Project summaries
Over 80% of households in England and Wales are still charged for their water based on the rateable value of their property: people in bigger houses pay more, and charges are independent of usage. But the other 20% of households - those who are metered - are charged on the basis of how much water they use, independent of the nature of their property. It is this sharp difference in charging structures, without any apparent philosophical basis or overt plan, that first brought the subject of water charging to our attention at the New Policy Institute.
And the plot thickens: rateable values have not been changed for almost 30 years, and are no longer used for any purpose other than water charging; on current progress, it will take another 25 years before a majority of households are metered; domestic consumption rises each year, but supply is fixed; and prices have risen each year for the last 15 years as ever more investment is made in environmental improvements. What all parties to the debate do agree on is that the current situation is a right old mess!
At one level, all the papers in this pamphlet are about the potential application of Council Tax bands to future water tariff structures, the motivation being to modernise whilst still retaining some element of the progressivity in charging structure. But, at another level, the papers are about how to combine market efficiency with social justice, and the role of government in setting the framework for utility pricing. Thus the material is of relevance to anyone thinking about policy development in the social justice arena, as well as those interested in the particular subject of water.
Before turning to the papers, I would like to establish a few basic principles. First, whilst there is clearly some relationship between metering and tariff structures (e.g. it is obviously difficult to have volumetric charging for unmetered households), they are essentially two distinct, and somewhat separate, subjects. For example, tariff structures which contain some element of ability to pay are perfectly possible in a metered scenario and, vice versa, it would be the height of simplicity to replace the current rateable value-based tariff for unmetered households with a single, flat charge.
Second, economic theories of pricing do not dictate that everyone should be charged the same nor that costs should be proportional to usage. What economic theory does suggest is that usage at the margin (i.e. at high levels of consumption) should be priced roughly according to the marginal cost.
Finally, the current situation is clearly not stable. If consumers have a choice between two options which are identical apart from their cost, they will inevitably move towards the cheaper option, even if this takes some time to happen. So, on current tariff structures, it will be the high rateable, low usage consumers of water who are attracted to metering. As they save money, the low rateable, higher usage consumers (e.g. poor families with children) will inevitably have to pay more to make up the difference.
Now to the papers, which address two main questions: a) is it important to retain a progressive charging structure for water and b) if so, how can this be achieved.
In their respective papers, both Peter Kenway and Keith Harris firmly conclude that the answer to this question is ‘yes’.
Peter’s case is centred on the notion of social justice. Whereas the predominant notion of social justice across the regulated industries is a narrow one, based on vulnerable groups, the reality of the notion embodied in the unmetered water tariffs is a much broader view of social justice, with payment according to means. He argues that the broader view is valuable, and demonstrates that it does not conflict with economic principles. Its retention or otherwise is therefore not just a technical matter and requires political intervention. He then discusses the government’s position, where it is clear that they are concerned about "fairness and affordability" but much less clear what they are actually going to do about it.
Interestingly, Keith, a senior manager in a major water company, almost takes the case for some element of social justice in the charging structure as read. He points out that, whilst it is important to have a price disincentive for high volume users, there is no such imperative for the majority, and thus that costs have to be determined on some other basis, with a range of choices for obtaining the required levels of revenue.
All the contributors agree that, strategically, it does not make sense to reform the current unmetered tariff unless something is also done about the metered tariff.
By way of a series of practical examples, Peter Vass illustrates what would happen: first, the high rateable value, low usage consumers would move to metering (as they are already doing) to save money; as a consequence, the average bill for unmetered consumers has to rise to maintain total revenues; this creates a greater incentive for more people to move to metering, which in turn raises the bills for the unmetered consumers again. Whilst it is not clear how long this process will take, it is clear that the low rateable value, high usage consumers (e.g. poor families with children) lose out substantially. Even if protection for vulnerable groups is introduced, the end result is still much more regressive than the current situation.
In this context, the papers by Janet Wright and Keith Harris both provide a number of practical proposals for future tariffs based on Council Tax bands. None of these are based on a straightforward switch from rateable value to Council Tax: as Janet’s analysis shows, such a scenario would be both regressive compared to the current situation and involve significant incidence effects (i.e. many ‘losers’). Rather, the preferred options centre on having a higher ratio between what the top band property pays and what a bottom band property pays than that which applies to the Council Tax itself.
Whilst the preferred options are both practical and progressive, they still involve incidence effects. But, the overall reduction in prices that is now in prospect presents an opportunity to overcome this to the extent that the losers only need to lose in the sense of not sharing in this reduction.
Of course, the reasons for the current predominant tariff are historical – water used to be provided by local authorities – but the end result is unique – in no other industry is ability to pay at the core of pricing policy. It is this which makes the subject of water charging so important: if a government interested in social exclusion cannot act decisively to retain some element of differential charging in an industry where the principle is widely accepted by both consumers and providers, what hope is there of such a principle even seeing the light of day in any other industry subject to price regulation?
On the other hand, if stable, strategic and progressive tariffs are introduced in the water industry, then a whole panoply of possibilities begin to emerge. For example, why shouldn’t the television licence fee differ according to ability to pay?
Second, it is clear that the Council Tax, as currently configured, is arbitrary to an extreme: whilst the principles of both rateable value (proportional to property prices) and the poll tax (same for everyone) are at least clear, the ratios between Council Tax bands were simply a matter of political choice. If the current ratios were judged suitable by a government of the right, why should not a more progressive government look at them again, with a view to increasing them?
Finally, is it time for a proper review of the regulatory process, and the respective role of the regulators and government in particular? Whilst their deliberations may be thought largely technical, and thus public visibility and accountability is low, the regulators are actually working in highly political areas where the economic principles are much less clear, and much less pervasive, than most people think.
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