Sydney, Australia we show how to optimally determine the time to supply augment using a ‘golden rule’ that minimises the average volumetric price paid by consumers. Our results show that, the greater the water scarcity and the longer the operational life of the additional supply, the sooner is the optimal time to augment. Based on our findings, we recommend that price regulators of water utilities adopt an historical cost less depreciation basis for a regulated asset base and a fully flexible and dynamically efficient volumetric pricing that accounts for the marginal opportunity cost of water supplies.

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  • Grafton, R. Quentin & Chu, Long & Kompas, Tom, 2015. "Optimal water tariffs and supply augmentation for cost-of-service regulated water utilities," Utilities Policy, Elsevier, vol. 34(C), pages 54-62.
    • Handle: RePEc:eee:juipol:v:34:y:2015:i:c:p:54-62
    DOI: 10.1016/j.jup.2015.02.003
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    References listed on IDEAS

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    1. Commission, Productivity, 2011. "Australian’s Urban Water Sector," Inquiry Reports, Productivity Commission, Government of Australia, volume 2, number 55.
    2. R. Quentin Grafton & Tom Kompas, 2007. "Pricing Sydney water ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), pages 227-241, September.
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    8. R. Quentin Grafton & Michael B. Ward, 2008. "Prices versus Rationing: Marshallian Surplus and Mandatory Water Restrictions," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 57-65, September.
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    11. Katherine Daniell & Jean-Daniel Rinaudo & Noel Wai Wah Chan & Céline Nauges & Quentin Grafton, 2015. "Understanding and Managing Urban Water in Transition," Post-Print hal-01290502, HAL.
    12. Whittington, Dale & Hanemann, W. Michael & Sadoff, Claudia & Jeuland, Marc, 2009. "The Challenge of Improving Water and Sanitation Services in Less Developed Countries," Foundations and Trends(R) in Microeconomics, now publishers, vol. 4(6–7), pages 469-609, September.
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    Cited by:

    1. Bako Kinga-Erzsebet & Fulop Arpad-Zoltan, 2017. "Profitability And Efficiency Analysis In Water And Sewerage Sector In Romania," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 96-102, August.
    2. R. Quentin Grafton, 2017. "Responding to the ‘Wicked Problem’ of Water Insecurity," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 31(10), pages 3023-3041, August.
    3. Garrone, Paola & Grilli, Luca & Marzano, Riccardo, 2019. "Price elasticity of water demand considering scarcity and attitudes," Utilities Policy, Elsevier, vol. 59(C), pages 1-1.
    4. Long Chu & R. Quentin Grafton, 2019. "Policy Note: "Short-term Pain for Long-term Gain: Urban Water Pricing and the Risk-adjusted User Cost"," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-14, April.
    5. Grafton, Rupert Quentin, 2019. "Policy review of water reform in the Murray– Darling Basin, Australia: the “do’s” and “do’nots”," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 63(1), January.
    6. Rust, Steven & Silberberg, Ben & Turner, Emma & Sharp, Basil, 2020. "Investigating the value of keeping options open for water infrastructure in the Lower Hunter, New South Wales," Utilities Policy, Elsevier, vol. 62(C).
    7. Cooper, Bethany & Crase, Lin, 2016. "Governing water service provision: Lessons from Australia," Utilities Policy, Elsevier, vol. 43(PA), pages 42-47.
    8. Molinos-Senante, María & Donoso, Guillermo, 2016. "Water scarcity and affordability in urban water pricing: A case study of Chile," Utilities Policy, Elsevier, vol. 43(PA), pages 107-116.

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