The European water industry operates under country specific regulatory frameworks. In 2000 the approval of the Water Framework Directive imposed a set of common rules aiming at promoting sustainable water use. The Directive recognised cost-oriented tariffs as an instrument to promote such sustainable use: the tariff calculation has to be based on an economic analysis which estimates the volume, prices and costs associated with water services, the relevant investments and a forecast of investments. The Water Framework Directive, however, does not detail mechanisms for cost recovery and tariff design.
The water industry, as other network industries such as electricity and gas, is highly capital intensive and each country has set its own rules to set tariffs to recover the costs of providing the water services (including capital charges) as well as to govern the relationships between the different stakeholders, including central and local governments.
Differently from the electricity and gas industries, however, no attempt has been made so far to introduce in the water sector a more comprehensive and harmonized set of rules at European level such as to have an homogeneous approach to cost recovery and governance across countries.