Utilizing both primary and secondary information pertaining to the water sector of Hyderabad City, India, this paper (1) evaluates the economics of various technically feasible supply augmentations options; (2) estimates the group-specific water demand and consumption response functions under alternative pricing behaviors; (3) calculates the net willingness to pay (NWTP, considered to be the value of raw water at source) of different user groups as derived from their respective price elasticities; (4) shows how inadequate the NWTP is to justify most supply augmentation options including intersectoral water transfers under the existing water rate structure; (5) argues that the economic and institutional conditions internal to urban water sector cannot justify an externally imposed water transfers, whether market-based or otherwise, as long as the water rate structure is inefficient and regressive; and (6) concludes by underlining the central role that the pricing option, both the level and structure, plays not only in activating a number of nonprice options but also in generating incentives for the emergence of new and the consolidation of existing institutional conditions needed to support economically rooted water transfers and conservation initiatives. ¿ 2001 American Geophysical Union