Review of current practices in determining user charges and incorporation of economic principles of pricing of urban water supply

Transcription

1 April 2 Draft Final Report Review of current practices in determining user charges and incorporation of economic principles of pricing of urban water supply Prepared for Ministry of Urban Development Government of India Project Report No. 29IA2 w w w. t e r i i n. o r g The Energy and Resources Institute

2 ii Review of current practices in determining user charges and incorporation of economic principles of pricing Suggested format for citation "#$29IA2% For more information #& '()'() *+, -. / 2 '()'''()'3 $* * 9:

3 iii Review of current practices in determining user charges and incorporation of economic principles of pricing CONTENTS LIST OF TABLES AND BOXES... V LIST OF FIGURES... VI CHAPTER INTRODUCTION... Scope of work... Methodology of study...2 Structure of Report...3 CHAP TE R 2 OVERVIEW OF URBAN WATER SECTOR IN INDIA... 5 Institutional framework...5 Policy framework...6 Pricing structures... 8 Regulatory reforms...9 CHAP TE R 3 REVIEW OF PRESENT PRACTICES IN URBAN WATER PRICING - INTERNATIONAL EXPERIENCE... 3 United Kingdom (UK)... 3 Institutional Framework... 3 Regulatory Framework... 3 Forms of Tariff Charged... 4 Tariff Setting Mechanism... 4 Australia... 8 Institutional framework... 8 Legal and Regulatory Framework... 9 Water Charge setting Mechanism... 2 Manila (Metropolitan Waterworks and Sewerage System Regulatory Office - MWSSRO).. 24 Institutional Framework Regulatory Framework Forms of Tariff Charged Tariff Setting Mechanism Key Findings from international experience CHAP TE R 4 REVIEW OF PRESENT PRACTICES IN URBAN WATER PRICING - NATIONAL EXPERIENCE Ahmedabad Institutional framework Legal and Regulatory Framework Tariff setting mechanism and tariff rates... 3 Problems in existing tariff system... 3 Delhi... 3 Institutional framework... 3

4 iv Review of current practices in determining user charges and incorporation of economic principles of pricing Legal Framework Tariff setting mechanism and tariff structure Chennai Institutional Framework Private sector participation in water sector Legal Framework Tariff-setting mechanism and tariff structure Hyderabad Institutional Framework Legal Framework Tariff-setting mechanism and tariff structure... 4 Bangalore... 4 Institutional framework Tariff setting mechanism and tariff rates Raipur Institutional framework Tariff setting mechanism and tariff rates Problems in existing tariff system Key findings from national experience CHAP TE R 5 REVIEW OF PRICING REFORMS AND PRINCIPLES IN ELECTRICITY SECTOR IN INDIA Overview of electricity reforms Approaches to tariff determination... 5 Rate of Return Regulation or Cost-Plus Approach... 5 Performance based cost of service regulation or MYT Approach... 5 Tariff setting process Tariff Design Lessons from electricity tariff reforms CHAP TE R 6 ECONOMIC MODEL FOR PRICING WATER Need for appropriate pricing Principles of tariff fixation... 6 Alternative tariff structures Single part, variable tariff structure Single part, fixed tariff structure Two component tariff structure Evaluation of tariff models to suitability for the objective set Pricing strategy Uniform tariff for state versus ULB based tariff Cost components Subsidy... 7 Other factors Tariff revision Approach to tariff determination Cost of service approach Willingness to pay approach... 75

5 v Review of current practices in determining user charges and incorporation of economic principles of pricing Category-wise water tariffs Domestic users Non-domestic users CHAPTER 7 RECOMMENDATIONS ON INCORPORATING ECONOMIC PRINCIPLES OF PRICING Law and policy changes Independent Water Regulatory Authority JNNURM Principles for water... 8 Linking water quality with prices ANNEXURE I LIST OF STAKEHOLDER S INTERVIEWED ANNEXURE II ABBREVIATIONS ANNEXURE III REFERENCES List of Tables and Boxes Table 2. Central Government Institutions responsible for UWSS sector...5 Table 2.2 State-level institutional arrangements in the urban water supply Sector... 6 Table 3. Responsibilities of provision of Water Services in UK... 3 Table 4. Responsibilities of DJB with provision of water Services in Delhi Table 4.2 Service charges Table 4.3 Volumetric water charges (based on consumption) Table 4.4 Costs and revenue of DJB (997-98) Table 4.5 Existing tariff structure in Chennai Table 4.6 Water cess tariff levied by HMWSSB... 4 Table 4.7 Monthly Minimum Charges levied by HMWSSB... 4 Table 4.8 Break-up of costs of BWSSB Table 4.9 Applicable water tariff by BWSSB Table 4. Comparative summary table of Indian cities studied Table 6. Types of tariff models Table 6.2 Evaluation of tariff models Table 6.3 Pros and Cons of uniform tariff pricing Table 6.4 Type of costs in water provisioning Box 2. Major Central Government WSS Policies...7 Box 2.2 Maharashtra Example in Water Regulation...

6 vi Review of current practices in determining user charges and incorporation of economic principles of pricing List of Figures Figure. Key deliverables of study Figure.2 Methodology of study Figure 3. Expenditure included in setting water tariff by OFWAT( Figure 3.2 Tariff setting mechanism in Australia Figure 3.3 Assessment of revenue requirement of Australia Figure 5. ARR Approval and determination process3

7 CHAPTER Introduction ;<+ +9;<++: = 9 > A? >? ;<++ - 9: &;* 9&;*:&B 9@: C D # Scope of work E 5 F '

8 2 Review of current practices in determining user charges and incorporation of economic principles of pricing, &;* - #E Deliverable A Deliverable B Deliverable C Inception Report: Review of documents/reports of MoUD relating to existing scenario on determination of user charges for urban water supply in India Mid-Term Review Report: Summarizing lessons drawn from review of international case studies, electricity sector in India and city visits Final Report: Final recommendations on guiding principles for setting urban water tariffs incorporating economic principles of tariff setting Figure. Key deliverables of study Methodology of study STEP : Review of existing pricing principles in water and drawing lessons STEP 6: Final recommendation on tariff principles for water # STEP 2: Review of existing pricing reforms in electricity sector in India STEP 5: Conducting consultative workshop Figure.2 Methodology of study STEP 3: Stakeholder consultations and City Visits STEP 4: Draft recommendation for tariff principles for water Step : Review of existing pricing principles in water sector in India and drawing lessons from international case studies # G - ;H A && -

9 3 Introduction Step 2: Review of pricing reforms in electricity sector in India G - Step 3: Stakeholder consultation and city visits - # A, A - # ' Step 4: Recommendation of tariff principles for water services, E + * - Step 5: Consultative workshop * - -* = Step 6: Final recommendation on incorporating economic principles in setting water tariffs &@;* - Structure of Report I - # 5 ;H A && + ' # A

10 4 Review of current practices in determining user charges and incorporation of economic principles of pricing * /, ( > I=

11 CHAPTER 2 Overview of urban water sector in India - < ' Institutional framework A ;&< 9&<: > = - Table 2. Central Government Institutions responsible for UWSS sector Ministry Institution Responsibility Planning Commission Planning Commission Planning and allocation of central government funds through five year plans Ministry of Water Resources (MoWR) Central water Commission (CWC) Central policy making Central Ground water Regulatory activities of ground water Ministry of Environment and Forests Ministry of Urban Development (MoUD) Ministry of Health and Family Welfare Others Board (CGWB) National Rivers Conservation Directorate (NRCD) Central Pollution Control Board (CPCB) Central Public Health Environmental and Engineering Organization (CPHEEO) National Institute of Communicable Diseases (NICD) Housing and Urban Development Corporation (HUDCO) Life Insurance Corporation (LIC) S O U R C E The World Bank. 26 concerning quality and overexploitation Responsible for river bodies Pollution watch Standards setting and harmonization between states Research and advocacy, particularly with civil society Funding for housing and other infrastructure sectors Development funding < #+J +* ;<++ =

12 Agency type State-level Specialist Agency (SSA) Public Health 6 Review of current practices in determining user charges and incorporation of economic principles of pricing Engineering Departments (PHED) Municipal Departments Metropolitan-level Specialist Agency (MSA) Specialist Municipal Undertaking (SMU) Table 2.2 State-level institutional arrangements in the urban water supply Sector Jurisdiction Responsibility Examples O&M Capital Works Entire state SSA Kerela Large Cities City-level specialist SSA Uttar Pradesh Agency Small Cities Local Government SSA Karnatka, Maharashtra, Tamil Nadu, UP, Delhi Entire State PHED Rajasthan Small Cities Local Government PHED Andhra Pradesh Large municipal corporations Metropolitan centers Metropolitan centers Municipal Department Municipal Department Gujarat, Tamil Nadu, Andhra Pradesh MSA MSA Bangalore, Chennai, Hyderabad SMU SMU Mumbai S O U R C E Urban Water Supply and Sanitation - World Bank Group Strategy; May 2 I' AA773 A -* /, ><+ + 9<++: & & 9&: <++ -AA <++ - > ; Policy framework J <++ = <++ > $ < 7)I - $< =- > = J9J@:<++ =,

13 7 Overview of urban water sector in India Box 2. Major Central Government WSS Policies National Water Policy (987): This policy assumed a holistic view of the water sector and advocated for the development of integrated information systems, conservation of resources, emphasis on multipurpose projects, and periodic groundwater assessment. It also prioritized drinking water over other water uses and stated that water rates should not only convey the value of scarcity but also cover a portion of fixed costs and the annual maintenance and operation charges. National Water Policy (22): The policy stipulates the progressive new approaches to water management including Re-enforcement that drinking water is the top priority over competing water uses, monitoring and limitation of ground water exploitation, monitoring and enforcement of water quality measures, and increasing awareness of conservation measures and water scarcity. One of the most notable features of the 22 Policy is the proposal to increase private participation in the sector and access to commercial borrowing. 9th Five-Year Plan: Some of the major policies highlighted in the Plan included extending water services to the entire population and sanitation services to reasonable levels, reinforcing the Constitutional Amendment that decentralized responsibility to ULBs, enhancing financial viability through full cost recovery, and enhancing social and environmental sustainability through eco-friendly and inclusive programs. th Five-Year Plan: Major policy components of the Plan include prioritizing water service to the currently uncovered populations, emphasizing participation of stakeholders in planning and implementation of schemes, integrating water and sanitation programs to emphasize conservation, and recommending the use and provision of subsidy of select latrine technologies. S O U R C E The World Bank.26 ;<++ ;<++ A ;<++ 9A;<+: / * A;<+ 775>7' <++ LL ; * ++ K& 9;*++&: 3>(#E? K >> / * 73(/@ > ;2, > / 9/:<++#,7)7 )5

14 8 Review of current practices in determining user charges and incorporation of economic principles of pricing Pricing structures - AM B - $ G = # A$;A777( 9+: I39:ND ND = 7( 9$;A3:$ '9&:()9/: - (() - A5O - -? A -; - - A = -A = $;A 5), -, 5(GP $ 5 -Q ' -, ( - G

15 9 Overview of urban water sector in India G > Regulatory reforms + - # - 9:- A IJA A<* A # - J&3& < A9&<A:A - - A 3-9,: JA A <& A 9A<&A:A*( &<AA3A A A 5 < A AJ J# This is because electricity is a concurrent subject under the constitution and both central and state have powers to regulate it, while in water sector the issues and problems are state or city specific and a state level regulator deems more appropriate.

16 Review of current practices in determining user charges and incorporation of economic principles of pricing Q & )J; ;<& K 9;<&:A #? = - Box 2.2 Maharashtra Example in Water Regulation MWRRA is quasi-judicial body established under the MWRRA Act 25 passed by the state legislature and brought into force on 8 th June 25. The Authority would regulate sectoral allocation, water rates, changes in water use/ diversion of water use and compensation for such changes in water use. Its main objective is to establish an institutional framework to: a) Regulate water resources within the state b) Facilitate & ensure judicious, equitable & sustainable management, allocation & utilisation of water resources c) Fix rates for use of water for agriculture, industrial, drinking & other purposes The MWRRA, under the MWRRA Act 25, has a mandate to rationalise and fix bulk water tariff through a consultative process for industry, drinking water and agriculture uses. The main responsibilities of Authority relating to tariff as given in Act are as follows:. (d) to establish a water tariff system, and to fix the criteria for water charges at subbasin, river basin, and state level after ascertaining the views of the beneficiary public, based on the principle that the water charges shall reflect the full recovery of the cost of the irrigation management, administration, operation and maintenance of water resources project;. (r) to determine and ensure that cross-subsidies between categories of use, if any, being given by the Government are totally offset by stable funding from such crosssubsidies or government payments to assure that the sustainable operation and maintenance of the water management and delivery systems within the State are not jeopardised in any way;. (u) the Authority shall review and revise, the water charges after every three years; The Authority at present has come out with an Approach paper on Preparation of criteria for bulk water pricing in the state of Maharashtra and has invited comments from various stakeholders to finalise the guidelines. Once these guidelines would be finalised, Maharashtra would be first state in India to bring out guidelines for setting bulk water rates. / - #> - -

17 Overview of urban water sector in India > - / > # >

18 2 Review of current practices in determining user charges and incorporation of economic principles of pricing

19 CHAPTER 3 Review of present practices in urban water pricing - International Experience = < - A ;H && F F United Kingdom (UK) Institutional Framework < Q = <+ A -@G<A,7I5 ;H = 7I5 <A = > <+ A9<A: &7 <@ 9<@: <A = ;H Table 3. Responsibilities of provision of Water Services in UK Region Water Supply Sewerage England & Wales Water and Sewerage Companies and 29 Water Only Companies (WOCs) Water and Sewerage Companies. Scotland Water Authority Water Authority Northern Ireland Departmental Water Service Departmental Water Service S O U R C E Peter Bailey.22 Regulatory Framework =<AB 7)7 = <+ 9<A:7 <>@ 9<@:@G<A

20 Forms of Tariff Charged 4 Review of current practices in determining user charges and incorporation of economic principles of pricing ;H < Q? Q B- BQ < E> ; B ; ; = & 9 : B Tariff Setting Mechanism E 2 upply.htm#calculating_water_charges

21 5 Review of present practices in urban water pricing - International Experience > 9L: # E - - > > -? - Process of tariff setting > < " # Categorization of expenditure G

22 6 Review of current practices in determining user charges and incorporation of economic principles of pricing Figure 3. Expenditure included in setting water tariff by OFWAT Methodology for review of =? >3 $ 9+:;+ E * M B B B >F, &- > >

23 7 Review of present practices in urban water pricing - International Experience % 9 : $$ ' () A & 9A&:- B-9> :- -?@G<A - B 9EL:@G<A E A# L E 9@A:EA = E 2 E< B + E<

24 8 Review of current practices in determining user charges and incorporation of economic principles of pricing # G Australia Institutional framework A B 5 #IO ( - A GL 5 $+< R > > + 9 +A<: - F R <+A A 9<+AA: -G L & < & Q$+< +< +A 3 In the urban water sector, wholesale water is water supplied by a bulk water service provider from its original source, to a retail water service provider who then distributes it to end-users and the retail water businesses caters to supply water direct to residential, commercial and industrial customers.

25 9 Review of present practices in urban water pricing - International Experience = G R $+< ># 9375 :Q L) Legal and Regulatory Framework - A G L $ +< $<A R - 9 L: 9 :> 9 < A : 9 R : A G <A -L$ <?

26 2 Review of current practices in determining user charges and incorporation of economic principles of pricing Water Charge setting Mechanism G 5 Determine revenue requirements Pricing mandate (e.g. statutory head of power, pricing principles / regulations or by laws) Institutional responsibility (e.g. ministers, economic regulators, local governments, or boards) Socio economic considerations Determine water charges Determine charging structure Figure 3.2 Tariff setting mechanism in Australia Assessment of revenue requirement? A -? 2 9 :? 2 E?9 : -?? 9: ; E?9 :Q Q A 9:

27 2 Review of present practices in urban water pricing - International Experience G 55? Determining Revenue Requirements. Capital expenditure Regulated Asset Base approach Setting efficiency targets Annuity approach Determining the asset base Calculate the annuity Providing for a return on capital Determine tax (or tax equivalence) payments Providing for a return for capital Determine interest cost on any debt Determine dividend payments (if any) 2. Operating expenditure 3. Other (e.g. externalities) Figure 3.3 Assessment of revenue requirement of Australia?E A A, AA 9 : > - > * A,

28 22 Review of current practices in determining user charges and incorporation of economic principles of pricing 9: G 5- A, E *@ EA>?9 $ : L E > 9 $+< L 9@*L:E 9> > : - F L *A E J - -A, E A,S9A,>6 4* 4* 9::969:: 9<S: #

29 23 Review of present practices in urban water pricing - International Experience * A & > * A #< A 9<A: * <A - G -9 -: <A #J A & 9A&:?? -. *9 :;A, -? #G $+ < > QL$ +A QR 9 <, 2 J> :? $? 9$: A

30 24 Review of current practices in determining user charges and incorporation of economic principles of pricing Structure of water Charges - ; M@B G A A G - $ $+< +A 5R A 3<A ( AR<+), < Manila (Metropolitan Waterworks and Sewerage System Regulatory Office - MWSSRO) Institutional Framework & & & <- + 77I > 9: 9> >: B 773&& 9(IO)O : 9( F: 9T& (3O$<>$<: = $ <A773 -? -

31 25 Review of present practices in urban water pricing - International Experience Regulatory Framework Forms of Tariff Charged = # # A 9A:&<++ =&& 4U<U 3A E,, + '>? A O- A JT( B9&<++:T7 +? & <9&<: U& <+9&<+:<U A77I A = &<++@ #&<++,' 3>' E + G A2 A - &<++@B A#? >- A E, E9 5 :

32 26 Review of current practices in determining user charges and incorporation of economic principles of pricing 9 >: A#9A:E 5 5 G * A#9G*A:E 9?: ' 9:E > O, AG*A :E 3O, AG*A ( &+ 9&+:E = I E & 9&<+:5O ) L A9LA:E O Tariff Setting Mechanism AA# A#29A2:SCDVCD6CD < 49:E $ +@9$+@: 4A#9A:E 9 : # 4 E3 &<++@? JA#9A: A 75AA- 9:9:E A B,A = A

33 27 Review of present practices in urban water pricing - International Experience & ;A # 9;A:A< # 7 * ;A# G# & Q 9377I: &<++@&<&<+A &<++@ B B - # > < E B *9 : Key Findings from international experience - E G@G<A ;H A -

34 28 Review of current practices in determining user charges and incorporation of economic principles of pricing + && >, G ;H@G<A? + 9+:- <;H >+ - G? GA 33O> > G > > - =;H< = A G

35 CHAPTER 4 Review of present practices in urban water pricing - National Experience Ahmedabad G > -, /Q * J# # $> G > 9 : A* /, A - Institutional framework A& 9A&: A)3O B A&A& 7O $ * + O < > HPA&7( A& 9@K&: - J F Legal and Regulatory Framework AA& -+ / *9/*:A J# J#<+ +,9J<++,: J<++,B # A

36 3 Review of current practices in determining user charges and incorporation of economic principles of pricing G J#< A 9J<A:, Q - A Tariff setting mechanism and tariff rates A& )>7A& - A 5O G 5 95O: M5OB# 9@K&: 9 : 9AKJ:9K&: - G GA G A&? B = -? > A A& A& -

37 3 Review of present practices in urban water pricing - National Experience - Q Problems in existing tariff system /A&B / A - 'F- 5 - P$$;&O QA& A& -- O ' 9 :O -A& I>I3O O Delhi Institutional framework $ 9$:* * P,9*P,:*P, * <,A 77) * <+ + * ;- # *P,, > - K $* *P, & * 9&*: -$* & 9$*&:*,*P,

38 Legal Framework 32 Review of current practices in determining user charges and incorporation of economic principles of pricing 7O W -@K& '*P, $ Table 4. Responsibilities of DJB with provision of water Services in Delhi Geographical Water Supply functions area CW O&M RF MCD Yes Yes Yes NDMC Yes Bulk Supply only Bulk payment from NDMC Delhi Cantonment Board Yes Bulk Supply only Bulk Payment from Cantonment Note: CW - Capital Works; O&M - Operations & Maintenance; RF - Revenue Function S O U R C E Delhi Water (Jal) Board Act, 998 *P, $* - +J *P, -@K&G *P, J *P,* <,A77)A A*P, $* G 33*P,A /,*P, # Tariff setting mechanism and tariff structure A > E G - L - -

39 33 Review of present practices in urban water pricing - National Experience / - - ( O / ' A.O 3, - $*&*, ( A * J E Table 4.2 Service charges Category Nature of Premises Charges per month (Rs) C-I (domestic ) Premises with built up Rs.4/- area upto 2 sq.m. Premises with built up Rs 2/- area above 2 sq.m C-II(Non-Domestic) Commercial Rs.25/- C-III(Non-domestic) Industrial Rs 6/- S O U R C E Citizen Charter, Delhi Jal Board, Website of Government of NCT of Delhi; details available at: Table 4.3 Volumetric water charges (based on consumption) Consumer category/ Consumption Slabs Category I - Domestic Volumetric charges (Rs/kl) Upto 6 kls. 7-2 kls kls 7. 3 kls & above. Category II - Commercial Upto 25 kls kls 2. 5 kls & above 3. Category III Industrial Upto 25 kls kls kls 35. kls & above 5. S O U R C E Citizen Charter, Delhi Jal Board, Website of Government of NCT of Delhi; details available at: Note:. 5% of volumetric water consumption charges are recoverable in every category

40 34 Review of current practices in determining user charges and incorporation of economic principles of pricing towards sewerage maintenance charges in respect of colonies/area where sewer lines have been led and are functional. 2. Fixation of average consumption of water if DJB /private water meter is defective and till it is replaced:- a) Premises having built up =Average of 2 Kls per month per connection per area upto 2 sq.m. and b) Premises having built up =Average of 3 kls per month per connection per area above 2 sq.m. 3. However, if the actual consumption recorded by the meter during2 months immediately before the meter stopped working is less than 2 kls/3 kls,(as the case may be )then actual average consumption will be charged for the billing purpose.the above criteria is in force w.e.f Costs and revenues,@, - '' Table 4.4 Costs and revenue of DJB (997-98) Cost Revenue Item % share in total Item % share in total Operation & maintenance 47 Water charges 44 (O&M) Salary, wages, etc 2 Water cess Electricity charges 2 Connection charges 2 Consumables 2 Bulk Supply charges 53 Repair and maintenance 2 Others 3 Financing cost 53 (Interest, Debt servicing charges) Total Total S O U R C E NIUA.25 - '7F- 9$;A3: 77I>7) )F- 5'O@K& (O 3F- 'F- 9@K& :

41 35 Review of present practices in urban water pricing - National Experience ((>)'O E - (- - *P, - - 5>'7F- < - F- 5- / - - > IO )5O 9$;A3:J *P, ) 9+AA7: *& && ( & +A,&$* (O 9+ AA7: 9 :# >> G / 5, & -+ *P, I(O 7(O>Q 9$;A3: '. /+,, = --- Q 3 * &+*P, A

42 36 Review of current practices in determining user charges and incorporation of economic principles of pricing 3O *P,B* J- *7 - P / Chennai < & <+ +,9&<++,: & <+ + A7I)A ; Institutional Framework &<++,> &<++, - -@K&,,)75OB L2-H J9 : > >9,@:, G, - +J Private sector participation in water sector #,77&<++, ' ( > 5'

43 37 Review of present practices in urban water pricing - National Experience '3>(3O Q = ' Legal Framework &<++, & <+ + A7I), - & GA, Q Tariff-setting mechanism and tariff structure &<++,@K& >, >> &<++,+J #E = > 5 ' J > 3 < > = '3 Table 4.5 Existing tariff structure in Chennai Consumer Category/ Consumption slab (m 3 ) Domestic A. Metered Unit Existing tariff - Rs/m Forms of private sector participation in water sector in India; Infrastructure Development Action Plan for Chhattisgarh Final Report by Price Waterhouse Coopers (PWC)

44 38 Review of current practices in determining user charges and incorporation of economic principles of pricing -5 Rs/m Rs/m 3 5. Above 25 Rs/m B. Un-metered Rs/month 5. Partly Commercial A. Metered - Rs/m Rs/m Rs/m Above 25 Rs/m B. Un-metered Rs/month 5. Commercial A. Metered Upto 5 Rs/m Above 5 Rs/m 3 6. Pvt. Hospitals (above 5) Rs/m 3 8. B. Un-metered Rs/month 4. (Pvt. Hospitals 8.) Institutional A. Metered Govt Hospital Rs/m 3 2. Private School Rs/m 3 4. B. Un-metered Govt Hospital Rs/month 2. Private School Rs/month 4. Public Tube wells supply (unmetered) W/sewerage charge (unmetered) Rs/month 4. Rs/month. S O U R C E Website of CMWSSB - Note: In addition minimum monthly charges, including sewerage charges: domestic Rs.5/dwelling or flat; commercial Rs.4 (non-water intensive use), partly commercial Rs.5, institutional Rs.2 (govt hospital), Rs.4 (private # 9A*,I:E ;G<IO G ''? 5,-)IF 5, ' + > = -

45 39 Review of present practices in urban water pricing - National Experience 3,@ - #- O 53O 9A*,I: - ;<9;G<: A = Hyderabad Institutional Framework /9: / & <+ +,9/&<++,:,/ A/& <+ + A7)7 / *9 :& /9: /&<++,7)7/&<++, > -@K & 9 : /G A # Legal Framework /&<+,, / - /&<++,, *&A Tariff-setting mechanism and tariff structure > > =G

46 4 Review of current practices in determining user charges and incorporation of economic principles of pricing /E 4J 9 : L 5 & F> - = ', -, 3 O ( + I 53O ) = 7 + O '(K'I Table 4.6 Water cess tariff levied by HMWSSB Category Description Consumption Rate KL/month Rs./KL All water supply connections other than covered by category 2 below (A) Where the monthly Consumption is 5 KL or less (B) Where the monthly Consumption exceeds 2 KL 2 (a)municipalities, Panchayats, Local Authorities, Cantonment and housing colonies (Other than Industrial housing colonies owner and maintained by institutions /Organizations / departments / Undertakings / industries) and Multistoried residential apartment complexes (c). S O U R C E Website of HMWSSB Entire consumption Up to the agreed quantity Above the agreed quantity Rs.6. Rs. 35. Note:. In respect of Government-run hospitals, educational institutions, welfare hostels, falling under Category-I (B), a rebate of 2% is applicable; 2. In cases where the water is used as the raw material, for the manufacture of end products such as, mineral water, soft drink, alcoholic beverages etc., the rate applicable is Rs. 6/- per KL irrespective of consumption.

47 4 Review of present practices in urban water pricing - National Experience 3. In cases of multi-storied residential apartment complexes, where specific agreements are not entered into, the agreed Quantity is deemed to be 5 KL multiplied by the number of residential apartments in the complex, as per MCH/ Municipality. Table 4.7 Monthly Minimum Charges levied by HMWSSB Category Description Monthly Minimum Charge (a) Where individual agreements are entered into with the customer for water supply Minimum charges as agreed to in the agreement or the charges applicable to 6% of the agreed quantity. (b) Individual domestic houses Rs 9/month (c) In the cases of customer under category-i Rs 9/month where the complex consists of five or more residential apartments as indicated in the plan approved by the MCH/municipality And the approval is for a residential Complex or Commercial-cum-residential Complex. (d) In the case of multi storied residential Rs 9/month Apartment complexes falling under Category-II, i.e., group housing as Defined in the notes to the boards proceeding no.4, dt (e) In all others cases, the minimum charges Rs./month the size of the pipe size connection 5 mm (/2 ) Rs 9/month 2 mm (3/4 ) Rs 27/month 25 mm ( ) - Rs 6/month 4 mm (-/2 ) Rs. 5/month 5 mm (2 ) & above Rs 32/month S O U R C E Website of HMWSSB Note:. In all cases of bulk supplies, multi-storied buildings and non-domestic supplies, where the monthly demand / consumption exceeds 5 KL per month the consumers are required to enter into agreements with the board for supply of water. 2. In all cases, where the agreed quantity is 5 KL per month and above, the minimum monthly charges levy able shall be the consumption charges for 6% of the agreed quantity. 3. In all cases where the consumption exceeds the agreed quantity, connection charges shall be payable on the quantity exceeding as per the tariff in force. Besides, additional consumption deposit shall also payable as determined by the Board form time to time. GF Bangalore,, >

48 42 Review of current practices in determining user charges and incorporation of economic principles of pricing - Institutional framework, <+ K+, 7(', <K+ +A7(' - A->J/ / - Tariff setting mechanism and tariff rates A, <K+ +A7(', 9 : 9 O 77O: 23O E K&AKJ$ - 9 : ') ->,<++, Table 4.8 Break-up of costs of BWSSB Cost components % of Total Establishment 2. Electricity 59.5 Chemicals - General Repairs 7.6 Raw Water - Interest payments 2.8 Others - Total SOURCE K S Sridhar and O P Mathur. 29 7)- 5I7- G J -/- # = '7

49 43 Review of present practices in urban water pricing - National Experience Table 4.9 Applicable water tariff by BWSSB Category & Consumption Revised Water Tarrif Per Kilo Litre Domestic (Sec. 36(i)) Minimum Rs 9/- ) ) ) ) ) 75 & above 36 Non-Domestic Min Rs36/- ) ) ) ) ) ) Above 6 Industries 6./KL Bidadi Industrial Area 5./KL Lorry loads(bmp/bda) 25./Lorry Swimming pools 6./KL Public Fountains 3. per annum Raw Water to Industries & Defence S O U R C E Website of BWSSB 36./KL Raipur Institutional framework - & 9&: / * - & 9@K&:# J * &H A(34()O O ;O -G73 &2* )&2* Tariff setting mechanism and tariff rates & = E

50 44 Review of current practices in determining user charges and incorporation of economic principles of pricing " ND> $ ND>'7 XD43 D43 ND4' XD4I D4 # K - + & A+A A & #5'O Problems in existing tariff system A&B / I - /& 2?3O I / M, $ P W#B ; & / +

51 45 Review of present practices in urban water pricing - National Experience &

52 46 Review of current practices in determining user charges and incorporation of economic principles of pricing ' - - ;<++ Table 4. Comparative summary table of Indian cities studied Particulars Ahmedabad Delhi Chennai Hyderabad Bangalore Raipur Institutional and Regulatory Framework Agency type Utility Independent Regulator Operational Framework Operation and maintenance Capital works Revenue function Municipal Corporation Ahmedabad Municipal Corporation (AMC) Bill drafted, Act pending Para-statal Delhi Jal Board (DJB) Independent Board Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) Independent Board Hyderabad Metropolitan Water Supply and Sewerage Board (HMWSSB) Independent Board Bangalore Water Supply and Sewerage Board (BWSSB) Nil Nil Nil Nil Nil Yes Yes Yes Yes Yes Yes No (State Government) Tariff mechanism and structures Tariff fixation Tariff structure Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes State Government Single part; Non volumetric flat rate DJB (with state intervention through subsidies) CMWSSB (with state intervention through subsidies) HMWSSB (with state intervention through subsidies) BWSSB (with state intervention through subsidies) Two part; IBT Two part; IBT Two part; IBT Two part; IBT Tariff subsidy Yes Yes Yes Yes N/a N/a Water utility performance (in percentages) Coverage area 85 N/a 89.3 N/a N/a 85 Full cost recovery No No O&M cost fully recovered No O&M cost fully recovered UFW N/a Metering Nil N/a Nil Municipal Corporation Raipur Municipal Corporation (RMC) RMC (With approval from state government) Single part; ferrule based No Collection efficiency N/a 99 N/a

53 47 Review of present practices in urban water pricing - National Experience Key findings from national experience - E ( A &7:, / 3 > 9; LG : 9<,-773:A 3>( / & + - ; & ( ( (& ( A 47 3 C DA I,75H 5'7 $ 3 & > Q -?( 9+5:* )'' 9&/ U:J <,- C 3( >))3 > 5 Source:

54 48 Review of current practices in determining user charges and incorporation of economic principles of pricing D (& 2 & // (& >> -9,: > + 5 & & &((/J # A?? 5'O &+?? J

55 CHAPTER 5 Review of pricing reforms and principles in electricity sector in India G =- Overview of electricity reforms 77, + 9+: +, 9+,: */ > - - A +, A59A5:P5 +B +B? A &+ = < A5 - - $ 9$:$ 9$:$ = #

56 5 Review of current practices in determining user charges and incorporation of economic principles of pricing +(9 :A5A # Approaches to tariff determination + $ & W9&W: + &W? G Rate of Return Regulation or Cost-Plus Approach? E $8 "8 %9,8 < AS? 9 - +J:,S9?: G, S 9?: S K9@K&: K& AKJ S? G A E + $

57 5 Review of pricing reforms and principles in electricity sector in India Performance based cost of service regulation or MYT Approach - Y Y + & W9&W:G- ;&W+ -@K& K* - G - ;&W F A F ;&WA G - $E -> 5 +,- &W + - CD*-? A? A AK AK - &W - # <-, # +

58 Tariff setting process 52 Review of current practices in determining user charges and incorporation of economic principles of pricing * &W - ; ; 9 : > A + $ ; A?9A: ++ ((A5 - A +- = A 3 Submission of ARR Commission scrutinises Applications deemed Financial Information ARR Estimation complete Technical Information Costs Capital Base Technical Data ARR applications Public hearings and scrutiny Utility responds to approved of ARR applications Regulator s Queries Figure 5. ARR Approval and determination process + - E + 4 > B AK* 4

59 53 Review of pricing reforms and principles in electricity sector in India - - G+ - #F > > + 5?4? K* 4? + > 3 4# > A # - ( K&4- >? A +-K&O * - I AJ 4 - ) 4?? A + + A + F#F A +J - + +

60 54 Review of current practices in determining user charges and incorporation of economic principles of pricing E, &(:O A J A * 9A*: O + H O ; > + $ G - $E + (3A * > = + +J (3A? A>

61 55 Review of pricing reforms and principles in electricity sector in India Tariff Design = 5 6 & /4+ & O + ' $/4 + - =/$ - + O 3 6 &4 - A - E $ - A$ 5 3O

62 56 Review of current practices in determining user charges and incorporation of economic principles of pricing + / Lessons from electricity tariff reforms A + A5+,F * - /A+B + : Q: > Q: - Q: - ; - # / > A? / - /&W -

63 57 Review of pricing reforms and principles in electricity sector in India? E o A 9 : o A o o?k o E o o $ 2- > G - > + 2- A

64 58 Review of current practices in determining user charges and incorporation of economic principles of pricing

65 CHAPTER 6 Economic model for pricing water B E $ A A > Need for appropriate pricing A;2, -;2, 9 -: >Z> E ; ; 5 < A ;> 9 -: ' ; 3 GCD A??;2,? =??

66 6 Review of current practices in determining user charges and incorporation of economic principles of pricing > ;2, Principles of tariff fixation 9 : #- B? #?9 - : 9 : 9 <+K+ : 9 : #- 9* < :E 3( /G B - - -?? /? G? A 9A: #A A

67 6 Economic model for pricing water - /??? (/( ' )< Y Y # # E / ; / / 9 - : #?? - B / #? "

68 62 Review of current practices in determining user charges and incorporation of economic principles of pricing Alternative tariff structures < E > A E 9: + E9 : ; - * - 9: + E G AL 9: Single part, variable tariff structure / /? * ( Table 6. Types of tariff models S.No. Type of tariff model A. Linear uniform volumetric tariff model Definition Objectives Assumptions Methodology Under this model, users will pay in direct proportion to their consumption and the corresponding water charges vary entirely based on their consumption. But in most of the cases water is provided at subsidised tariff to the masses based on their affordability to pay. Ensuring cost recovery of relevant costs Incorporation of concept of water conservation Ensuring social equity Ensuring water availability for poor people irrespective of their paying capacity All elements of cost are recovered fully Average costs of water supplied is same for all Average cost per KL is computed based on total water supplied and total cost incurred at various levels. This average cost per KL is the base tariff charged to all customer groups. The subsidies to the various groups are provided on the base cost. B. Volumetric increasing block tariff (IBT) model IBT provides more than one price for water used, where each price applies to a customer s use within a defined block. Prices rise with each successive block. The water slabs are determined based on consumption pattern of the Ensuring the cost recovery for O&M operation Ensuring the economic efficiency Incorporation of the concept of water conservation Market driven tariff All elements of cost are recovered fully Water consumption slabs are defined based on water norms for various types of households. Average cost per KL is computed based on total water supplied and total cost incurred at various levels Weights are derived based on water consumption norms.

69 63 Economic model for pricing water C. Tariff model based on cost incurred in servicing different type of consumers public. For the purpose of development of the model the slabs are adopted based on per capita water consumption norms defined for local bodies, which forms the base for the design. Hence this model is more tuned towards the determining of tariff for local bodies based on their type. This model is somewhere in between the ULB based pricing and uniform tariff Ensuring social equity Ensuring water availability for poor people irrespective of their paying capacity ULB are incurring different costs for supplying water to different groups of customers categorized as commercial, public stand post and households. As the cost of production is different for these groups of customers, hence the tariff should also be different for them. These weights define the corresponding level of per capita water consumption and depict the ratio for the tariff in these slabs. In this model, it is suggested that at the ULB level itself, cost will be segregated between the different categories of consumers based on data on water pumped. For all ULBs, cost should be aggregated consumer category wise and cost per KL will be calculated. The subsidies if any can be provided on -9,: AA*,-# 9 > 5:,&,?, -?, = - /, -

70 64 Review of current practices in determining user charges and incorporation of economic principles of pricing,e,? >= - C D 5 <, Single part, fixed tariff structure ;2, 9 : + E A = 9G :G 9 : Two component tariff structure + 9 : 9 :E> AB E ;2, / ;2, 9: 9 :9: 9:/>? 9: 9?:9 : 9>Z> :

71 65 Economic model for pricing water Evaluation of tariff models to suitability for the objective set A #= Table 6.2 Evaluation of tariff models Tariff structure Fixed charge Uniform volumetric charge Increasing block tariff Decreasing block tariff Cost recovery Economic efficiency Equity Affordability Adequate Provides stable cash flow if set at appropriate level Good If set at appropriate level. Moreover adjust automatically to changing consumption Good Only if the size of the blocks are well designed Good But only if the sizes of the blocks are well designed Poor Does not send a message about the cost of additional water Good If set at or near marginal cost of water Good If water is sold at marginal cost or near to marginal cost Good If water is sold at marginal cost or near to marginal cost (Applicable only when there is no water scarcity) Poor People who use large quantities of water pay the same as those who use little Good People pay according to how much they actually use Average Normally people do not pay according to the costs their water use imposes on the utility Poor People do not pay according to the costs their water use imposes on the utility Adequate If differentiated by having different tariffs depending on ability to pay Average However it is possible to differentiate set of consumers by geographical/ social barriers Poor Penalise poor families with large households and/or shared connections Poor This would only facilitate higher consumption categories with better affordability and goes against the category with less affordability,? # # $ %#

72 66 Review of current practices in determining user charges and incorporation of economic principles of pricing Pricing strategy A E ; E ;2, ;2, ;2, o ; o o & o Uniform tariff for state versus ULB based tariff E< ;2, ;2, Table 6.3 Pros and Cons of uniform tariff pricing Pros of uniform tariff pricing Easy to administer by government or any independent regulator Ensures social equity and affordability for all class of customers Avoids the risk of charging different rates to local bodies Reduces the administrative costs Ensures the viability of small schemes where cost of production is abnormally high because of lesser population covered under the scheme Makes the process of tariff revision simple Ensures uniform service to all customers Encourages investments in water supply infrastructure in an open system market Cons of uniform tariff pricing Very often does not reflect the true cost of production and hence goes against the economic principles May provide subsidy to high cost customer, hence violating principle of equity and affordability May not be acceptable to customers for whom cost of production is less than tariff May discourage customers from water conservation - > 9,2: H2? A

73 67 Economic model for pricing water ;2, ;2, A ;2, &'% (&'% )* &'% Cost components A ;2, 9 ;2, :9 ;2,:< 9 ;2, : 9 : (' 9: 9: Table 6.4 Type of costs in water provisioning Type of costs Transmission Treatment Distribution Other A. Direct costs i) Fixed Power cost (fixed charge) Manpower Repairs & maintenance Power cost (fixed charge) Manpower Repairs & maintenance treatment Power cost (fixed charge) Manpower Repairs & maintenance Interest on loan Interest on working capital Depreciation Return on assets Major maintenance costs Lifecycle capital costs

74 68 Review of current practices in determining user charges and incorporation of economic principles of pricing Type of costs Transmission Treatment Distribution Other ii) Variable B. Indirect costs Power cost (usage charge) Bulk water rates Royalty Power cost (usage charge) Chemicals Fuel Power cost (usage charge) Establishment Administration charge? +% '%9,) "# ;2, $ #? / 9/: / < %& &;2,? B ' - ;2,

75 69 Economic model for pricing water? ( ;2, # 9 :# # A 6+$ (/ ") - -?;2, $ A % 9?:? G

76 7 Review of current practices in determining user charges and incorporation of economic principles of pricing + # $,-.. Subsidy Method of subsidization Targeting the subsidy Time period of subsidy G - E &= R E = * - = + M M?B, A,2 *+9*+: /? ;2, / ;2, +G

77 7 Economic model for pricing water 9+G: -?? A?? A G= : #9 - : / = - Quantum of + A 9 : / $ $ *

78 72 Review of current practices in determining user charges and incorporation of economic principles of pricing Other factors Unaccounted for water Connection costs - 9;G<:;G< - - ;G< Q - ;G< O P$$;& + = - # * 9 : > 5(O>?

79 73 Economic model for pricing water AP$$;& ;2, O ;2, J 9I3: 9' -: ';2, G - /? J O + P$$;& 9: 9 : 9 :@ -? 9 :- Tariff for public stand posts (PSP) +A - +&?A ? :+?

80 74 Review of current practices in determining user charges and incorporation of economic principles of pricing Tariff revision A E < -- - A < + A - - +< $ A 2 3 Approach to tariff determination A -+, -M B E Cost of service approach

81 75 Economic model for pricing water + F Willingness to pay approach ; = +?# #? F F A > + E - /? - Q A - #,-. / $ 4/ T E R I Report No. 29IA2

82 Category-wise water tariffs Domestic users Level of first block 76 Review of current practices in determining user charges and incorporation of economic principles of pricing A, -9,: # /,E < -[ / [ < -[ -, 3 ' ( 5?(H2 G - -H2 3>H2 // Number of levels = Proportion of cost to be recovered =9 :A - -/ Recommended per capita water supply norms for designing water supply schemes for urban areas as per Central Public Health and Environmental Engineering Organization (CPHEEO)

83 77 Economic model for pricing water Non-domestic users $>9 : H2 G G G@K& + 5 %$ o ( :' ;" o (<7 <8:'",-. o (=7 <8:'",-.>?@4A +3" *:' ) o

84 78 Review of current practices in determining user charges and incorporation of economic principles of pricing

85 CHAPTER 7 Recommendations on incorporating economic principles of pricing Law and policy changes # ## B# Q - A >;2,? >;2, Independent Water Regulatory Authority + &<AQ ;A A+ E + Q & > Q - Q A - &? JNNURM AP$$;& - - -

86 8 Review of current practices in determining user charges and incorporation of economic principles of pricing P$$;& - - O ;2, - Principles for water J??- -E o o L o 2 L >,@, Q A> - ;2, E - F o 4 &+ A -- -

87 8 Recommendations on incorporating economic principles of pricing Q #? - - ;G< Q - ;G< - += - O + P$$;& A A ? :+ - L? = A, - E o + 4 E

88 82 Review of current practices in determining user charges and incorporation of economic principles of pricing o + 4 o M\BO $> H2G > Linking water quality with prices? /-?

89 ANNEXURE I List of Stakeholder s Interviewed &&+-*A9/: / =9/@: A& 9A&: 5 J#<+ +,9J<++,: ' J#*,9J*,: 3 &++ 9: (, <+ +,9,<++,: I && ) H-;<+ *, 7 & &# A &P AJ9AJ:

90

91 ANNEXURE II Abbreviations AKJ A A& AJ A A& A* A * A<&A A <& A A A? A;<+ A ;<++,2, 2,<++,, <+ +, A& A A J<, + A & A A# J, + &<++, & <+ /@ = + AJ < A G*A J*, + AJ A# G * A# J#*, J<++, J#<+ +, /&<++, /& <+ +, /;*@ / ;*

92 86 Review of current practices in determining user charges and incorporation of economic principles of pricing, 2 &* & &;* &< &+A &+ &<, - 2 & * & &;* &< & > + A &+ & < &<A &< A &<++@ & <-+ &W $*& $ $* $* @A / /* + < K& A2 L & <A + +, + & W $* & $ $ * $ * $ A / / * > + < & A#2 L & <+ A + +, +

93 87 Abbreviations +G +&; ;A ;G< +G + & ;- ;A # ;G< ;*++& ;* ++ K& ;<& ;<& K ;<++ LA <A <@ <+AA <++ ;<+ + L A < A <@ <+AA <+ +

94

95 ANNEXURE III References <,-( ;/; <,-P( $;A3 ;/< & $ ;A+3 H++@&7 $$&. ;( :( ; LG ; ; <,-773 = / 6 ;$*><+ B@ & ; / &/ U ;/ " *+/$*, 3& > / + ;, * <, &? &; 3; ; $ G $*