New water charging arrangements will prove to be temporary

Opinion: ‘Price announcements by the Government usurp the function of the supposedly independent regulator, in this case the Commission for Energy Regulation’

Fiach Kelly and Michael O'Regan analyse the new water charges plan.

 

Opposition deputies described the new water charging arrangements announced yesterday by Minister for the Environment Alan Kelly as a climbdown and warned that the freeze in rates of payment will prove to be temporary. They are correct on both points.

Revenue from the new, lower charges will be well below what was initially planned and also well below the costs of the system. If Irish Water is to become a self-standing utility, generating sufficient revenue to meet operating costs and to remunerate capital, the charges will eventually have to rise.

Until the new utility was established, Ireland had 34 water authorities, one for each local council.

One of the motivations for rationalising the water industry was to reduce the cost of operation. This has simply not been achieved.

The Economic and Social Research Institute has estimated that staffing costs remain excessive and the trade unions managed, under the radar, to negotiate a deal which preserves current employment levels for a 12-year period, with additional staff taken on by Irish Water at central level.

Total staff costs thus appear to have gone up instead of down, reminiscent of the pattern established when the regional health boards were merged into the Health Service Executive.

There are numerous industries in Ireland which must inevitably be operated as monopolies. These include electricity transmission and distribution, the gas network and the water industry.

It is simply not practical or economic to have duplicate networks competing with one another in these sectors.

Consumers are unavoidably exposed to the pricing policies of these firms and do not enjoy the prerogative of taking their business away from an ineffective or exploitative monopoly.

The monopoly firm, free of competitive pressure, can incur excess operating or capital cost, or can pursue excess profit.

Governments around the world have resolved this dilemma by establishing independent regulators intended to protect the consumer through enforcing fair prices.

Yesterday’s price announcements by the Government usurp the function of the supposedly independent regulator, in this case the Commission for Energy Regulation.

Competitive discipline

Irish Water will, at least for the next four years, charge amounts which have been set arbitrarily, and well below an efficient level of cost, by politicians faced with a populist insurrection against paying anything at all.

Water charges under the old system were abandoned in time for the 1997 general election. It is quite misleading to pretend that this latest shambles was somehow sprung on the Government by the troika.

The conversion of the Irish water industry into a conventional public utility has been in the works since 1997, and the first legislation was passed seven years ago under the Fianna Fáil/Green government.

The project has been poorly conceived and poorly executed, with a failure of politics accompanying a failure of public administration.

The politicisation of utility charging is undesirable in itself. Ministers who are the owners of monopoly utilities should not also oversee their regulation, much less set their charges.

The function of overseeing regulators would be better vested in the Minister responsible for consumer protection.

In addition to the fuss about charging levels, there has been some scaremongering about the possible privatisation of Irish Water, with Opposition parties (and Labour Senators) demanding a constitutional amendment to prohibit the disposal of the company by government.

Exchequer subsidy

It is unsaleable.

Placing randomly selected policy commitments in the Constitution, festooning it like balloons on a Christmas tree, is in any event a dodgy procedure. The 1983 amendment on abortion turned out to mean something rather different from what its proponents intended.

The place for policy commitments is in election manifestoes and the Government has wisely decided to ignore the calls for a referendum.

The notion that the public should take comfort from public ownership of monopolies is in any event endearingly naive. Monopolies are a headache, whoever owns them. The protection of the consumer requires effective regulation, regardless of ownership.

Some of the State-owned and regulated monopolies in Ireland have produced a less-than-stellar performance – electricity charges, for example, are now well ahead of the EU average, having been reasonably competitive at one time.

Populist placation

An ingredient in public discontent has been the sheer accumulation of once-off charges and taxes, which have a pure nuisance value in addition to the straight financial hit.

People pay far more in VAT, universal social charge and income tax than they will ever pay for water or in local property tax.

But they do not endure an avalanche of fan mail from the Government about form-filling, PINs, PPS numbers, much of it unaccompanied by a clear indication of how much money is being sought.

The Government should consider, when the dust settles, the creation of a single household-based platform for the collection through monthly instalments of property tax, annual car tax, the television licence fee and all of the other fiscal irritations.

Colm McCarthy is an economist

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