Chapter 5

Price and rate structures This chapter deals with the principles for pricing water delivered to municipal users by public water supply systems. In principle, there are many different rate structures that could generate the same total revenue for a public water utility. The question, therefore, is what type of rate structure to adopt. In this chapter we consider some of the criteria that have been proposed for designing rate structures, we review the economic theory of how rates should be set, and we examine some of the empirical experience with different types of rates in the U.S.1 [A] Components of a water rate structure Earlier this century, most urban water agencies were financed through fixed monthly charges. While these charges did not vary directly with consumption, they did sometimes vary according to customer characteristics, which, in the absence of metering, utilities used to identify probable consumption levels. In 1907, for example, Phoenix charged $1.50 per month for domestic water supply to dwelling houses; 25 ¢ per month each for water for horses and cattle; $1.00 for barber shops without fixtures, $1.50 for barber shops with one basin and one chair, and 50 ¢ for each additional chair; and rates of $1.00-$4.00 for stores and $2.50 an