MANUAL ON WATER RATES AND RELATED PRACTICES
(2nd Edition)

LOCAL WATER UTILITIES ADMINISTRATION
Katipunan Road, Balara
Quezon City 1104
Philippines

February 2000

FOREWORD

Water is the foundation for all life. In various ways, the human race depends on this resource. We are dependent on a water supply in everyday life. We face the demanding task of calculating a need-based distribution of water in respective quantity and quality at a cost.

Water is free. It's a product of nature, readily available in lakes, streams, acquifers, and from rain. In presenting the argument that water is free, people forget that it must be collected, treated, stored, and delivered; and always available for whatever needs the customer may have. These steps cost money, and so a responsible price for water must be set. Establishing realistic and fair rates is a key element in the operation of any water system.

Water is a value-added commodity. Its value raises issues of scarcity, competition, and the need for integrated water resource management. The cost of supplying water is increasing, especially the expense of complying with safe drinking water regulations. Cost issues also raise questions related to economies of scale and the structural character of the water supply industry. Finally, pricing deals with sending appropriate signals to customers about the value and cost of water.

INTRODUCTION

The water supply industry believes the public can be served best by self-sustained enterprises adequately financed with rates based on sound engineering, social, and economic principles. It is strongly advocated that a properly operated and managed water utility should be a self-sufficient enterprise.

This manual presents the basic elements involved in the evaluation and allocation of costs of service to the various classes of customers, as well as the development of rates to equitably recover the cost of service from each class of customer. The identification of an established fair market price must reflect the utility's need to maintain and meet future customer needs.

Full-cost pricing, meaning setting a price per unit of water that covers all the costs involved in treating water and delivering it to the customer, is the fairest way of charging for water. To charge the total cost of water to customers as fairly as possible, the system must be 100 percent metered. That means every service or customer must have a meter. If some customers are unmetered, flat rate must be incorporated as part of the total rate schedule, though by so doing, the accuracy and fairness of the rate schedule is automatically reduced.

The potential for substantial water rate-increases and accompanying rate shock looms large, rivaling the past experience of the country's energy utilities. Changes in pricing policies to encourage conservation and the wise use of water may add to the upward pressure on rates. As rates rise. so does concern about customer willingness and ability to pay for water service. All of these issues place demands on water supply managers and regulators as they evaluate costs, allocation of costs, and rate design alternatives.

This manual presents the fundamentals of the rate-making process and related practices and serves as a resource that the policy maker or manager may draw on to guide the analysis of the validity of rates and the basis on which they are founded. Specific rate making for any particular water utility, based on sound engineering, social, and economic principles, may require the services of experts in rate matters.

This manual is not intended, nor should it be considered as a complete text of water-rate making and practices. The complexities of any system requires consideration of many factors not included in this presentation. Rather, this manual should be used as reference and guide for the procedures and practices used in developing cost-of-service analyses and establishing a structure of rates and charges that meet the objective of being cost-based, adequate, fair, reasonable, and equitable.

A glossary of terms commonly used in the rate-making process is provided to establish its uniformity in defining costs and allocation of costs for providing water utility service and arriving at a structure of rates.