Analyze article and answer the following questions:

1. Possible solutions to such situations (applying the lesson of the day).
2. Select one possible solution to the case. Explanation for how you select this solution (the best alternative is not always feasible to resolve the central or primary situation presented in the case or article).

Full cost accounting for water supply and sewage treatment: concepts and case application.

Renzetti, Steven, and Joseph Kushner. "Full cost accounting for water supply and sewage treatment: concepts and case application."Canadian Water Resources Journal29.1 (2004): 13+.Global Reference on the Environment, Energy, and Natural Resources. Web. 8 Apr. 2018.

Abstract: It has been suggested recently that water and sewage utilities move to 'full cost' accounting as a means of addressing some of the challenges facing them. However, there are disagreements regarding how to implement this concept, and few estimates exist that show the impact of such a change. In this paper, we consider what is meant by full cost accounting for water utilities, and examine the operations of the Regional Municipality of Niagara, a typical municipality in Ontario, to determine the extent to which current accounting procedures understate the full social cost of providing these services.

In the case of the Niagara Region utility, we estimate that the annual unaccounted costs were between $10 and $35 million in 1998. This estimated range compares to a combined annual operating budget for the water and wastewater facilities of $64 million. Thus, our results indicate that the cost of water supply and sewage treatment is substantially understated by a factor of 16%-55%. Because of the commonality of accounting practices, weexpect other Ontario utilities to be similarly underpriced.

Introduction: Much of the recent attention on Canadian water and sewage utilities has focused on problems related to water quality. However, another major concern raised by academic researchers, government agencies and even the Walkerton Inquiry Commission is the pricing practices of the utilities (Pearse et al., 1985; National Roundtable on the Environment and Economy, 1996; Renzetti, 1999; O'Connor, 2002). All of these concerns share a belief that water and sewage utilities' accounting of their costs is somehow incomplete or inadequate such that the utilities fail to account for the 'full costs' of their operations.

The most concrete manifestation of these concerns has come in the form of legislation requiring Ontario water and sewage utilities to adoptfull cost accounting (Government of Ontario, 2002). There is also interest internationally (Easter et al., 1993; Chave, 2002; OFWAT, 2003). Under Ontario's new legislation, every provider of water and wastewater services must provide two plans for the government's approval. The first inventories the utility's infrastructure and documents its full costs of service including source protection, operating, financing, renewal and replacement and improvement. The second is a cost recovery plan that sets out how the utility will earn the revenues needed to cover full costs. Once approved by the Ontario government, the utility must then implement these plans. Despite these requirements, a number of challenges remain in adopting full cost accounting, including the lack of accepted definitions and methods and few empirical studies of the implications for water and sewerage providers and their customers.

In this paper, we address these issues by undertaking two related tasks. First, we consider a number of conceptual matters related to full cost accounting for water utilities and second, we present a case study of full cost accounting. Specifically, we examine the operations and cost accounting of the Regional Municipality of Niagara (herein "the Region"), a typical municipality in Ontario.

Background: The provision of municipal services in Ontario is set out in provincial legislation. The service delivery model in Niagara is split between the Regional Municipality of Niagara and its twelve member municipalities. Specifically, the Region is responsible for water and sewage treatment plants, trunk water distribution facilities and major sewage collection systems including pumping stations and the municipalities are responsible for water distribution and local sewage collection. The Region operates eight potable water systems that include seven water treatment plants and one well system together with the associated remote treatment and flow metering facilities, water mains, storage reservoirs and tanks, and pumping stations. The total rated normal capacity for all potable water systems is 614.9 ML/day. A total of 80,717,236 [m.sup.3] of potable water were supplied in 1998.

The sewage treatment plants in the Region treated a total of 84,083,335 [m.sup.3] and typically provided primary and secondary levels of treatment. Since the collection system receives both storm run-off as well as sewage from households and businesses, it is not uncommon for flows to exceed capacity during heavy rains or spring melts. In these cases, sewage is released with minimal treatment. All sewage treatment plants operate under Ontario Ministry of the Environment (MOE) Certificates of Approval that regulate behaviour. For example, one plant in the system has the following limits on its effluents: Suspended Solids (25.0 mg/L), BOD (25 mg/L), Phosphorous (1.0 mg/L).

These services are then sold to the various municipalities who in turn are responsible for water distribution and local sewage collection within their respective municipalities. This split jurisdiction may be described as the Region being the wholesaler and the municipality the retailer. The Region recovers its capital and operating costs through a uniform rate levied against member municipalities. The rates are calculated to generate sufficient annual revenues to cover operating costs, debt retirement, and capital reserve contributions to meet both current and future capital cost requirements. Overall, the Region's expenditure per residential unit of $243.36 for water and $403.34 for sewers is comparable to other regions in the province (Regional Ad-Hoc Committee on the Review of Municipal Services, 1998).

Previous Research: There isa large body of economic research devoted to measuring whether a household, government agency or firm's accounting of the costs of its activities accurately reflect the costs borne by all of society. Instances where the social costs of an activity have been found to exceed privately measured costs range from road transportation (Lee, 1997) to the generation of electricity (Krupnick and Burtraw, 1996). In fact, most texts on project evaluation and cost-benefit analysis provide guidance to the definition andestimation of both private and social costs (Hanley and Spash, 1993).

Unfortunately, the literature on the application of full cost accounting to water and sewage utilities is very limited. As one researcher recently observed, "there is a gap in the literature and practice on the full cost per unit of sanitation services such as drinking water, wastewater and sewage treatment and municipal solid waste management" (Louis and Siriwardana,2002). Part of this literature addresses guidelines for full costing ofthe water supply. Louis and Siriwardana (2002) and Fortin et al. (2001) applied conventional accounting principles to full costing of water supply and sewage treatment. The latter paper is particularly important given that the Walkerton Inquiry recommended a limited form of full cost accounting for water and sewage works (O'Connor, 2002). The report of the Walkerton Inquiry acknowledges the presence of external costs but argues that, for safety purposes, there is no need for internalizing these costs into water and sewage works accounting. However, the report (O'Connor, 2002, ch. 10) argues that for conservation and efficiency purposes, the government should consider this more general form of full cost accounting. These papers, however, do not provide unambiguous guidance for adopting full cost accounting. For example, neither paper deals with the costing of environmental damages arising from water and sewage utility operations.

In addition, relatively few studies provide empirical estimates of differences between private and social costs for water and wastewater utilities. One set of studies considers whether utilities account for declining groundwater supplies and other environmental impacts in their costing. For example, Martin et al. (1984) find the failure to include the increasing costs related to declining groundwater levels resulted in Tucson's water prices to be underpriced by 58%. Similarly, Munasinghe (1992) estimates that the long run marginal cost of water supply for Manila would be $US 0.13/[m.sup.3] if the depth of aquifer supplying Manila were to remain at a constant depth. However, under current pumping rates, the aquifer is falling and this externality raises the marginal cost of supply to $US 0.142/[m.sup.3].

A number of authors (Frederick etal., 1997; Renzetti, 1999) have noted that, by emitting waste products into receiving waters, sewage treatment facilities effectively transfer a cost from themselves to society. What is interesting is that, in so doing, the cost savings to the sewage treatment facilities is minimal. Frederick et al. (1997) in their survey of the U.S. literature report a median value for sewage utility avoided costs savings of only $1 (1994 U.S.$)/acre-foot. Conversely, the damages imposed by these emissions can be quite significant. For example, Leggatt and Bockstael (2000) estimate the influence of sewage treatment plants on water quality (as measured by fecal coliform count) by considering waterfront property values in the Chesapeake Bay area. The authors find that changes in sewage outfalls have a significant impact on local property values. Specifically, "A change of 100 fecal coliform counts per 100 mL is estimated to produce about a 1.5% change in property prices" (Leggatt and Bockstael, 2000).

Full Costs of Water Supply and Sewage: Concepts and Definitions

Defining the cost of a productive activity is, in principle, fairly straightforward. The opportunity cost of employing an input is the highest net benefit generated had it been employed elsewhere. For example, if a utility borrows $1 million to invest in its infrastructure, the opportunity cost is the rate of return it could have earned over the life of the investment. The full cost of a productive activity is the sum of the opportunity costs of all inputs. While mostof these inputs are purchased or leased by the firm (as in the case of capital or electricity), other inputs may be used without being purchased or leased (as in the case of raw water supplies and water bodies used as a sink for the disposal of sewage outflows).

The concept of full cost accounting can be extended further if there are additional costs to society associated with the consumption and/or disposal of a product that are not considered by the private decision-maker. This type of approach is usually referred as life cycle or 'cradle to grave' accounting (Arditi and Messiha, 1999).

For a variety of reasons, a government agency or firm's private accounting of costs may differ from the full economic cost of those activities. First, the price paid for an input may not reflect its opportunity cost to society. For example, the generation of electricity causes a variety of environmental damages which are not included in the accounting of power utilities and thus not reflected in electricity prices. An extreme case of this situation occurs when a firm has access to an input for free. For example, firms in Ontario may emit certain substances into the air (rather than trap and dispose of them) for free. Similarly, sewage treatment plants may dispose of certain substances into lakes and rivers without cost to themselves. In each of these cases, the market price of the input does not accurately reflect the cost of its use to society. Thus private accounting of costs will understate the full costs of production.

Second, there may be accounting guidelines set out in government regulations which dictate the way in which costs are recorded. For example, utilities may be prevented from assigning a competitive rate of return as part of the opportunity cost of its capital goods.

Third, a water utility may receive subsidies from other agencies. These could include direct subsidies such as capital grants from senior levels of government or indirect subsidies as might occur if a municipal water utility were to receive services from the city's legal department without charge.

Although defining the full cost of a productive activity is relatively straightforward, applying the concept may not be so simple. The first reason is that analysts and utility regulators differ in how completely they wish to see an agency move to full cost accounting (Citizen's Network on Essential Services, 2003). For example, some would argue that it is sufficient to see that operating and maintenance (O&M) costs are fully accounted for whereas others would also include capital costs. This appears to be the position taken by the Walkerton Inquiry and Ontario's new legislation as described above. It is also the position taken regarding cost accounting by the regulator of the English and Welsh water and sewerage utilities, OFWAT (Cowan, 1994; OFWAT, 2003). Still others would argue that all external costs such as environmental damages and the opportunity cost of raw water supplies must be included (this is the position reflected in the European Union's Water Framework Directive-cf. the discussion in Chave, 2002). A second factor that inhibits implementation is a lack of standardized guidelines for full cost accounting (Government Finance Officers Association, 2001; Louis and Siriwardana, 2002). Finally, because of the novelty of this approach to water and sewage utility accounting, there may be difficulties in obtaining the data needed to estimate some cost components.

Full Costs of Water Supply and Sewage: Case Study

In order to supply water, Ontario water utilities withdraw raw water from the environment, treat and pressurize it and then deliver it using a network of mains, pumps and reservoirs. Similarly, sewage treatment facilities collect wastewater using a network of mains, pumps and storage facilities andthen treat it before releasing the water into a receiving water body. Thus, both agencies combine purchased inputs (capital, labour, energy, materials and land) with unpurchased inputs (raw water and the absorptive capacity of the environment) to provide their services. If all inputs were priced according to their respective opportunity costs and if both agencies set output price at the marginal cost of production, then consumers would pay the full cost and would be fully informed of the costs of their consumption decisions which, in turn, would lead to an efficient allocation of resources.

This outcome, however, is not observed in Ontario. Under Ontario law, anyone holding a permit to withdraw water may do so free of charge. At the same time, firms and sewage treatment plants may discharge effluents into surface water and groundwater free of charge so long as their effluents do not exceed Ministry of Environment standards. It is important to note that the fact that these environmental goods are available tousers at no cost does not mean that there is no cost to society associated with their use. Water withdrawn by a regional water utility is unavailable to others such as local agricultural operations or self-supplied industrial water users. Effluents disposed into receiving waters have the potential to damage local ecosystems as well as reduce the welfare of local residents.

Other inputs purchased by water and sewage utilities may also be costed incorrectly from a social point of view. For example, utilitiespurchase electricity and natural gas to power their pumps. A substantial body of evidence demonstrates that the prices of electricity and natural gas do not reflect their social marginal costs. The reasons for this mirror the reasons for incorrect cost accounting by water and sewage utilities.

Investment in land and in physical plant can also be costed incorrectly. Utilities have extensive land holdings to house their treatment plants, storage tanks and other facilities. Most of these lands were paid for in the past but there is a continuing opportunity cost to holding these lands, as measured by their market value. Likewise, the physical plant has an opportunity cost. In the case of Niagara Region, the water and sewage utility recovers the costs of borrowing through water prices. However, the utility's calculation of the costs of its investment expenditures is inaccurate as a competitive rate of return is not included in the cost of capital.

We next consider two components of costs related to the supply of water and the treatment of sewage by the Region. The first component consists of those expenditures recorded by the Region and the second consists of those costs that are relevant to society but are not recorded by the Region. This second set of costs may be subdivided into those which the new Ontario legislation would appear to require as part of a full cost accounting and those which it does not.

In calculating and recording its costs of service, the Region follows accounting rules that are standard for water utilities in both Ontario and Canada (Fortin et al., 2001). In 1998, the recorded expenditure for water operations, including administration and supervision, was $22,186,300. This amount includes expenditures on labour, energy, materials, debt chargesand contributions to capital reserve funds. The uniform water rate for potable water charged by the Region to local municipalities was $1.25/1,000 gallons ($0.275/[m.sup.3]). Annual operating expenditures for 1998 for the Region's sewage treatment facilities were $41,043,900 and include the same type of expenditures as water operations.

We now consider those costs that are relevant to society but are not recorded by the Region: capital, energy, raw water and changes in water quality.

A Competitive Rate of Return on Invested Capital

In determining its cost of production, the Region does not include a competitive rate of return on its invested capital. Unlike investment in long-term government bonds which is risk free, investment in utilities is not and therefore if the utilities were privately owned, investors would have to receive risk compensation; specifically a competitive rate of return after taxes that would be earned on a comparable investment. It should be noted that in England and Wales, water utilities were required to earn a 5% rate of return even when they were publicly owned. After water and sewage utilities were privatized in England and Wales, the Office of Water assumed that utilities would have to earn a competitive rate of return when calculating allowed price increases (Cowan, 1994).

Utilities are capital intensive and require substantial amounts of capital. With respect to investment in land, the Region's land holdings used for water supply and sewage treatment are assessed at $7,704,350. Inthe case of physical capital, the Region does not have a costing of the buildings and their contents. The properties, however, are insured for replacement. In 1998 the appraised value for the buildings and contents was approximately $100,000,000. Thus theregion has approximately $108,000,000 invested in capital to provide for water and sewage treatment.

For guidance on the opportunity cost of invested capital, we turn to the Province of Ontario's Bill 35, the Energy Competition Act, which recently deregulated the Province's electricity industry. Under Bill 35, utilities are allowed to charge prices that include so-called 'competitive rates of return' which at maximum would earn a 9.88% return after taxes or 17.49% before taxes on deemed equity, which is effectively 50% of net book value. Given the similarity in the technology and output between local electrical and water utilities, it is reasonable to use this rate of return to calculate the unaccounted costs of capital use by the Region's water and sewage utilities. Using this rate, we estimate that capital costs are underestimated by approximately $9,500,000 annually.

An alternative method to determine the opportunity cost of the invested capital is to examine the market price of other utilities such as local municipal hydro utilities. Private sector corporations including Servco (formerly Ontario Hydro) made purchase offers to local electrical utilities of approximately 1.5 times their net book value. If water and sewer utilities were sold at similar prices and the monies invested at the interest rate on long-term government bonds for 1998 (5.6%), the annual foregone interest income is approximately $9,072,000. This second estimate is similar to the $9,500,000 return calculated using the Ontario Energy Board's regulated 'competitive rate'. Thus, depending on the method used to calculate the opportunity cost of invested capital, our estimates for the unaccounted portion of capital costs range from $9,072,000 to $9,500,000.

Energy

A key input in water and sewage treatment is electricity. A number of studies have concluded that electricity is priced below its social cost dueto the negative externalities caused by the generation of electricity. These externalities include increased mortality and morbidity associated with increases in air pollution from generating stations. A study conducted by Ontario Hydro estimated the external costs associated with its power generation to average $0.004/kWh for its fossil-fueled plants and $0.00005/kWh for its nuclear plants (Boone et al., 1996). Krupnick and Burtraw (1996) estimate that the average external marginal cost of electricity generated in the U.S. ranges from 1.5-5.6 mills/kWh. Krupnick and Burtraw's estimate is equivalent to approximately 0.2-0.9% of the Region's average cost of electricity (D'Amboise, 2002). Thus, the estimated external cost of electricity consumption by the Region's water and wastewater facilities is relatively small (approximately $50,000) when compared to the other unaccounted costs.

Raw Water

In general, the value of the raw water to the utility is best measured by the avoided cost of using the next most expensive source of raw water. However, we cannot determine what this value is until the utility is compelled to find an alternative source. Because self-supplied firms and utilities have free access to raw water supplies, there is remarkably little known regarding the value of water in Ontario (Renzetti and Dupont, 1999).

Several methods can be used to estimate the value of the Region's raw water. First, we could use the volumetric charge of $0.005/[m.sup.3] used by Renzetti and Dupont (1999) in their analysisof provincial water permits. While the authors do not suggest that the volumetric charge is meant to represent the shadow value of water, they note that the charge is comparable to what other provincial governments levy as a charge on direct water abstractions. Second, we could use estimates from studies such as Teeples and Glyer (1987) which measure the cost of water supply for a sample of utilities that rely on both self-supplied and purchased raw water. Adjusting for inflation and conversion to Canadiandollars, Teeples and Glyer's estimate of the cost of self-supplied raw water is $0.179/[m.sup.3]. Finally, we could estimate the value of raw water as its price if water exports to the United States were allowed. Becker and Easter (1999) examine the issueof water diversions from the Great Lakes to the United States and estimate the value of exported water to be approximately $0.102/[m.sup.3].

Given the abundance of water in Niagara Region, the argument could be made that there is no opportunity cost for raw water. This may have been true in the past but with the possibility of declining water levels induced by climate change, increases in population and the willingness of the U.S. to purchase Canadian water, it can no longer be argued that water withdrawn by the Region does not have an opportunity cost. Therefore, for our analysis, we use the range given by these studies of $0.005-$0.179/[m.sup.3] which results in a valuation of $403,586-$14,448,385 for the raw water. The width of this range reflects the relative paucity of information regarding the value of water use in Ontario.

Changes in Water Quality

The region's sewage treatment plants use the Great Lakes as a receiving ground for their effluents, which normally include suspended solids, BOD and phosphorous. The plants operate under Ministry of the Environment certificates that limit the quantities of effluents that may be discharged. In the event of a significant rainfall, the combination of stormwater and wastewater exceeds the plants' storage capacities in which case the utilities are permitted to divert water that has received only primary treatment into the receiving water body.

During warm summer months, one of the results of discharges is the closure of local beaches due to high fecal coliform counts. These closures lead to foregone recreational and commercial opportunities as well as possible negative health impacts. A total accounting should consider these negative externalities. Because of data limitations, however, we present two estimates ofonly the costs of foregone recreational opportunities.

The first approach considers only foregone recreational opportunities, based on Dupont's (2003) estimate of households' willingness to pay for a day's swimming at Hamilton Harbour. This estimate can be combined with knowledge regarding foregone recreational opportunities at Niagara beaches to estimate the social cost of outfalls from the Region's sewage treatment plants.

In 1998, the municipal beaches in St. Catharines were closed for 65 days or 71% ofthe summer season due to high bacteria levels. Unfortunately, because attendance is not recorded at municipal beaches, the exact reduction in beach attendance caused by beach closures is not known. To determine the reduction, we use Dupont's estimate of 0.25 actual visits per household per year for posted days (when beaches are closed) compared to a predicted 5.24 visits per household per year if water quality in Hamilton Harbour was 'swimmable'. Hamilton's socio-economic composition is similar to that of the Niagara Region's and, thus, we believe it reasonable to use this estimate of the change in beach attendance attributable to reduced water quality.

Given that there are 52,000 households in St. Catharines, Dupont's estimate of the difference in beach attendance translates into a total reduction in attendance for the 65 days of beach closures of 197,200 household-visits. This loss in attendance is multiplied by Dupont's estimate of $4.90 per day of an average household's willingness to pay for a day's swimming, to arrive at an annual cost of $898,308 to society for foregone recreational opportunities. This estimate understates the social cost of water pollution arising from the Region's sewage treatment plants. First, there are other municipal beaches in the Region that have similarly experienced beach closures but we have no information on the frequency of such closures. Second, there are other costs associated with water pollution such as reduction in property values, reduced health (and elevated health costs) and days lost at work. Although these effects have been noted in other jurisdictions (Renzetti, 2002), they are not included here because of data unavailability.

An alternative method to determine the losses in recreational benefits is to ask how much additional expenditure by the Region would be required to guarantee water quality at the 'swimmable' level. A study conducted for the Ontario Ministry of the Environment (Apogee Research, Peat Marwick and James F. Hickling Management, 1990) calculated the annualized value of the capital and operating costs of upgrading Niagara's sewage treatment plants in the Niagara Region to achieve this goal would be $9,760,609 in 1990 dollars ($10,896,827 in 1998 dollars). Thus, by continuing to use Lake Ontario as a sink for its wastes, the Region avoids an annual expenditure of $10,896,827.

Depending on the method used, our estimate for the unaccounted cost due to the Region's water pollution ranges from $898,308-$10,896,827.

Implications for Costs and Prices

The preceding discussion indicates that water and sewage utilities do not consider the full social costs of their operations. Table 1 reports both the recorded operating costs and our estimates of the Region's external or unaccounted costs. As noted in Table 1, if full cost accounting were to be used, the recorded cost of these services would increase by at least 16% and possibly as high as 55%. While there is some ambiguity in the definition of full costs found in Ontario's recent legislation, it appears that adherence to the new legislation would require the Region to include only the unaccounted capital costs. This would lead to an increase in cost of approximately 14.5%. Conversely, if the European Union's Water Framework Directive of including environmental and resource costs were used, the cost increase would be between 16% and 55%. The application of full cost accounting will translate ultimately into higher prices, although further analysis of the price implications is clouded by several factors. The first is that some of the unaccounted costs may relate to variable inputs (e.g. electricity) while others may relate to fixed costs (e.g. capital). In the short-run, it would be expected that only changes to variable costs could potentially have an impact on prices. In the long-run, of course, all inputs are considered variable and, as a result, changes to the accounting of all input costs would have a direct bearing on prices. The second factor concerns price setting methods. There is a remarkable diversity of price structures and methods used for setting prices across Canadian water and sewage utilities (Burke et al., 2001). At one extreme some utilities do not meter water use and recoup their costs through annual fees alone, in which case increases in recorded costs will translate into increases in the annual fee. At the other extreme, are some utilities that meter all water use, and apply complex, nonlinear multi-part pricing. In this case, predicting the impact of moving to full cost accounting is very difficult without knowing which cost categories are affected and how prices are set.

It should be recalled that wholesale rates charged by the Region to municipalities constitute approximately 62% of the delivered price to consumers. As a result, if these cost increases were to translate directly into increases in the price charged by the Region to local municipalities and if the municipalities, in turn, raised prices proportionately to consumers, the approximate increase in residential and commercial water prices in the Niagara Region would range from 10-34%. Of course, if the municipal water utilities in the Niagara region also moved to full cost accounting then they, too, would see an increase in their recorded costs. As a result, retail water price rises would increase beyond the 10-34% range due to increases in wholesale water prices.

Conclusions

We have examined the extent to which the accounting procedures used by Ontario water and sewage utilities understate the social cost of providing these services. If oneincludes a competitive rate of return on assets, pollution externalities and the value of raw water supplies, our analysis indicates that these external costs are nontrivial. Specifically, in the case of the Niagara Region, the estimated range of unaccounted costs for 1998 is $10 million-$35 million. This range compares with an annual operating budget for the Niagara water and wastewater facilities of $64 million.

The policy implications of this research are clear. Previous research (Renzetti, 1999) has shown that, even using their own bad accounting methods, Ontario water and sewage treatment utilities' prices significantly understate the marginal cost of their services. As a result, when external and unaccounted costs such as those considered in this paper are included, the gap between price and social cost necessarily grows even larger. This wide gap implies that consumers of potable water and users of sewage treatment services have their consumption subsidized and, thus, are strongly encouraged to over consume.

The considerations described in the previous section inhibit predicting the implications of moving to full cost accounting for any specific utility. Nonetheless, if the Region were to continue setting prices according to its average cost of service, moving to full cost accounting would imply that the wholesale cost of water to municipal water utilities in the Niagara region would increase by at least 16% and possibly as high as 54%. The final impact on consumers depends upon each municipal utility's accounting and pricing rules. Unfortunately, this wide range of predicted wholesale price increase reflects the current state of knowledge regarding the value of water, the economic costs of water pollution and the opportunity cost of capital employed by water utilities. Although more research is required in these areas, we can conclude that full cost pricing will result in significant price increases, and consumers will be encouraged to conserve water.