Study on mechanism for water pricing (2002)

Water resources contribute greatly to human well being, both directly and indirectly. Water resources are irreplaceable natural resources, and are limited. However, due to a growing population and related economic development, the water demand from urban, industry and agriculture has increased dramatically. Water shortage has become one of the most severe problems of the Yellow River basin, and has become a major constraint for the social and economic development of the region. It is well known that water demand management methods aim at applying economic incentives to reduce the consumption of water and to encourage conservation and protection of water resources. Water pricing, an important part of demand management, has been identified as a major solution to deal with water scarcity. Water is widely recognized to be, an economic good. But, in many cases the existing price for consumers is much less than the cost of production. Because these subsidies have traditionally been in place, the water price has never been connected to the actual cost by the government or local authorities. Consequently Water pricing reforms are strongly recommended in the Yellow River basin. One of the most important issues of water pricing reform is to set a rational price. Alot of discussion is going on about how to calculate the water price and which factors should be taken into account. There are many factors playing an important role in the economic valuation of water. Besides water supply cost and operation and maintenance cost, it has to take into account such factors as the intrinsic value of water, environment effects, sustainabihty, affordability of consumers, and so on. Based on above principles, the following topics were analyzed systemically in this study. These topics included: (1) water demand management and the role of water pricing, (2) the present situation of water price system and existing problems in Yellow River basin, (3) the value of water - theory and applications in other countries, (4) full cost recovery and analysis of factors effecting the water price, (5) WRM principles and consequences for water pricing, (6) a case study on a water supply project in the Lower Yellow River, (7) legal and institutional procedures for water pricing, and finally, providing a conclusion and recommendations. This study has set up the concept of Full Cost Recovery for the pricing of water supply. Putting forward Full Cost Water Pricing should include three parts: resource cost, engineering cost and environmental cost. A theoretical framework was developed to solve the problems of the calculation of full cost water price. This theoretical framework has been applied to a case study for irrigation district on the lower Yellow River. Due to limitations of data availability, different assumptions have been made during the case study, which should be further improved and refined. With detailed field studies and data analysis, this study could be helpful for the development of the water pricing reform for the Yellow River and support YRCC in this aim to come to a more integrated management of the water resources in the basin.