Binominal formula for water pricing
About this good practice
This type of pricing policy or tariff manages to guarantee the recovery of all costs for each use for domestic, commercial, industrial, construction use and public consumption. Whitin these uses, different subgroups can be established that are susceptible to have singular pricing. Those which are based on social or environmental aspects, such as large families, polluting industries, temporary or seasonal consumers, hourly discrimination, etc. For each of the uses and subgroups, a progressive pricing system is established by tranches, so that the higher the consumption is, the greater the economic contribution would be given to the recovery of the total costs.
The pricing structure must consider the concepts of guarantee of supply, understood as: guarantee of quantity, guarantee of quality, guarantee of service and guarantee of sustainability. The consumption blocks of the variable component usually depend on the following characteristics, which are unique to each supply system:
- Technical parameters (difficulty in obtaining the resource with quality).
- Geographical location (coastal or inland).
- Type of consumers of the service (whether there are large consumers).
- Social conditioning factors (income level).
- Economic and financial equilibrium (historical imbalances to be corrected).
Expert opinion
Resources needed
To have the power of setting the tariffing system according to the relevant national and regional rules.
Evidence of success
This is considered a good practice in the field of urban water supply and sanitation services, due to the advantages demonstrated wherever it has been used. This form of pricing contributes to a more efficient use of water and less pollution; furthermore, these effects are reinforced by the establishment of consumption brackets with increasing prices.
Potential for learning or transfer
This system can be explained in a presentation since follows the pricing structure advocated by the European Commission documents stating that the overall amount paid by a user should be calculated in the following way (progressive binomial formula): P = F + a × Q + b × Y
F: a fixed fee depending on the uses and services contracted.
a: unit price of water consumed (/m3), under a progressive structure, that is the higher consumption, the more expensive unit price is assigned per m3.
Q: total quantity of water consumed (m3).
b: price per unit of pollution produced (/m3).
Y: total pollution produced (m3).