THE IMPORTANCE OF INSTITUTIONAL STRUCTURE IN CONTROLLING AGRICULTURAL RUNOFF1

Abstract: Agricultural runoff, such as dissolved mineral salts and selenium, creates pronounced downstream impacts to agricultural producers and to wildlife. The ability to manage these problems efficiently depends critically on the institutional pricing structure of irrigation water delivery agencies. An important characteristic of irrigation water delivery is whether irrigators pay per unit of water received or make one payment regardless of the quantity of water received. In this study we compare the effectiveness of agricultural runoff reduction policies in two regions that employ these different water pricing structures. We find that reduction policy is more effective and can be achieved at a lower cost when water is priced on a per unit basis and that growers have greater incentive to act on their own to reduce runoff problems. Operating under a per unit pricing system encourages water conservation and runoff reduction, which creates public benefits that are not achieved under the single-payment, fixed allotment method of irrigation water delivery.     

Incentive pricing and cost recovery at the basin scale

Incentive pricing programs have potential to promote economically efficient water use patterns and provide a revenue source to compensate for environmental damages. However, incentive pricing may impose disproportionate costs and aggravate poverty where high prices are levied for basic human needs. This paper presents an analysis of a two-tiered water pricing system that sets a low price for subsistence needs, while charging a price equal to marginal cost, including environmental cost, for discretionary uses. This pricing arrangement can promote efficient and sustainable water use patterns, goals set by the European Water Framework Directive, while meeting subsistence needs of poor households. Using data from the Rio Grande Basin of North America, a dynamic nonlinear program, maximizes the basin's total net economic and environmental benefits subject to several hydrological and institutional constraints. Supply costs, environmental costs, and resource costs are integrated in a model of a river basin's hydrology, economics, and institutions. Three programs are compared: (1) Law of the River, in which water allocations and prices are determined by rules governing water transfers; (2) marginal cost pricing, in which households pay the full marginal cost of supplying treated water; (3) two-tiered pricing, in which households' subsistence water needs are priced cheaply, while discretionary uses are priced at efficient levels. Compared to the Law of the River and marginal cost pricing, two-tiered pricing performs well for efficiency and adequately for sustainability and equity. Findings provide a general framework for formulating water pricing programs that promote economically and environmentally efficient water use programs while also addressing other policy goals.     

EFFECTIVE WATER PRICING1

ABSTRACT: When the goal of water pricing is elevated from mere cost recovery to deriving the greatest value from scarce water and associated nonwater resources, conventional rate regimes are found to be deficient. To address the challenge of creating rates that are both efficient and budget-balancing, several theoretical and practical aspects of rate-making are considered. Purposeful selection of rate parameters for a specific billing system is demonstrated to serve efficiency and cost recovery objectives. Attention to non-accounting opportunity costs is an important system element, but these costs are often not fully borne by the utility or its customers. In situations where this issue is serious, state or federal pricing policy may be necessary.     

Irrigation water management policies: Allocation and pricing principles and implementation experience

Food security and sustainable development require efficient use of water resources, especially in irrigation. Economic pricing can be an effective tool to achieve more efficient water use, provided it is supported by other policies in implementation. Applying various water pricing and cost recovery arrangements is suggested for efficient allocation. Any adverse impact on farmers’ incomes must be addressed and more reliable service must accompany higher prices. Experience from several countries suggests a variety of implementation issues. Essential complements to water pricing are water distribution rules and technological choices at critical nodes in the delivery system that allow farmers flexibility in conserving water in response to higher prices. Among supporting institutions, water users associations seem a higher priority than water markets.     

Water resource pricing: Policy options

This paper critically examines pricing policy options for water resources and attempts to derive an operationally feasible and socially desirable pricing structure for this important resource. Marginal cost pricing options are studied under different economic and resource conditions, such as inflation, constrained water resources and price distortions in an economy. Options such as pricing of water at its ‘real’ resource value, ‘social’ pricing, and pricing to reflect intangible benefits are also examined.     

THE EFFECT OF PRICE ON LONG RUN WATER SUPPLY BENEFITS AND COSTS1

ABSTRACT The long-term effects of presently used and alternatively proposed water pricing policies were studied using some tools of operations research and economics. A discrete deterministic dynamic programming model was structured and operated to determine the optimal water supply capacity expansion paths for a hypothetical residential community with a given water pricing policy. The objective of the model was the maximization of future discounted consumers'surpluses plus producer's revenues net of the long-run cost of supply. State variables were the size of system capacity in MGD and stage variables were the times of feasible capacity increase in years. Demand curves, population sizes, and growth rates for various economic sectors of the community were assumed known, as well as short-run production and capital construction costs. Several policies, including constant unit rates, decreasing or increasing block rates and summer differential rates were tested. It was concluded that price plays a major role in the short-run allocation and long-run planning and conservation of water supplies. Conservational pricing policies were advocated as means of lowering the long-run cost of water, using the water price-demand function as a planning tool. Further research in these areas was recommended.     

Water resources management in small island countries Cost recovery and demand management

The concepts of cost recovery and demand management in the context of water resources for small island countries are introduced. Water pricing mechanisms which could be used to achieve the goal of cost recovery are discussed. Regulatory and economic measures, and pricing policies for limiting increases in demand ('demand management') are also presented. Examples from island countries are used to illustrate the policies discussed.     

EXTERNALITIES,WATER PRICES,AND WATER TRANSFERS1

Discussing, estimating or analyzing the value of water is a difficult task. In addressing the value of water as reflected in its price — either as charged by a water utility, as the price of a water transfer, or a water sale in some market — this paper will examine three propositions regarding water pricing. The paper will consider the marginal scarcity rent of water, estimates of externalities, the full cost pricing of water and the consequences of these considerations on water prices, transfers and the efficiency of water use.     

WATER SUPPLY COSTS FOR SMALL PRIVATE UTILITIES1

ABSTRACT: This paper examines the cost of water supply for small and mid-sized private water utilities. An econometric approach was employed in which data on utility costs and characteristics were used to estimate a total water supply cost function from which average and marginal costs were derived. The results suggest that although average and marginal costs decline with output, the rate of decline rapidly approaches zero, and unit costs therefore appear to remain relatively constant over a wide range of output. Implications of the results for pricing policy are examined.     

Water supply policies and issues in developing countries

The significant progress made during the UN International Water Decade is reviewed, eight years after its inception in 1981. Major issues remain, especially in rural areas. The advantages of an integrated water resource planning framework (IWRP) are explained, including the use of this process to develop a flexible strategy for the water and sewerage sector to meet national policy objectives. Economic efficiency in supply implies optimal service quality and least cost planning, while efficient pricing policy requires the implementation of long-run marginal cost based tariffs. Better sector organization, management, accountability, options for decentralization and innovative financing methods are also discussed.     

SEWER AND WATER PRICING AND INVESTMENT POLICIES TO IMPLEMENT URBAN GROWTH POLICY1

ABSTRACT. The article proposes the use of certain water and sewer extension pricing and investment policies. Such policies would complement an urban growth policy designed to guide the location and timing of growth in urbanizing areas. Proposed pricing policies are based upon marginal cost principles. The types of pricing policies discussed include benefit assessments, connection fees, and user charges. Proposed investment policies deal with the division of financing responsiblities between the public and private sectors. Discussion of each proposal explains the economic influence of the proposed policies upon key decision makers in the land development process. The application of proposed pricing and investment policies in the case study communities is mixed. In Knoxville, Tennessee, where pricing and investment policies reflect the proposed policies, no urban growth policy exists. In Lexington, Kentucky, mixed pricing and investment policies do not complement what is a relatively good urban growth policy. In Greensboro, North Carolina, reasonably effective pricing and investment policies complement other policies which provide some guidance to the urban growth pattern. It is hoped that the article will increase the recognition of utility pricing and investment policies as one means of implementing urban growth policy.     

The pricing of water services in developing countries

This paper focuses on improving efficiency in the water and sewerage sectors through long-run marginal cost pricing, adjusted for financial needs, externalities, second best considerations, lifeline tariffs and cross subsidization within an integrated water resource planning (IWRP) framework. Supply efficiency suggests that for a given price structure, an optimal long-run investment plan and a corresponding level of supply quality should be determined which maximizes net social benefits. Supply efficiency also requires efficient operation of the water system, including optimization of losses.     

Controlling groundwater pumping online

Groundwater over-pumping is a major problem in several countries around the globe. Since controlling groundwater pumping through water flow meters is hardly feasible, the surrogate is to control electricity usage. This paper presents a framework to restrict groundwater pumping by implementing an annual individual electricity quota without interfering with the electricity pricing policy. The system could be monitored online through prepaid electricity meters. This provides low transaction costs of individual monitoring of users compared to the prohibitive costs of water flow metering and monitoring. The public groundwater managers' intervention is thus required to determine the water and electricity quota and watch the electricity use online. The proposed framework opens the door to the establishment of formal groundwater markets among users at very low transaction costs. A cost–benefit analysis over a 25-year period is used to evaluate the cost of non-action and compare it to the prepaid electricity quota framework in the Batinah coastal area of Oman. Results show that the damage cost to the community, if no active policy is implemented, amounts to (−$288) million. On the other hand, the implementation of a prepaid electricity quota with an online management system would result in a net present benefit of $199 million.     

CONSERVATIONAL WATER PRICING FOR INCREASED WATER SUPPLY BENEFITS1

ABSTRACT: A study was undertaken to see if benefits from water supply could be increased by utilizing price-usage information in reservoir design studies. Three pricing policies were examined. The first policy assumed no price-use relationship, and quantity demanded was based on existing community usage with a low water rate. The price of water was set to recover system costs. A price-use relationship was assumed in the second policy and the water rate was constant. The price of water was determined from the associated system which provided maximum expected net benefits. The third policy assumed the price-use relationship and the price charged for water during each billing period was a non-linear function of storage which increased as the amount of water in storage at the beginning of the period decreased. It was found that the use of the conservation pricing policies substantially reduced storage requirements while providing demonstrable net benefits to the community and a large average supply. The conservation pricing policies substantially lowered the average price paid for water. The effect of uncertainty in consumer response to changes in price was studied by using a probabilistic price-use relationship. This uncertainty did not significantly reduce the effectiveness of the conservation policy. It was concluded that demand management by the use of a proper pricing policy could significantly increase net water supply benefits to a community.     

EVALUATING INTERDEPENDENT WATERSHED CONSERVATION AND GROUND WATER MANAGEMENT REFORMS1

Abstract: Conserving the watershed can help to preserve ground water recharge. Preventing overuse of available water through pricing reforms can also substantially increase the value of an aquifer. Inasmuch as users are accustomed to low prices, efficiency pricing may be politically infeasible, and watershed conservation may be considered as an alternative. We estimate and compare welfare gains from pricing reform and watershed conservation for a water management district in Oahu that obtains its water supply from the Pearl Harbor aquifer. We find that pricing reform is welfare superior to watershed conservation unless the latter is able to prevent very large recharge losses. Watershed conservation that yields net gains in combination with pricing reform may cause net losses without the pricing reform. If adoption of watershed conservation delays the implementation of pricing reform, the benefits of the latter are significantly reduced.     

A model of costs and resources for rural and peri-urban water supply and sanitation in the 1990s

This article develops a model of cost and financing strategies for rural and peri-urban water supply and sanitation. It suggests that significant progress towards the World Summit for Children's goal of universal access to water supply and sanitation can be made if a combination of strategies is adopted. On the cost side, significant cost reductions should be possible through efficiency in resource use and reduction of system management costs. On the financing side, it suggests restructuring the financing of the sector with improved efficiency and greater cost recovery in urban services; full recovery of operation and maintenance costs; cost sharing through community contributions in kind such as local labour and financially in rural and peri-urban water supply for basic levels of service depending on willingness and ability to pay and full cost recovery for higher levels of service; a high degree of cost recovery in rural and peri-urban sanitation; development of institutional structures for both collection and management of revenues; development of alternate financing mechanisms such as rural credit schemes and revolving funds, adapted in specific country contexts, including the required institutional mechanisms; and additional allocations from governments and external support agencies. Additional government or external financing alone, while critical, will not of itself lead to effectiveness in the use of resources. Equally, cost recovery alone cannot lead to universal access and sustainable solutions. A composite set of actions is needed within which building capacities of institutions and people is necessary for sustainability .     

MUNICIPAL WATER USE AND WATER RATES DRIVEN BY SEVERE DROUGHT: A CASE STUDY1

ABSTRACT: This paper synthesizes and interprets data pertaining to the evolution of average water revenue, water use, and the average cost of water supply in the City of Santa Barbara, California, from 1986 to 1996, a period which included one of the most devastating droughts in California this century. The 1987–1992 drought hit the study area particularly hard. The City of Santa Barbara was dependent exclusively on local sources for its water supply. That made it vulnerable as the regional climate is prone to extreme variability and recurrent droughts. The 1986–1992 drought provided a rare opportunity to assess the sensitivity of municipal water use to pricing, conservation, and other water management measures under extreme drought conditions. Our analysis indicates that the average cost of water rose more than three-fold in real terms from 1986 to 1996, while the gap between the average cost of supply and the average revenue per unit of water (= 100 cubic feet) rose in real terms from $0.14 in 1986 to $ 0.75 in 1996. The rise of $3.08 in the average cost of supplying one unit of water between 1986 and 1996 measures the cost of hedging drought risk in the study area. Water use dropped 46 percent at the height of the drought relative to pro-drought water use, and remains at 61 percent of the pre-drought level. The data derived from the 1987–1992 California drought are unique and valuable insofar as shedding light on drought/water demand adaptive interactions. The experience garnered on drought management during that unique period points to the possibilities available for future water management in the Arid West where dwindling water supplies and burgeoning populations are facts that we must deal with.     

THE COST OF PEAK CAPACITY WATER1

ABSTRACT: Calgary, the fastest growing city in Canada, is about to expand its urban water supply facilities in order to meet peak summer demands. Most of Calgary's residential water is sold by flat rate. The effect of this pricing policy on peak and average demands is discussed. The true marginal cost of peak capacity from the new expansion is calculated. The effect of a proposed metering program on capacity expansion requirements is computed. It is concluded that metering should preceed the next capacity expansion.     

COSTS AND EFFECTS OF A WATER PROGRAM FOR A SMALL STRIPPING COMPANY-SOUTHEASTERN OHIO1

The purpose of the study was to use economic analysis in determining the ability of a small strip mining company to incure the financial burden of carrying out various alternative mine drainage abatement programs. The quantity and quality of water with which the company has to deal were determined and treatment and diversion programs were costed out. The company's market area and the market structure were analyzed. It was found that pricing policies were determined by a dominant firm, so the target company had no control over its price per ton of coal. The costs and revenue of the firm were analyzed for the period 1960-1970 and, even without a water quality program, losses were incurred in six out of eleven years. Analysis of the average cost curve indicates that the per unit cost could have been reduced by increasing output thereby increasing efficiency. The conclusions of the study were that the small company could not unilaterally implement mine drainage programs because the added costs would seriously worsen its already precarious financial position. Even uniformly enforced legislation might reduce the small firms competitive position because of economies of scale associated with the large treatment facilities used by big mining companies.