Water pricing and water reform
Best practice water pricing is a key element of the National Water Initiative (NWI).
NWI pricing reforms are intended to:
- promote economically efficient and sustainable use of water resources, water infrastructure assets and government resources devoted to the management of water
- ensure sufficient revenue streams to allow efficient delivery of the required services
- assist efficient functioning of water markets, including inter-jurisdictional water markets, and in both rural and urban settings
- give effect to the principle of user-pays and achieve pricing transparency in respect of water storage and delivery in irrigation systems and cost recovery for water planning and management
- avoid perverse or unintended pricing outcomes
- provide appropriate mechanisms for the release of unallocated water.
Progress
In its 2007 Biennial Assessment of progress against the NWI, the National Water Commission found that states and territories have largely met their ongoing NWI commitment to move towards upper-bound pricing for metropolitan water storage and delivery. However, the level of cost recovery for water storage and delivery in rural and regional areas has been mixed across states. (See also 2009 Biennial Assessment.)
Cost recovery for water planning and management lags NWI commitments in a number of states. In periods of extended water scarcity, a case exists for governments to provide some fee relief provided that it is transparent and time-limited. Nevertheless, clear arrangements for recovering the costs of water planning and management are needed to ensure ongoing capacity for managing the resource.
The significant wave of government investment in urban water supply augmentation makes NWI pricing principles and independent prices oversight even more important. This is also true of proposed investments in rural infrastructure.
The Commission considers that government contributions to urban water infrastructure should be managed to maximise NWI outcomes and minimise price distortions. For example, this may be achieved through conditions imposed to achieve NWI or other public good outcomes, or through time-limited assistance to infrastructure projects.
At the same time, the Commission considers that some of the prerequisites for achieving NWI-consistent pricing outcomes will be stronger prices oversight arrangements in some states, together with institutional and market arrangements (especially in urban areas) to improve price signals between water suppliers and water users.
These are not currently included as actions under the NWI.
A note on upper bound pricing
Upper bound pricing is the level at which, to avoid monopoly rents, a water business should not recover more than the operational, maintenance and administrative costs, externalities, taxes or tax equivalent regimes (TERs), provision for the cost of asset consumption and cost of capital, the latter being calculated using a weighted average cost of capital (WACC).