WATER should be priced on how much is available rather than on how much people use, the Federal Government's water advisory group has recommended.

The National Water Commission yesterday released a report that found existing pricing systems were not encouraging people to curb their water use.

"The prospect of rising water demands in urban areas due to population growth, coupled with declining water availability in many of our cities, highlights the need for a well-planned, efficient, sustainable and responsive water sector," one of the commissioners, Chloe Munro, said.

At the moment people generally pay a fixed charge to cover the cost of access to water as well as additional charges for how much they use. But Ms Munro said charging people according to how much they used was not working.

The commission wants the Council of Australian Governments to consider scarcity pricing: people would pay more in times when water was scarce. If dams were full people would be charged on a use basis alone. The commission argues this would send a more effective price signal than water restrictions, which are applied differently in each state and territory.

The commission said this system would let people decide how they used water rather than being told activities were restricted.

It also called for individual meters in all flats so people who live in high- and medium-density housing could be charged for their use and not just a percentage based on how many people live in the complex.

This would also allow tenants to be charged for water use.