Affordability of Household Water Services in Great Britain

1
Affordability of Household Water Services in
Great Britain

• Water Affordability in Scotland Conference
• April 2004
• Dr John W Sawkins and Mrs Valerie A Dickie
• Department of Economics,
• School of Management and Languages,
• Heriot-Watt University, Edinburgh

2
1. Introduction

• Recognition that affordability is an important
  issue re household water services, begs the
  questions.
• How should we charge for water services?
• What principles should underpin charging?
• Determined (ultimately) by our (societal)
  perception of household water services

3
1. Introduction

• Perceptions may differ between individuals,
  communities, societies etc
• Consider possible perceptions of household water
  services (potable water and sanitation)
• 2 models (due to Herrington 1996)
• 1. Social Service Model
• 2. Business or Public Corporation Model

4
2. Household Water Services Economic
Characteristics

• 1. Social Service Model
• stresses consumer rights to the service
• emphasis on public health benefits
• finance industry via general taxation
• scepticism over domestic metering
• concern over volumetric charging systems lest
  universal access is compromised

5
2. Household Water Services Economic
Characteristics

• 2. Business or Public Corporation Model
• stresses commercial nature of industrys output
• services supplied in response to demand
• sympathy towards domestic metering, volumetric
  charging and marginal cost pricing
• finance industry via customer charges
• affordability problems to be dealt with via tax
  and social security system

6
2. Household Water Services Economic
Characteristics

• Which model to employ?
• Classify household water services in two ways
• 1. Essential (Basic needs) use - drinking,
  cooking, basic sanitation etc
• 2. Discretionary (Luxury) use - garden,
  leisure, luxury appliances
• 1. Social Service Model?
• 2. Business or Public Corporation Model?

7
2. Household Water Services Economic
Characteristics

• Consensus in OECD countries
• access to (Essential / Basic Needs) household
  water services is a prerequisite of participation
  in, and cohesion of, civic society
• access may be denied or limited if services are
  not affordable
• What is meaning of water affordability
• How is it measured?
• How might it be benchmarked?

8
3. Defining Affordability

• Definition
• synonymous with ability to pay (not
  willingness to pay)
• problem of subjectivity
• pragmatic solution to assume a negative
  correlation between of household income spent
  and ability to pay (affordability)
• but how to define income (net or gross)? use of
  expenditure data instead?

9
4. Measuring / Calibrating Affordability

• Calibration
• macro affordability measures (eg average water
  charges to average household income)
• obscures much important detail
• micro affordability measures
• can be disaggregated by income group, region,
  family type etc
• Use micro affordability measures, disaggregated
  by region and income

10
4. Measuring / Calibrating Affordability

• Statistical Analysis
• use of Family Resources Survey 1997/8 and
  2002/2003
• two snapshots
• income based (larger sample sizes than
  expenditure surveys)
• adjustments made for household composition
  (equivalisation)
• gross income estimates used (clean but not a
  complete picture)
• classify households by country and income decile
  and Council Tax band

11
4. Measuring / Calibrating Affordability

• Results
• Table 1 (Scotland by income decile)
• rise in between years across all income groups,
  most marked in lower deciles
• Table 2 (England and Wales by income decile)
• slight fall in between these years
• note higher initial base than Scotland
• timing of Period Review 1999 one off price cut
• Similarity (for 2002/3) between Scot, Eng and
  Wales

12
4. Measuring / Calibrating Affordability

• broad income bands obscure much detail
• decompose further by income and council tax band
• Table 3 (Scotland)
• rise in as move up CT bands
• note lowest income decile (G based on small
  number of obs - 8)
• Table 4 (England and Wales)
• similar pattern
• not as marked in lowest income decile (due in
  part to use of rateable values not CT bands?)

13
4. Measuring / Calibrating Affordability

• General Observations
• proportion increases across bands and decreases
  with higher income
• similarity between Scot, Eng and Wales
• note pace of change in Scotland
• note position of those in lowest income decile
• Further work
• use of net income
• further analysis of lowest income decile

14
5. Benchmarking Affordability

• No commonly agreed water affordability benchmark
  throughout the UK
• Compare with fuel
• a fuel poor household spends 10 or more of its
  income on all fuel use to heat its home to an
  adequate standard
• 10 cut off point derived from 1988 Family
  Expenditure Survey data (average fuel spend of
  lower 3 income deciles)
• not rebased every year. Used as a fixed reference
  point, interpreted by devolved administrations

15
5. Benchmarking Affordability

• Water (England and Wales)
• Water Affordability indicator in Quality of Life
  Counts 1999 (latest DEFRA update 2004)
• households spending more than 3 of income on
  water and sewerage charges. See Table 5
• derivation of baseline? Illustrative?
  Approximately twice median spend by households as
  a percentage of disposable income

16
5. Benchmarking Affordability

• How useful?
• Timing of baseline crucial - what point in
  investment / regulatory / pricing cycle?
• Comparisons always relative to ..
• Applicability of Eng and Wales figures to
  Scotland?

17
6. Conclusion

• Conclusion
• Proportion of household income spent on water and
  sewerage charges increases across CT bands and
  decreases with increasing income
• In Scotland proportion of household income spent
  on water and sewerage has risen rapidly in recent
  years
• Now similar to England and Wales
• Further work needed to establish whether position
  of those in lowest income decile in Scotland is
  worse than those in Eng and Wales

18
6. Conclusion

• Conclusion
• water charge affordability impinges on social
  inclusion agenda of Scottish Executive
• lack of clarity in perception of water services
• are household water services best understood
  within social service model or business and
  public corporation model..or both
• are water service charges to be regarded
  (explicitly) as an instrument of social policy?
• Importance in Scottish Executives Principles of
  Charging debate summer 2004