Domestic Metering and Water Conservation – Economic Implications

1. Domestic Metering and Water Conservation – Economic Implications Edgar Morgenroth

2. Introduction 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.

3. Usable Water is not Free! 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.

4. Public Expenditure on Water and Sewerage (constant 2010 prices)

5. Who Should Pay? Basic Principles 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.

6. Prices – Domestic Customers • 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;

7. Prices – Commercial Sector • 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.

8. Commercial Water Cost per m3, 2011 Source: IBEC

9. Collection Rate Non-Domestic Water Source: Service Indicators in Local Authorities 2010

10. 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;

11. Pricing • 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.

12. Meters • 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)?

13. Unaccounted for Water Source: Service Indicators in Local Authorities 2010

14. Cost Implications 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).

15. Bailout – Unpleasant Arithmetic 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)

16. Conclusion • 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.