Transcript Some Economic Issues on the setting up of Irish Water

Domestic Metering and
Water Conservation –
Economic Implications
Edgar Morgenroth
Introduction
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Ireland is a water abundant country and is likely to remain so,
although some parts of the country may face some pressures
particularly at certain times of the year.
So why should we need to pay for water and reduce demand
for drinking water?
While public attention centres on whether charges should be
introduced the key issue, efficiency, is ignored.
Efficiency has a number of dimensions, demand
management, supply management, macroeconomic
implications.
This presentation will focus on the demand management side
and also refer to the macroeconomic dimension.
Usable Water is not Free!
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Water needs to be treated to avoid public health issues – that
comes at a cost;
Water needs to be pumped to get to households and
businesses – that comes at a cost;
The supply of water requires infrastructure – that comes at a
cost;
No matter how water abundant Ireland is, waste water needs
to be treated – that comes at a cost.
While there are fixed costs, to a large degree the total costs of
providing water and wastewater services depend on the level
of demand (long-term).
In the absence of a demand based charging system
externalities arise.
Public Expenditure on Water and Sewerage
(constant 2010 prices)
Who Should Pay? Basic Principles
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The beneficiary pays principle – cost recovery.
The polluter pays principle.
Both principles are well established and embedded in the EU
Water Framework Directive.
Strong endorsement from the OECD (2012).
Additionally, equity and policy coherence need also be
considered (OECD 2012) – secondary principles.
Prices – Domestic Customers
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Domestic customers currently do not face an explicit price for
their water. A cost per household can be calculated (around
€500 per household), but given that the cost is largely met
from ‘general’ taxes it is impossible to identify the precise
incidence of the cost.
No price means no mechanism to set quantity consumed
efficiently;
Average usage in Ireland is estimated to be 145 litres – in
Germany it is 108 litres i.e. water consumption is 34%
higher;
Prices – Commercial Sector
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The commercial sector does face a price but there is low level
of cost recovery (52%)
There is evidence of cross subsidisation.
Some firms have existing agreements (contracts) that might
be difficult to change.
It is unlikely that the current pricing system incentivises
efficient use of water resources.
Waterford City
Cork City
Galway
Tipp North
Offaly
Mayo
Longford
Sligo
Laois
Cavan
Limerick City
Limerick
Meath
Kildare
Galway City
South Dublin
Fingal
Dublin City
Louth
Kerry
Tipp South
Monaghan
Cork
Leitrim
Westmeath
Carlow
Donegal
Dún Laoghaire-Rathdown
Source: IBEC
Wexford
Waterford
Roscommon
Kilkenny
Clare
Wicklow
Commercial Water Cost per m3, 2011
€3.50
€3.00
€2.50
€2.00
€1.50
€1.00
€0.50
€0.00
Collection Rate Non-Domestic Water
Source: Service Indicators in Local Authorities 2010
Price Responsiveness
• Some people claim that there is no evidence that charges
reduce usage;
• There is an extensive literature and practical experience in
Ireland (Group Water Schemes);
• Espey et al., (1997) meta- analysis of 24 studies for the USA
found an average elasticity of -0.51;
• Dalhuisen et al., (2003) meta-analysis of 64 studies on the
price and income elasticities in OECD countries -0.41.
=>Water consumption is price inelastic i.e. a 1% increase in
price will reduce consumption by less than 1%, but it does
respond to price changes;
Pricing
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Should the same price be charged everywhere?
Uniform charges are not currently used and do not follow
international practice. This reflects the fact that
abstraction/filtering and pumping costs vary. Regional
development impact. Has this been considered?
Should there be a free allowance?
this would imply higher per unit charges for those consuming
in excess of the free allowance;
no incentive for those below threshold;
the charges are not per household (1,654,208) but per
housing unit (1,994,845) - holiday homes go free?!
Poor households can be dealt with using the social welfare
system.
Meters
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There are lots of options on metering – which is the correct
one? This requires careful (cost-benefit) analysis – where is
it??
Should there be universal roll-out and how should the roll-out
be organised?
Where should the meters be located – boundary or in the
property? Where is the leakage – at the householder side or
at the suppliers side? Access to properties.
How should they be read – what about the possibility of using
the communications module of smart energy meters (and
indeed joint roll-out)?
Unaccounted for Water
Source: Service Indicators in Local Authorities 2010
Cost Implications
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The decision on the metering options have a big impact on
costs – even if there is no upfront cost to get the meters
installed
The Walker Review shows there are substantial cost
differences - between £106 and £471 depending on the
choice.
If meters are rolled out to 1.7 million homes (assuming 15% of
the housing stock will use private sources) the costs of rolling
out meters could range from €225 million to over €1 billion!
Even a difference of just €100 million would imply an
additional cost of €70 per household (not counting interest
and assuming that the cost is borne by private households).
Bailout – Unpleasant Arithmetic
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The debate seems to largely ignore the fact that Ireland is
reliant on the ‘kindness of strangers’ – without this the
budget deficit would have to be cut to zero immediately.
Deficits can be reduced through cuts in expenditure or
through higher taxes - the deficit this year is about €8000 per
household (eliminating the banking debt or even all debt
would still leave a sizable deficit);
Water and wastewater services need significant investment –
this is not possible on the public balance sheet.
=> Taken off the public balance sheet would allow Irish
Water to borrow off the balance sheet – this would reduce
the national debt by about 2% of GDP (See Fitz Gerald and
Morgenroth, 2012)
Conclusion
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There are a number of good reasons to reform the provision
of public water and waste water services in Ireland;
Doing so has macroeconomic benefits;
It will make water consumption more efficient;
The devil is in the detail and there are lots of banana skins
around.
A careful evidence based approach is what is needed.