Assessing water services affordability: macro and micro approaches

Regulation of water services is increasingly important worldwide. Consumer protection and in particular the promotion of affordable prices is one of the main duties of water regulators, regardless the type of the regulatory regime. However, affordability problems are frequently seen as already solved in developed countries. The purpose of this paper is two-fold. First, contribute to the debate on how much water must be affordable for all by discussing complementary approaches on the affordability concept. Second, using the Portuguese case as an example, and empirically weighting whether residential water charges are affordable for the most vulnerable groups, it intends to assess if water affordability concerns should be reinforced/reoriented. The main rational behind this research relies on the argument that macro affordability only provides a basis for a needed deeper affordability assessment. Indeed, macro affordability analysis gives a general picture on the issue, but a single numeric criterion (based on average figures) can be misleading and therefore the assessment of water services affordability should be complemented with the analysis of micro affordability figures and particularly of the most vulnerable households’ case. Water affordability is often measured as the share of household income spent on water charges (e.g. Garcia Valiñas et al., 2010; Reynaud, 2010). Despite differences in the literature, around 2 to 5%, a 3% threshold affordability ratio (AR) is often considered for water services (Fankhauser and Tepic, 2007; Smets, 2009; Martins et al., 2013). To address the question of the quantities that might be relevant when discussing water affordability, we start by estimating potential or ex-ante macro affordability ratios (AR) for Portuguese mainland municipalities. This procedure provides a range of values, which allows to critically commenting on the suitability of the concepts. The estimation of macro affordability indicators, for 2011, is performed by computing the water bill in each of the Portuguese mainland municipalities, for a hypothetical basic consumption level of 70 liters per capita per day (WHO 2011), for the average household size (hereafter QWHO) , and according to the tariff scheme in charge, with the local average household income. To mitigate potential limitations of the value judgment implicit in the definition of an ‘appropriate’ amount of water, we further estimate the AR considering the charges for two other benchmark household consumption scenarios: 12m3 per month (QERSAR) – the approximate annual average consumption by Portuguese households; and 200m3 per year – 16,6m3 monthly equivalent (QIWA) – often used for international comparisons (e.g., OECD 2010, IWA 2014). In what concerns to these macro AR, data on tariff structures in charge, in 275 (of the 278) Portuguese mainland municipalities, was collected from ERSAR and from water utilities webpages. The average household disposable income was obtained from the Directorate-General for Taxation and the average household size per municipality from the 2011 Census. Next, the analysis is supplemented with the empirical assessment of micro affordability, with household level disaggregated data. As disaggregated household level data is not available, primary data was collected from a household sample of residential users in mainland Portugal by means of a questionnaire-based survey. The random sampling frame was built upon a complete telephone list of customers from 13 water utilities, located in the 5 Portuguese hydrographical regions. 2440 valid questionnaires were obtained. In order to compute observed micro AR, the household survey data on income was matched with actual records (from the water utilities) on the monthly consumption and bills paid by the same customers. Besides the need to go deeper on the assessment of water affordability by confining it to water consumption inelastic levels, in accordance with the satisfaction of essential needs (QWHO), it is particularly relevant to analyze this issue for the most vulnerable groups (Martins et al., 2013a). Indeed, according to the Portuguese Statistical Office (INE), in 2011, almost a quarter of the Portuguese population was at risk of poverty or social exclusion. Accordingly, for the 3 levels of water consumption considered, we estimated the potential AR in each municipality considering the Portuguese poverty threshold (a poverty scenario) income level.The macro AR estimations indicate that water charges do not represent a disproportionate burden. Indeed, the estimated potential macro AR is below the 3% threshold for all municipalities regarding the minor amount of water consumption considered (QWHO). Even considering the water charges for the Portuguese national average consumption (QERSAR) only in 7 municipalities (less than 5% of the Portuguese population) the ratio exceeds the 3%. Regarding the residential international reference equivalent to 16.6(6)m3/month (QIWA) the threshold is exceeded in 56 municipalities. A complementary analysis with real figures (the observed water consumption level and the actual income) at the household level of disaggregation reveal different pictures: the observed average household water consumption is about 9m3 per month; and the affordability threshold is exceeded for an important share of the households’ sample. The analysis for the most vulnerable households reveals that water services’ affordability should be a focus of concern to the public and decision makers. Further, taking into account their spatial distribution throughout the country, it becomes clear that several of the municipalities where the AR for poor households is above the threshold are among the ones with higher average income, thus emphasizing the need to assess beyond averages. To sum up, the water affordability analysis at the macro (potential) level shows that, on average, it does not seem to be an important issue in Portugal. On the contrary, at the micro (observed) level it seems to be a problem for significant shares of the households’ sample. Further, regarding low income households, there are affordability problems in 66 Portuguese municipalities, even when considering low water consumption levels. The proposed integrated analysis, complementing macro and micro approaches, helps to identify who is at risk, revealing that water services’ affordability for poor households should be a focus of concern, also in developed countries, particularly when there are significant income distribution inequalities. Accordingly, the accomplishment of the social sustainability goal requires water services regulation to review and improve current approaches on affordability issues. References Fankhauser, S.; Tepic, S. (2007), Can poor consumers pay for energy and water? An affordability analysis for transition countries. Energy Policy, 35(2), 1038–1049. García-Valiñas, M., Martínez-Espiñeira, R.; González-Gómez, F. (2010), Affordability of residential water tariffs: Alternative measurement and explanatory factors in southern Spain. Journal of Environmental Management, 91(12), 2696–706. 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