Best practice pricing principles and the politics of water pricing

Considerable progress has been claimed regarding the establishment of economic reforms in the water sector in Australia, including the development of cost-reflective pricing for water users. This is evidenced by the highly developed status of water markets, especially in agricultural areas, and the substantive efforts that have been made to measure and include the cost of capital and its replacement in charges paid by water users. However, recent government responses to secure additional water for environmental purposes have given rise to a spate of public investments in irrigation infrastructure arguably reminiscent of bygone eras of policy (see, for example, Musgrave, 2008). A critically important, but under-investigated feature of this latest policy response, is that irrigators are subsequently not obliged to pay water prices that reflect the cost of publicly funded irrigation infrastructure. This paper investigates the processes for establishing water charges that are generally cost reflective and contrasts these with the political influences that can markedly distort best practice water pricing. An assessment framework that draws from best practice pricing principles embodied in the National Water Initiative, the Water Industry Regulatory Order and the Victorian Essential Services Commission Act (2001) is used as a framework to consider areas of improvement. Whilst special attention is given to arrangements in Victoria, Australia, we argue that caution about the risks of political interference in water pricing in irrigation should be broadly understood.