Environment, Food and Rural Affairs CommitteeSupplementary written evidence submitted by Anglian Water Services Ltd

RISING BLOCK TARIFFS IN ENGLAND AND WALES

1. At present, measured domestic tariffs in England and Wales are generally structured on the traditional “two-part” basis, with a fixed component and a variable component.

2. As household metering has developed, alternative tariff structures have been considered from time to time, prominent amongst which is the “rising block tariff”. In general, such a tariff would entail a small or zero fixed charge, a lower volumetric rate for consumption up to a certain level (which could vary according to specific customer characteristics such as household occupancy), and a higher volumetric rate for demands above that level.

3. The case for the rising block tariff is usually put forward on the basis of one of two arguments (or both):

that a rising block tariff has re-distributive properties, because better-off households use more water than less well-off households; and

that it has positive water efficiency and environmental properties, because it confronts households with a lower price signal for their “basic needs” non-discretionary use (toilet-flushing, drinking, etc), and a higher price signal for their discretionary use (garden watering, use of pressure washers, etc), and can therefore make a positive contribution to “demand management”.

4. Neither argument can be refuted from a theoretical point of view. They therefore stand or fall on consideration of the empirical evidence.

5. For example, in some countries the correlation between income or wealth, and water use, is very strong, especially in warmer climates where better-off households tend to have gardens and swimming pools, and in areas where the access to water supplies of the less well-off is attenuated (eg where communities are served by communal standpipes).

6. In England and Wales, however, the correlation between income and consumption is both flat and weak. The main reasons for this are that, after occupancy, the principal determinant of water use is age and type of water appliance, which is inversely correlated with income: that is, better off households tend to have, for example, newer toilet cisterns and modern water efficient white goods, whereas the less well-off households are more likely to have older cisterns (which use at least twice as much water) and older white goods. It is possible that, in the long term, the relationship between income and consumption will have altered, as older cisterns are replaced and the scope for achieving yet further efficiencies (without significant technological changes) is exhausted.

7. Similarly, the second argument is not supported by empirical evidence. For one, whilst it is possible to define “basic needs”, it cannot be estimated with any degree of reliability for any given household. In principle, it might be possible to set the “lower block” on the basis of “occupancy”, but even that can be difficult to pin down. A new-born baby, for example, “uses” a very different amount of water as compared with a teenager. In addition, as noted above, two households with identical “occupancy” may use very different volumes for reasons to do with the types of appliance they have.

8. Further, there is no strong evidence that the price elasticity of demand, even for “non-discretionary” water use, is very high in England and Wales. The net effect of a stronger price signal for higher volumes, coupled with a weaker price signal for lower volumes, may therefore be very limited.

9. Indeed, the evidence of the past 20–30 years suggests that factors other than price signals have a more promising role to play in achieving water efficiency objectives. Government policies (eg on cistern capacities) have achieved significant reductions in water use in the home and will continue to do so as older devices are replaced with modern ones. In addition, it is probably fair to say that centrally-developed and mandated policies on issues such as grey water recycling in new properties offer a more promising route to the achievement of greater water efficiency than relatively modest changes in price signals to households, the majority of whom find their water bills modest and manageable in comparison with other demands on the household budget.

10. At the hearing of the Select Committee Peter Simpson also commented on experience in Australia. In Melbourne, a rising block tariff was introduced in 2004. The tariff was in three parts with an increasing price for each additional block of water in each three month period. No account was taken of the number of people in a household. An independent reviewer1 concluded that the tariff ensures that water will be used inefficiently in an economic sense; that it creates incentives for trade in water between households; and it discriminates between households in a way that is inequitable, especially in relation to the number of people in a household.