Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Supplementary Memorandum by the New Policy Institute (DWB 13(b))

  In the Committee's evidence hearing (Q.538) the Rt Hon Michael Meacher MP, Minister for the Environment commented "if companies come forward with alternative proposals, there is nothing to stop them. We can ensure that they are provided with data on Council Tax bands without primary legislation." But, our understanding is that there may be some legal hurdles to jump over before Council Tax data can be used. The New Policy Institute's 1997 report Fair and Sustainable: Paying for Water set out the legislative position at that time: "Section 28 of the Local Government Finance Act, 1992, which created Council Tax, limits the use of Council Tax bandings in England and Wales to the collection of the tax itself . . . Associated issues include the repeal in part of the Data Protection Act (if Council Tax liabilities are to be used) and the repeal of the requirement in the licence for charges to equal costs. Another issue is the need to remove weightings of values between England and Wales, particularly for the three companies that straddle the Welsh border." We have not taken legal advice on whether any or all possible Council Tax charging schemes would be possible, within this context. We are, however, concerned that water companies will be put off from proposing Council Tax based charging schemes, while the legislative framework remains unclear.

  We undertook to answer two questions for the Sub-committee:

    1.   How many winners and losers might there be under potential alternative ways of charging?

    2.   To what extent are low income customers already paying more as a result of high income customers switching to meters?

  Wessex Water has agreed to supply us with data on their customers to answer this second question. We will submit this information to the Sub-committee as soon as we receive it. This note answers only the first question.

1.   WINNERS AND LOSERS UNDER ALTERNATIVE CHARGING MODELS

  Part One of the note draws heavily on a paper written jointly by the New Policy Institute and OXERA Ltd. It was first published in Water Charging and Social Justice—Why Politicians Must Act (New Policy Institute, 2000).

Modelling the Impact of Switching from Rateable Values to Universal Metering, under Current (1998) Tariffs

  The effects of switching from rateable values to universal metering (under current tariffs) are shown in the graph, for a sample of 880 households in the Severn Trent region. It shows the estimated proportion of winners and losers in the sample from the different Council Tax bands.

graphic1

  Assuming this data-set is reasonably representative of the whole of England, national estimates can be calculated for the number of "loser" and "winner" low-value households. Overall, around six million households in Bands A to C lose more than 50p per week (including two and a half million by more than two pounds per week). In addition, over 70 per cent of families with children lose more than 50 pence a week. Twenty per cent of lone parent families and 40 per cent of two parent families lose more than two pounds per week.

  It should be emphasised, however, that what is being assessed here is not any shift to metering but a wholesale shift to metering on the present tariff. The conclusion is that, if measured charges are to have a more explicit and effective social dimension, then a more refined charging system will be required with alternative tariffs developed to mitigate the regressive effects.

MODELLING THE IMPACT OF SWITCHING FROM RATEABLE VALUES TO COUNCIL TAX BASED CHARGING

Model one: A simple switch from Rateable Value to Council Tax

  The most straightforward model for switching from Rateable Values to Council Tax charging would create many low income losers (and few gainers). In this scenario, that part of the bill (the variable element) previously based on the property's rateable value is now calculated according to its Council Tax band (using current Council Tax ratios). A uniform fixed (standing) charge is retained.

  The effects of switching from rateable values to this charging model, for a sample of 880 households in the Severn Trent region, are shown in the graph.

graphic1

  Assuming this data-set is reasonably representative of the whole of England, national estimates can be calculated, for the number of "loser" and "winner" low-value households. Overall, over three million low-band customers lose out, while only one and a half million gain.

  This undesirable impact on low income customers is the result of two separate factors:

    —  Increased regressivity. The difference between charges for high and low value properties is reduced, so poorer households pay more and richer households less (in this sample, Band G charges shift from being three and a half to two and a half times the level of Band A bills).

    —  Incidence effects. Significant turbulence results from the difference between rateable values and council tax bands. Although some minor impacts may be the result of the `banding' of Council Tax (compared to individual property valuation under rates), on the whole turbulence is caused by the archaic 1973 valuations being out of line with 1990s property values. As one objective of the Council Tax is to have more up-to-date valuations, these incidence effects are, in general, desirable—although they need to be managed carefully, for example through transitional measures.

  We undertook to answer two questions for the Sub-committee:

  1.  How many winners and losers are there under potential alternative ways of charging?

  2.  To what extent are low income customers already paying more, as a result of high income customer switching to meters?

  This part of the note answers the second question. It is based in part on information provided to us by Wessex Water.

2.  THE IMPACT OF SWITCHING FROM UNMEASURED TO MEASURED TARIFFS

METERING HAS BECOME MUCH MORE COMMON IN THE LAST FIVE YEARS
% of households with meters 19971998 19992000
Water Industry1113.9 17.119.6
Wessex Water14.217.6 23.627.5

Source: Ofwat

Wessex Water reports "switching" has a noticeable annual impact on unmeasured charges

  Without tariff rebalancing average charges for measured and unmeasured homes would rise and fall by the same percentage, as a result of influences such as Periodic Review determinations.

  The switch of some customers to metering, and subsequent rebalancing, is however causing a noticeable deviation from this pattern. For its customers, Wessex Water estimates that over the last five years:

    —  metered customers' charges increased each year by 2.5 per cent less than the average charge increase across all customers.

    —  unmeasured customers' charges increased each year by 0.5 per cent more than the average charge increase across all customers.[5]

    Source:   Keith Harris, Director of Finance and Regulation, Wessex Water.

These impacts will probably get worse

  On the assumption that, each year, around 3 per cent of customers continue to switch to metering, the impact on remaining unmeasured customers will become more severe. At the moment the `cost' of customers switching is shared between about 80 per cent of customers remaining on unmeasured tariffs. If current trends continue, in a decade almost 50 per cent of customers will be on metered tariffs so the same annual rebalancing `cost' will be shared by fewer unmeasured customers. As a result the charge increase per household (in excess of changes to average charges) will be higher.


5   It should be noted that while over 4 per cent of Wessex's customers have been switching to meters each year, across England and Wales the figure is a little under 3 per cent. Back


 
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