Aqua Publica Europea event

Assessment of cost recovery through water pricing

Gorm DigeTerritorial environment, policy and economic analysis

(gorm.dige@eea.europa.eu)http://www.eea.europa.eu/publications/assessment-of-full-cost-recovery

 

From the 2012 Water Eurobarometer

• 70% of Europeans realise the seriousness of water-related problems and support stronger EU action

• 84% of consumers support charges for the volume of water they use

• 12% disagree with pay-more-if-you-use-more-principle

• 57% explicitly call for a fairer pricing policy

• 47% want stricter water regulation

Challenges

Article 9 of Water Framework Directive (WFD) – cost recovery of water services taking into consideration environmental and resource costs (ERC)

Blueprint to safeguard Europe’s water – enforce water pricing/cost recovery obligations under WFD including metering when relevant

Are Member States ready for the challenge?

Purpose of this study

• Collates practical information on current state of water pricing in Europe

• Cost recovery of water services including ERCs

• Addresses issues of incentives, affordability and social equity

• Selected countries: Croatia, England, France, Germany, the Netherlands, Serbia, Scotland, Slovenia, Spain and Wales

• Recommendations - development of pricing models and water pricing reporting

Pricing of water serve as policy instrument to achieve:

• Cost recovery - financial recovery of water supply (including investments in infrastructure, operation and maintenance) and water use-related environmental and resource costs

• Incentives - conserve water and promote water efficiency

Water prices can be charged in many waysWater service Pricing mechanism Cost types covered*

Water abstraction Tax or charge E&R E&R Water trading

Water supply/consumption Water price / tariff C&I; O&M Tax on water use E&R

Sewage Sewage charge C&I; O&M Waste water treatment Waste water charge C&I; O&M Water pollution Water pollution charge/tax E&R Quantitative water management

Water system charge C&I; O&M

* C&I: Capital and Investment costs; O&M: Operational and Maintenance costs; E&R: Environmental and Resource costs.

Is water consumption reactive to water price changes?

Country Region Method Elasticity of demand for water Notes Sources

Spain North-west Regression (OLS) -0.14 to -0.17 1993-1999

Marginal price -0.34 Beyond a minimum

-0.20 Consumption in summerFrance Gironde Regression (OLS) -0.17 1975 Point (1993) in

(Nauges, 1999)

Country Regression (OLS) -0.10 to -0.20* 1975- 1980- 1985-

-0.25 to -0.35** 1990Country Regression (OLS) -0.12 1989

-0.32* - 0.31** 1995Yerres Basin Regression (IV) -0.31 1995 (Le Coz, 1998)

Gironde Regression (IV) -0.08 1990 to 1994 (Nauges et al., 1998)

Moselle Regression (IV) -0.22 1989- 1993

Regression (Panel) -0.23 1989- 1993

Greece Athens Chronological regression series (macro elasticity) -0.4 small consumers

Consumption Band <15 m3

-0.8 large consumers >60 m3

Cyprus Water demand model -0.79 (for the lowest 10% of incomes)

-0.39 (for the highest 10% of incomes)(Hajispyrou et

al., 2001b)

(Martinez-Espiñeira,

2000)

(Boistard, 1993)

(Pouquet and Ragot, 1997)

(Azomahou, 2000)

(Ghini, 2000)

Source: www.planbleu.org/publications/fiuggi_cemagref_eng.pdf

Source: Grafton et al., 2009

Evidence of water pricing schemes providing incentives to reduce household water use

Czech Republic:• Between 1990-2004 the water and wastewater tariff for

households increased from 0.8 to 48 CZK/m3. Fees increased for the extraction of both surface, ground water, and discharge of waste water. Household consumption decreased by 40% from 171 litres per capita per day in 1989 to 103 litres in 2002

Denmark:• Between 1993-2004 real price of water (including

environmental taxes) increased by 54 %. This has led to a substantial decrease in urban water demand from 155 to 125 litres per person per day, one of the lowest levels in OECD  

Water pricing schemes to recover costs in water and wastewater servicesCountry

Water pricing structuresDrinking Water Sewage/Sanitation Irrigation

England and Wales

Households: fixed + rateable value (if unmetered) OR fixed

+ volumetric

Industry: fixed + volumetric

Households: fixed + rateable value (if unmetered) OR fixed +

volumetric

Industry: Small users pay volumetric; large users pay fixed

+ higher volumetric rate

Abstraction charges (fixed + volumetric) apply

Scotland

Households: fixed (based on tax bracket)

Industry: fixed + volumetric (based on size of meter)

Households: fixed (based on tax bracket)

Industry: fixed + volumetric (based on size of meter)

Only abstraction charges apply

The NetherlandsHouseholds: fixed + volumetric

Industry: fixed + volumetric

Households: fixed (based on size)

Industry: variable (based on pollution units)

Farmers using piped water are treated as business customers (industry); farmers using groundwater pay a groundwater charge; farmers using surface water pay nothing

GermanyHouseholds: fixed +volumetric

Industry: fixed +volumetric

Households: fixed + volumetric + runoff charge based on land

cover

Industry: N/A

N/A

Cost recovery levels (water/sanitation tariffs)

Note: For FR the estimated cost-recovery levels are evaluated together and should be 83% (median level) and not 138% as reflected in the table

Some issues related to financial cost recovery

• Difference in assessment methodologies including cost elements considered

• Operation and maintenance costs recovered from water users in most countries/sectors – not the case for investment costs

• Data on cost recovery are not homogenous across and within countries – and not always easily accessible

ERCs and cost recovery

• Variability in the way Member States define and account for externalities in practice

• Most MSs examined consider ECs by charging water polluters for purification of wastewater and for untreated pollution discharged in surface waters

• RCs to a lesser extent considered by setting charges on water abstraction, construction, operation, and maintenance of water storage facilities

Examples of revenue figures collected from env. taxes for water services

• New requirements in WFD Article 9 – not affect mechanisms put in place for recovering ERCs as indicated in total revenues

• Absence of drastic changes in revenues from env. taxes - indicating no additional efforts to internalise ERCs

(000s Euros)

2005 2006 2007 2008 2009 2010 2011 2012

Germany (all Länder) 339,480 289,140 269,330 254,040 - - - -

France (all agencies) 1,789,300 1,665,800 1,730,400 1,876,200 1,838,700 1,959,600 2,044,700 2,084,000

Spain (ACA) 326,110 336,967 322,127 347,518 366,420 - - -

UK (EA) 119,400 114,300 184,500 188,900 200,000 200,600 194,300 196,700

Scotland (SEPA) 12,728 13,940 16,954 18,867 19,452 19,082 19,459 19,929

Proposed options for reporting ERCs

• To ensure EU wide implementation of cost recovery principles - comparable systems for reporting of utility costs and revenues

• A system is needed that indicates what areas of ERCs are covered

• Benchmarking initatives are one promising option for such a reporting instrument

• Proposed reporting sheet for assessment of inclusion of environmental and resource cost in cost recovery (p. 103)

Affordability levels for drinking water supply and sewage and wastewater treatment services

Country

Affordability for the household sector [% of disposable income]

Drinking Water Supply Sewage and Wastewater Year

England & Wales 1.09 1.21 2009/2010

Scotland 0.96 2010/2011

The Netherlands 0.6 1.00 2009;n.d.

France 0.42 0.38 2009/2010

Germany 0.55 0.68 2010

Slovenia 1.4 0.2 n.d.

Spain (Catalonia) 0.52 2010

Do water pricing schemes account for social concerns?

• In each examined MS affordability taken into account. A variety of systems are found

• Water authorities in some MSs perform periodical pricing studies - comparing family income with water bill

• Some MS specify means to achieve affordability others leave this unaddressed

• Artificially low water prices not the best way to ensure affordabilty – risk of underfunded service providers....

Example of means for achieving affordability

• Via reductions in service charges

• Social welfare allowances earmarked for the payment of water services

• Water charges pegged to the value of the house (e.g. England, Wales, Scotland) and special tariffs

• Sewage charge remission for households (e.g. the Netherlands) that cannot afford to pay

• A remission for the purification, pollution and water system charges is also possible

• Support through social welfare – includes an allowance for the cost for water service (e.g. Germany)

In conclusion - ways forward for pricing schemes

• A substantial part of the water bill is variable

• Volumetric or increasing block rates are used - metering indispensable

• Rates or rules for calculation fixed in a transparent way

• Rates high enough for water suppliers to invest in improvements

• Affordability addressed through social measures - not by reducing water price incentives (such as reduced VAT rates)

• Regional variations in e.g. water scarcity reflected in water prices

Please do not hesitate to ask us!

Contact the European Environment Agency for information

http://www.eea.europa.eu

ERCs – the two attempts from Common Implementation Strategy (CIS)

WATECO group (2003):• Environmental costs: damages incurred by

ecosystems and people as a result of water use...

• Resource costs: occur only when the resource is used beyond its natural regnerative capacity...(overexploitation)

DG ECO2 group (2004):• Environmental costs: env. damage costs of aquatic

ecosystem depletion (e.g. pollution)....

• Resource costs: only arise if alternative water use generates a higher economic value......(misallocation)

Financial cost recovery (agriculture - where irrigation water tariffs are in place)

Country Cost recovery levels Year

Netherlands 99% (figure including all sectors, i.e., domestic and business users

including farmers)

2010

France O&M costs: 100%

Investment costs: 15 – 95 % (Average: 55%)

Arcadis, 2012

Spain (Guadalquivir) RBD)

49,78% 2005

Cyprus 51% Arcadis, 2012

Greece 54% Arcadis, 2012

Italy 20 – 30 % (South)

50 – 80 % (North)

Average: 50%

Arcadis, 2012