Understanding utility pricing

Many cities in India relate water tariff to the consumption of the good, but most are unable to recover their actual costs or expenditure of supplying water due to concerns of affordability or political considerations, observe Kala Seetharam Sridhar and Om Prakash Mathur in ‘Costs and Challenges of Local Urban Services: Evidence from India’s cities’ (

For example, “In Lucknow, the water tax is set at 12.5 per cent of the annual rental value of the property, so it is primarily related to consumption (of water) which is assumed to depend on the size and other characteristics of property,” the authors inform. They add that no considerations of coverage of capital, or O&M (operations and maintenance) expenditure or costs, are taken into account by the Lucknow Jal Sansthan.

Another example in the book is of Pune, where the water tax is set at a certain proportion of property tax, which is a function of the annual rental value of the property. “This is based on the assumption that consumption of water is related to the carpet area of the household.”

In contrast are cities such as Bangalore (where the tariff is set on the basis of proportionate increases in the electricity expenditures which account for nearly half of the total expenditure), and Surat (which switched over to a system of metered connections in March 2008, and is able to recover about 70 per cent of its O&M cost through the tariff).

Countering the common perception that price hike policies are the logical outcome of deregulation and break-even cost, the authors emphasise the importance of efficiency in water management. “For instance, reduction of leakages, thefts, and unaccounted for water (UFW), in the distribution system, will reduce expenditure… In the case of most of the cities, leakages account for nearly one-third of the total water supplied.”

Water pricing structures in India are extremely complex and often even clumsy, fret Sridhar and Mathur. They find price discrimination to be common, with categories of water users which comprise not only the principal categories of domestic and non-domestic users but also the assorted categories consisting of water use for washing motor vehicles, cattle sheds, stables, and so on.

Central to price discrimination, they say, is cross-subsidy, with non-domestic users subsidising the domestic sector, and the high-income households using large quantities of water subsidising low-income households.

Citing Whittington (2008), the authors call for the setting of water tariffs that strike a balance among the four main objectives of revenue sufficiency, economic efficiency, equity, and poverty alleviation. The first objective is met when the revenue from water users is sufficient to meet the O&M costs, service the loans taken to replace and expand the capital stock, and provide a return on capital at risk.

Economic efficiency requires that water prices signal to consumers the financial and other costs that their decisions to use water impose on the rest of the society. Equity, the third objective, demands that users pay for water in proportion to the costs they impose on the utility by their water use. And, finally, poverty alleviation can be facilitated through a mix of differential pricing for high- and low-income users of the service, recommend Sridhar and Mathur.


This article is closed for comments.
Please Email the Editor

Printable version | Jan 20, 2021 4:06:16 PM |

Next Story