Best practice pricing principles vs. the politics of water pricing

Government response to water reform in Australia has included a buyback of water rights and public investments in irrigation infrastructure. In the case of the latter, a critically important but under-investigated feature of this policy response is that water users are subsequently not obliged to pay water prices that reflect the cost of gifted irrigation infrastructure. Thus, whilst considerable progress has been claimed towards establishing water prices that are cost-reflective, such as offering tradable water rights, much can still be done to improve the price signals received by rural and urban water users. This paper investigates the politics of establishing water charges that are cost reflective. More specifically, we discuss how political economy can potentially and markedly distort best practice water pricing. An assessment framework that draws from best practice pricing principles embodied in the National Water Initiative (NWI), Water Industry Regulatory Order (WIRO) and the Essential Services Commission (ESC) Act is used as a framework to consider areas of improvement with special attention given to arrangements in Victoria. Nonetheless, we argue that the results are applicable in most jurisdictions and suggest there is considerable scope for improving the efficiency of water prices. Keywords: water prices, gifted assets, best practice pricing.