The first step to cost recovery is accurate and transparent recording of all financial costs of water supply, sewerage and wastewater treatment service providers.

Full cost recovery should include the following:

• Operating costs, namely the costs incurred directly by running the operations (costs of labour, energy, current maintenance, chemicals, etc.);
• Depreciation costs (investment maintenance costs – e.g. by regular application, 2% of pipeline will be replaced on average per year);
• Investment costs (i.e. capital investment costs funded from own sources); and
• Financing costs (capital expenses, capital servicing costs), if a local community decides to repay the loan through price of service for improvement of which the loan was spent (while a local community may also decide to repay this loan from its own budget instead of water price, namely to make repayment from the funds of all citizens, not only those who use the relevant service).

The inclusion of the following costs should also be considered. Not necessarily in the initial period of the new tariff structure implementation, but certainly as a long-term objective:

• Economic costs of resources, related to lost water value for other potential purposes;
• Environmental impact costs; and
• Other costs such as those related to development of the required accounting and other information systems,
• development of human resources to the extent needed for sustainable provision of services, monitoring (including the benchmarking) and evaluation, planning and development of necessary strategies, etc.

It is also necessary to emphasise the relation among individual types of costs and delivered volume of water or users’ consumption – namely, some of the costs do not largely depend on the volume of generated water and have similar values in equal but shorter period (e.g. on a monthly basis).

Such costs include, e.g. staff wages and compensations, or depreciation, and they are usually called the fixed costs (sometimes also the capacity costs). This group should also include the specific costs of consumers, such as meter maintenance (which depend on the size of the meter and the period when it has to be replaced), or metering and billing costs (which is carried out even when the dwelling is used, and therefore water consumed, only seasonally, unless otherwise regulated by a special Contract). In longer periods, the level of these fixed costs can be changed too, so this term should not be understood literally, but rather as an indication that these costs are not proportional to water production.

On the other side, there are costs whose level is relatively proportional to the volume of produced water; the example can include costs of electricity spent in the process of pumping or distribution, chemicals used for treatment of water, etc. In practice, these costs are called variable costs.

The key issue is how to incorporate these two types of costs into the tariff structure and generally fulfil the previously stated principles.

For more information please check the Report, section Proposal of draft tariff setting methodology on page 23.