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Utility regulation: residential demand for water

Water utilities are under significant financial pressure as a result of increasing urbanization, deteriorating infrastructure, and increasingly stringent drinking water-quality regulations. In addition, recurring droughts and the difficulty of developing new sources of supply indicate that water is becoming scarce. The present ability of water utilities to address these problems is partially constrained by regulation.

This paper looks at the different demands for water for residential use. It identifies  the different stakeholders in the provision of water in a developing country like India and discusses the costing and pricing strategies generally adopted. The paper gives details about the regulation in the provision of water and the interactions between different stakeholders.

The study reveals that:

  • future progress in water pricing and costing changes, for both publicly owned and privately owned water utilities, is likely to face significant obstacles
  • publicly owned utilities generally face less regulatory and financial constraints than investor-owned utilities, therefore they appear to be the more immediate vehicle for water-rate
  • investor-owned utilities have considerably less flexibility to adjust to the adverse financial effects that can result from rate innovation
  • neither managers of publicly owned or privately owned water utilities are likely to search out and adopt new pricing and costing practices

The authors suggest that recognition of these impediments to rate reform highlights the need to replace traditional "cost-of-service" rate regulation with some form of incentive regulation that gives water utilities both the freedom and the incentive to adopt more-efficient practices.