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Water Research 126 (2017) 216e231

Contents lists available at ScienceDirect

Water Research
journal homepage: www.elsevier.com/locate/watres

New era / new solutions: The role of alternative tariff structures in


water supply projects
F. Silva Pinto*, R. Cunha Marques
CESUR, CERIS, Instituto Superior T!
ecnico, Universidade de Lisboa, Av. Rovisco Pais 1, 1049-001, Lisboa, Portugal

a r t i c l e i n f o a b s t r a c t

Article history: Water utilities face different challenges that may force them to seek prioritized objectives. When doing
Received 19 April 2017 so, particular projects may have to be developed, being important to understand their impact on water
Received in revised form tariffs, and thus, on customers. Such consequences may bear an increased relevance in cases stressed
6 September 2017
with, e.g., resource scarcity, poverty, and the need for infrastructure investments. The resulting cost and
Accepted 10 September 2017
revenue variability demand a comprehensive study. If the rst may require a stochastic modeling (in
Available online 13 September 2017
major cost components) in order to consider its inherent uncertainty, the second needs to be modeled
following context-specic objectives set by the relevant stakeholders. The solutions achieved will likely
Keywords:
Tariff structures
promote distinct revenue sources, as well as diversied water tariff structures. A multi-objective opti-
Stochastic desalination cost mization model (i.e., a Framework for Suitable Prices) is built to deal with those diversied requirements
Multi-objective optimization (e.g., stochastic energy costs, affordability, cost recovery, or administrative simplicity). The model is
Sustainability solved through achievement scalarizing functions with several weighting coefcients for a reference
Water supply point, so as to provide a signicant perception of possible revenue options (and their impact) to the
decision makers. The proposed method is applied to a case study, Boa Vista Island in Cabo Verde, in
which the background characteristics, namely water sources availability (e.g., the adoption of desalina-
tion technologies), economic development and other contextual factors were considered. The key role of
tariff structure selection is displayed, instead of assuming it a priori, giving important insights regarding
project feasibility.
2017 Elsevier Ltd. All rights reserved.

1. Introduction approaches), or tariff structure adjustments (Pinto and Marques,


2015b).
Water utilities around the world have been subject to different The link between the costs incurred in those projects and how
but increasing challenges that dene the current framework (WHO they further translate into revenue requirements is, somehow, yet
and UNICEF, 2014). The source may vary from environmental, to be properly achieved. A clear display of that stance is found
economic, social or political issues, possibly in the shape of resource worldwide in the promotion of uncertain project assessments and
scarcity or infrastructure inadequacy. Therefore, when developing in the misapplication of tariff structures, as well as other sources
solutions those specic constraints should be considered to weigh of revenue, bearing a possible undesired impact on customers.
each solution's cost, limitations and potential. The standpoint of Regarding project assessments, during the past decades,
each utility is context specic, and thus, the goals to be pursued extensive attempts were developed to estimate the cost of con-
may differ between cases. Pragmatically, utilities that face water struction and operation of diversied infrastructures (e.g., for
scarcity, or a high economic exclusion (in terms of affordability), desalination plants, see the studies highlighted in Gude, 2016;
could focus their efforts on developing different types of initiatives. Pinto and Marques, 2017). Most of those studies range from
Possibilities cover water restrictions (Cooper et al., 2011), special empirical estimations based on experts to more sophisticated
social plans (Massoud et al., 2009; for analogous wastewater predictions. The relevance of those studies is uncontested, but due
to their deterministic nature, each cost variable is assumed to be
exact/precise, disregarding the inherent uncertainty. Indeed, if in
some cases, depending on the level of project denition, time
* Corresponding author. frame selected, among other characteristics, the energy costs (e.g.,
E-mail address: frcsilvapinto@tecnico.ulisboa.pt (F.S. Pinto).

https://doi.org/10.1016/j.watres.2017.09.023
0043-1354/ 2017 Elsevier Ltd. All rights reserved.
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 217

electricity price) and nance charges (e.g., interest and ination 2. Cost components and revenue streams
rates) can be considered depending on their values at the time of
evaluation or assumed to be constant over the time set, in others 2.1. Cost components and costing methodologies
they should not. The previous statement has an increased rele-
vance when there are high capital and operating requirements In the provision of water supply as an industrial production
(i.e., costs), as well as uncertainties in the availability of affordable process (Barak, 2012), it is necessary to identify and recover the
energy and in the predictability of future nancial markets (Rigotti associated costs, and therefore there is a need to understand the
and Shannon, 2005), perhaps, promoting statistical approaches. revenue requirements. The magnitude of these costs is utility
The stochastic nature of such costs, and the expected benets (at specic and depends signicantly on the hydrogeology, technology
least the revenues from tariffs), demand a comprehensive quan- used, and management practices; requiring at least the recovery of
tication of such uncertainties (Park et al., 2010). recurring costs in order to keep operations running. However, if in
The standpoint concerning the possible misapplication of the short-run that may be acceptable, for the long-run it is not, and
different sources of revenue, herein focused on water tariffs, a more holistic approach is required to have a glimpse at sustain-
mainly refers to the promotion of policies applied successfully ability. Additionally, there are varying opinions about who should
elsewhere, but that rendered to be unt, harming the objectives pay for what costs, and if so, which percentage is reasonable, and
initially set (for further insights, see Angel-Urdinola and Wodon, how they might be paid (Cardone and Fonseca, 2003).
2012). Such an example is the wide adoption of Increasing Block Theoretically, the sum of all operational and maintenance costs
Tariffs (IBTs), sometimes even imposed/suggested through legis- (O&M), capital charges, opportunity costs and those related to ex-
lation (e.g., Brazil and the Philippines). IBTs may bear some ternalities constitute the full cost of supply. Still, it is important to
strengths, but if the whole tariff design process is not duly guarantee a thorough understanding on what it entails and how
considered, the tariff structure inherent assumptions may not they can be measured. Therefore, Table 1 highlights the general
apply, rendering the process awed (mainly in the denition of principles and the current perspective of costs to be covered
structural decision variables as the number of blocks and their (adapted from Rogers et al., 1998; Zetland and Gasson, 2013; Global
volume, see Pinto and Marques, 2015a). Furthermore, there are Water Intelligence, 2014). The estimation accuracy item relates to
studies that formulate a noteworthy tariff modeling, as Hanemann the ability to which a specic cost component can be estimated,
(1993); Grifn (2001); Nauges et al. (2015); however, the tools and the degree of acceptance highlights if the estimation methods
developed therein dene the tariff structure a priori, constraining are consensual among academics and practitioners (e.g., the capital
the problem solutions. charges can be based on the historical repayment of investments or
Due to the above mentioned issues, the current paper develops a also include the replacement of the capital stock, both are accurate,
multi-objective optimization (MOO) model to formulate the asso- but not so consensual in their application). Note that those features
ciated revenues and to assess cost variability through a risk-based are classied from the lowest (e e) to the highest () ability to be
analysis. Additionally, there is a focus in avoiding strict assump- fullled.
tions regarding the tariff structure (e.g. the number, volume and Therefore, even if the standard presumption is that total costs
price of potential blocks), modeling the objectives while letting should include only the nancial outlays (at best), when identifying
those variables free to take the form that best suits the water revenue requirements or even comparing with other investment
utility context and objectives. The opportunity to consider, in a scenarios, the inclusion of nonaccounting costs should be also
proper framework, background factors and the willingness to promoted (nonaccounting opportunity costs, see Grifn, 2001;
pursue diversied political economic goals is innovative and pro- perhaps externalities, see Scarpa et al., 2007).
vides less arbitrariness in tariff setting. Another problem relies on the difculty of cost estimations,
This Framework for Suitable Prices (FSP) aims at nding, or projections and forecasts. In general, there are particular charac-
approach the set of efcient solutions, in order to propose a range of teristics that have to be considered to justify their suitability. For
possibilities to be considered. The use of a reference point method the case of estimates, depending on the degree of project denition,
is particularly suitable due to the projection made onto the Pareto different possibilities can be selected in accordance with: 1) end
frontier through an achievement scalarizing function (Wierzbicki usage of the estimate; 2) estimating methodology; 3) estimating
et al., 2000). Hence, to guide the decision making process, accuracy; and, 4) the effort required to produce such estimate
distinct weighting coefcient vectors were used for a given refer- (Dysert, 2007). Following the AACE RP 17R-97 (Recommended
ence point to build a set of options. This method of projecting a Practice for Cost Estimate Classication, AACE, 1997a), and AACE RP
given reference point (also labeled as reservation or aspiration 18R-97 (similar to RP 17R-97 but with insights for process in-
points) that represents the objective, criteria or outcome values dustries, AACE, 1997b), specic inputs are required to produce the
desired by the decision maker (DM), onto the set of efcient solu- desired estimating quality at each phase of the estimation process.
tions, has been widely developed (Cabello et al., 2014; Dujardin See Fig. 1 for a short overview of such classication.
et al., 2015; Pinto et al., 2015). As observed in Fig. 1, the estimating methodology will fall into
In order to promote a proper discussion, the proposed method is deterministic categories depending on the level of project deni-
applied to a case study (i.e., Boa Vista Island in Cabo Verde), where a tion. However, for initial stages or in a forecasting perspective, the
status quo and additional scenarios were assessed. Due to values are occasionally considered as deterministic, varying
complexity and size constraints, the case study was adapted to signicantly due to the assumptions made. To counter that pre-
become, somehow, a minimal working example. dicament, sensitivity analyses are performed to assess the cost
This document is structured as follows. Section 2 highlights the variations associated with a predened change in those assump-
main cost components and revenue streams that ought to be tions. However, for some variables, their representation through
considered, giving the rationale to the FSP model framed in Section probability distributions is relevant in order to yield cost pre-
3. Section 4 highlights the empirical analysis, discussing the results dictions with a quantiable uncertainty, i.e., dening with a known
achieved and providing key policy implications. To conclude, nal degree of condence, the value-at-risk (Lianyu and Tiong, 2005;
remarks are drawn. Kavvadias and Khamis, 2014).
218 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

Table 1
Status quo of water supply costs (features classication: e e, e, , ).

Main cost Denition Estimation Degree of Adoption


components accuracy acceptance frequency

O&M The expenses associated with daily operation and maintenance of the system
Capital charges The expenses associated with capital investments (depreciation costs and associated e
interest)
Opportunity costs The value of foregone options, possible alternative uses (the non-accounting ones) e e ee
Externalities The costs (or benets) imposed due to the mutually interfering usage ee ee ee

Fig. 1. Cost estimate classication characteristics (adapted from AACE RP 17R-97 and RP 18R-97).

2.2. Revenues: the role of tariff structures their revenues from customers through tariffs, earmarked taxes
and other charges (for further country experiences, see OECD,
Water utilities must be able to pay for the expenses mentioned 2009).
in Section 2.1, as this is essential for the continuous provision of Actually, due to the nature of water services, revenue sources are
services and adequate functioning of the utility. important to support further community objectives besides cost
There are numerous sources of revenues. In fact, according to recovery. Thereon, there is a requirement to focus on water tariff
OECD (2010), the right combination of tariffs, taxes and transfers, components to achieve improved pricing policies (Nauges and
the so-called 3Ts, needs to be sought, as revenues from other Whittington, 2017; Pinto and Marques, 2016). In order to achieve
sources of nance will be repaid through them. Nonetheless, such a tariff structure that is responsive to the philosophy and objectives
additional sources, as loans and bonds, must be explored due to of both the utility and its community, all decision variables involved
exibility benets. A comprehensive list, of possible revenue in its modeling have to be assessed with care (Nauges et al., 2015).
sources, would include operating revenues from water services Therefore, assuming that a tariff structure is essentially a function
(e.g., unmetered sales, metered sales, sales for resale/wholesale, of xed and variable components with possible adjustments, we
and re protection) as well as other operating revenues (as forfeited highlight in Table 2 the main decision variables that arise when
discounts or rents from water property), not neglecting the considering the most adopted structures. For an exhaustive char-
nonoperating revenues (AWWA, 2012; Raftelis, 2014). The latter acterization of tariff structures, and their impact on customers, see
covers interest and dividend income, gains or losses from disposi- Aymerich et al. (2015); Pinto and Marques (2015b).
tion of property, tax revenues, transfers and allowances related to In Table 2, there are some adjustment proxies that should be
specic funds, contributions, grants or even development charges. connected with specic cost components/categories depending on
Regarding sources of revenue, there is no one size ts all model the stress they create to the utility. Besides, to successfully
to nancing, as the context (e.g., background factors) differs greatly implement pricing policies, the value-in-use to different customers
in a worldwide basis (Hoque and Wichelns, 2013). Pragmatically, in ought to be assessed, or similarly, their willingness to pay (Rogers
some developing countries, utilities have to draw heavily on et al., 1998).
transfers and philanthropy to cover capital costs as well as many
recurrent costs (e.g., in Banerjee et al., 2010, from 45 African water
3. Modeling a framework for suitable prices
utilities only 36% covered all O&M costs and 9% the capital charges).
Despite that fact, in some developed countries, utilities with
The FSP model covers a set of strategic stages in order to set
mature systems are able to raise all, or at least a signicant part, of
suitable water tariffs. Those stages are somehow hierarchically
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 219

Table 2
Tariff structure design considerations and possible adjustments.

Tariff structure Fixed, at Uniform, single block, (UT) Increasing (decreasing), blocks Increasing rate, sliding scale
(IBT/DBT) (IRT)

Denition A xed fee per customer per A single rate per unit of volume The volumetric unitary charge The unitary volumetric price for
bill, that is, the charge does not is applied, therefore, it is a increases (decreases) stepwise all water consumption
change with the volume of single volumetric rate. as water usage increases, from increases as water usage
water use. block to block. increases.
Design features 1) The price (or level). 1) The price (or level) per unit of 1) The number of blocks; 2) the 1) and 2) are equal to IBTs/DBTs,
volume. volume associated with each and; 3) the price to be charged
block, and; 3) the price to be by ending total consumption on
charged for each block. that block.
Adjustment proxies
Customers Type (e.g.): Social, large families. + To differentiate based on customer characteristics, usually through proxies: Affordability - some wealth index;
property value. Equity - household (HH) size and number of dependents.
Possible Possible Possible, focus on price and Possible, focus on price and
volume variables volume variables
Time frame Type (e.g.): Seasonal, time of use, peak load. + Rates differ according to the time's frame demand/water availability, being usually adapted to peak
hours, days, week, seasons.
Only time frames longer than Possible Possible, focus on price Possible, focus on price
the billing periods
Spatial Type (e.g.): Urban/Suburban/rural, Municipal. + Users pay for the actual cost of supplying water to their region, or even their establishment.
Possible Possible Possible, focus on price Possible, focus on price

Note: If different types of structures are combined, the possibilities arise, but so does complexity.

linked and, depending on the problem under analysis, they may we allow each volume and time unit to have its own unitary price,
require specic stakeholder participation. The FSP working ow- revealing the inherent tariff structure by mapping those assign-
chart is highlighted in Fig. 2. ments. This concept of structuring tariffs may lead to a signicant
In brief, once the initial setting is devised, scenarios are built for burden due to the number of decision variables involved; however,
comparison based on the associated cash-ows, and unless other- if we consider all the requirements that the tariff ought to have,
wise stated, the analysis is made at nominal or current year prices, there will be certainly less freedom, and most importantly, less
so that relative price changes and price level changes are suitably arbitrariness in tariff setting. The mentioned requirements are
considered. Afterwards, for particular instances (as cost-benet enforced through the ability to support and optimize a blend of
measurements) all values are deated to a selected year price various utility objectives. Indeed, since water tariffs are a major
level (Jenkins, 1978). Then, depending on the information available, source of revenue, the following objectives should be assessed
the costs are distributed to customer classes. After those two steps, (adapted from Pinto and Marques, 2016):
the revenue requirements have to be assigned to sources of reve-
nue, in which the tariffs will be modeled according to specic ob- Economic efciency (allocative efciency);
jectives and constraints. Financial sustainability (cost recovery, and revenue stability);
As identied in Fig. 2, there are some processes and links that Environmental concerns (sustainable use);
have a major impact on the whole process. First, it is the link be- Social concerns (equity across users, and affordability);
tween measuring elements/variables and composing specica- Governance (clarity, and administrative simplicity).
tions of functional costs processes, as there lies the selection of
variables that will undergo stochastic modeling and the level of Those objectives have to be modeled in accordance with infor-
analytical cost breakdown. Once selected, those variables will be mation available, not disregarding DM interaction (as highlighted
assessed according to their nature, to their historical magnitude in Fig. 2). A formulation of this MOO problem specifying the sets,
and frequency, as well as expert judgment, in order to t a distri- indices, parameters, decision variables, constraints, and objective
bution function. Please note that depending on their use in the functions considered, is outlined in Appendix A (concerning the
model (as in projections), a correlation matrix may be required empirical analysis developed in Section 4).
(Park et al., 2010; Kavvadias and Khamis, 2014). Second, in the However, since the FSP requires exibility due to information
scenario building process, different scenarios are built analogously availability, we will consider without loss of generality that a MOO
based on the problem boundaries initially set. Different possibilities problem to be solved by the FSP can be dened by a set of objective
can be developed, either related to the project's nature (e.g., addi- functions f1(x), f2(x), ,fn(x) with n " 2, assuming that they are to
tional investments besides a baseline/business as usual/status quo be minimized. The respective decision variables are expressed by a
approach), or to data differentiation based on tted probability vector x x1 ; x2 ; ; xm , where x2X, X being the set of feasible
distribution functions and respective uncertainty (for further in- solutions. Moreover, we dene an objective vector
sights on scenario building, see Lus et al., 2016). The cost alloca- z z1 ; z2 ; ; zn with z2Z, considering a vector function
tion stage assigns to each customer type their inherent costs, f : X/Z, with Z f(X) denoting the set of feasible points in the
allowing to impose revenue requirements and to link them to objective (or criterion) space Rn Z4Rn . Thus, we can formulate
possible revenue sources (e.g., tariffs). this problem as follows (Figueira et al., 2010):
As for the tariff design stage, it is where the MOO model is
developed. Due to its nature, the problem falls into the mixed-
integer linear programming classication. The general structure
min f x f1 ; f2 ; ; fn x
(1)
subject to: x2X:
relies on assigning charges (generally per time units), allowing for
exibility in the rate selection (the price to apply per volume units), Since this type of problem has generally several solutions, it is
framing the water tariffs (i.e., the procedures and elements that critical to use particular techniques to get efcient solutions in a
establish the customer's bill, as dened in OECD, 1999). Therefore, suitable processing time. Hence, following the approach proposed
220 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

Fig. 2. FSP owchart covering the main stages.

by Wierzbicki (1980), we use achievement scalarizing functions, as small number 0 < r1. The family concept usage relies on the
they are particularly appropriate to work with reference points. possibility to build several functions in line with a set of diversied
Each objective function, characterized from a complex expres- weighting coefcients and reference points. Therefore, an
sion to a single variable, has aspiration levels (i.e., desirable values), achievement problem can be stated as follows:
and the resulting objective vector is the reference point, which can
be dened either in the feasible or in the infeasible region of the # "
objective space. To minimize the maximum unwanted deviation to
min s z; z0 ; l; r (3)
the reference point, a L distance coupled with a L1-based term subject to: x2X:
allows to build a family of achievement functions whose solutions Since the weighting vectors can be normalized, we represent the
for the problem in eq. (1) are assured to be properly efcient, set of feasible normalized scaling coefcients vectors as follows:
outlined as follows:
( $ )
$ X
n
! " n ! "o n ! " $
X L l l1 ; l2 ; ; ln $ lk 1; lk > 0; k 1; 2; ; n
s z; z0 ; l; r max lk zk & z0k r lk zk & z0k ; $
k1
k1;2;;n
k1
(4)
(2)
0
For a specic reference point z , different Pareto optimal solu-
where s is a mapping from Z onto R, z0 z01 ; z02 ; ; z0n is a tions can be achieved for the problem previously dened in eq. (3)
reference point vector, l l1 ; l2 ; ; ln is a weighting co- by using different l vectors. Hence, we consider that depending on
efcients' vector (scaling coefcients), and r is an arbitrary positive the formulation used we can acquire different solutions for the
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 221

same aspiration point (or DM). For the FSP, we consider a reference perspective in 2016 US$ adjusted for private consumption pur-
point built by inducing, when meaningful, a small perturbation to chasing power parities, PPP, World Bank, 2016).
the optimal solution achieved through solving each objective
function separately. This way, we are able to get any of the non- 4.2. Model application
dominated points by covering the non-dominated region. The
calculation process is guided by an augmented weighted Cheby- In order to apply the FSP, we followed the main steps high-
shev scalarizing function, where we normalize the values, as sug- lighted in Fig. 2. After achieving a requisite understanding of the
gested in Miettinen and Ma kela
(2002), to give a similar amplitude Boa Vista's situation, we selected a few key stakeholders (DMs) to
to each objective function. As for the weighting coefcients, we gather the required information for the 2016e2025 time frame
acknowledge different l vectors considering eq. (4) to get a diver- (covering two periods of tariff structure stability). Such information
sied set of non-dominated points, able to be assessed by the DM. included operational and strategic data gathered through ex-
change of emails and interviews, allowing to address the subjec-
tivity needed. This focus group included a Planning Director, an
4. Empirical analysis and ndings
Engineer, a Developer, and a Municipal Ofcer, all somehow con-
nected with the utility.
4.1. Case study overview
As a result of such interaction and considering the master plans
developed for Boa Vista, we built four scenarios based on the
The case of water supply in Cabo Verde is one of the harshest
combination of two project nature and two data differentiation
around the world due to the scarcity of natural, capital, labour and
possibilities. The rst relies on a comparison of the proposed plans
technology resources. In order to deal with that situation, the state
(expansion of current and new smaller sized RO plants, in 2017 and
of Cabo Verde has adopted several innovative solutions, acknowl-
2022) and the viability of an RO plant (in 2017) on the Lacaca ~o
edging the practical challenges in doing so (Marlow et al., 2013).
tourism development zone (Fig. 3), where it would be possible to
Indeed, the country has undergone several initiatives to perform
combine the location (hereafter, collocation) with a power plant.
institutional reforms, empower the providers with qualied pro-
Expected benets of the collocation option are: ability to provide
fessionals and nancial resources to promote coverage expansion,
the required energy (limiting the impact on the local power grid);
rendering an effective and continuous access to water supply (EBES
other direct cost savings (e.g., for the interaction between both
and DHV, 2012). Those initiatives have been developed with rele-
plants intakes and disposal systems, see Voutchkov, 2011, for
vant external/foreign aid from different countries and international
others, see Kavvadias and Khamis, 2014); easier control of harmful
organizations that allow Cabo Verde to have a solid basis to face the
algal blooms (Caron et al., 2010); and, environmental impacts (also
challenges ahead (ORWA Department/SNFO, 2014). Some of the
promoted by using lower salinity feed water, Mun ~ oz and
results achieved are embodied in two National Strategic Plans: 1)
Ferna !ndez-Alba, 2008).
for integrated water resources management (PAGIRE); and, 2) for
As seen in Fig. 4, the key components found were ination, in-
Water and Sanitation (PLENAS). Those results are now also being
terest rates and electricity costs. They were modeled in order to
embodied into Municipal Master Plans, which render this type of
develop projections (for the case study time frame) considering
research an increased relevance.
possible statistical dependence between them. To generate those
The Boa Vista Island is located in the fareast position of the ar-
stochastic variables, past records (32 data points from 1984 to 2015)
chipelago, it has 620 km2 and the terrain is mainly at (Fig. 3).1
were used to t probability distributions and to compute correla-
Following ANAS (2016), the island had a 50% growth over 5 years
tion matrices (auto-correlation and cross-correlation), allowing to
reaching 14451 inhabitants, being 71.4% economically active (age
apply the Vector Autoregressive to Anything (VARTA) process
15e64), plus 4274 equivalent inhabitants due to tourism. The
(Biller and Nelson, 2003). The probability density functions are
annual average precipitation is 68 mm/year, being considered a dry
selected in accordance with their goodness of t (Kolmogor-
region (Peel et al., 2007). The PAGIRE states that the available sur-
oveSmirnov test) and feasibility of use in the VARTA process. Sta-
face water reaches 2.5 hm3/year and the total exploitable ground-
tistical dependence was found only for ination and interest rates
water source may be as low as 0.3 hm3 (during dry season). The
(analogously to Park et al., 2010). In Fig. 4(c) and past data points
same document species that the respective intake is estimated to
are included for comparison purposes, grey bars for ination and
be 0.12 hm3/year, though the actual volume is certainly higher due
interest rates, and a black line plotted for electricity. From 2016
to unaccounted intakes. Since those sources are mainly of brackish
onwards, it shows the projections of ination and interest rates
nature, the Boa Vista network has relied mainly on desalination
(blue bars). As for electricity prices, projections were generated
processes of both brackish and seawater under Reverse Osmosis
separately based on trends identied in IEA (2016) and EIA (2017)
(RO) plants with a joint capacity of 3750 m3/day, coupled with
for price variations in the electricity generation matrix: solar,
energy recovery systems.
wind, diesel and fuel oil 180/380 (3.5%). All possibilities are oulined
In terms of service coverage, following the multi-objective
by the grey shaded area, which includes the 2 trends considered
continuous survey 2014, 32.5% of the households were served by
(reference case and high oil prices). Please note that Fig. 4(c) con-
piped network, 1.2% from neighbors, 26.7% by water delivery trucks,
siders the planned electricity generation matrix, which is modied
39.1% by standpipes, and 0.6% from other sources (INE, 2015). The
for the collocation scenarios.
system is managed by the water and energy utility of Boa Vista
The investment plan (IP) for the time frame covers a dened
(AEB), an institutional public-private partnership. The institutional
portfolio which is kept for all scenarios when possible (as in water
framework also covers an economic regulator (ARE) responsible for
distribution). Furthermore, following the data highlighted in
setting tariffs, which nowadays is structured under a 3 block IRT
Bricen ~ o-Garmendia and Benitez (2011) and ICA (2016), infrastruc-
with block-changes at 6 and 10 m3 (see Fig. 3 for an historic
ture was considered to be subsidized 40% through grants (directly
deducted) and the remaining 60% through loans (added under
1
longterm credit). Concerning subsidization, there is a relevant
Fig. 3 draws information from the following sources (last accessed on 10/01/
2017): 1) http://les.turismo-em-cabo-verde.webnode.pt/; 2) www.are.cv/index.
distinction between the available possibilities, mainly covering
php?optioncom_content&taskview&id104&Itemid70; and, 3) WWF and access, consumption, and external subsidies to customers. A mix
Wetlands International (2007). was found in terms of subsidizing access and consumption.
222 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

Fig. 3. Boa Vista protected areas and tariff historic perspective.

The different types of customers considered were established in The feedback was positive as there was the possibility to easily
accordance with available information for the whole system, assess several optimal tariffs, the impact of proposed investments,
allowing to dene consumption patterns. Note that, in general, and to discuss policy implications.
customers do not change consumption patterns very drastically,
and if they have a cheaper source nearby, they will continue to use 4.3. Results achieved: a set of possibilities
it for their main uses.
Therefore, as displayed in A, the main drivers set as objective The results achieved through the FSP are highlighted in Fig. 5
functions were unitary price (z1), simplicity (z2), average (z3) and and Fig. 6 for scenario #1, as well as in Appendix C for the
marginal (z4) price control, as well as affordability (z5). Regarding remaining scenarios.2 In this interactive assessment (Ruiz et al.,
the constraints imposed, minimum levels were set while allowing 2008), the DM xed two weighting coefcients (l2, l3 0.05)
for inter customer exibility (cross-subsidization). For particular allowing to vary the remaining l. Since the focus group was mainly
cost-benet measurements made in the post-processing stage, we interested in knowing which tariff structure was associated with
used a rate able to consider the nancial opportunity cost for dis- the assigned l, we built Fig. 5. The shaded area is only linked to the
counting. Table 3 highlights the parameters and assumptions used tariff structure obtained in those points. In order to guide the focus
to develop all scenarios, as well as the main MOO model features. group through the Pareto front, the solutions achieved were always
Main data sources, software used and input data are highlighted in compared to the others (in terms of objective function results). In
Appendix B (e.g., plant capacity, lifetime and availability). Fig. 6, the group was allowed to assess possible variations in price
During the whole process, the focus group was engaged and for all l regarding all customers (shaded area with each customer
provided relevant feedback. Initially, there was an interest in un- color). Charges that do not vary with consumption are framed on
derstanding and developing the operational link between costs of
supply, possible investments, unconstrained tariffs and customers.
Afterwards, as most members of the focus group were concerned 2
Due to lack of information, specic tariff structures and adjustments were ruled
with the software used (B), we built a graphical user interface (GUI). out by the model (at least the structures mentioned in Table 2 are possible to be
modeled).
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 223

Fig. 4. Probability density functions for (a) ination and (b) interest rates, as well as (c) projections developed.

Table 3
Model features used for the Boa Vista case study.

Parameters Scenario #1 Scenario #2 Scenario #3 Scenario #4

Ivestment base Boa Vista master plan Boa Vista master plan Collocation project Collocation project
CAPEX Remaining plus IP Remaining plus IP Remaining, part of IP and DEEP Remaining, part of IP and DEEP
Electricity price trend Reference case High oil prices case Reference case High oil prices case
Other O&M Utility data Utility data Utility data/DEEP Utility data/DEEP
Demand The demand was set based on coverage increases and identied consumption patterns.
MOO details
# %
Reference point z01 ; z02 ; z03 ; z04 ; z05 0; 0; 0; 0; 0
lnm Due to constraints, thirty six different sets m of weighting coefcients (n objective functions).
Disposable incomea Relative to HH living on minimum wages (threshold of 3%e5%).
EMQa,b A consumption of 40 L per person per day.
a
Based on PLENAS.
b
EMQ, Essential minimum quantity.

the right side y-axis. The requirements to select particular tariffs overcharged. A full run, 387468 variables and 258192 constraints,
(e.g., minimum to domestic customers) were widely discussed, and with pre and post-processing routines may take 55 min; and a
highlighted the inherent tradeoffs. partial run with a single set of ls lasts 9 s. Volume levels considered
For decision making purposes, as a result of DM interaction, possible demand variations (z15%), in fact, disaggregated data was
constraints were built in the form of which costs should be covered scarcely available (for customers demand, due to previous tariff
by tariffs? or what should be subsidized and how?. Answers were structures info - 3 domestic blocks outline 3 different types of
given by the focus group in the form of at least the O&M by tariffs, customers).
exibility in the nancing of capital expenses, EMQ can be sub- The impact of prices to both utility and customers is highly
sidized by taxes or transfers or ensure an affordable universal uncertain, mainly in developing countries where customers may
supply through distribution points. share collective bills, and the information regarding income,
Regarding the computed objective function values, each one of housing type, family size, and attitude towards water conservation,
them translates how such objective is being achieved or penalized. is difcult to gather. In the Boa Vista case study, which is driven by
Furthermore, by using achievement scalarizing functions, the tourism related economic activities, HH size is signicantly
model can be solved at reasonable processing time even when different across the island, and HH with low water consumption
224 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

Fig. 5. Display of FSP results (scenario #1) regarding domestic tariff structure possibilities, highlighting the objective function results for l 0:18; 0:05; 0:05; 0:45; 0:27

Fig. 6. Display of FSP results (scenario #1), initial values for l 0:18; 0:05; 0:05; 0:45; 0:27 and possible variations (l and year).

may not be poorer than those with higher consumption. E.g., in costs and the hardly monetized externalities through non-cost
block tariffs poorer families that have a lower per capita con- parameters, is policy relevant.3
sumption end up consuming in higher blocks, due to higher HH size The mentioned exibility is signicant as different scenarios
or shared bills. The previous situation is intensied if customers do may bring different costs related to the project's nature (e.g.,
not understand the tariff imposed or if previous cheaper brackish seawater vs. brackish water, respectively scenarios #1 j #2 and #3 j
sources are kept. Indeed, if water demand wavers, reducing water #4, or against reclaimed, surface or groundwater) or even with the
sales, revenues may not be sufcient and unitary costs will rise actual costs that need to be covered (short run vs. long run marginal
(being possibly heightened by having a plant working below pro- costs). Regarding the reliance on desalination technologies, there is
jected capacity). a likely trend that due to the fast growth rate experienced (lever-
Furthermore, for the collocation project to be preferable, at least aged by tourism) it will be higher than the one projected in PLENAS,
blended funding (grants/loans) must be promoted, which is not disregarding possible pitfalls (Tal, 2017).
reasonable under public (internal/external) or private (e.g., tourism The assessment of the whole system allows to foresee how
related partners) nancing. The tariff design can be modeled to every type of customer will respond, and avoids the unwanted
accommodate different project delivery specications, namely, promotion of contrasting principles across them (domestic, com-
being indexed with automatic cost adjustment mechanisms, as, mercial and industrial customers). Such situation, which impacts
among others, an energy cost variation driver and/or nancial the competitiveness of an industry, may distort the fairness prin-
related factors (as a consumer price index). ciple, promoting a dubious cross-subsidization, and thus, induce
social unrest. Those tariff reforms that raise the overall price tend to
be politically explosive, mainly in developing countries (Nauges
4.4. Policy implications and research needs et al., 2015). Therefore, the selection of a suitable combination of
revenues is critical, being a difcult situation of compromise.
A proper cost assessment represents at least a rst step towards Customer type characteristics are a further source of uncertainty
achieving a suitable water tariff, as well as a comparison between
alternative projects. To build comparisons under the same cost
analytical breakdown linked to the opportunity to select which cost 3
The assessment of possibilities should be developed in a more comprehensive
categories to follow (prioritize), possibly including opportunity way, as in Eggimann et al. (2016) for wastewater infrastructure.
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 225

that lead, e.g., to changes in demand. This way, it would be inter- updated. Additionally, the collocation scenarios suggest that the
esting to simulate such behavior instead of just assessing absolute lower treatment cost of brackish water in Lacaca ~o enables different
variations and discussing possibilities. Furthermore, the results tariff structure possibilities. The case study gives important insights
achieved outline the requirement to assess the consumption being into project feasibility, it reveals distinct issues in the nancing of
subsidized, as customers may be located solely on that block such projects, and highlights requirements to assess further project
rendering a possible decit to the utility (see the case study of impacts (regulatory, licensing and environmental).
Tunisia, in Touzi et al., 2010). Specic attention has to be paid Finally, to reach a requisite tariff system for water supply, the
regarding possible outliers on the dened customer types (e.g., HH weighting coefcients set must be assessed by the DMs, as tariff
size), which may require tariffs to be structured/adjusted differ- selection should be built over clear political economic goals.
ently. For Boa Vista, the promotion of an IRT scheme, with a Moreover, a clear point is that water tariffs should never be a stand
comparatively lower HH size induced by tourism related foreign alone framework, as there is a need for additional policies (as
workers, and the current coverage level, can be harmful. In fact, the accompanying measures) in order to achieve the desired objectives.
access to the system may be constrained to impoverished HH, that
usually have a greater HH size (INE, 2015). Indeed, that is why if the Acknowledgments
DMs decide to rely on block tariffs, the variables included should be
carefully evaluated instead of based on ad-hoc considerations. The authors are grateful to the two anonymous reviewers and
The set of weighting coefcients established must be assessed managing editor for their insightful suggestions. A word of appre-
by the DMs, as their selection depends on the chosen political ciation also goes to all the participants of the 2nd International
economic goals (Dalhuisen and Nijkamp, 2002). For ARE, the set of Conference on Desalination and Environment (Doha, 23e26
tariff policies will leave the utilities with little exibility and, thus, January 2016), the 2nd seminar on European Water Utility Man-
we highlight that all policies have to be adjusted/updated to the agement (Oviedo, 28e29 June 2016), and the International
current challenges and their dynamic nature (across time and ter- Workshop on Water Tariffs, Governance and IWRM for Sustain-
ritory). In the Boa Vista case study, although the tariff is frequently ability (Cebu City, 10e12 August 2016) for their contributions
adjusted, its structure should also be assessed. Indeed, water reg- throughout the initial stages of this research. The authors would
ulatory agencies must take decisions when facing uncertainties also like to thank all the stakeholders from Cabo Verde for their
about the consequences of their actions (Nauges et al., 2015). For valuable support, as well as Prof. Jose
! Rui Figueira, and all MCDA/M
utilities, the FSP provides an operational link between costs of 2016 Summer School participants, for their valuable suggestions
supply, unconstrained tariffs and customers, which are seldom regarding the model. The authors received no funding for this
considered in practice, leading to inefcient tariffs (Zetland and research and have no further conicts of interest. Any errors and
Gasson, 2013). Tools such as the FSP are useful to help think sys- omissions are the responsibility of the authors. The usual
tematically about future possibilities covering tariff policies and disclaimer applies.
required accompanying measures (Pinto and Marques, 2015a).
Appendix A. Model specications
5. Concluding remarks
In accordance with the workow dened in Fig. 2, as well as
The dire situation of water supply services requires innovative with the information given in Section 3 and Section 4, the following
solutions, which come with practical challenges, demanding the model was co-constructed through the interaction between ana-
link between prioritized objectives, technical solutions, and rate lysts and the focus group.
structures, to be part of them. Thus, in this paper we propose the
FSP. Sets and indices
The FSP framework allows stakeholders to make sense of rele-
vant economic information regarding new projects (e.g., desalina- The sets and indices used are:
tion related investments), by integrating multiple required n o
concepts and translating complex issues into objective information. I n1; ; i; ; io is the set of types of customers;
Indeed, the FSP allows the decision-making process to be based not J 1; ; j; ; j is the set of unitary assignments to which a
just on costs, but also on the inherent risk and the existing revenue price can be made (e.g., 1 m3);
possibilities. Hence, by considering varying cost parameters at the K f1; ; k; ; ng is the set of achievements (objective
whole system level to model revenues, the problem is assessed functions)
& to be reached;
'
globally. In that context, tariff structures drawn from a set of Pareto L 1; ; [; ; [ is the time frame.
optimal solutions (non-dominated/efcient possibilities) will sup-
port utilities to reach their objectives in a swifter way.
Furthermore, we consider in the FSP that the tariff structure Model parameters
selection process should be based on the availability of data, the
least amount you have, the simpler they should be, as complex The model designed has some parameters that are single values,
tariffs may become data intensive. Besides, implementing complex others vary with the dened sets, as follows:
tariffs with no information may promote dubious assumptions, as
highlighted in the case study. hi[ is the number of customers of type i in year [, for all i2I, and
The Boa Vista case study allows to draw key remarks. By [2L.
analyzing the commitment on desalination technologies, there is a zi[ is the monthly water quantity per customer, m3/(custom-
clear evolution on the municipality's objectives. In fact, previous er.month), demanded by customers i in year [, for all i2I, and
objectives relied on water conservation, due to scarce surface and [2L.
groundwater sources, nonetheless, that standpoint changed a[ is an interest/discount rate in year [, for all [2L.
completely once there were other alternatives (e.g., with desali- cc[ are the capital (CAPEX) and nancial costs (and possibly
nation projects). Those changes have an important impact on tariff other related layouts) incurred by the utility to provide water
structures, perhaps highlighting that the current structure could be supply services in year [, for all [2L.
226 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

cm i[ are the (monthly) management/business unitary costs b) Total revenue


incurred by the utility to provide water supply services to
customer type i in year [ (e.g., billing, collection, metering and 0 1
related services), for all i2I, and [2L. X
co[ are the O&M costs (excluding cm r ti[ 12@xi[ yij[ vij[ Ahi[ ; i2I; j2J; [2L (A.2)
i[ ) incurred by the utility to
provide water supply services in year [, for all [2L. j2J

cui[ are the unitary O&M costs incurred by the utility in pro-
ducing and distributing water supply services to customer type i
in year [, for all i2I, and [2L.
cx[ are the unitary total average costs incurred by the utility in c) Cost-benet measurement (discounted cost, in general)
providing water supply services in year [, for all [2L.
d[ is the disposable income of a household with 2 minimum
X ca[
wages in year [, for all [2L. cd (A.3)
t is the threshold related to the burden with water supply [2L 1 a[ [
services on each household's disposable income (affordability
ratio).
q is the essential minimum quantity that each household re-
quires in order to attend its basic needs. d) Cost-benet measurement (discounted revenues, in general)

XX r ti[
Decision variables rd (A.4)
[2L i2I 1 a[ [
The decision variables considered were:

xij is the xed price paid by customer type i in year [, for all i2I
and [2L. e) Cost recovery
yij[ is the price paid by customer type i, for volume j, in year [,
for all i2I, j2J, and [2L. X
vij[ is a binary variable that highlights consumption by r ti[ " ca[ ; [2L (A.5)
customer type i, in volume j, year [, for all i2I, j2J, and [2L. i2I
b[i[ is a binary variable that detects the existence of a volu- Note #1: The cost recovery was considered annually due to the
metric component in customer type i, and year [, for all i2I, and provider's nature and to avoid inter year transitions/income tax
[2L. considerations.
bcij[ is a binary variable that identies a price change in
customer type i, volume j, year [, for all i2I, j2J, and [2L.
pm f) Volumetric component identier
ij[ identies how far from the marginal operating cost is the
marginal price paid by customer type i, volume j, in year [, for all
i2I, j2J, and [2L. X
puij[ identies how far from the average cost is the marginal yij[ ' n b[i[ ; i2I; [2L; n[0 (A.6)
j2J
price paid by customer type i, volume j, in year [, for all i2I, j2J,
and [2L.
r a[ identies how far from threshold t on a household's
disposable income is the price paid for the EMQ in year [, for all
[2L. g) Price change (i.e., block) identier
ca[ is the total cost incurred by the utility to provide water
supply services in year [, for all [2L.
yij[ syij0 [ bcij[ 1; i2I; j; j0 2J : j 1 j0 ; [2L (A.7)
r ti[ is the total revenue made through water supply tariffs by
customer type i, in year [, for all i2I, [2L.
cd is the total discounted cost incurred by the utility to provide
water supply services.
rd is the total discounted revenue made through water supply h) Average price control
tariffs.
X ! " X
xil yij0 [ vij0 [ 1 puij[ vij0 [ cx[ ; i2I; j2J; [2L
j0 2J:j0 'j j0 2J:j0 'j
Expressions and Constraints
(A.8)
There are several types of expressions and constraints:

a) Total cost
i) Marginal price control

X ! "
ca[ cc[ co[ 12 b[i[ cm
i[ hi[ ; [2L (A.1)
yij[ 1 pm u
ij[ ci[ ; i2I; j2J; [2L (A.9)
i2I
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 227

j) Affordability constraints (tax rate 15%) X$ $


min $r a $ (A.16)
[
0 1 [2L
X # %
1:15@xi[ yij[ vij[ A 1 r a[ t d[ ; Note #4: All functions are modeled into eq. (2) to solve the
j2J;j'q
(A.10) problem.
i fDomesticg2I; [2L

Appendix B. Data sources


k) Water consumption

(
1; j ' zil
vij[ ; i2I; j2J; [2L (A.11) Table B.1
0; j > zil
Parameters used and respective sources, last consulted in January 2017
Note #2: Additional constraints are required/possible, namely: Parameter Description Value Main sources
1) based on variable boundaries (e.g., min, max, inter year and inter
hil Number of customers of type i in year [, for e Utility data, IP
block variations); and, further consumption patterns. all i2I, and [2L. and Master
plans
zil Monthly water consumption per customer, e Utility data and
Objective functions m3/(customer.month), demanded by IP
customer type i in year [, for all i2I, and
There are ve objective functions: [2L.
al Interest/discount rate in year [, for all [2L. e World Banka
ccl Capital and nancial costs (and possibly e Utility data, IP,
Unitary price z1 - In this function, the objective is to mini- other related layouts) incurred by the and DEEP
mize all unitary prices, both xed and variable price utility to provide water supply services in
components. year [, for all [2L.
cm Management/business (monthly) unitary e Utility data
X X X! " il
costs incurred by the utility to provide
min xi[ yij[ (A.12) water supply services to customer type i in
i2I j2J [2L year [ (e.g., billing, collection, metering and
related services), for all i2I, and [2L.
Note #3: Weighting coefcients may be applied to differentiate, col O&M costs (excluding cm ) incurred by the e Utility data, IP,
il
e.g., cross-customer subsidization. Those coefcients are assigned utility to provide water supply services in and DEEP
through DM interaction, as highlighted in Section 4.3. year [, for all [2L.
cuil Unitary O&M costs incurred by the utility e Utility data, IP,
in producing and distributing water supply and DEEP
Simplicity z2 - In this function, the goal is to minimize price
services to customer type i in year [, for all
changes so that tariff structures can be understood in an easier i2I, and [2L.
way. The aim is to model the identication of volumetric com- cxl Unitary total average costs incurred by the e Utility data, IP,
ponents (eq. (A.6)) and block changes (eq. (A.7)). utility in providing water supply services in and DEEP
year [, for all [2L.
X X X! [ " dl Disposable income of a household with e INE (2015)
min bi[ bcij[ (A.13) 2 min wages in year [, for all [2L.
i2I j2J [2L T Threshold related to the burden with water e PLENAS
supply services on each household's
disposable income (affordability ratio).
Average price control z3 - In this function, the goal is to q EMQ that each household requires in order e PLENAS
to attend its basic needs.
follow economic principles where distortions between prices
Desalination plant model parametersb
and average costs are minimized. The aim is to model price/cost Characteristics of desalination plant
distortions (eq. (A.8)). #1 Desalination technology RO e
#2 Plant Capacity (m3d) 2240 e
X X X$$ $$ #3 Feed Salinity (ppm) 20000
$puij[ $
e
min (A.14)
#4 Average feed temperature (( C) 25 e
i2I j2J [2L Operation and performance data
#5 Water plant lead time (months) 12 e
#6 Lifetime of water plant (year) 20 e
Marginal price control z4 - In this function, the goal is to #7 Water plant operating availability (%) 90 e
follow economic principles where distortions between volu- #8 Water plant planned outage rate (%) 3.2 e
#9 Water plant unplanned outage rate (%) 6.0 e
metric based prices and operational costs are minimized. The
#10 Water plant owners cost factor (%) 5.0 e
aim is to model price/cost distortions (eq. (A.9)). #11 Water plant cost contingency factor (%) 15 e
X X X$$ $$ #12 Water plant O&M insurance cost (%) 0.5 e
min $pm
ij[ $ (A.15) Note: The FSP main routine (model in A) was compiled and solved using the IBM
i2I j2J [2L ILOG Cplex Optimization Studio v12.6, whereas most pre and post-processing
routines, as well as the GUI (Graphical User Interface), were developed in MAT-
LAB R2015b.
a
Affordability z5 - In this function, the goal is to follow social b
http://data.worldbank.org/indicator/.
The data used considered the information in: https://www.iaea.org/NuclearPo
principles. The focus is to promote the access to a dened
wer/NEA_Desalination/index.html.
quantity of water at an affordable price to customers. The aim is
to model price/disposable income distortions (eq. (A.10)).
228 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

Appendix C. Display of FSP results for the remaining


scenarios (#2, #3 and #4)

Note: The shaded areas in the domestic tariff structure possi-


bilities were left as obtained in Fig. 5, for scenario #1, in order to
have a comparable basis.

Fig. C.2 Display of FSP results (scenario #2), initial values for
l 0:18; 0:05; 0:05; 0:45; 0:27 and possible variations (l and year).

Fig. C.1 Display of FSP results (scenario #2) regarding domestic tariff structure possi-
bilities, highlighting the objective function results for l 0:18; 0:05; 0:05; 0:45; 0:27.
F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231 229

Fig. C.4 Display of FSP results (scenario #3), initial values for
l 0:18; 0:05; 0:05; 0:45; 0:27 and possible variations (l and year).

Fig. C.3 Display of FSP results (scenario #3) regarding domestic tariff structure possi-
bilities, highlighting the objective function results for l 0:18; 0:05; 0:05; 0:45; 0:27.
230 F.S. Pinto, R.C. Marques / Water Research 126 (2017) 216e231

Fig. C.6 Display of FSP results (scenario #4), initial values for
l 0:18; 0:05; 0:05; 0:45; 0:27 and possible variations (l and year).

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