Where does the price of water come from?

The preamble to Directive 2000/60/EC of the European Parliament and of the Council, establishing a framework for Community action in the field of water policy (hereafter referred to as the Water Framework Directive or WFD) states “Water is not a commercial product like any other, but rather a heritage that must be protected, defended and treated as such.” Strong words, and a proper understanding of them could save us from water shortages, pollution disasters or islands of plastic floating in the oceans. It could, but it didn’t protect.

Some will say that the directive has been in force since 2000, so it was only then that we learned to understand water protection properly. In Poland, it has actually been in force since 2004, since joining the Union. To this day I hear that in our country the Water Framework Directive is still being implemented. Although it is now of age (18 years have passed), we are still treating it as something new, learning it. The WFD has already gained a voice, and in the next planning cycle it will bill us for our ignorance.

The principle of reimbursement for water services

The directive stipulates how to prevent water pollution, how to use water wisely and rationally, what the environmental goals are and how they should be achieved. The document also invokes the principle of reimbursement for water services. In the justification for the Water Law of July 20, 2017. reads that the implementation of the principle of reimbursement in the draft new law is intended to ensure “complementarity in water charge policy” while “responding to the ex-ante conditions in Annex IV of the EC draft General Regulation on Cohesion Policy.”

Changes to the system for charging environmental fees for water abstraction are crucial for financing water management tasks. The fee system adopted, along with the 2017 law, is one of the ways of financing water management, which seeks to fully recover the costs of water services.

That is, water, like any commercial product, comes at a price

It comes at a price as a product usually packaged in a bottle, increasingly – to my delight – glass, not plastic. I hope that the bail system, as announced by the government, will be introduced in Poland from January 1, 2025. and we will finally catch up with the rest of Europe in this regard. So far, an attempt to return the bottle to the nearest store is causing panic among the shopkeepers.

So whether in a glass bottle or not, the price for water is written on the receipt. This price consists of many elements that are usually covered by company secrecy. But one pricing component is easy to know – the water service fee paid to the Water Authority. This is a brick of the water financing system, that is, part of the implementation of the principle of cost recovery.

So let’s calculate the fee per^{cubic meter} of underground water that a water bottling plant pays. According to the Water Law, the water service fee, for groundwater extraction, consists of a fixed part and a variable part (depending on the extraction). The method of calculating this fee is quite complicated and depends on the number of days the plant draws water and the amount of water expressed in^m3/s that can be drawn under the water permit.

If the plant draws 10 liters of water per second for 365 days a year, its fixed fee will be PLN 1,825/year. The variable part depends on the need for water treatment and its purpose, and in this case will be PLN 15,085/quarter, or PLN 60,340 per year. Our hypothetical plant drew 311,040^{m3 of} water per year. As you can easily calculate, the incurred cost of the water fee in the price of^m3 of water is only 20 gr(source: based on Decree of the Council of Ministers of December 22, 2017. On unit rates of fees for water services (Journal of Laws 2022. 2438) and their own calculations). That is, the water charge for the price of a liter bottle (of which we counted slightly more than 311 million units) is unnoticeable

In the Water Law, in Art. 9 stipulates that water management is based on the principle of cost recovery for water services, taking into account environmental and resource costs and economic analysis. But is the hypothetical amount of 20 gr sufficient to cover the environmental costs of producing 1^{m3 of} water that does not require treatment by the ecosystem? I dare say probably not, and if the water comes from the catchment area of the Oder River, then certainly not. But I leave this topic for discussion in another issue ofWater Matters.

Let me just mention that every six years, for the purposes of the Water Management Plans, the Polish Water Authority prepares economic analyses related to water use. They should include information on the degree of cost recovery for water services, taking into account user contributions and environmental and resource costs, as well as a projected estimate of volumes, prices and costs associated with water services.

Price for water 1^m3

Now let’s look at the rate for supplying 1^{m3 of} water to a household. According to the statutory definition, the price for supplied water is the amount expressed in monetary units that a service recipient is obliged to pay to a water and sewerage company for 1^{m3 of} supplied water. The price for water should be set by the company, agreed with Polish Water and made public.

Water utilities do not have the ability to set prices arbitrarily. The Regulation of the Minister of Maritime Affairs and Inland Navigation on the determination of tariffs, the form of the application for tariff approval and the terms of settlements for collective water supply and collective sewage disposal provides a concrete basis for calculating the price. The unit price for water, therefore, does not come from nowhere. So why so much discussion about Waters’ representation of residents’ interests and effective blocking of unjustified increases? Why are there so many newspaper articles about arbitrary pricing by water companies?

Let’s see, therefore, how the price for water should be shaped and what factors are taken into account by water companies when determining this amount.

Water price – What it consists of

First of all, the water utility, for the purpose of calculating the price for water, is to determine the necessary revenues. They are understood here as covering the costs of the business, which consist of:

• the cost of salaries and employee benefits and the average annual growth rate of the average monthly salary;
• The cost of materials, transportation services and the average annual price index of sold production;
• planned water purchase costs;
• Operation and maintenance costs, which include:
  • environmental fees;
  • water service fees;
  • taxes and fees independent of the company;
  • Interest payments on borrowings or bonds issued;
  • Provisions for non-performing receivables;
  • depreciation or amortization allowances determined in accordance with accounting regulations;
  • Capital installment payments over and above the value of depreciation or amortization.

The company’s profit margin is also a pricing element, with the regulation indicating that it is intended to ensure that the interests of service customers are protected from unreasonable price increases.

Fee for 1^{m3 of} water

The water service charge, as with bottled water, is a quantifiable value. So let’s assume that the hypothetical plant delivers the same water it bottles to our homes. However, the fee for the same unit of water will be lower, because the variable fee rate applied for the supply of water to residents (the so-called “target 40”, i.e. for the implementation of the municipality’s own tasks in the collective supply of water to the population for consumption) is lower. The variable fee in this case is PLN 42,300. The fixed fee will be at the same level.

As usual, the devil is in the details

If the amount of the water service fee in the price of ^1m3wateris 20 gr or less, what’s all the fuss about? Why do some groups of entrepreneurs think the fee is too high and are calling for it to be waived or at least reduced? It’s all a matter of scale, the amount of water taken, and ultimately the price per liter.

*Source: based on data published by Wody Polskie: the cheapest water is available to residents of Podlaskie Voivodeship, with an average of PLN 7.^18/m3, while the most expensive is available to residents of Malopolskie and Swietokrzyskie Voivodeships, with an average of PLN 12.^77/m3.

In both cases, the amount of the water service fee included in 1^{m3 of} water is comparable and, as we calculated earlier, is less than 20 gr.

The water service fee is intended to reflect the principle of cost recovery for water services introduced by the WFD. The price for water, its amount should allow for effective and efficient management of the resource, taking into account economic efficiency, ecosystem sustainability and social acceptance. Is 20 ^gr/m3 of a resource that “is not a commercial product like any other” enough to preserve it and treat it properly?

Currently, it should be assumed that it does. All the more so because the legislator, in connection with the amendment of the Geological and Mining Law, removed the provisions in the Water Law regarding the linkage of water service fees to available groundwater resources and the average low flow from many years. In addition, in Art. 274(1) has already permanently adopted a single rate of fees for groundwater and surface water abstraction, without differentiating them according to available groundwater resources or SNQ.