Dean Lombard Utilities Policy Analyst

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Water Tariff Structures Review November 2007

• Dean Lombard Utilities Policy Analyst
• dean.lombard_at_vcoss.org.au www.vcoss.org.au

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The Victorian Councilof Social Service

• Peak body of the community sector
• Represents the interests of disadvantaged and
  vulnerable households in policy development
  processes
• Concerned with
• Social equity
• Affordability for low-income households
• Ongoing social sustainability
• We work with other organisations when developing
  policy proposals
• St Vincent de Paul, Chronic Illness Alliance,
  CUAC, CALC, Tenants Union, Good Shepherd,
  Uniting Care
• Also talk with industry, government, regulators
  etc.

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Pricing principles

• Promote sustainable consumption
• Account for customers interests
• especially low-income and vulnerable customers
• Understandable tariff structures

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Essential services

• A special case not substitutable
• If bananas are too expensive, I buy apples
  instead
• If housing is too expensive, I go hungry, or
  sleep in a doorway

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Price signals...

• ...come three months later
• Elasticities research indicates
• Indoor elasticities very small for all income
  groups (-0.14)
• Outdoor elasticities higher for middle and high
  income groups (-0.46 compared with -0.19)
• So for a lot of people, the price signal doesnt
  work so well
• Still, weve seen significant decreases in
  consumption over the last few years

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Our opinion...

• Education is the driver
• Price is the reward
• It reinforces behaviour motivated by awareness
  and social pressure
• So pricing principles should
• Facilitate affordability for efficient use
• Be accompanied by measures to help households be
  more efficient...
• ...and concessions to protect low-income
  households

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Low income...

• Sole parents and aged pensioners 537.70 per
  fortnight
• Unemployed person and some sole parents 429.80
  per fortnight
• 20 of low income households cant pay at least
  one utility bill a year
• 10 of Australians live in poverty (less than 40
  of average weekly earnings)
• 39 of Victorian households get the water
  concession

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Income distribution

• Wages and salaries 62.7
• Centrelink payments 22.5
• Own unincorporated business 4.6
• Zero or negative income 0.9
• This is metropolitan Melbourne. Outside of
  Melbourne are fewer wages and salaries and more
  of everything else

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Cant pay my bill...

• Nearly 20 of low income households
• 37 of sole parent households
• As the price of other essentials such as housing
  and fuel has increased markedly over the last few
  years, more low-income households are seeking
  help more often to pay utility bills

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Bill size and price shock

• Low-income households cant save and have few
  reserves. They live from payment to payment
• So rather than consider their annual water bill
  against their annual income, we need to look at
  their quarterly bill against their fortnightly pay

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Ouch

• A 200 water bill is 37 of a pension and 47 of
  an unemployment benefit
• Doesnt leave much for rent/mortgage, food,
  transport, etc.
• ...let alone buying a water-efficient washing
  machine

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Two options

• Price whatever, get affordability for low-income
  households through concessions
• Blow out the concessions budget
• Structure tariff for affordability for efficient
  average-sized households
• Moderate concessions increases will protect
  low-income households
• High consumption households will carry more of
  the new infrastructure costs

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Tariff structure the foundation...

• Structure the tariff to
• Make basic essential use cheap
• human right component
• Make efficient household use affordable
• rewards efficiency
• Make excessive use expensive
• discourages wastage
• means those who dont care pay more for the
  infrastructure their apathy makes necessary
• Keep it simple
• one fixed charge
• one volumetric charge

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...with a few adjustmentshere and there

• Concessions facilitate affordability for
  low-income households
• Rebates to large concession households
• 4 or more dependents
• More help for high usage low-income households to
  increase efficiency
• Especially tenants

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Volumetric vs fixed charge

• Increasing the volumetric component
• Gives more control over the size of their bill
• Increases the reward for being efficient
• Variable fixed charge based on property value
  (above a threshold)
• A progressive tax for essential social
  infrastructure
• Low-income homeowners protected by concession
• Not that unfamiliar really

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Comparing tariff structures
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Baseline tariff

• Revenue down 6
• Concessions down 17
• Efficiency discounts 10-20

• Concession has been doubled to 75 per quarter

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Proposal 1

• Revenue down 6
• Concessions down 17
• Efficiency inconsistently rewarded (8 for 1
  person, 60 for 4, 20 for 6)

• Concession has been modified to apply more
  heavily to the volumetric component (55/20)

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Proposal 2

• Revenue down 11
• Concessions down 15
• Efficiency consistently rewarded (18-26)
• /kL giving the right signal

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To summarise...

• Tariff structure is the foundation of
  affordability and sustainability
• But concessions, rebates, and help with
  efficiency are crucial components
• A wholistic approach using complementary
  strategies
• But the right tariff structure is essential if we
  are going to get it right