The re-introduction of domestic water charges for the majority of households is inevitable. Ireland is the only OECD country which does not currently charge households directly for water use, save for the approximately 8 percent of the population comprising group water schemes. At an approximate annual cost of €1.2bn as per the 2010 figures, the provision of water services in Ireland is double the cost of water services in Scotland. A perception remains however, that the introduction (or re-introduction) of water charges is a regressive and ultimately unfair form of double-taxation which should be avoided.
The challenge now is to ensure that the price of water is set correctly and that Irish Water, the body being established as part of the Government’s water reform programme, is given appropriate legal powers to deal with any organised campaign of resistance to the payment and recovery of water charges.
EU Water Framework Directive
The EU Water Framework Directive was adopted in 2000. It sets out a legal framework for the improvement of water quality on a ‘River Basin District’ basis throughout Europe. Member states are required under the Directive to carry out an economic analysis of water use for each River Basin District. This analysis is required to include all costs, not limited to the cost of supplying drinking water and providing waste water treatment services. In relation to managing the cost of water, article 9(1) of the Directive requires member states to “take account of the principle of recovery of the costs of water services, including environmental and resource costs, having regard to the economic analysis conducted according to Annex III of the directive and in accordance in particular with the polluter pays principle.”
The Directive also requires that, from 2010 onwards, water pricing policies should provide incentives to use water efficiently and ensure an adequate contribution by different water users desegregated at least into industry, agriculture and households. The Directive provides that member states may take account of the social, environmental and economic effects of water usage in recovering the costs of water services. This obligation is limited by the derogation in article 9(4) of the Directive, which provides that a member state will not be in breach of the Directive if it decides, in accordance with established practices, not to apply the provisions relating to cost recovery, provided that “this does not compromise the purposes and the achievement of the objectives of this Directive”.
In order to take advantage of the article 9(4) derogation, Ireland must demonstrate that the non-charging of households for water services does not compromise the purposes and the achievement of the objectives of the Directive and report the reasons for not fully applying the cost recovery principle in the river basin management plans which are required to be drawn up under the Directive.
Non-compliance
Arguably, Ireland cannot adequately demonstrate compliance with the purposes and objectives of the Directive in light of current inadequacies in water services infrastructure and leak prevention. Inefficient use of water and waste through loss of ‘unaccounted for water’ may be linked to the non-charging of household water services and the failure to fully recover charges from the non-domestic sector. The limited economic and statistical data that is available highlights a number of important features of the current Irish system of water charges for the business, agriculture and industrial sectors which may be in breach of the Directive’s cost recovery principles.
Firstly, the non-domestic sector is charged only the marginal operational costs of the water supply and wastewater treatment services, i.e. those costs which arise over and above the cost of providing those services to the domestic sector. The charges do not generally include capital costs, save where capital cost contributions are negotiated directly with significant contributors to waste water treatment plants.
Secondly, water authorities (currently local authorities) are only recovering a fraction of the marginal operational costs from industry, agriculture and other non-domestic consumers, with rates of recovery varying significantly throughout the country. In April 2012 the Local Government Audit Service reported that approximately €160m is owed to local authorities in unpaid water charges. There is evidence to suggest that there is pressure on local authorities to set non-domestic water charges at a level which is considerably below-cost, and to not actively enforce the recovery of charges, in order to create and maintain an attractive low-cost environment for industry and commercial operations in the local authority area. Such subsidisation of industry is likely to continue while water services investment costs are paid out of Exchequer funds, but the situation is likely to change once Irish Water is required to take over the functions of local authorities and comply with the principle of cost recovery under the Directive.
Thirdly, the proportion of ‘unaccounted for’ water is very high in Ireland. In certain areas of Ireland approximately 40 percent of treated water is currently being lost in the system through leaks and unauthorised connections. A significant proportion of the leaks are occurring on privately owned lands and the power of local authorities to charge for and recover the cost of such unaccounted for water is limited.
Fourthly, Ireland applies the principle of cost recovery to a limited range of water services for the non-domestic sector, namely water supply and waste water treatment (sometimes referred to as ‘water in – water out’). In November 2011, a reasoned opinion was issued by the European Commission to the effect that Ireland is in breach of article 9 of the Directive due to its failure to recover the cost of a wider range of water services and uses, including water abstraction for cooling industrial installations and agricultural irrigation, the impoundment or storage of surface waters for navigation purposes, flood protection, hydro power production, as well as drilling for agricultural, industrial or private consumption. The EU Commission issued a similar reasoned opinion to a number of other EU member states. Ireland has responded to the EU Commission, but it seems likely that the EU Commission will take legal action against Ireland and other member states in order to force them to apply the principle of cost recovery to a wider range of water services and uses. Ultimately, this may see the cost of water services increasing, and an expansion of the scheme of charging to a wider range of water services and uses.
Energy costs for treating water and wastewater have also increased dramatically over this period. Unless Irish Water and/or water services authorities are in a position to tackle inefficiencies and wastage across the water services sector in order to reduce costs, the application of the principle of cost recovery of the full costs of water services in accordance with the Water Framework Directive is likely to have a significant adverse impact on Ireland’s competitiveness and prospects for economic recovery.
Recovering Charges
The setting and imposition of charges is of course only half the battle. While many local authorities have been actively pursuing unpaid water charges, the legislation which empowers them to charge for and recover the costs of water services is complex, out-dated and restrictive. For example, the legislation currently provides that the local water services authority may recover charges from “the person to whom the water is supplied”. It is unclear whether the person to whom the water is supplied is the owner or the occupier of premises, or a management company responsible for the management of the premises; or whether joint owners or occupiers are always to be jointly and severally liable for the charges; or whether the person to whom the water is supplied is the same individual as the person who uses or consumes the water supplied.
Local authorities are faced with significant arrears which they may not be in a position to recover, particularly where businesses have ceased trading. Local authorities do not rank as preferential creditors, and in the absence of a specific legal power to require up-front payment for at least a portion of the water supply charges, they have no security against non-payment of charges. Considerable pressure is also placed on local authorities to continue the supply of water to commercial premises (even where charges are not being paid) in order to relieve financial pressures from struggling businesses and maintain jobs in the local area.
For the years up to the abolition of water charges in December 1996 by the then Minister for the Environment Brendan Howlin, a sustained and organised campaign of resistance to water charges seriously undermined local authority financing of water services. Legislation was introduced requiring local authorities to seek a Court order prior to discontinuing supply to households, and proceedings to recover charges in the Courts were generally unsuccessful. The re-introduction of water charges for households requires a robust legislative framework to enable local authorities and ultimately Irish Water to take appropriate action where households refuse to pay, otherwise Irish Water is likely to experience significant funding difficulties in to the future. In particular, careful consideration needs to be given to the legal implications of granting each household an allowance of water, as this limits the enforcement action which may be taken in response to non-payment of charges. Lessons need to be learned from the experience of water authorities in the UK, where the level of household debt and arrears in relation to water charges is rising each year, placing a greater burden on the remaining households that do pay water charges.
The re-introduction of domestic water charges is often linked politically to the household tax, the proposed property tax and the requirements of the Troika, but the driving force behind the re-introduction of water charges is the legal obligation to move to cost recovery for water services under the Directive. The key issue now is not whether household water charges should be introduced, but the actual price that households and other sectors will be required to pay in accordance with the polluter pays principle and how the principle of cost recovery is to be applied in practice.
Setting the right price is not just a political imperative for Government; it is already a legal requirement.
Alice Whittaker is head of the Environment and Climate Group of Philip Lee Solicitors, a commercial law firm with offices in Dublin and Brussels. The firm advises local authorities, Irish and multi-national companies operating in the water and wastewater sectors.
This article appeared in the June edition of the PAI monthly journal. For more information on how to subscribe to the Journal and additional publications, click here.