Pricing Urban Water Supply

Right Pricing is key to water sector reforms as it would send correct signals for its use. However, water is generally viewed as a social good rather than an economic good and hence pricing of water is also done accordingly. This has led to over-exploitation of water resources which has bearing for sustainability. Already many states are water stressed and a large section of the population does not have access to drinking water. State and city level agencies are severely resource constrained and are providing water service to consumers at prices below cost, further aggravating their financial position. Ultimately this results in lower quality of water supply, insufficient network expansion and lesser emphasis development of water projects.

This paper attempts to understand the existing methodology (rationale) for pricing of urban water supply in different cities in India. It examines tariff setting practices in water sector in countries which at one time faced similar challenges but which were able to successfully reform their sectors. The paper, then examines regulatory and pricing reforms in the electricity sector in India. This is pertinent as electricity is also an essential service, pricing has been for long a political/populist decision, and inefficiencies have affected quality and availability of electricity to end consumers. Regulatory reforms in the distribution segment in the electricity sector were introduced in the late 1990s and early 2000's and therefore sufficient time has passed to understand the impact of reforms.

Based on the learnings from the electricity sector and based on international experience, the paper recommends principles of pricing of urban retail water supply in India, including suggesting an appropriate tariff structure. It also makes recommendations on issues such as subsides, unaccounted for water and metering.