Empirical Basis for Municipal Water Rates Modification

Abstract

An empirical understanding of the variables affecting water rates is crucial for the formulation of more rational policies in urban water supply and its pricing. This paper reports the findings of a comparative analysis of the costs of supply and the water rates in Ontario. The emphasis is on developing empirical methods for comparing costs and marginal costs of water supply with average rates charged to consumers.Previous studies in Canada and the U.S. demonstrate that water use is price responsive. However, water pricing has not often been used as a policy tool; water charges are typically used to recover construction and operating costs. The few empirical studies suggest that costs of supply explain less than 50 percent of the variance in water rates. This was confirmed in this study.Methods for computing two measures of the marginal cost of supply are presented and applied; in nearly half the municipalities in the sample, water supply production was still a declining cost industry and the de...