Abstract

Cross-border drinking water supply is often a solution for the emerging water crisis, related also to climate changes, but in several cases also a historical legacy of changing borders. It is challenged by the increased complexity of water supply management, mainly because of the doubled reality of administrative, legal, accounting and decision-making processes. Analyzed water pricing of existing cross-border utilities clearly demonstrates applied water pricing approaches mainly based on pure negotiation principles demonstrating different and often heavily asymmetric bargaining positions of partners. In order to overcome this situation applicable water pricing principles are presented. The model is demonstrated on real business cases of three water utilities from Central and South East Europe, but similar concepts are applicable for drinking water transfer between regions or municipalities in other countries.

INTRODUCTION

The sustainable use of water is one of the most important challenges of our time. Urban water supplies are under considerable pressure in a number of the world's major cities as a result of ageing infrastructure, declining investment, increased demand from population growth, and the migration of rural workers to cities. Between 2000 and 2030 it is expected that population will grow especially within the urban areas of less-developed countries. OECD (2016) reports that water demand will increase by 55 percent globally by 2050 as almost 60 percent of the global population will be hosted by urban regions. About 4 billion people will be living in water-stressed areas leading to almost unavoidable competition across different types of water users – particularly for agriculture, energy and urban dwellers. Increasing supply of water, construction of new infrastructure to increase harvests and storage resources are among the most mentioned challenges to manage growth in water consumption. Governments have become reluctant to adopt this approach in the recent past because it requires debt funding of large capital investments, and suitably located sites have been given over to urban development.

Ageing and inadequate water infrastructure hinders the ability of communities to provide clean drinking water in many developed countries. It has been estimated that more than $600 billion is needed over the next 20 years to maintain and improve drinking water infrastructure across the USA. In 2015 the US Environmental Protection Agency, for example, launched the Water Infrastructure and Resiliency Finance Center to help communities across the country improve their wastewater, drinking water and storm water systems, particularly through innovative financing and by building resilience to climate change. Fiscal constraints and changing water consumption patterns bring changes in water demand schedules and the composition of public finance. A survey on 48 cities from OECD countries and emerging economies reports that significant progress has been achieved in urban water management but important challenges remain. More than 90 percent of the cities surveyed reported ageing or lacking infrastructure, which threatens universal coverage of drinking water and sanitation and diminishes the capacity to protect citizens against water-related disasters. Sub-national governments also report lack of capacity as the most important challenge for the future. Sixty-five percent of surveyed cities emphasized the lack of staff and managerial competencies and unstable or insufficient revenues as the most important obstacles for effective implementation of water responsibilities (OECD 2016). Adaptive water governance will be a system that follows intensified competition for water among households, farmers and urban dwellers. Non-state actors will be able to influence water policy outcomes positively or negatively in direct or indirect ways (OECD 2015).

The present paper contributes to the literature of water pricing and cross-border water supply (CBWS) providing relevant data from three different utilities that are part of CBWS systems, identifying real practical problems and presenting a feasible water pricing model. National guidelines and academic publications endorse two possible approaches: marginal cost approach and full cost recovery approach. This paper presents the applicability of these approaches for cross-border water supply and provides a practical model for cost allocation. Existing costs and the mechanisms of their incurrence in the cross-border context should be carefully examined based on proper allocation of variable and fixed costs of water abstraction and water delivery, with special attention on recognized inefficiencies. Moreover, efficient management of water resources and envisaged environmental changes should emphasize common long-term investment in cross-border and cross-regional water supply systems (WSSs), indicating a need for sound methodology for dividing costs of water to different users (in different regions/countries) and various generations in order to achieve social, economic and environmental balance (Kanakoudis et al. 2014). The paper analyzes three different WSS from three different countries, Slovenia, Croatia, and Bosnia and Herzegovina. All case studies are based on relevant accounting data and present a procedure for cost-based price calculation. While one would expect that contract price would be higher than the total costs per unit, this is not the case for WSS Neum from Bosnia and Herzegovina. In this case the price does not cover even variable costs of water supply, indicating that Bosnia is subsidizing water supply to Croatia. Applying market-based mechanisms would promote conservation among users and establishes clear market-driven pricing signals on the one hand, and better long-term investment decisions from government and the private sector on the other.

INSTITUTIONAL CONTEXT AND ECONOMICS OF WATER PRICING

The provision of drinking water is characterized by the use of high value assets indicating a highly capital intensive sector with significant entry barriers leading to limited competition between the suppliers (natural monopoly). Besides high investment costs the infrastructure is characterized by low mobility since it is constructed for a specific purpose. The technology of water supply exhibits scale and scope economies over a fairly wide range of output (Hayes 1987; Boisvert & Schmit 1997). In order to achieve maximum social efficiency and minimize dead-weight losses the pricing should be at the level of long-run marginal cost. Due to the fact that water utilities are usually a natural monopoly and therefore marginal costs are lower than average costs, such pricing would lead to a unit price that is less than average costs and the utility will not generate enough funds to cover all costs (Monteiro 2005). Economic theory has developed several first- and second-best solutions to overcome this problem. The first-best solution advocates the use of subsidies and taxation as a form of lump sum transfer to make up the loss (Hotelling 1938). Coase (1946) criticized this approach as he considered subsidies to be distortionary and proposed the use of a two-part tariff: fixed charge covering the cost of network connection and a volumetric charge set at the marginal cost of supply. The fixed charge should be set at a level to finance the fixed costs, i.e. the difference between average and marginal costs. Second-best solutions are characterized by the use of price discrimination to recover costs, with Ramsey pricing and the Pareto Superior Non-Linear Outlay Schedule being the most common. A Ramsey price is set at the welfare maximizing level of output using price discrimination based on the demand elasticity of different buyers' segments.

In practice, the foundations for pricing in drinking water provisions were set by the European Union Water Framework Directive (WFD), more precisely its Article 9 introducing the principle of cost recovery for water services in accordance with the ‘polluter pays’ principle and relating not only to the financial costs of the water supply service (direct costs) but also to the costs of negative environmental effects (environmental costs) as well as the opportunity costs of alternative water uses (resource cost (RC)). Article 9 thus promotes the internalization of environmental and RCs resulting from existing uses of water resources and aquatic ecosystems (European Environmental Agency 2013). As the European Environmental Agency further states, the calculation of the price that reflects the true value of water does not represent a simple task but is contributing to the long-term sustainability of water resources. The calculation of direct costs seems easy but requires special attention as it depends on many factors varying in time and space as repairs or replacement costs (Kanakoudis et al. 2011). Direct costs are also influenced by different business processes at the level of utilities and model of corporate governance. The costs related to replacements and repairs can be substantially reduced by identifying optimal maintenance and replacement times (Kanakoudis & Tolikas 2001; Kanakoudis 2004) while issues of corporate governance still need to be resolved.

The most misleading principles are identification of environmental costs (ECs) (according to the OECD the environmental costs are costs connected with the actual or potential deterioration of natural assets due to economic activities; by definition these costs include damage to humans, ecosystems and resources (Bickel & Friedrich 2005)) and RCs (resource costs refer to foregone profits (benefits) of the alternative use of water (competitive water users); if the water demand for all users is covered adequately, the resource cost is zero, but the resource costs start to increase in the case when water shortages occur for certain water users). Evaluating RC and EC should depend on determining the area where the environmental impact takes place indicating that the contribution of each water utility should match the proportion of environmental damage and depletion of natural resources to the whole River Basin Districts (Kanakoudis et al. 2011). The WFD has actually led to major reform in environmental legislation and the administrative sector although some countries are lagging behind with its implementation, as noted by Kanakoudis et al. (2014), especially in fields like agriculture, energy generation, transport and production or use of chemicals (Richter et al. 2013). It is also evident that RC and EC are not included in many cases in the implementation of mitigation measures of the full water cost recovery (Gómez-limón & Martin-Ortega 2013). In the long run, the system's sustainable balance requires the correct full costs' estimation based on the application of the ‘polluter pays’ principle, the implementation of non-revenue water reduction measures and identification of direct, resource and environmental costs (Kanakoudis et al. 2016).

Water pricing in practice discloses huge diversity in price and rate structures applied by water utilities even within areas with similar geographical conditions. As documented in several studies in Greece (the interested reader can find more about different pricing schemes in Greece in the excellent work by Kanakoudis et al. (2014)), France (see more in Howe (2005)), Portugal (see Martins et al. (2013) for more details), USA (see more on that in Hewitt (2000)), Canada and other countries, developing appropriate schemes for water pricing is a challenging issue as pricing is influenced by several factors, such as the level of infrastructure development and other local characteristics, geological and climatic conditions and different regulatory environments. In Denmark, England and Wales, Scotland, France, Germany and Slovenia, for instance, water utilities have chosen two-part tariffs and charge a fixed annual or monthly charge and a price per cubic metre for water consumed, whilst in a number of OECD countries water utilities charge only a volumetric charge (OECD 2010). Interestingly, several countries such as Hungary, Poland and the Czech Republic have already adopted water pricing policies based only on volumetric pricing with a trend of moving towards increasing block tariffs (Kanakoudis et al. 2016). However there are substantial differences also at the regional level within one country. Kanakoudis et al. (2014), for example, analyzed 84 municipal enterprises operating in the water supply sector and their water pricing policies, finding the conclusion that there is a considerable spatial differentiation in pricing policies at the regional level, probably depending on other factors than actual demand and supply of water. Obviously the tariffs are developed in order to prevent risks of revenue variation during periods of low demand (Roth 2001). Therefore the development of the revenue requirements of a particular utility is the first analytical step in the rate-setting process that aims to provide adequate and sustainable funding levels for operating and capital costs (American Water Works Association 2012). (The overall adequacy of water revenues can be measured by comparing projected annual revenue requirements with projected revenues under existing or authorized rates. Revenue projections can be made for any length of time depending on the purpose of the projection. Many utilities have capital improvement plans that use a comparable 5-year time frame. In general we can project revenue requirements based on the cash-needs approach and the utility-basis approach. Therefore the most common approach in business is pricing water according to the average cost pricing approach based on setting water rates, which ensure the revenue from water sales is sufficient to cover the total costs of the system (Carter & Milon 1999).)

This study is based on the experience of project partners from different countries within the DrinkAdria project (the DrinkAdria project was co-funded by the European Union, IPA Adriatic CBC Programme 2007–2013 (DRINKADRIA project, 1o str./0004: www.drinkadria.eu)) and proposes a simple model for calculating the ‘fair’ price for CBWS. Within public water supply the costs of the operation of the entire system are usually averaged. When discussing the CBWS the specific costs related only to the CBWS should be identified since the users which consume large quantities of drinking water (bulk quantities) should pay the full (monetary) price but should not bear the cost that arises due to water supply to other users (a water tariff in general can be set at the level of the service provider or by the local or national authority as a political consensus on how much to charge for water (Cardone & Fonseca 2003) and how much will be covered by public funds). Thus, a separate accounting approach should be introduced in order to enable a transparent approach to the cost analysis. The important issue in allocating the costs of bulk water supply (wholesale) is which costs should (could) be allocated to the purchaser of bulk drinking water in order to ensure a transparent procedure of cost allocation and consequently a fair price agreement, which is a very important component of a sustainable water supply between two regions. As stated by Zieburtz (2012), in wholesale water supply it is important to understand which facilities are needed to provide the service (e.g. certain facilities as a transmission line can be built specifically for the wholesale user). Banovec & Domadenik (2016) proposed a simple model of identifying cost centers (related to specific parts of the production process and infrastructure) important for CBWS. After all cost centers for the necessary parts of the WSS are identified, variable and fixed cost components should be defined for each cost center (CC). The main idea is that the variable and fixed components of the total bill are divided in such a way that the bulk user bears part of the variable costs according to the yearly consumption but the proportion of fixed costs (due to design capacity) regardless of water consumption in a particular year (please refer to Banovec & Domadenik (2016) for more details).

APPLICATION – THE CASE OF WATER UTILITY ‘VODOVOD IN KANALIZACIJA NOVA GORICA D.D.’

This section presents the analysis of the prices and costs of drinking water supply in water utilities (WSS) from Slovenia (Nova Gorica), Bosnia and Herzegovina (Neum) and Croatia (Buzet). All calculations are based on the latest available accounting data and refer to the year 2014. All water cross-border WSSs, presented in the paper, share common parts of the transport pipeline, water pumping and treatment facilities which are used by both parties. Nevertheless in all cases it is well defined: (1) the allocation of different components of the WSS for CBWS and (2) the actual annual water consumption by domestic and foreign users. Allocation of costs related to water losses is a specific issue which has been addressed by several authors (Kanakoudis et al. 2016) but is not addressed in this paper. Moreover we argue that water system networks that have acceptable levels of water losses according to IWA indicators should be considered as adequate starting points while the allocation of costs related to water losses between partners could be defined during the negotiation process.

WSS ‘Vodovod in kanalizacija Nova Gorica d.d.’ (WSS NG) is a public company from Slovenia. Besides the public water supply service to neighboring municipalities it also delivers drinking water to the municipality of Gorizia in Italy. Based on the firm's annual report and accounting data in 2014 we were able to identify the various parts of the income and costs for the drinking water supply. According to the legislation (the decree of the tariff system for public service on the environmental field was applied in 2012) the price of the drinking water supply should consist of variable and fixed parts. The variable part should cover the costs related to daily functioning of the WSS such as the direct costs of the materials and services, labor costs, indirect costs, general costs, etc. In this case the decree defines that the variable part should cover also the costs of the water abstraction charge. The fixed part should cover the depreciation costs of the infrastructure, the replacement and maintenance costs, etc.

In 2014 in the studied utility WSS NG the price of drinking water supply for water utility users consisted of a variable part (approximately 0.94 €/m3) which was the same for all types of utility users (households, industry, institutions, etc.) and a fixed part. The latter depends on the water meter size (DN) and amounted to approximately 3 € per month for DN ≤ 20 and approximately 600 € per month for DN ≥ 150. In 2014 WSS NG supplied 5,048,247 m3 of drinking water; 3,074,144 m3 were delivered to domestic customers, and the remaining 1,974,103 m3 to Italy. In total, WSS NG reports 3.020 million € of costs being associated with drinking water supply in the studied year. Of the total costs, 49.7 percent are direct costs (relating to the production process), while the remaining costs include indirect (19.7 percent) and general costs (24.2 percent). Other costs account for 6.4 percent (lease of infrastructure and interest costs). The total costs per unit, calculated as total costs of 3.020 million € divided by the total amount of drinking water – 3,074,144 m3, amounts to 0.9826 €/m3 (the regulatory procedure demands that additional revenues from market activities (like CBWS) are subtracted from direct costs of WSS units resulting in a decrease of direct costs to 0.2975 €/m3 and total costs to 0.5984 €/m3). In order to calculate the cost-based price for CBWS we need to examine direct and indirect costs in detail. The largest part of the infrastructure costs is represented by the costs of infrastructure depreciation (728,998 €) and the costs of the replacement and maintenance of the connections (458,080 €). Other costs refer to insurance (10,158 €) and compensation costs (282 €). Total costs were estimated at 1,197,518 €. To acquire a rough estimate of the costs of bulk water supply, we had to divide the costs of the water supply service into the costs for end users (national public water supply users) and the costs of the wholesale of drinking water to a water utility in a neighboring country.

Table 1 represents the variable costs of part of the observed WSS in 2014 broken down by cost centres. The cost centres relate to the part of the observed WSS in joint use (CC1 and CC2) and the part which is only used for CBWS (CC3). For example, CC ‘Mrzlek’ relates to the pumping station, water treatment plant, the second CC to the main distribution line and the last one to the transport pipeline only used for CBWS (water export). The coefficients used for allocation of variable costs are defined based on the proportion of CBWS in the total supply of water. In 2014 WSS NG supplied 5,048,247 m3 of drinking water, 3,074,144 m3 were delivered to domestic customers while the remaining 1,974,103 m3 were delivered to Italy. For the part used only for the CBWS, the variable coefficient equals 1.

Table 1

Variable costs, part of the observed WSS NG, 2014

CC1CC2CC3
Cost centre Cost centre descriptionMrzlek – water source, pumping and treatment plantMain water line – Mrzlek – Nova GoricaTransport pipeline – (only for cross-border)
Electricity costs 193,998.97 0.00 179.78 
Costs of materials 31,043.45 655.49 0.00 
Costs of services 114,583.10 0.00 0.00 
Labour costs 201,616.00 965.74 582.55 
Other variable costs 343.96 0.00 0.00 
Total variable costs 541,585.48 1,621.23 762.33 
Variable cost coefficients 0.39 0.39 1.00 
Variable costs of CBWS 213,601.42 639.41 762.33 
CC1CC2CC3
Cost centre Cost centre descriptionMrzlek – water source, pumping and treatment plantMain water line – Mrzlek – Nova GoricaTransport pipeline – (only for cross-border)
Electricity costs 193,998.97 0.00 179.78 
Costs of materials 31,043.45 655.49 0.00 
Costs of services 114,583.10 0.00 0.00 
Labour costs 201,616.00 965.74 582.55 
Other variable costs 343.96 0.00 0.00 
Total variable costs 541,585.48 1,621.23 762.33 
Variable cost coefficients 0.39 0.39 1.00 
Variable costs of CBWS 213,601.42 639.41 762.33 

Similarly to the case of WSS Nova Gorica, WSS Neum supplies water annually to Dubrovačko primorje (Croatia). In 2014 WSS Neum supplied 227,101 m3 of drinking water; 210,000 m3 were delivered to domestic customers, while the remaining 17,101 m3 were delivered to Croatia. In total WSS Neum reports 309,936.9 € of costs being associated with drinking water supply. Of the total costs, 67.7 percent are direct costs (relating to the production process), while the remaining costs include indirect and general costs (32.3 percent). The total costs per unit, calculated as total costs of 309,936.9 € divided by the total amount of drinking water, 227,101 m3, amount to 1.3647 €/m3. Table 2 represents the variable costs of the observed WSS Neum in 2014 broken down by cost centres. The cost centres relate to the part of the observed WSS in joint use (CC1 and CC2) and the part which is only used for CBWS (CC3). CC ‘Gabela’ relates to the pumping station, water treatment plant, the second CC to the main pipeline ‘Gabela-Neum’ and the last one to the transport pipeline only used for CBWS (water export). The coefficients used for allocation of variable costs are defined based on the proportion of CBWS in the total supply of water. In 2014 WSS Neum supplied 8 percent of all drinking water in Neum to Croatia and therefore this is the coefficient used for variable costs' allocation. For the part used only for the CBWS, the variable coefficient equals 1.

Table 2

Variable costs, part of the observed WSS Neum, 2014

CC1CC2CC3
Cost centre Cost centre descriptionGabela – water source, pumping facilities, water treatment plantMain pipeline – Gabela – NeumDubrovačko primorje – CBWS pipeline, water meter
Electricity costs 5,650.45 43,061.26 0.00 
Costs of material 0.00 0.00 0.00 
Costs of services 12,017.86 36,053.58 5,879.86 
Labour costs 29,589.87 77,792.50 0.00 
Other variable costs 0.00 0.00 0.00 
Total variable costs 47,258.18 156,907.34 5,879.86 
Variable cost coefficients 0.08 0.08 1.00 
Variable costs of CBWS 3,780.65 12,552.59 5,879.86 
CC1CC2CC3
Cost centre Cost centre descriptionGabela – water source, pumping facilities, water treatment plantMain pipeline – Gabela – NeumDubrovačko primorje – CBWS pipeline, water meter
Electricity costs 5,650.45 43,061.26 0.00 
Costs of material 0.00 0.00 0.00 
Costs of services 12,017.86 36,053.58 5,879.86 
Labour costs 29,589.87 77,792.50 0.00 
Other variable costs 0.00 0.00 0.00 
Total variable costs 47,258.18 156,907.34 5,879.86 
Variable cost coefficients 0.08 0.08 1.00 
Variable costs of CBWS 3,780.65 12,552.59 5,879.86 

The third case in this study refers to the CBWS between Croatia and Slovenia. WSS Buzet from Croatia supplies 567,278 m3 of water annually to Koper (Slovenia) in order to mitigate water supply shortages during the summer peaks. In 2014 WSS Buzet supplied in total 6,027,922 m3 of drinking water and 5,460,644 m3 were delivered to domestic customers. In total WSS Buzet reports 6,145,677 € of costs being associated with drinking water supply. Of the total costs, 62.1 percent are direct costs (relating to the production process), while the remaining costs include indirect and general costs (37.9 percent). The total costs per unit, calculated as total costs of 6,145,677 € divided by the total amount of drinking water, 6,027,022 m3, amount to 1.0196 €/m3. Table 3 represents the variable costs of the part of the observed WSS Buzet in 2014 broken down by cost centres. The cost centres relate to the part of the observed WSS in joint use (CC1 and CC2), while there are no parts used only for CBWS. CC 1 relates to the pumping station, water treatment plant, and the second CC to the main pipeline. The coefficients used for allocation of variable costs are defined based on the proportion of CBWS in the total supply of water. In 2014 WSS Buzet supplied 9 percent of all drinking water in Buzet to Slovenia and therefore this is the coefficient used for variable costs' allocation.

Table 3

Variable costs, part of the observed WSS Buzet, 2014

Cost centreCC1
Water source, pumping facilities, water treatment plantCC2 Main pipeline
Electricity costs 789,293.00 87,700.00 
Costs of materials 13,286.00 134,340.00 
Costs of services 250,470.00 375,705.00 
Labour costs 625,660.00 1,459,873.00 
Other variable costs 24,280.00 56,654.00 
Total variable costs 1,702,989.00 2,114,272.00 
Variable cost coefficients 0.09 0.09 
Variable costs of CBWS 153,269.01 190,284.48 
Cost centreCC1
Water source, pumping facilities, water treatment plantCC2 Main pipeline
Electricity costs 789,293.00 87,700.00 
Costs of materials 13,286.00 134,340.00 
Costs of services 250,470.00 375,705.00 
Labour costs 625,660.00 1,459,873.00 
Other variable costs 24,280.00 56,654.00 
Total variable costs 1,702,989.00 2,114,272.00 
Variable cost coefficients 0.09 0.09 
Variable costs of CBWS 153,269.01 190,284.48 

Similarly to variable costs' allocation Table 4 presents the fixed costs (in this case infrastructure depreciation) being borne by different CCs. In this case, infrastructure depreciation is separated for the facilities and equipment. Fixed costs allocation coefficients were calculated based on data on design capacity. In the case of WSS Nova Gorica – Mrzlek (CC1), total design capacity amounts to 7 million m3 and therefore 2 million m3 for CBWS represents 0.29. A similar calculation was made for the main water line (CC2) where the capacity is slightly larger (7,018,258 m3) and the coefficient is 0.28. In the case of the transport pipeline being used only for CBWS allocation the coefficient is 1. Fixed costs are summed and by using fixed cost coefficients the fixed CBWS costs are calculated.

Table 4

Fixed costs, part of the observed WSS NG, 2014

Fixed costs (EUR)CC1CC2CC3
Depreciation – facilities 46,108.17 0.00 0.00 
Depreciation – equipment 55,870.18 32,446.17 1,515.80 
Other fixed costs 0.00 0.00 0.00 
Total fixed costs 101,978.35 32,446.17 1,515.80 
Fixed costs allocation coefficient 0.29 0.28 1.00 
Fixed costs of CBWS 29,136.67 9,246.22 1,515.80 
Fixed costs (EUR)CC1CC2CC3
Depreciation – facilities 46,108.17 0.00 0.00 
Depreciation – equipment 55,870.18 32,446.17 1,515.80 
Other fixed costs 0.00 0.00 0.00 
Total fixed costs 101,978.35 32,446.17 1,515.80 
Fixed costs allocation coefficient 0.29 0.28 1.00 
Fixed costs of CBWS 29,136.67 9,246.22 1,515.80 

In the case of WSS Neum the total design capacity of the Gabeka part is 4.7 million m3, the main pipeline Gabela–Neum (CC2) is 7.25 m3 and the total design capacity for Dubrovačko primorje is 0.473 million m3. As agreed, the annual amount for CBWS is 0.473 million m3, the relevant fixed costs' allocation coefficients for CC1, CC2 and CC3 are 10 percent, 7 percent and 100 percent, respectively. Based on the allocation coefficients Table 5 reports that the CBWS should cover 7,385.09 € of total fixed costs per year.

Table 5

Fixed costs, part of the observed WSS Neum, 2014

Fixed costs (EUR)CC1CC2CC3
Depreciation – facilities 24,972.88 74,918.64 0.00 
Depreciation – equipment 0.00 0.00 0.00 
Other fixed costs 0.00 0.00 0.00 
Total fixed costs 24,972.88 74,918.64 0.00 
Fixed costs allocation coefficient 0.10 0.07 1.00 
Fixed costs of CBWS 2,497.29 4,887.80 0.00 
Fixed costs (EUR)CC1CC2CC3
Depreciation – facilities 24,972.88 74,918.64 0.00 
Depreciation – equipment 0.00 0.00 0.00 
Other fixed costs 0.00 0.00 0.00 
Total fixed costs 24,972.88 74,918.64 0.00 
Fixed costs allocation coefficient 0.10 0.07 1.00 
Fixed costs of CBWS 2,497.29 4,887.80 0.00 

In the case of WSS Buzet, the total design capacity of CBWS part 1 (water source, pumping facilities, water treatment plant – CC1) is 30 million m3 while the capacity of the main pipeline (CC2) is 30 million m3. As agreed, the annual amount for CBWS is 567,278 m3, the relevant fixed costs' allocation coefficients for CC1 and CC2 are 1 percent and 2 percent, respectively. Based on allocation coefficients Table 6 reports that CBWS should cover 36,807.56 € of total fixed costs per year.

Table 6

Fixed costs, part of the observed WSS Buzet, 2014

Fixed costs (EUR)CC1CC2
Depreciation – facilities 415,736.00 1,151,937.00 
Depreciation – equipment 103,943.00 60,628.00 
Other fixed costs 500,000.00 96,172.00 
Total fixed costs 1,019,679.00 1,308,737.00 
Fixed costs allocation coefficient 0.01 0.02 
Fixed costs of CBWS 14,995.28 21,812.28 
Fixed costs (EUR)CC1CC2
Depreciation – facilities 415,736.00 1,151,937.00 
Depreciation – equipment 103,943.00 60,628.00 
Other fixed costs 500,000.00 96,172.00 
Total fixed costs 1,019,679.00 1,308,737.00 
Fixed costs allocation coefficient 0.01 0.02 
Fixed costs of CBWS 14,995.28 21,812.28 

The calculation gives the pricing based on the proportion of variable and fixed costs that could be attributed to CBWS (Table A1 in the Appendix, available with the online version of this paper). In total the price per m3 would amount to 0.13 € in the case of WSS Nova Gorica, 1.73 € in the case of WSS Neum and 0.671 € in the case of WSS Buzet. It is interesting that the price of the cross-border water supply service from Slovenia to Italy is set based on a bilateral agreement between the representatives of both sides and does not refer to any specific methodological framework. The most recent change of price dates to the year 2007 when the wholesale price for a m3 of drinking water was set at 0.25 €/m3 indicating that the CBWS price is almost twice as high as the ‘fair’ price that covers all fixed and variable costs would be. In the case of Neum the CBWS price does not cover all variable and fixed costs associated with water supply. In fact Dubrovačko primorje covers less than 75 percent of variable costs indicating that Bosnia in general and Neum in particular are subsidizing water supply to Croatia. On the other hand WSS Buzet charges 0.95 € per m3 of water being supplied to Koper (Slovenia), which amounts to a profit margin of nearly 42 percent. However, it should be mentioned that the 58 cents applies to the volumetric charge while the remaining part applies to the water usage fee of 37 cents per m3 used in the WSS. According to the literature and WFD the water usage fee should be based either on estimating RCs' or environmental costs' allocation coefficients. Calculations in the paper show that this is more a case of abusing the monopoly position of one WSS due to specific infrastructure connections between two WSSs. The difference between average total costs per m3 of the CBWS and contract price is presented in Figure 1.

Figure 1

Average costs and contract prices in three analyzed water utilities, 2014.

Figure 1

Average costs and contract prices in three analyzed water utilities, 2014.

It has to be specifically mentioned that the approach represents a very rough calculation aimed primarily at presenting the complexity of the issue of defining a fair CBWS (wholesale) price. The issue requires further research and considerations, which are beyond the current scope of this presentation. However it needs to be mentioned that the price for CBWS should cover all fixed and variable costs of cross-border supply. Presenting three different cases from three different countries signals that agreed cross-border prices were not justified by cost calculation but rather by domestic prices being adjusted for cross-border supply according to the bargaining power of both parties. In order to facilitate CBWS in the long run, parties should agree on fair cost calculation without initiating a substantial price premium as in the case of WSS Buzet or not even covering the variable part of the costs as in the case of WSS Neum. Although one should be aware that the accounting of fixed costs is not a good representation of infrastructure costs in the case of water utilities, it is difficult to argue that such large differences between contract- and cost-based prices are due to accounting deficiencies. Increasing fixed costs by 100 percent would still lead to prices being significantly lower in the cases of Buzet and Nova Gorica.

CONCLUSIONS

Water supply nowadays represents a system that faces important challenges as the high quality of urban water services is threatened by a massive investment backlog impeding the upgrading, renewal and maintenance of water-related infrastructure. Public investment issues need to be re-examined including multilevel co-ordination and capacity challenges, fostering cross-sectoral approaches to infrastructure and balancing the trade-offs across water users in rural and urban areas and between current and future generations, among others (OECD 2016). All these issues become even more severe in the case of cross-border supply when two countries/regions need to reach an agreement on financing new investment in water-related infrastructure. In order to ensure a fair price for drinking water for CBWS the price should cover the full economic cost of the water supply with the emphasis on proper cost allocation. The latter should be implemented in such a way that the CBWS service is allocated the specific (exact) costs that occur in a specific part of the WSS system being identified and precisely listed. The (capital) investment plans should be prepared. A separate accounting should be enabled to support the transparent distribution of the costs of public water supply and costs of the CBWS service in order to have a sustainable and long-term water supply.

Within the EU DrinkAdria project a methodology for cross-border water supply pricing was developed, based on a transparent pricing principle that would enable long-term drinking water delivery between countries. The approach was tested in the real cross-border drinking water delivery systems in the region. While addressing the fixed and variable cost coverage, some items in cross-border water delivery economics should still be negotiated and there are no straightforward solutions. First, resource and environmental costs need to be identified and charged, but one should be aware that these costs are a specific domain where national legislation usually defines some procedures, not always necessarily supported with clear, scientific methods. Second, validation of the incurred costs is required. While the water utilities have specific national supervisory frameworks set in place to validate the incurred costs, it is far more challenging to set in place joint supervisory boards at the cross-border level. This is a framework that is necessary to validate the cost items included in the calculated water prices in the case of cross-border water delivery that would improve also the pricing policy in the three listed examples.

ACKNOWLEDGEMENTS

This work is elaborated through a project co-funded by the European Union, IPA Adriatic CBC Programme 2007–2013 (DRINKADRIA project, 1o str./0004: www.drinkadria.eu). The authors are indebted to Dejan Guduraš, Mohor Gartner, Ajda Cilenšek and Vesna Vidmar for excellent research assistance. We would like to thank also two anonymous referees for their valuable comments.

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Supplementary data