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Residential water price elasticity and full water cost estimation according to the European Water Framework Directive

Congress: 2008
Author(s): Nikitas Mylopoulos, C. Fafoutis, D. Vagiona
Assistant Professor Dept. of Civil Engineering Faculty of Engineering University of Thessaly

Keyword(s): demand management, price elasticity, water full cost, residential water use, integrated water policy, water conservation
AbstractResidential water price elasticity and full water cost estimation according to the European Water Framework Directive N. Mylopoulos, Fafoutis C. and Vagiona D. Dept. of Civil Engineering Faculty of Engineering University of Thessaly, Pedion Areos 38334 Volos Tel: +3024210 74162 email: Preferred mode of presentation: Oral Congress Sub-theme most closely related to the paper: 6. Water conservation and demand management -Economic instruments and water pricing Abstract The relationship between water abstraction and water availability has turned into a major stress factor in the urban exploitation of water resources. There is a wide recognition nowadays that there is a need for strategies for the sustainable use of water resources and water demand management. In the city of Volos-Greece the number of water counters has been almost tripled during the last 3 decades. The fact that water sources have remained stable has created a derangement of water balance. In order to evaluate various aspects of current water policy, investigate the perspectives of water saving, explore new approaches toward sustainable water management in the water supply sector and evaluate water price elasticity, a survey has been performed recently in the city of Volos, concerning the residential sector. All qualitative data was gathered through questionnaire with the method of personal interview. Time series data of 3-month water consumption levels from 1997 to 2005 were collected from databases of Water Utility of the city of Volos, while raw data concerning rainfall and temperature were retrieved from stations in the city of Volos. Water quality, water demand and water availability issues, water related problems, as well as public information concerning water and environmental issues, public reactions in price changes and public willingness to pay in the residential sector are the main aspects examined and analyzed. The influence of some selected variables such as the price of water, the size of the dwelling, the indoor and outdoor uses, the educational level, the income of consumers as well as rainfall and temperature levels was examined and residential water demand curve was calculated using the fixed-effects and random effects model. Elasticity with respect to marginal and difference price was estimated to be -0.95 meaning that price elasticity was inelastic. Nevertheless the price of water affects consumers' water usage behaviour as they perceive big changes in this price and tend to reduce their water usage as it increases. Estimations of future water demand under different pricing policies were then performed using the IWR-MAIN model. Those policies were being evaluated, and the revenues of the Water Utility of Volos were calculated for each pricing-policy scenario. The price of water is a critical parameter as far as domestic consumption is concerned and therefore contributes to demand side management. The European Water Framework Directive refers to the principle of the recovery of the costs of water services and clarifies the cost components that should be included in full cost. According to the above principle of the WFD, full water cost in the city of Volos was estimated, and the included cost components were: the direct (financial) cost, that represents the costs of investments, operation, maintenance, labour, administrative costs and other direct economic costs. the resource cost, that represents the loss of profit due to restriction of available water resources, and the environmental cost, that represents the cost from the damage of the environment and the aquatic ecosystems incurred by water uses and services The conclusions of this study prove that water pricing and public participation are necessary precursors of achieving the ecological goals of Water Framework Directive. It is evident that through demand oriented water policy, water would be used more rationally and valued more highly.
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