The DWMP blog – 30. How should we charge for water and sewerage services?

This episode of the blog is not directly about DWMPs (Drainage and Wastewater Management Plans), but I have the “brand” established now, so I will stick with it.

This was sparked by an article in the The Washington Post about plans to improve the failing water system of Jackson, Mississippi (https://tinyurl.com/8m8f5zwt).? Ted Henifin said that one of the problems was keeping the services affordable for all:

“… almost every state has some sort of equitable rate requirement in their statutes that says you can’t treat water customers differently. ?But what if we just flipped the way we billed water so that everyone pays about the same percentage of their income on water? ?For example, if you look at property values as a surrogate for income…”

This reminded me of an article that I wrote a few years ago exploring the conflicts between different principles for charging for water and wastewater services.?I had three principles:

• Cost reflective – charges depend on the cost of providing the service.
• Equitable – people pay for what they get and get what they pay for.
• Customer choice – allowing flexibility in cost and service levels

To these we could add Henifin’s principle:

• Redistributive – transferring value from richer people to poorer people.

I would also now add:

• Nudge – using charges to encourage sustainable customer behaviour.

There are some obvious contradictions.?Cost reflective against redistributive, equitable against redistributive, customer choice against nudge.?So where are we, how did we get here and where should we go in the future?

Redistributive

Historically in the UK, water and wastewater charges were based on the “rateable value” of the property.?(An explainer for those in other jurisdictions, rateable value is an estimate of the rental value of the property rather than its purchase price).?So, this would align with Henifin’s principle but it still has its drawbacks.?Property value is not necessarily a good indicator of disposable income.?In particular you tend to get elderly people with low income living alone in their old family house.?We could overcome that by going even further and paying for water services out of general taxation, which ideally would be more redistributive.?However, neither of these can be considered equitable in that the amount you pay is not related to the amount of the service that you use.

In the UK we are now moving to metering the water supply and charging based on usage.?The main driver for this was the nudge factor of encouraging reduced water use but it does also move towards the equity argument of paying for the water that you use and therefore also the wastewater that you discharge to sewer.?The metered charges are intentionally set low so that there is a cost reduction for having a meter as this is a “good thing”.

If you don’t have a water meter then your bill is still largely based on property value.

Now to put on my DWMP hat again.?The big driver for investment in the drainage and wastewater systems is the discharge of surface water to sewers, whether combined or separate surface water sewers.?How is this charged??This depends to some extent on how each water company partitions up their charges, but investment in combined sewers and wastewater treatment works to handle storm flows could be lumped in with the wastewater charge.?Investment in separate surface water sewers is charged as an extra lump sum “surface water charge”.?There may be a rebate on some of this if you do not discharge any surface water to a public sewer but this is likely to be small.?(In my case the rebate is about 5% of my total water and wastewater services bill).?So, for surface water there is neither equity in charging by how much you discharge to sewer nor nudge to encourage you to discharge less through property level sustainable drainage.?One of the biggest potential savings to water companies and therefore their customers is a missed opportunity.

Reflective of the cost of providing service

Under the current system the charges in each region reflect the regional cost of providing service and a regional target level of service.?The regional boundaries were originally set up for river flood and water resources management.?(The smaller, water only companies had a different basis.)

So having prices reflective of cost of providing service is accepted as a principle, but only at a regional level.?The charge to an individual community does not directly reflect the cost of providing service to that community.?This leads to some anomalies, for example the Thames Tideway scheme will be paid for by the people of Purley in Berkshire, who neither contribute to the problem nor directly benefit from the solution; but not by the people of Purfleet in Essex who do.

So what if we changed from cost of providing service at a regional level to cost of providing service at a community level??There would be several disadvantages including:

• A postcode lottery, service areas for water and wastewater do not necessarily coincide with recognisable communities so some customers could be treated unfairly.
• Rural areas would potentially pay more than urban areas but may be less able to afford it.
• Communities would struggle to afford large “lumpy” expenditure when expensive key assets serving the community needed investment.?(Some of the small water only companies have already faced this challenge.)

So our current system is not designed to be directly reflective of the cost of providing service.?How about the alternative of a national charge based on a national cost of providing service??This would need to be aligned to the devolved nations and potentially further sub-divided with future devolution to the English regions.?But this could be seen to be fairer and to align with customers’ feelings of identity.?National frameworks for cost of providing service are already in place for telecoms and other utilities.?So why not water and wastewater?

Equitable

The principle of fair redress is an important part of our legal framework; that one who suffers a wrong is recompensed for it and one who commits a wrong pays compensation.?However, this principle is not built in to our current system of charging for water services.?I offer two examples:

• If a customer is flooded with sewage the water company pays the customer a rebate of a few hundred pounds that is likely to be much less than the damage caused.?However, if a company floods more than its target number of customers, then all customers including the 99% who have not been flooded receive a rebate. ?The cost to the company of that penalty for a flooding incident can be typically ￡42?000, but the impacted customer gets hardly anything.
• If a community is impacted by pollution of its watercourse because of a failure of water company assets then it will gain redress through the fine imposed by the magistrates’ court (there is now a proposal that this money should go to local environmental improvements rather than to central government).?However, if the community is impacted by traffic disruption from a similar asset failure, then it gets nothing.?

So our current system is not designed to be equitable.?But what if service was measured not as the lack of failures, but rather as the compensation paid when failure occurs, then an equitable system is possible.?Rather than asking customers, “how much extra would you pay so that someone else isn’t flooded”, they would be asked, “if someone is flooded, how much compensation should they get.”?Most customers would understand that.?The redress is then paid directly to those suffering the harm.

Responsive to customer wishes

The cost of providing service in each region reflects the cost to provide the level of service that is desired by its customers.?The customers’ wishes are gauged through willingness to pay surveys and focus groups.

The customer wishes are gauged uniformly across the water company region, although at least one water company analysed the willingness to pay results separately by operating area.?They found significant differences, but they decided that it was politically unacceptable to actually respond to those perceived customer wishes with different levels of service and charges.

It is perhaps reasonable that a community should be deterred from opting for a lower level of service at a cut price; but should it be prevented from opting to pay more for a better level of service.?If a community suffers from river flooding, they are not only able, but officially encouraged to pay extra to get a higher level of protection.?But if the community suffers from sewer flooding it cannot.?

So the current approach is not designed to reflect customer’s wishes at an individual, group or community level.

Nudge

We have already seen that there is a significant financial nudge to get a water meter and that provides an ongoing nudge to reduce water consumption.?However, there is no significant nudge to reduce discharge of surface water to sewer.?We need to encourage this as it is the most sustainable solution to the problems of sewer flooding and overflow discharge that we are facing but currently SuDS retrofit is too expensive an option.?I discussed some of the issues in Episode 27 of the blog, but now consider it from a charging point of view.?

We can readily measure the area of impermeable surface for each property with multi spectral arial photography (although we cannot measure what is connected).?We could therefore base charges on this area with an extra nudge of a higher charge if it discharges to a combined sewer rather than a surface water sewer.?There would need to be a mechanism for a homeowner to provide evidence if some of the area did not discharge to sewer; but that would be similar to the existing mechanism for claiming the surface water rebate.?The difference would be that the surface water charge would reflect the billions of pounds that will be required to upgrade drainage and wastewater systems if the surface water is not removed.?That is both more equitable and more of a nudge than at present.

Summary

The current system for water charging in the UK does not meet any of the potential principles of fair charging that we could wish to adopt.?It needs reform.