23 MARTINDALE CENTER FOR THE STUDY OF PRIVATE ENTERPRISE Figure 2 Components of full cost recovery principle sideration of cost-efficient rate design is objective 3, fairness, implying utilities should match prices to the utility’s cost of delivering water to each customer class. Simply put, if delivering a unit of water costs NT$10, the price of that unit should be NT$10. Achieving this objective becomes complicated when servicing different customer classes. Economies of scale reduce average costs ($/cubic meter of water delivered) to supply large users compared to small users (Kim & Clark, 1988). A rate structure where prices for additional volumes of water progressively decrease as consumption increases would be most appropriate for cost matching. Larger users would pay a lower rate for additional water. This is known as a decreasing block structure, the opposite of an increasing block structure. Taiwan uses an increasing block structure; so, it would first appear that Taiwan also fails to achieve objective 3. Therefore, a tradeoff exists between objectives 2 and 3. Pricing signals from an increasing block structure entirely contradict the ability to match costs of service with prices through a decreasing block structure. Alternatively, Taiwan succeeds in achieving objective 3 if considering the financial costs borne by the utility along with the social costs of using water. A modern school of thought for including external effects of overuse—beyond the utility and direct users—lies in the principle of full water cost recovery. This principle argues that efficient full cost pricing should internalize all costs associated with the delivery of water, not solely the financial costs (Tsitsifli et al., 2017). Every additional unit delivered has a higher associated external cost to society and the environment, dubbed social cost, and these social costs likely are not factored into the cost matching methodology currently used to design rates in Taiwan. Ching-Ruey Luo, a professor at National Chi Nan University in Taiwan, argues that these costs account for the environmental externality associated with high water use (Luo, 2024). For example, high use perpetuates a greater need for reservoirs, which have known negative impacts downstream, leading to high costs for rehabilitating ecosystems (Dević, 2015). Additionally, to allocate water to industry during seasons of drought, the Taiwanese government has subsidized rice farmers to not grow crops, resulting in lost agricultural production (Feng, 2023). Water insecurity among those farmers allowed to grow rice has motivated groundwater pumping, in turn leading to land subsidence and high costs for infrastructure refurbishment (Kastner, 2015). Even outside of droughts, high use in spatial clusters like science parks has been known to detract from nearby domestic use, with potential further effects on health (Rosinger, 2020). If external social costs associated with high use are large enough to exceeed cost savings from economies of scale for large users, then the full cost follows the relationship seen in Figure 2. As use increases, total delivery costs increase at a faster rate than when ignoring social costs. An increasing block structure would best achieve both the cost matching and price signaling objectives in this usecost relationship. The WRA is a public utility; hence, the full cost of delivering water should include not only financial costs borne by the utility but also all costs to society as a whole. Figure 2 Components of full cost recovery principle Cost of delivery (NT$/cubic meter) Monthly water use (cubic meters)
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