Not every bucketful is equal

For the sake of fairness we need a new charging system

For the sake of fairness we need a new charging system

Important changes are afoot in how we pay for our water. For more than 80 per cent of us, the amount of water we use has no bearing at all on the size of our water bills, as we are not connected up to water meters. In England and Wales our water bills vary according to the rateable value of the property we live in - the same basis on which local authority taxes were calculated before the introduction of council tax and its predecessor, the poll tax. Since rateable value rises as the overall standard of the property rises, people who live in bigger, better-equipped homes pay more for their water than those living in more modest accommodation. Roughly speaking, most of us pay for water according to our means.

The growing minority who have had water meters installed pay on a very different basis. Their bills have two elements: a small and uniform fixed charge, plus a variable amount proportional to their water usage (the "volumetric" charge). Water metering can be justified on both economic and environmental grounds, as it introduces financial incentives for efficiency among customers and companies, and so promotes a less profligate use of a resource whose unchecked consumption threatens the environment (see box opposite).

In practice what is driving the mainly voluntary spread of metering is that well-off households and those who use little water (for example, single-person households) can significantly reduce their bills if they pay on a metered basis, rather than by rateable value (see "Current payment methods" diagram on the opposite page).

Although this debate remains in the hands of the industry and mainly at a technical or economic level, the different charging systems are based on very different principles and have starkly contrasting implications for social welfare and justice.

There are several legitimate objections to the currently favoured system of water charges based on rateable values. First, rateable values were last set in 1973, so are more than a quarter of a century out of date. As they are no longer used for local taxation, it would be prohibitively expensive to carry out a new valuation just for water. Second, a charging system that is completely independent of the amount of water used makes it impossible to encourage efficiency or economy via financial incentives. And third, bills based on rateable values are at odds with the way the water industry regulator has chosen to interpret "fairness" in water charging. His view is that fairness means that "charges should broadly reflect the cost of providing water and sewerage services to different classes of customer". From this point of view, two households using the same amount of water should pay the same for it. Under rateable values, the two households pay different amounts if they live in different-sized houses.

"Cost reflectiveness" has much to be said for it. It is the basis on which almost all prices are set, regardless of whether a shopper is rich or poor. Yet it is not the basis on which we pay for our public services via taxation, and an attempt to introduce such a principle into local government ten years ago - the poll tax - was decisively defeated. Most of us still automatically think of water as a public service - as it was until privatisation.

The fact that we all pay for water (and indeed other services piped into our homes) by means of periodic bills, rather than, as it were, by the bottleful, makes it possible to conceive of a very different kind of charging structure from, say, how we buy items off supermarket shelves.

In thinking about alternatives to the current systems of charging, two questions should be considered. Is it possible to continue with a system based on some proxy for payment according to our means? And is it possible to reconcile the objective of social justice with those of economy and environment? I think the answer to both questions is yes.

One way of preserving the principle that water should be paid for according to our means would be to replace rateable values with the council tax bands that underlie the current system of local taxation. Since larger properties pay a higher council tax than smaller properties, they could pay a higher water bill, too. But such a switch would be politically difficult, chiefly because it would create many losers at all income levels, whose opposition might be more weighty politically than the support of the many winners. This is how water is paid for in Scotland, although its introduction there was made much easier by the fact that households are still billed for their water by the local authority, as an additional item on the ordinary council tax bill.

Is it possible to go further and accommodate the principled concerns of those who would wish, through the price mechanism, to introduce financial incentives for customers to economise on their water use?

Hitherto the debate about how to price water has tended to polarise on the question of water metering, with the strongest opposition coming from those predominantly concerned about social welfare and justice. Their concerns are compelling: for reasons both of public health and private well-being people should not face financial incentives to economise on water for essential needs such as drinking, preparing and cooking foods, washing and bathing, and flushing the toilet.

This opposition, regrettably, has focused on metering itself, in the sense of measuring how much each household uses. But what really matters is the tariff, which is then built around the information that metering yields, to determine how much each household has to pay. The heart of the objection to metering is that it creates a financial disincentive for people to use any water, including the water they ought to be using for health and hygiene.

Yet a metered tariff need not do this (see diagram, left). Here, the amount a household pays rises above the fixed charge once consumption exceeds a predetermined level (often, though inaccurately, called the "tranche of free water"). Only then would any financial disincentive to use water kick in.

The volume of water covered by a fixed charge could vary between households, so those with more people would have a proportionally larger tranche of free water. And the amount payable in fixed charge could vary between households according to their liability for council tax, thereby preserving an important element of payment according to means. This is certainly a more complicated system, but it satisfies economic, social justice and environmental objectives.

In the coming months the water regulator will approve the water companies' charging schemes for the next five years. The public should scrutinise his decisions for their commitment to fairness. If, as he desires, water charges are broadly to reflect costs, both a simple council-tax system and the hybrid suggested here will be ruled out. But, applied without modification, the regulator's principle actually produces a substantial, stealthy redistribution in the way that society as whole pays for its water. The winners are richer households and low-user households; the losers poorer households and high users; and the net outcome greater unfairness - the precise opposite of the regulator's stated aim. Without an informed and more sophisticated approach to the issue of water charging, poll tax history could yet be repeated as water metering farce.

Peter Kenway is director of the New Policy Institute, which will be producing in the autumn a collection of essays on fairness in water charging