Water restrictions should be phased out and utilities such as Actew in Canberra should set flexible prices, according to the Productivity Commission's vision for Australia's water future.
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Its inquiry into Australia's urban water sector also recommends that individual meters be installed in all townhouses and units and governments should stop all subsidies for water, wastewater and stormwater infrastructure, including rainwater tanks and shower heads.
The productivity commission's report found ending block tariffs and legislating for greater transparency around supply and pricing, as well as allowing water price fluctuations in response to the scarcity value of water, would improve water use efficiency and conservation.
ACT households are charged a flat $95 water connection fee and $2.33 per kilolitre for up to 0.548 kilolitres of water per day. Water use above 0.548 kilolitres per day costs $4.66 per kilolitre.
Executive director of the environment institute at the University of Adelaide Mike Young said low-income households would benefit from a ban on inclining block tariffs.
''All the research shows it is inequitable and inefficient and often it means there is a transfer of wealth from poor people to rich people,'' Professor Young said.
He urged the Government to consider all the commission's recommendations and said households should pay for the amount of water they used.
''Every water user should be exposed to price signals,'' he said.
The report found ACT households with the lowest income spend more than 2.5 per cent of their disposable income on water and water services compared to 0.5 per cent spent by the wealthiest.
The report set a 2012 deadline for Council of Australian Governments to reach cross-border agreements on reforms and cease subsidy payments. The inquiry recommended all reforms be in place by the end of 2013 and that an independent public review of the implementation of the reform package take place in five years.