Price, profit, and water tariffs:
Ne’er the twain shall meet?

PRICE AND PROFIT.

Or, price vs. profit?

These are the two sides of the water equation that is at the heart of ongoing “rate rebasing” talks between the Metropolitan Water and Sewerage System (MWSS) and the two private water concessionaires serving the capital region and surrounding areas.

A fortnight ago, they engaged in a noisy row over the possible disallowance of claims for income tax payments, but yet again they are locking horns.

This time, it is over the level of guaranteed returns that the water companies are entitled to get — a major factor in setting water tariffs.ntitled to get — a major factor in setting water tariffs.

How this debate ends will determine not only what price customers will have to pay for water but also how much profit the water firms could make in the next five years.

Manila Water Co., which provides water service in the eastern half of Metro Manila and surrounding areas, wants to increase rates by P5.83 per cubic meter or 21 percent to P34.12 per cubic meter.

Maynilad Water Services, Inc., which runs the water system in the west zone, is proposing to increase average basic rates by P8.58 per cubic meter or 25 percent to P42.55 per cubic meter.

Since MWSS was privatized in 1997, water rates have soared nine-fold in Manila Water’s east zone and more than six-fold in Maynilad’s west zone.

Apart from being allowed to recover past expenses and future costs from tariffs paid by customers, the two water companies are also allowed to earn a return on those cash outflows.

For the next five years until 2017, they want a return, also called the appropriate discount rate or ADR, of 8.99 percent, according to people privy to the discussions.

However, MWSS water regulators find the proposed discount rate of 8.99 percent too high, given that yields on long-term Philippine government bonds have plummeted, especially in the last five or six years as the country’s economic fundamentals have gotten better alongside falling U.S. interest rates.

The regulators are said to have initially set the ADR at 6.16 percent, according to people familiar with the discussions between the MWSS and water firms.

In plain terms, water rates increased faster in the early years of privatization as a result of big jumps in the ADR, because of higher interest rates and the peso’s decline.

Today, amid lower interest rates and a stronger peso, the returns of water firms are expected to also fall proportionately, thus tempering any increase in the price of water.

However, by many accounts, the water firms’ proposed ADR of 8.99 percent does not seem to reflect this changed reality.

So, what “guaranteed returns” for water service is best in the next five years?

Should it be 8.99 percent, according to the water companies?

Or, should it be 6.16 percent only, according to MWSS’s estimate?

Is there a perfect balance here between the profit that water firms should make, and the price that customers should pay for water, in the next five years?

Read our latest report, MWSS, water firms clash over ‘guaranteed returns’.

Check it out also on BusinessWorld Online and ABS-CBNnews.com.