The hidden depths of the water charge

as submitted to the Sunday Business Post:

In a somewhat haphazard style, the government this week announced more details of its reform of the water sector. Unfortunately, the plans are about as well-crafted as the announcements.

People focused on the revelation that Father Christmas will not bring water meters this year. Instead, water meters will have to be paid for. It does not matter much whether households pay upfront or over time, through higher taxes via the Department of Finance, or through lower pensions via the National Pension Reserve Fund. Households will pay.

How much will households pay? A basic water meter costs €60, a fancy one €150. (The government appears to have picked the latter model.) An experienced plumber can fit a meter in 15 minutes or so. This is not terribly expensive, but many people are hard-up.

The government, however, does not trust households to install their own meters. The government could use a flat charge for people without a meter and a volumetric charge for people with a meter. If the flat charge is high enough, many will install a meter. This is a common arrangement in other countries. It is perfectly fine with the EU, ECB and IMF.

The government does not want to give people this choice. Ireland will be one of the first countries in the world with universal water metering. The government has yet to publish the cost-benefit analysis that shows that this is indeed the best bang for what little buck is left.

Because the government suspects that some people will not be happy to have their water metered and charged – and may thus refuse the government’s plumbers access to their house – the plan is to install water meters just outside the property, on council land.

That means what holes will need to be dug. The exact location of water pipes is not always known, so there may be some searching involved. Furthermore, water meters will be far from the smart electricity meters that the ESB is installing everywhere. Water meters therefore cannot piggy back on the communication network that the ESB is also putting up. Water meter readings will be collected separately.

All this makes water metering rather expensive. The government is not very forthcoming with its estimates, but it will be at least €500 per meter. The government will be happy to lend you that money – in fact will leave you no choice – so that a few hundred euro in interest should be added.

It is easy to get excited about such details – why pay €800 or more for something that can be had for €200 or less – but they distract from the bigger picture. Water meters are only the beginning. Water is metered so that it can be charged.

The government is tight-lipped about what the water charges will be. The EU Water Framework Directive is clear. Water charges should fully recover the cost of drinking water provision and waste water disposal. Ireland spends about €1.2 billion per year on water. Only some €200 million is recovered from non-domestic users. The total amount that will need to come in through household water charges is therefore €1 billion per year – or, not counting those with private or collective wells, €560 per household per year.

Unmetered households in countries similar to Ireland use about 150 litres of water per person per day. Full cost recovery implies that the water charge would be about €3.80 per thousand litres. As metering and charging reduce water use, typically by about a third, Uisce na hEireann would be quickly forced to increase the water charge to €5.70 per thousand litres.

The government has repeatedly promised that each household will get a generous allowance of free water. This is not clever. Again, the government has left us in the dark about the size of the allowance. If it is 100 litres per household per day, the water charge would be €9 per thousand litres. If the allowance is 200 litres, the water charge would be €22.

And therein the problem lies. Uisce na hEireann will supply water to households. The free water allowance will be for households. Small families will get all their water for free. Big households will pay through the nose. The minister will spin this as a boon to little old ladies living alone. A family of four would pay €800 per year without a free allowance but €1600 with. This is a baby tax.

Uisce na hEireann could only give a free water allowance per person if it would track how many people are present in a household.

The free allowance is best done without. Water charges place a disproportionate burden on the poor. Therefore, water charges should be raised and Uisce na hEireann should pay a dividend to the government, which should be used to increase benefits and tax credits. Not everyone would trust the government to pass on that dividend. Uisce na hEireann could have been mutualized, with every man, woman and child in Ireland owning an equal share.

Instead, Uisce na hEireann will be a subsidiary of Bord Gais Eireann (BGE). The government did not want to create a new state company, and it did not want to call on the private sector. That left little choice. BGE has a sound track record in providing households with gas, and it has successfully added electricity. BGE should be well able to deal with the retail side of Uisce na hEireann.

But Uisce na hEireann will do more than charging for water. It will run the water network and the treatment plants. BGE has diversified into wind power, an unfortunate decision which led to a downgrade of its credit rating. BGE loses money on its gas-fired power plant because it relied on in-house knowledge rather than external expertise. Let’s hope BGE has learned from this, because not anyone can run a sewage treatment plant.

Any manager would lose sleep over Uisce na hEireann. 34 local water boards will be merged to form a national company, with 34 different IT systems, 34 different model contracts with suppliers and operators, and 34 different labour regulations. 32 counties will transfer their water assets to Uisce na hEireann. Uisce na hEireann may initially employ 4,000 people, compared to the 1,000 people that now work for BGE proper. Was it wise to limit the competition for Uisce na hEireann to BGE and Bord na Mona?

Uisce na hEireann will be regulated by the Commission for Energy Regulation (CER), presumably soon to be renamed. The CER is struggling. It is wedged between the minister for energy qua policy maker and qua owner of the dominant companies. It has to deal with the far-reaching reforms of the energy market imposed by Brussels. And now its remit will be extended from energy to energy, drinking water, and sewerage. The CER cannot expect additional resources. Will it cope?

The government has embarked on a transformation of the water sector. That is welcome, in principle. It is unfortunate that options are not thoroughly scrutinized before decisions are made. The public debate has been distracted by the minor question how meters will be paid for.

Irish Water (again)

I had an op-ed in yesterday’s Business Post, together with a raft of other pieces. The points raised should come as no surprise to those who read Morgenroth’s and my earlier blogs. Conor Pope independently confirms our numbers. Summary:

  • The government plan for water meters is exceedingly expensive.
  • Free water allowances are a bad idea, particularly if the allowance is per household (as is likely) rather than per person.
  • Is Bord Gais up for this? Can the Commission for Energy Regulation cope?

The Sindo also wrote about Irish Water, which highlights another issue: Bord Gais is not fully state-owned. Employees own a fair chunk too. An uncompensated transfer of water assets from the counties to Irish Water would be a windfall for Bord Gais employees, a capital gain that will be taxable at some point in the future. It would be better if Irish Water would pay a fair price for the assets, funded by newly issued equity. The county councils would then be part-owner of Bord Gais, which would further complicate the planned privatization of part of the company.

Water meters (ctd)

Would you rather

Apparently, only Bord Gais and Bord na Mona are still in the running for Irish Water. One has lost focus, the other is in search of a mission. Not an easy choice.

This follows on yesterday’s post.

Water meters and all that

Ireland is not Greece. Ireland, for instance, does not have a problem with tax collection. Or does it? There clearly is a problem with collecting the household charge. To my mind, the core issue is that the Department of the Environment — which has limited experience with indirect taxation and none with direct taxation — tries to do something for which it was not set-up to do — and refused to call in the experts. Like all departments, Dept Env was already stretched because of the austerity programme.

The household charge is flat: 100 euro per residence. It is easy to determine who should pay. Is it a residence? Are you the owner? If yes and yes, you should pay 100 euro.

The household charge should, at some point in the future, morph into a property tax. There are two key differences. The property tax will be differentiated: More valuable properties would be taxed more. And the property tax will be much higher than the household charge: somewhere between 500 and 1000 euro per household on average.

If Dept Env struggles with something so simple as a low household charge, how will it cope with a more complicated and much higher property tax?

The next episode of the saga re-emerged in the news today: Water meters (1, 2, 3). Households will / will not pay for the installation of water meters. If so, payments will be up front / distributed over the years. If not, the Dept of Finance / National Pension Reserve Fund will make up the difference, perhaps as a soft / commercial loan to Dept Env / households. Installation will cost at most 300 euro per meter / at least 300 euro per meter / not yet known.

The semi-state that is to implement water meters, Irish Water, was supposed to start in early January. It is now mid April and plans are not yet definite. It is not even known whether Irish Water will be an independent entity or a subsidiary to Bord Gais or Bord an Mona. The National Roads Authority is apparently no longer in the running, and private companies (Veolia, Tesco) were never considered. As perhaps 4,000 county council staff may be transferred to Irish Water, it may want to recruit from the HSE to draw on their expertise in forging a national entity out of disparate regional ones.

This matters. Water meters are part of the ECB/EU/IMF agreement and the Water Framework Directive. As long as there is no Irish Water, Dept Env will fulfill its duties in the interim — duties that are beyond its actual remit. I worried about that in January. This piece has an intriguing remark at the end. Apparently, at least one county council is rushing through decisions, preempting the presumably stricter regulatory regime expected under Irish Water and the Commission for Energy (and Water) Regulation.

As I have argued before, there is an advantage to electing competent managers (rather than school teachers) to the Dail, as TDs may become ministers in charge of sprawling bureaucracies. Of course, it would help if the higher echelons of the civil service would have similar competencies.

Towards Irish Water

The public consultation on the establishment of Irish Water opened today. See here and here.

As I’ve argued before, charging for water and waste water is right and proper; and doing so through a state-owned, tightly regulated monopoly is a reasonable solution (although you can argue for a mutual company instead).

The contents of the position paper published today were well-leaked and contain little news. The position papers confirms that Irish Water will also be responsible for waste water and waste water treatment. Council staff will be transferred to Irish Water, probably with a considerable improvement in working conditions.

The Commission of Energy Regulation will regulate Irish Water. There is no sign of the creation of a super-regulator. The new CEWR will be inter-departmental, though, an interesting experiment.

The department persists in two follies – mandatory roll-out of water meters, and free allowances – but a third folly – universal metering – has been dropped.

The time table has been slipping, which is no surprise as it was so ambitious. The public consultation was supposed to start in October, and Irish Water was supposed to start work in January. Originally, the plan was to install 1.4 mln meters in 2 years time; that is now 1.0 mln meters in 3 years time – less than half as fast. It is not clear to me that this would support 2,000 jobs: 500 meters per job, installing two meters in three days.

To make up for lost time, the Department of the Environment now intends to start the work of Irish Water. This is a mistake. Like any department, Environment is struggling with staffing as it is. Utilities are better at being utilities than departments are. Utilities are also better at resisting cronyism than departments – every TD will want a water metering contract to go to their favourite engineer cq plumber. Irish Water will wrestle with the legacies of the county councils, and it is now being saddled with a departmental legacy as well.

Maybe the public consultation will further improve the plans.

The provision of water services

The Irish Times ran a series on water services in Ireland.

The first article is perhaps the most interesting. It leaks the yet-to-be-published report on the water sector by PWC. PWC will apparently be fairly critical of the current system, which nicely fits with the plans by the Minister for a radical overhaul. There will be more investment in water infrastructure. There will be a water regulator. Word on the street has that the Commission for Energy Regulation will have its mandate extended to water (but not to transport). There will be national water utility. Bord Gais, Bord na Mona and the National Roads Authority are bidding to run Irish Water. Only Bord Gais has experience in mass retail.

The piece discusses the transfer of Shannon water to Dublin, but the Minister disappears from the story at that point. I would think that we first want to promote water conservation and fix the leaks.

The piece is silent on the future role of the county councils in water. If Irish Water runs the show, what will happen to the water infrastructure owned by the county councils? What will happen to the civil servants who run this?

Another article wonders what will happen to the private water schemes. Will they be nationalized? Will households with a private well and a septic tank have to pay the water charges? That would be grossly unfair.

The inspection fees for septic tanks are unfair too. Us city folk poo for free — or rather, waste water services are covered from general tax revenues. That is, septic tank owners pay for urban waste water, but city dwellers do not pay for rural waste water.

The second main piece is on drinking water quality, the problems with which are typically overlooked even though they are serious.

The third main article is on water meters. It is summarized in an editorial, and repeats a number of points I made in August. My main concern is the plan for the centralized roll out of water meters. I think that it makes more sense to have people install their own meters and let these meters use the same communication network as the smart electricity and gas meters. See the discussion here.

Conor Pope cites 1000 euro per household per year. I said that. If we maintain the current spending on water (incl. investment), if we keep the business rates for water as they are, and if we exempt those on private schemes from the water charges, then full cost recovery (as required by EU legislation) implies an annual charge of 500 euro per household per year.

Water Meters

I had an op-ed in the IT last Thursday. Discussion is not great on their site. Here’s my edit.

The government aims to create a national water utility to install water meters and charge for water use. The general thrust is commendable, but it may become an expensive failure.

Taxes will need to go up and public spending down to close the government deficit. This will hurt the economy. However, consumption taxes do less damage to growth than income taxes. The government is right to introduce water charges.

A flat water charge would be unfair. Exemptions for those unable to pay are crude and expensive to administer. A flat water charge would not induce water conservation. We produce about 450 liters of drinking water per person per day (l/p/d). The average person probably uses some 150 l/p/d. It is not fully known what happens to the remaining 300 l/p/d. Part is lost through leaky mains, part is used illicitly, and part is lost through leaks in the house or garden. Experience in other countries, and in the group water schemes in Ireland, shows that water charges would substantially reduce household water use. People would also press the water providers to reduce wastage in the distribution network. As the number of meters increases, it will be easier to locate leaks and illicit use. The government is right, too, to introduce water meters.

The government wants to install water meters in 2012 and 2013. That is ambitious: 1.4 million meters in two years, 2800 meters per day. There is also a plan to replace all household electricity meters with so-called smart meters. This has been carefully planned and trialed over the last three years. The smart meter roll-out will be done by well-established companies. In contrast, the installation of water meters is to be led by Irish Water, a company that does not yet exist. I would be surprised if there will be a water meter in every home in Ireland by Christmas 2013. Flat charges may be with us for a long time.

In fact, there is a possibility that water meters will follow the path of voting machines, as learning from past mistakes is not the strongest point of the Irish government.

Water meters will be unpopular, as they remind people of water charges. Installers would need permission to put water meters in the home. Some homeowners will withhold such permission. The idea is therefore to install water meters just outside the property boundary. This is easier but much more expensive. 1.4 million connections will need to found, and 1.4 million holes dug. The water meters would be far from the smart electricity meters and therefore need a separate communications network. This may cost up to 800 per meter (€1.1 billion in total) according to one estimate.

There is a simpler and cheaper option that has worked well in other countries. Households can install water meters themselves, or ask their plumber to. Households with a meter would pay whatever water they use. Households without a meter would pay a flat charge. If the flat charge goes up over time, more and more households will install a meter. If the costs of water meters are a concern – a good plumber could install a certified meter for less than 200 – then Irish Water could give a voucher for 200 worth of free water upon registering the water meter.

The government has repeatedly promised that there would be free water allowances. Only excessive water use would be paid for. This is nonsense. It does not promote water conservation, and it is bad social policy. Like water, food is essential, but the government does not hand out sacks of potatoes. Instead, there are benefits for those without income and tax credits for those with. Benefits in cash are better than benefits in kind, because the household can choose what potatoes to buy, or pasta. Similarly, water should be charged from the first liter onwards. The revenue from the first 100 l/p/d or so should be used to increase benefits and tax credits.

The government may also seek to transfer the responsibility for drinking and sewage water from the county councils to a new, semi-state utility called Irish Water. There is merit in this too. Water treatment plants are largely build, designed and operated by private companies, but guidance and supervision by the county councils has not always been up to scratch. A new national water company would professionalize water management. If assets would be transferred from the counties, Irish Water should be able to borrow money at a lower rate than the government.

There are dangers too. In the past, semi-state monopolies have served their employees and their political masters well – but customers and owners got a raw deal. The government should create a Commission of Water Regulation at the same time as it creates Irish Water.

Or maybe sooner. The prospect of digging 1.4 million holes in the ground is great news for the construction industry – and a number of companies are actively trying to convince the government that this is the only option. It is not. It would be better if all options would be considered, and the best one selected after an open debate.

Water charges

The draft Memorandum of Understanding with IMF, ECB and CEC has that the government will study the transfer of the provision of water services from the county councils to a water utility, and will start charging for water no later than 2013. This is a year earlier than in the four year plan.

The Irish Times has some more detail. Besides the water utility, there would be a water regulator. That is silly. There is a regulator already: the EPA. It would be better to extend the mandate of the EPA to price regulation than to create a new body (plus CEO and fancy offices) and a turf war.

It would be better still to do away with the separate regulators for this and that and create a unified regulator. The Commission for Energy Regulation, for instance, reports to the Department of Energy, who write the regulations and own most of the regulated companies. It may be better to have the regulators report to Department of Finance or the Central Bank. A unified regulator would have economies of scale (regulation is regulation) and be less prone to regulatory capture.

The plan is still to have a central program to install water meters in every home in the country, and to have a free water allowance. Fortunately, the IMF will review the plans and chances are they will talk some sense into DEHLG under the new minister.

Poolbeg and drinking water

While I am still waiting for someone to explain to me why you do not need a foreshore license if you own land, An Bord Pleanala has cleared the Compulsory Purchase Order and construction of the Poolbeg seems set to continue (according to the Irish Times).

UPDATE: JD DUG UP THE PERTINENT LEGISLATION

While a lot of effort was spent (in vain, it appears) to stop incineration in one particular constituency, there is a warning about the quality of drinking water. We said roughly the same thing over a year ago and the EPA issued warnings before that. Although there is an investment deficit, it is not likely that drinking water quality can be improved without institutional reform. There is no sign of that.