The Water Tariff Reform in China

Zheng Xingcan
(National Engineering Research Center for Urban Water & Wastewater)

1. In connection with challenge of market economy to traditional water management system, this report analyses the current situation and problems on economic policies of water management. And present the policies proposal on improving water management and it‘s industries, with intensive consideration of market economy conditions, including pricing, taxation, investment, trust, market simulation, accounting and so on. The report also make a review and assessment on influence of the existing water price system on the economic, social, domestic, industrial, agricultural and commercial uses in the city.

2. The report present a proposal concerning water pricing system and tariff levels, based on cost/benefit analysis and calculation of balance between costs and prices of urban water, to meet the needs of market economy after assessment of the need for water tariff restructuring and reform in the cities. It will promote the optimal conservation and sustainable utilization of urban water resources as well as support the sustainable economic-social envelopment of the cities.

3. The current key problems in urban water charging and pricing system in China are wastewater charging and pricing for wastewater collecting, treatment and disposal. The construction and operation of municipal wastewater treatment facilities are most important measures to control the water pollution in the urban areas and their surroundings. For this, this report carry out a survey on necessity, basis, conditions and scope of wastewater charging system, and present a suggestion on the principals and methods of wastewater charging and pricing system. The current and historical financial data on wastewater charging from several provinces and cities with the most serious water shortages and water pollution are collected and analyzed. By surveying current investment and operation costs of the urban water and wastewater systems in common situation of China, carried out a detail study on pay-services issues of municipal wastewater treatment facilities as independent (self-financing) enterprises.

4. This report state the significance and role of setting up charging system for domestic wastewater, and with several conditions under consideration, presented the outlines of charging system and tariff standards for domestic wastewater. And propose a domestic wastewater tariff and implementing procedure for covering overall costs of wastewater treatment and disposal in the average level of major cities for reference of national pricing program. Be aimed to the region with serious water pollution problem, present a calculation procedure for municipal wastewater charging and tariff level, including contents of overall investment and operation costs, determination of wastewater tariff and gave a demonstration example.

5. For the water tariff setting, the methods and procedures for water tariff setting are introduced in this report, based on current domestic and international practices, including the water tariff setting objectives, the influencing factors, cost recovery options, pricing options, alternative and appropriate water tariff structures, systems of water tariff structures. The detail principles and methods on water rates setting are collected from national and international experience and publications. The following aspects are discussed and introduced in the report, including:

— The determination of revenue requirements

— The allocation of both operating- and capital-related costs to the functional components of cost of service

— The distribution of component costs to customer classes

— The establishing of customer classes for a water utility

— The determination of unit costs

— The tariff design with consideration of service charge, block-rate, minimum-bill, base-extra capacity and commodity-Demand rate.

— The other methods of tariff design: uniform, seasonal, commodity-demand, marginal cost, flat, inverted-block and lifeline rates.

6. The price hearing and decision-making systems and their implementing methods in the national-wide are introduced in outline and the full examples of three big cities, Beijing, Qingdao and Shenzhen City, are given out in this report. In most of provinces, the hearing system was put in force in January 1st, 1999, and their effective scope includes water pricing.

7. Considering the reform of urban water pricing and wastewater charging systems, the evolvement and major changes of urban water supply and wastewater treatment pricing policies in China are evaluated and summarized. For a long period, the water pricing was strictly control by the Central Government or Provincial Governments. The principles of water pricing policies in national-wide almost kept the same until 1997, even though the water price was considerably increasing. In Jun 1997, the State Development Commission issued a notion on steadily advancing of water pricing reform of water supply. In this notion, the basic water pricing principles were lower charge for basic water usage and cost price or market price for the usage beyond the basic usage. This notion demanded that the water utilities should started to gradually change their water tariff structures into two-part system consist of capacity charge and usage charge, and the block or step pricing should be applied for usage charge. But the notion still emphasized that the increase level of water price should fully consider the bearing ability of residents. In January 1998, the State Development Commission issued another notion related to pricing policy. This notion clearly stated that the government pricing procedure should be improved to synthesize the bearing abilities of all aspects of economic development and society, asking for enhancing the leverage role of pricing, to promote the healthily development of water industry. The new water pricing system should be setup to make the municipal water rates reaching the services costs in three years, to ensure the self-maintaining operation of water supply and wastewater treatment services systems.

8. In order to meet the needs of developments of socialist market economy, the National Pricing Act was put in force in May 1998. The Act removed the final obstacles on the way of water tariff reform. The main contents and background of the Act were introduced in this report. Conform to this Act and the Municipal Water Supply Bylaw, and based on the information derived from investigation and expert’s consulting services, the State Development Commission and Ministry of Construction constituted the Pricing Management Procedure for the Municipal Water Supply. It was made known to all of the Price Administration Bureaus at provincial levels in September 1998. The Procedure provides foundation and bases for the reform and setting of water price and entirely promotes the reform of water pricing. As the results of the embodiment of oneness character of water and wastewater management, marketing mechanism and sustainable development, the Procedure clearly provisions that the wastewater charge should be reckon in municipal water price, collecting from all of customers within the service range of municipal water supply.

9. For the classes and components of urban water tariff, the urban water utilities should practice the classified water tariff and the customers can be classified as residential, industrial, administration career, services, special. The components of urban water tariff include water supply expense, fees, taxes and return. The water supply expenses consist of raw water, purchased power and materials, depreciation, maintain and repair, direct salary, water monitoring, and other expenses in the water production. The fees include customer and selling, general service and administration, and financial service expense. The costs of wastewater treatment services estimate separately.

10. For the establishment of urban water tariff, the following principles should be taken into consideration: costs recovery, reasonable return, water saving and fair distribution. The reasonable average return rates are 8%~10% based on net capital assets. In principle, for the water utilities mainly invested by the government, the return on utility’s net capital assets should not exceed 6％; for those mainly financed by the enterprises and investors (including loan, foreign capitals, bonds or stocks), the return on utility’s net capital assets should not exceed 12％in the period of return.

11. For the tariff structure of urban water supply, the two-parts or block (step) rates should be gradually applied, consisting of capacity and volume charge, the capacity charge for recovery of capital costs, the volume (measured water usage) charge for recovery of operational and maintenance costs. The calculation methods are:

Two-part water tariff = capacity water charge + volume charge

capacity water charge = basic capacity charge×capacity base per household

basic capacity price =（annual capital assets depreciation expenses + annual interest expenses of capital assets investment）/annual water production capacity

capacity base for households = average persons per household× arranged average water usage per capita per month

capacity base for nun-households: the average water usage of past one or three years, new customer following the approved usage

volume charge=basic volume charge×actual usage

basic volume charge =（costs + fees + taxes + return - (annual depreciation of capital assets + annual interest on capital assets invested)）/annual water sales

For the residential water usage, the block rates may be applied at first, based on local conditions. The block rates can be classified as three blocks, with the ratio of 1:1.5:2. The calculation methods are:

block rates＝first block rate×first block volume base＋second block rate×second volume base＋third block rate×third volume base

first block volume base for household = persons per household × average planed usage per capita per month

12. For summarizing the current practices and experiences, the detail data and information on resetting and reform of water tariff and wastewater charges are collected, analyzed and compiled from about 150 cities or regions in 24 provinces and municipality directly under the Central Government in recent two years. In order to strength the role of price policy in the promoting of water conservation, China started to reform the water pricing systems for water conservancy service, urban water supply, wastewater treatment and agriculture water supply in 1998. The information collected, as a reference database, is very helpful for the further reform of water pricing system in China. The table below shows an example of the current water pricing in 12 counties in Heilongjiang Province, in order to meet the costs increasing of water services. The prices resetting were proved by the county governments with the pricing hearing meetings.
13. City or County Year Water price ( yuan/m³) Residential

Enterprises organizations
and Commercial

Commercial
(special) Old New Old New Old New Baoqing 1999 1.50 1.80 2.80 3.40 3.80 4.50 Jixian 1999 1.50 1.80 2.50 3.00

3.00 Jidong 1998 1.00 1.40 2.00 3.00

4.50 Mulan 1998 1.90 2.40 3.00 3.50

Tonghe 1998 2.00 2.50 3.00 3.50

Hailin 1998 1.30 1.50 2.30 2.50 3.30 3.50 Yanshou 1998 2.10 2.50 2.50 3.00 2.50 3.50 Dongning 1998 1.00 1.04 2.25 3.00 2.50 3.25 Shuifenghe 1998 1.20 1.40 2.30 2.50 2.50 3.00 Du’erbote 1998 1.70 1.80 2.20 2.60

3.00 Nahe 1998 1.20 1.50 1.80 2.30 1.80 2.60 Fangzheng 1998 2.30 2.50 3.00 3.50 5.00 5.50

The current water prices in the major cities in national-wide are collected from October, 1998 to March, 1999 for analysis, and the water prices for domestic usage in March, 1999 are showed as follows: City Price City Price City Price Beijing 1.00 Yangzhou 0.95 Xianhuang 0.55 Tianjin 0.98 Hanzhou 1.10 Tianmen 0.90 Shijiazhuang 0.65 Ningbo 0.85 Qianjiang 0.90 Tanshan 0.90 Wenzhou 1.75 Changsha 0.78 Xintai 0.77 Jiaxing 0.80 Guangzhou 0.70 Chengde 1.00 Shaoxing 1.00 Shenzhen 1.00 Hengshui 0.72 Jinghua 1.10 Nanning 0.80 Taiyuan 1.20 Quzhou 0.85 Haikou 0.90 Datong 0.90 Zhoushan 2.00 Shanya 0.95 Changzhi 1.10 Lishui 0.80 Chengdu 0.85 Jincheng 1.10 Taizhou 1.85 Guiyang 1.20 Yuncheng 1.40 Hefei 0.74 Liuoengshan 1.00 Baotou 0.60 Wuhu 0.68 Zunyi 0.95 Wuhai 0.65 Tongling 0.75 Tongren 0.85 Fulenbeier 0.95 Anqing 0.70 Qianxinanzhou 1.12 Xing’an 1.00 Chuzhou 0.77 Bijie 0.50 Xilinguole 1.20 Fuzhou 0.84 Anshun 1.10 Shenyang 1.10 Xiamen 2.00 Qiandongnanzhou 0.85 Dalian 1.80 Shanming 0.80 Qiannanzhou 0.86 Anshan 1.30 Zhangzhou 1.02 Kunming 0.95 Jinzhou 1.10 Nanping 0.80 Qujin 0.80 Panjing 1.20 Nanchan 0.60 Pu’er 0.80 Tieling 1.10 Jiujiang 0.60 Dali 0.65 Changchun 1.20 Gangzhou 0.58 Linchang 0.85 Jilin 1.10 Yichun 0.60 Lasa 0.70 Tonghua 1.10 Wuzhou 0.63 Xi’an 1.36 Yanbian 1.60 Jinan 1.14 Baoji 1.10 Ha’erbin 1.00 Qingdao 1.20 Xiangyang 0.81 Qiqiha’er 0.80 Zhaozhuang 1.00 Weinan 1.06 Jiamusi 0.80 Tian’an 0.89 Hanzhong 0.88 Mudangjiang 0.95 Zhengzhou 1.30 Yan’an 1.70 Shanghai 0.88 Zhoukou 0.80 Lanzhou 0.65 Nanjing 1.00 Nanyang 0.73 Xining 0.50 Xuzhou 0.95 Wuhan 0.63 yunchuan 0.80 Shuzhou 0.95 Huangshi 0.70 Wulumuqi 0.45 Nantong 0.93 Chongqing 0.95 Huzhou 1.10 Yichan 0.61

Unit: yuan/m3