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19 pagesInternational audienceBy adopting the Water Framework Directive (WFD), the European Commission and the Council made recommendations for water pricing policies in EU Member States with a view to enhancing the sustainability of water resources. Clearly, the Directive integrates economic instruments in environmental policies to provide incentives for the sustainable use of water resources. Our analysis will focus on public water utilities, required to be financially self-sufficient, facing demand and capacity shocks. The paper deals with the simultaneous determination of incentive pricing policies and investment rules under an ex ante maximum demand charge. We will characterize the welfare-optimal capacity selection rule and the welfare-optimal maximum demand pricing rule. Heterogeneous consumers demands are considered when tariffs are set ex ante, before demands are known. Our results are state-contingent nonlinear pricing that responds to demand fluctuations and capacity constraints

This article contains an application of peak-load pricing rules to public water services. The model presents a standard water distribution system and a separate wastewater collection and treatment system. Technical and financial constraints are considered. The optimization process provides peak-load prices for drinking water and sewerage services. These prices reflect efficiently the costs of systems constraints and the real value of water resources scarcity. They provide important guidance in the design of efficient water rates and in the development of different water utilities planning strategies. New technologies in water metering (telemetry) should permit applying this model.

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