The cost of urban water utilities. A necessary analysis for rate setting and control

Urban water utilities are a typical case of a public service with regulated prices. This paper examines the costs of the service, which must be understood if rates are to be set and controlled on an appropriate basis. We adopt a highly practical approach. In the first place, we establish two cost classifications in order to establish the level and structure of the costs of the utility, analysing the difficulties inherent in calculation. We then go on to analyse the municipal water and sewerage service in the city of Zaragoza. This case study is of particular interest in a context where public information about the cost of such utilities and the cost systems employed is in short supply.The analysis reveals the practical difficulties inherent in the accurate classification and quantification of costs and highlights the weaknesses of the systems applied by both local entities and river basin agencies to capture the true economic costs of providing the utility. Our estimates suggest that costs are currently understated, and that the cost structure is taken as a point reference but not a key factor to determine the structure of water rates.