Urban Water Pricing and Drought Management: A Risk Based Approach

Abstract

This paper presents a new methodology for urban water pricing during drought condition that expresses urban water pricing as a function of risk. Risk is given as the probability that urban water demand exceeds available water supply. Urban water demand is believed to be elastic to price. However, uncertainty is involved in the estimation of the expected demand and the available supply. Both the demand and the supply, which are also related to the return period of hydrologic conditions, can be represented by probability distribution functions about the expected values. The general trend is that the gap between the available supply and the expected demand diverges as the return period increases. Relationships between urban water price, the return period of hydrologic conditions and the associated risk are developed. Also under sustained drought conditions where the demand exceeds the available supply, a methodology is developed whereby the demand can be adjusted down to the available supply through successive increases in the water price.