There are several different tariff structure models. The objective is to select the most appropriate model for the specific needs of local communities in BiH. These are, for example:
- Single unit price of a m3 of water, paying according to volume of water used without a fixed charge;
- Single unit price of a m3 of water, paying according to volume of water used with a fixed charge;
- Single unit price of a m3 of water for all consumers;
- Flat tariff;
- Marginal cost tariff; and
- Tariff structure with two or more block tariffs.
Below are explanations of each model:
Single unit price of a m3 of water, paying according to volume of water used without a fixed charge
This relates to tariff set per unit of the consumed water volume (KM/m3) where the unit price does not depend on the total volume of water consumed (every m3 of water has equal price for the same consumer category). The tariff per m3 still can be (but does not have to be) different for different categories of consumers. It includes specific consumer’s costs such as meter maintenance or meter reading and billing. This method does not include fee for recovery of costs not depending on the delivered volume of water (consumer’s costs). In BiH, this the most frequently used tariff structure. It is simple to analyse and apply and easily understandable for service users.
Single unit price of a m3 of water, paying according to volume of water used with a fixed charge
This differs from the previous structure in a way that, along with the volumetrically set charge, the fixed charge is added, which does not depend on the volume of water consumed. The two variants of this tariff structure relate to fixed charge which includes only specific consumer’s costs, i.e. the fixed charge including, along with consumer’s costs, also a certain volume of water consumed. In this case, the price per m3 can (but does not have to be) different for different categories of consumers too.
In the former case, therefore, the fixed charge primarily concerns the specific costs of maintenance and replacement of meters, meter reading and billing, with possible adding of the (small) amount related to maintenance of the operational network. In the latter case, even a relatively small volume of water is in cluded in the fixed charge (usually 5%-15% of the average consumption in this category); the volume of water included in the fixed charge should not be large, because in that case the fixed charge could turn into a flat rate. The estimate of the volume of water to be included in the fixed charge can be conducted based on the minimum volume of water delivered to that category of consumers during the year. All other consumption above this volume that enters the fixed charge is calculated per m3 with equal unit price within the same category, and independently on the volume of water consumed. In this case, the price per m3 can (but does not have to be) different for different categories of consumers too.
Single unit price of a m3 of water for all consumers
A single price per m3 is set regardless of the category of consumers, irrespective of the volume of water consumed. A unit price per m3 is calculated by simple dividing of the total required revenues with the total estimated water consumption. This is mostly used in practice in the small systems where consumers have similar requirements. Specific consumer’s factors such as inequality of consumption or the size of meters are not taken into account when setting the price.
Flat tariff
This type of the tariff structure is mostly used when water consumption is not metered, mainly in the category of households. This structure is not cost-effective and should be avoided whenever possible. It is usually based on the number of household members, which may seem logical (although it is not always simple to obtain the updated information on the number of members, particularly in terms of seasonal, e.g. students’ migrations), but in case of individual dwelling units this principle does not take into account the consumption of water for purposes such as watering the garden, washing and cooling terraces, etc. In practice, it is even possible to see the principle of the flat rate per household, regardless of the number of the household members, or even the dwelling size, which obviously has nothing to do with real consumption and puts consumers of services in unequal position.
Marginal cost tariff
This tariff model is based on marginal costs related to production of the additional product unit. The prices are, thus, related to the costs of the required enhancement of the total water supply capacity, namely development of additional infrastructural facilities needed for the increased production driven by the increased demand. This way, an adequate signal on the real water price is sent to consumers. The application of this tariff structure is not practical for water supply and sewerage services.
Tariff structure with two or more block tariffs
The structure with two or more block tariffs can have increasing or decreasing character. A distinctive market approach to sale appears when the unit price of a product or a service decreases with the quantity of order – in this case, this means that the unit price decreases as the consumption grows, within the given framework (e.g. the first 5 m3 of consumption are billed at one price per m3, then the price decreases for consumption of 6-10 m3, then the price decreases again, etc.). In principle, this tariff structure makes sense, since most of the costs incurred by service provision are captured by assuring the basic consumption; thereby the unit costs of users with lower consumption are higher.
Nevertheless, increasing block tariff is used more frequently – when the unit cost per m3 of water increases with higher consumption. This is primarily used to stimulate water saving. After adopting the block tariff ceilings, it should also be checked whether the adopted elements create sufficient revenues to recover all related costs (for each of the categories of consumers). The following chapters will provide recommendations for selection of the tariff model suitable for BiH, which will, at the same time, answer the above question on incorporation of the fixed and variable costs in the tariff model.