WSNTG 9th Annual Conference

1
WSNTG 9th Annual Conference

• Water Services Strategic Plans
• Fact or Fiction

2
Economics of Water Services Provision Public
Schemes

• Oliver Ring
• Director of Services
• Comhairle Chontae Chiarraí

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Water Pricing Policy Principle

• The governing principle behind the Water Pricing
  Policy is Article 9 of the Water Framework
  Directive and particularly the opening sentence
• Member States shall take account of the
  principle of recovery of the costs of water
  services, including environmental and resource
  costs, ... and in accordance in particular with
  the polluter pays principle.

4
Water Pricing Policy Framework

• In Autumn 1998, the Government adopted a Water
  Services Pricing Policy Framework requiring
• Recovery of average operational and marginal
  capital costs of Water Services from all
  Non-Domestic (ND) users.
• Metering of all such users by 2006.
• Continuation of policy of not charging the
  Domestic sector for water services - operational
  costs to be funded through the Local Government
  Fund (L.G.F.) and infrastuctural costs to be
  funded through the DELG Capital Programme.

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Circular L16/02

• The Policy was communicated to Local Authorities
  in a series of circulars, which were consolidated
  in Circular L16/02 of September 2002.
• Capital and Operational cost recovery policies
  and procedures are set out in the circular.
• Comprehensive Guidance Notes were prepared by
  Consultants and rolled out to LAs in 2002,
  followed by regional workshops.

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CCMA Report on Water Pricing

• The CCMA Water Services Committee established a
  group in January 2003 arising from concerns
  expressed in relation to the practical
  implementation of L16/ 02.
• The output was a CCMA Report on Water Pricing in
  January 2004 and the issues raised in this Report
  are largely still unresolved.

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Key concerns of the CCMA

• Include
• the capacity of the LGF to fund the cost of
  Domestic water services
• the fairness and practicality of the Water
  Pricing Policy in relation to recovering capital
  costs from the ND sector

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Water Pricing Operational Costs

• Operational costs have been rising steadily due
  to
• increased provision of services, and
• new and higher environmental and performance
  standards.
• A CCMA survey in 2002 found that costs were set
  to rise by about 282 in all Local Authorities
  between 1990 and 2008.
• Average Non-Domestic element is about 40 of the
  total demand.

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DEHLG Management Information Questionnaire
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2002 Operating Costs (Water Wastewater)
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2006 Operating Costs Estimated-(Water
Wastewater)
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Domestic costs as of LGF
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Operational Costs Domestic Sector

• L16/02, Section 1.2. says the Government will
  continue to fund in a transparent way the cost
  of the provision of water and waste water
  services to domestic users through the capital
  budget of the Department and, in the case of
  operations costs, through the Local Government
  Fund, in a manner consistent with efficiency and
  environmental sustainability.

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Operational Costs Domestic Sector

• Section 12 of L16/02 says The Water Pricing
  Framework includes a commitment to fund domestic
  operational costs through the L.G.F. The
  Department is actively involved in developing a
  process to deliver on this commitment.
• LA experience is that there has not been full
  funding for operational costs since 1998.

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Operational Costs Non-Domestic Sector

• Section 1.2 of Circular L16/02, , says
• Operational costs in respect of the provision of
  water and waste services to non-domestic users to
  be recovered in full based on usage, with an
  attendant adjustment to the commercial rate.
• Sections 5 and 6 deal with the detail of
  Non-Domestic Capital and Operational Cost
  Recovery.

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Issue Full Cost Recovery (FCR)

• CCMA view is that the Irish Water Pricing Policy
  is not a framework for FCR - L16/02 does not
  explicitly define what it means by FCR.
• CCMA recommends 7 cost areas which should be
  included in the FCR, including,
• cost of replacing existing run-down assets,
• cost of implementing Environmental Legislation
• cost of service level improvements.

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EU position on FCR

• The absence of full-cost recovery either means
  that subsidies are in place to make up the
  difference between costs and water charges (so
  that the water utility can be financially
  sustainable) or that the asset is being run down.

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Issue No Profit

• Section 5.11of L16/02, The Framework also
  provides for the recovery of domestic capital
  cost from the Exchequer and domestic operations
  costs through the Local Government Fund. It is
  implicit in this arrangement that Local
  Authorities do not make a profit from the
  provision of water services.

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Issue No Profit

• CCMA considers that the no profit concept is in
  clear conflict
• with FCR by Local Authorities
• with the DBO process
• with LAs adopting a stand-alone commercial
  approach to the provision of water services
• Operating surplus is part of providing any
  utility service.

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Issue No Profit

• CCMA suggests a possible alternative definition
• Water Authorities will not be allowed to raise
  funds for services other than water services
  through the Water Pricing Scheme. Where there is
  an excess of revenue over costs in any operating
  year, the excess will be applied to fund future
  water services infrastructure.

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Issue Cross Subsidisation

• Section 5.12 of L16/02 says
• The clear absence of cross-subsidisation of the
  domestic users is both a key element of the
  policy and an issue which has been repeatedly
  stressed by business groups.

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Issue Cross Subsidisation

• CCMA recommends that cross-subsidisation, in
  either direction, be avoided in the new pricing
  system.
• Can only be resolved when a clear policy decision
  is taken on how domestic water services are to be
  paid for, and by whom.
• Until then, any shortfall in income for water
  services after full cost charging to non-domestic
  and Local Government Fund contributions will have
  to be made up by subsidy from L.A. funds.

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Issue UFW (Unaccounted for Water)

• WP Policy limits the amount of UFW chargeable to
  the ND Users sector to 20.
• National Water Study says about 47 UFW in the
  Local Authority system The reasons have to do
  with historic having a low investment, low cost,
  albeit efficient system.
• Forcing the Domestic sector to carry costs for
  UFW levels above 20 is a subsidy to the
  Non-Domestic sector.

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UVF v. Water Conservation.

• Good water management practice is to manage water
  conservation on the basis of the Economic Level
  of Leakage. (ELL)
• Northern Ireland W.S. which had 37 UFW in 2002,
  estimates that 600 million is needed to reduce
  UFW to 20.
• After 10 years of substantial investment in
  England and Wales 75 of Water Conservation have
  not reached E.L.L.

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Issue UFW

• CCMA recommends that
• Local Authorities be incentivised to become more
  efficient, with emphasis on serviceability and
  customer service standards rather than solely on
  UFW.
• Realistic and achievable ELL targets should be
  set for individual schemes for progress over a
  number of years, rather than immediate 20 UFW
  cap for N.D. Charging.

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CAPITAL COSTS

• Section 5.1 of L16/02 says
• Capital contributions should be sought (from
  non-domestic users) to cover the full marginal
  cost of water services capacity reserved by them
  and that individual contracts from larger
  industrial users be negotiated.

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Issue Marginal Costs

• Problems with calculating the ND user sector
  contribution on the basis of the marginal costs
• it amounts to a form of cross-subsidisation which
  is unfair, and undesirable in terms of the
  polluter pays principle.
• it is complex and time consuming to calculate and
  agree the costings the calculations are first
  made at Preliminary Report Stage and revised at
  least three more times this frequently leads to
  frustration and delays in projects.

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Issue Marginal Costs

• CCMA recommends that
• average cost pricing be used to determine ND user
  sector contributions as used in Scotland,
  Northern Ireland and elsewhere.
• This would
• eliminate cross-subsidisation,
• be transparent and
• eliminate unnecessary complexity.

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Recovery of Non-domestic Capital Costs

• Two ways in which a Local Authority can recover
  ND user capital costs.
• through a volumetric or flat rate water charge as
  detailed in L16/02, Sections 5 and 6.
• Through a Development Levy scheme (cf. Section
  5.14).

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CAPITAL COSTS

• Section 1.2 of L16/02, includes the following
  objective
• Collection of capital contributions by Local
  Authorities from non-domestic users in a
  structural and uniform manner and in accordance
  with the polluter pays principle.

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ND Capital Cost Recovery through Water Charges

• Water charging should be on a volumetric basis
  for all non domestic users from 2007 onwards,
  following the proposed completion of universal
  metering of non domestic users by the end of next
  year.
• The issues of FCR, No-profit and Cross-
  subsidisation have been discussed in the context
  of Operational costs recovery but the same
  comments apply

32
ND Capital Cost Recovery through Development
Levies

• Under the 2000 Planning and Development Act - 3
  types of schemes
• General Development Contribution Schemes
• -Reserved Function.
• Special Development Contribution Schemes
• where exceptional costs not covered by the
  general scheme are incurred.- Executive function
• Supplementary Dev. Contribution Schemes.
• to facilitate a particular infrastructure service
  or project.
• -Executive function.

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Issues

• Considerable variation in the various General
  Contribution Schemes, as adopted, including the
  level of charges, methodology of calculating
  charges, categorisation of developments, etc.

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Commercial/industrial Charges

• Some of the lowest and highest 2004 water and
  waste water charges

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Residential Charges

• Selected current development charges for water
  and wastewater for residential units

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• The wide variation in charges is unlikely to be
  explained by differences in construction costs or
  need or infrastructural development.
• The fact that General Development Schemes are
  subject to adoptation by Elected Council must be
  a factor

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• The CCMA believes that an integrated series of
  decisions is required to bring the Development
  Levy Scheme properly into the overall pricing
  framework for water.
• These are set out in the CCMA water pricing
  report and include recommendations to amend the
  Government WP Policy to include this integration.

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Other Issues New Residential Development

• The current WP system treats existing residential
  property and infill within existing networks as
  domestic and fully fundable by the Exchequer.
• New residential development outside of the
  existing network is treated as commercial and
  capital costs must be recovered, as from the
  Non-domestic user sector

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Other Issues Incentives for Efficiency

• Article 9 of the WFD states
• Member States shall ensure by 2010 that
  water-pricing policies provide adequate
  incentives for users to use water resources
  efficiently, and thereby contribute to the
  environmental objectives of the Directive.

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Incentives for Efficiency

• Metering and water charges will clearly provide
  the necessary incentive to the N-D users but it
  hardly seems adequate to rely on a policy
  statement in L16/02 Section 12 that Local
  authorities should establish a system whereby
  domestic users are notified of the true cost of
  their water services and are encouraged to
  conserve their use of this resource.

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Incentives for Efficiency

• At a minimum, measures should include
• revising the Building Regulations to allow only
  water efficient design and devices and
• providing a meter chamber for all new connections
  with a view to installing meters (temporary) for
  water conservation purposes.
• (The incentive with the best record is still
  water charging!)

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Further Issues

• Impact of DBOs on operations budgets
• Expansion of DBO into distribution?
• Future role(s) of LAs in water services
• Service provider/ operator
• Manager of privately delegated operator
• Local Regulator
• National Regulator?
• River Basin Districts WFD

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Finally

• The key questions to be resolved are
• When and how is the Domestic use of water
  services to be paid for fairly and fully?
• Is the polluter pays principle to be fully
  applied in the Water Pricing Policy?

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WSNTG 9th Annual Conference

• Water Services Strategic Plans
• Fact or Fiction