WSNTG 9 th 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

3. 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.

5. 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.

6. 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.

7. 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

8. 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.

9. DEHLG Management Information Questionnaire

10. 2002 Operating Costs (Water & Wastewater)

11. 2006 Operating Costs –Estimated-(Water & Wastewater)

12. Domestic costs as % of LGF

13. 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.”

14. 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.

15. 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.

16. 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.

17. 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.”

18. 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.

19. 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.

20. 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.”

21. 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”.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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).

30. 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”.

31. 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.

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

34. Commercial/industrial Charges • Some of the lowest and highest 2004 water and waste water charges

35. Residential Charges • Selected current development charges for water and wastewater for residential units

36. 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

37. 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.

38. 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

39. 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”.

40. 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”.

41. 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!)

42. 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

43. 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?

44. WSNTG 9th Annual Conference “Water Services Strategic Plans – Fact or Fiction”