THE ECONOMIC REPERCUSSION OF THE WATER
FRAMEWORK DIRECTIVE ON THE URBAN SECTOR
Fernando PORTA
Environmental and Institutional
Coordination Director of the AGBAR
Chairman of the AEAS
1.
INTRODUCTION
At the dawn of the 21st century sustainability has presented itself as the
great challenge for society. There is no doubt that, in all spheres, measures
must be adopted and implemented that lead to the achievement of
sustainability, with the water sector being among those most deeply
involved in this challenge.
The European Union (EU) has been deeply aware of this obligation and has
highlighted it with the approval of “Directive 2000/60/EC, of the European
Parliament and the Council, by which a community framework of action is
established in the sphere of water policy” (2000/60), better known as the
Water Framework Directive (WFD).
By meeting all of the established deadlines for the reaching of the
objectives of the WFD, the member states will achieve full compliance of
the directive in 2025. As a result, a homogeneous and sustainable
environmental level of hydric resources within the sphere of the EU will
have to have been achieved within the first quarter of the new century.
Thus it is not a case, at the beginning of the 21st century, of considering a
series of objectives to be achieved in the interests of improving water and
waste water services, but of advancing towards the fulfilment of what has
already been legislated for, and doing so within the established deadlines.
Nevertheless the water sector must also face other obligations. In effect,
in the Explanatory Statement of the WFD, the European Council (EC) takes
for granted that the Potable Water Directive (98/83), the Nitrates
Directive (91/676) and the Urban Wastewaters Directive (91/271) will have
to be fully applied, in time and form, when the WFD comes into force.
Which member states will be in a position to respond in the affirmative?
Furthermore it must also be taken into account that the EC will probably
present, in the near future, a Directive Proposal for the regulation of the
conditions in which treated wastewaters can be used.
Finally, it must also be emphasised that a greater investment in applied
research and innovation will have to be made in the European water sector.
It is a case of a sector that is capable, in general, of responding to
demands for quantity and quality, yet the rates are insufficient to allow for
the full recovery of all of the service costs, with the result that
investments could be minimised and, should this be the case, investments in
research and innovation would be relegated to the back of the queue.
It is the question of rates that is of most concern to the water and waste
water distribution services, whether such be public or private, due to the
large scale increase that the prices of these services will have to undergo
if, as is evident, the above directives are to be met.
2.
THE IMPRECISION OF ARTICLE 9 OF THE WATER FRAMEWORK
DIRECTIVE
In order to comment thereon, I partially quote the text of Article 9 of the
WFD.
“Article 9
Recovery of costs for water services
1. Member States shall 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, and in accordance in particular with the polluter pays principle.
Member States shall ensure by 2010
- that the water-pricing policies provide adequate incentives for the
users to use water resources efficiently, and thereby contributive to
the environmental objectives of this Directive.
- an adequate contribution of the different water uses, disaggregated
into at least industry, households and agriculture, to the recovery of
the costs of water services, based on the economic analysis conducted
to the Annex III and taking into account of the polluter pays principle.
Member States may in so doing have regard the social, environmental
and economic effects of the recovery as well as the geographical and
climatic conditions of the region or regions affected.
2. Member States shall report in the river basin management plans on the
planned steps towards implementing paragraph 1 which will contribute to
achieving the environmental objectives of the Directive and on the
contribution made by the various water uses to the recovery of the
costs of water services.
3. Nothing in this Article shall prevent the funding of particular preventive
or remedial measures on order to achieve the objectives of this
Directive.
4. Member States shall not be in breach of this Directive if they decide in
accordance with established practices not to apply the provisions of
paragraph 1, second sentence, and for that purpose the relevant
provisions of paragraph 2, for a given water-use activity, where this
does not compromise the purposes and the achievement of the
objectives of this Directive. Member States shall report the reasons
for not fully applying paragraph 1, second sentence, in the river basin
management plans.”
Comments
2.2.1. The expression “they will take into account the principle of costs
recovery” is not sufficiently explicit, insofar as it is not clearly
binding and, furthermore, given that it refers to Appendix III for
the preparation of the economic analysis. This Appendix only
expounds ideas of a general kind and does not define the items that
make up the costs of the services, a necessary chapter in the
development of the said analysis.
2.2.2. The environmental costs, as well as those of resources, must be
established by the hydraulic administration, for the purpose of
adopting the necessary measures in basin hydrological plans for the
achievement of the environmental goals.
Yet in terms of financial overheads it must essentially be the users,
essentially the water and waste water services, that propose their
plan of action to the competent administration, insofar as it is the
latter that are responsible, for the provision of a service of general
interest. Once their opinion is known the administration will then be
able to calculate the suitable contribution that corresponds to each
water use in the recovery of services costs.
2.2.3. This section is of particular interest, insofar as it allows the member
states not to apply costs recovery to a determined water use, always
insofar as neither the ends nor the achievement of the goals of the
WFD are compromised.
In this event, and depending on how the exception is applied, will this
not lead to economic and sectoral imbalance?
2.2.4. Other Observations:
a) On the other hand, should part of the costs of the large scale
infrastructures of general interest forming part of the “registered”
supply of water, be included in the price of water? In this respect it
must be pointed out that cases, such as the one existing in Spain,
have not been taken into account, where the hydraulic regulation of
resources is necessary to achieve a sufficient level in supply
guarantee. Thus, a costly infrastructure is required that will produce
other benefits of a social kind, such as flood protection, the battle
against desertification and the maintenance of the population in
depressed areas.
b) In terms of environmental costs, how can the immense differences
between the hydric reality of the north and the south of Europe be
combined?
c) Meanwhile, the principle that “he who pollutes must pay” may well be
difficult to apply. In this case, how can additional treatment costs be
claimed from those who cause pollution?
3.
THE POSTURE OF THE EUREAU WITH REGARD TO THE WATER
FRAMEWORK DIRECTIVE.
3.1 Presentation of the EUREAU
The European Union of National Associations of Water Distributors and
Waste Water Services (EUREAU) is a non profit Association with the goal,
among others, of representing the common interests of its members, public
or private, before the institutions of the EU, intervening in the processes
of elaboration of community legislation and the European regulations
concerning the potable water and waste water sector.
The EUREAU is made up of National Associations or Water and Waste
Water Services for the 15 European Union member states, as well as
Iceland, Norway and Switzerland. There are also 7 observer members,
which are the Bulgarian, Estonian, Hungarian, Polish, Rumanian and Croatian
associations, as well as the Nicosia Water Service (Cyprus).
Thus, today, the EUREAU is the spokesman for the European total water
cycle industries, which provide their services to almost 400 million
consumers in Europe. It is also a qualified spokesman because, on the basis
of the contributions of its members, it can offer an updated body of
technical and scientific knowledge, as well as optimum know-how in the
water sector
3.2 The EUREAU and the WFD
There is no doubt whatsoever that the philosophy of the EUREAU is fully in
line with that of the Community Programme for the sustainable
development of the environment, in terms of the total water cycle.
For the reasons given above the EUREAU backs the decision of the
European Commission to draw up a Water Framework Directive Proposal.
The EUREAU understood and informed the EC, in its day, that it would have
been useful to improve the proposal in three key aspects: practical viability,
calendars and priorities, and costs and charges.
Insofar as the AEAS (Asociación Española de Abastecimientos de Agua y
Saneamiento – Spanish Association of Water Supplies and Waste Water) is
a member of the EUREAU, it assumes the position adopted by the latter
with regard to the WFD.
Judging by the contents of the paper, we will only be dealing with the last
aspect.
3.3 Costs and Charges
The capacity and desire to pay, along with price equity, are fundamental
aspects of reaching the goals of the WFD. There is no doubt that users are
increasingly more reticent to meet any increase in the price of water,
above all due to a lack of knowledge of costs. Although it is fair to
acknowledge the real cost and value of hydric resources it is also necessary
to find a balance. The EUREAU believes that this balance can be gained
always insofar as the principles of subsidiarity are correctly applied, along
with the maxim that “he who pollutes must pay".
3.3.1 Key Terms
a) The costs must be equitably assigned among the different sectors
affected: domestic, industrial and agricultural.
b) In each sector, the principle of subsidiarity will be applied to the
allocation of costs.
c) Any mechanisms, employed to fix the prices will have to be
transparent and must include complete information about
subsidies.
d) The application of the maxim “He who pollutes must pay” is
fundamental.
3.3.2 The EUREAU Proposal
In terms of paying for existing services it is believed that it would
be of great use to have a clearer idea of the definition of the costs
that are produced. From the point of view of the EUREAU, and in
order to achieve unification at a community level, the costs of
services should be itemised in Appendix III of the WFD, in the
following way:
a) The financial overheads of services

Operating and financing water supply and waste water services
Covering all of the operating costs, technical and financial
repayments and the compensation of the capital invested.

Conservation of resources
This refers to the costs resulting from diffuse or discontinuous
pollution by agriculture or industry, reservoir maintenance, the
impact of transferring water between different watersheds, etc.
The costs of pollution should really be paid by the polluter, yet
the operational difficulty of the maxim "he who pollutes must
pay", has resulted, in some cases, in these costs being included in
the service costs.

Pollution control
Covering the costs of evacuation and reuse of subproducts and
sludges, as well as those due to rainwater pollution.

Management of hydric resources
Covers the administrative costs, and others, of the competent
bodies in charge of managing the hydric resources. Billing should
be done in conformity with the agreements established in each of
the member states.

Provision for atmospheric and extraordinary phenomena
Should the legislation so allow, an additional cost will be included
as a provision for atmospheric and extraordinary phenomena of a
cyclical character (floods and droughts), sustained by a suitable
technical report.
b) Environmental Costs
Representing the costs of the damage caused to the environment and
ecosystems by the use of the water.
This is the question that presents the greatest difficulty. Various
attempts have been made, for example, to appraise the intrinsic
ecological value of certain aquatic ecosystems, although up to now
none have been successful. Research in this sense will have to
continue.
Environmental costs may, among others, be considered as those due
to the maintenance of the ecological flow levels of rivers and in the
suitable overall management of surface and subterranean waters in
order to palliate, in periods of drought, the scarcity of surface
waters.
c) Resources costs
These are the costs generated by new users due to the exhaustion
of resources, beyond the natural process of renewal or recovery (e.g.
the over-exploitation of subterranean waters).
3.3.3 Comments
a) When establishing prices for their services EUREAU members
will continue to reduce costs, improving efficiency and will
recommend their customers to use water in a rational way. The
EUREAU believes that price incentives are a question of
subsidiarity.
b) It is necessary to consider the financing of new investments with
great care, with a view to achieving the goal of the sustainability
of hydric resources, although this aspect is, in particular, a
decision that falls with the framework of subsidiarity. When it
comes to an evaluation, the member states will have to bear
complex issues in mind, such as:
4.

Subsidies and social policy.

The transparency of the financing process.

Investments in long-term, sustainability infrastructures,
such as refilling aquifers or large-scale hydric resources
projects.
OUTLINE OF A TOTAL WATER CYCLE BILL
The proposed outline could serve for all of the urban supply and waste
water services, managed directly or delegated, either public or private.
We distinguish between three items in the total water cycle: potable
water, the sewage system, and the treatment and discharge of
wastewaters.
4.1 Potable Water
Real consumption levels must be billed, measured by meter. Binomial
(already introduced in the majority of EU states) and progressive pricing
are proposed, differentiating the rates according to type of use: domestic,
commercial, industrial, municipal, etc.
The service charge must be on the basis of the diameter of the meter that
determines the rated flow of the supply, or the type of dwelling.
The consumption charge must consist of a maximum of three price increase
blocks, in order to penalise high levels of consumption. A method could be
established to avoid levies on large families of limited economic resources.
In order to rectify these cases, in Barcelona the following exception is
applied: as long as it can be justified, on the basis of the municipal census,
when five or more people inhabit a dwelling, then the price of the third
block is set aside solely for the cubic metres that exceed an individual
consumption level in excess of 100 litres per person per day –this being
considered a normal average consumption level – i.e., 9 m3 per person per
month (36 m3 for a family of four members, this being the limit of the
second block). Thus, a family of five members that has consumed 100 m3 in
a quarter, will pay the first 18 m3 alt the price of the first block, the
following 37m3 at the price of the second block and the remaining 45 m 3
(not 64 m3) at the price of the third block.
VAT, even at the reduced rate, will not be applied.
The rate must cover financial overheads, i.e. acquisition, transport,
potabilisation, health control, storage, distribution and home supply costs,
as well as financial repayments, financial charges and compensation of the
invested capital.
The service charge covers the fixed operating overheads and guarantees
immediate availability for users along with permanent access to the service.
It depends on the type of supply, which could be from 30% to 40% of the
total cost. The consumption charge covers the variable service costs.
4.2 Sewage System
Real consumption levels, measured by meter, must be billed. The charge will
binominal and progressive, with a maximum of three price increase blocks.
Special cases may also be accepted.
VAT, even at the reduced rate, will not be applied.
The charge must cover the financial overheads of the service and those
due to the drainage of rainwater in the case of a unitary sewage system
network.
4.3 Treatment and discharge of wastewaters
Real consumption levels, measured by meters must be billed, with the
differentiation of domestic uses from remaining uses. It must be of an
ecological character.
For domestic use binomial and progressive pricing are proposed in, at most,
three price increase blocks.
For other uses it would be advisable to establish a single bracket with two
components, general and specific. The general component would have a
single value for all uses, while the specific component would depend on the
pollutant load of the discharges, in this way applying the maxim that “he
who pollutes must pay”.
VAT, even at the reduced rate, will not be applied.
This rate must cover, not only the financial overheads of the service but
also the environmental costs through the specific component.
4.4 The Goals of a Pricing System
a) To ensure an equitable share out among users
b) To offer a transparent image of the price of the services
c) To ensure a balance between service revenues and expenses, in
both the short and the long term
d) To encourage the rational use of water
e) The structure of the rate applied must be:
5.

Easy for the user to understand

Without difficulties in terms of applying it to the service

Stable over time
SUSTAINABLE DEVELOPMENT IN HYDRIC RESOURCES POLICY
A range of arguments, studied by the EUREAU are proposed, based on the
pricing criteria and policy of the European Commission, in order to assist in
the achievement of sustainability in waters policy:
5.1 To promote price policies that involve the complete introduction of
principles of sustainability (environmental, economic and social
sustainability), taking into account the fact that these elements,
because of the differences between them, could on occasions enter
into conflict and must therefore be balanced. Price policies must have
a triple goal:
a) To encourage the efficient use of water.
b) To provide incentives for a reduction of pollution.
c) To guarantee that environmental protection is only carried out
after a careful balancing of benefits with costs (not only referring
to economic measures).
5.2 To back the principle of total costs recovery and, as a consequence, to
attempt to establish, among others, the maxims of “he who consumes
must pay” and “he who pollutes must pay”.
5.3 To promote actions the aim of which is to ensure the transparency of
cost structures. A greater understanding of why the prices are as
they are could result in the more favourable disposition of consumers
when they have to pay the water bill.
5.4 Working on the attainment of sensitive models that acknowledge the
immense diversity of circumstances in the member states, while
bearing in mind the fact that the implementing of the WFD and the
ideas expressed therein (e.g. in the notification of the Environment
Commission of the European Parliament on pricing, the Fleming report),
will lead to a greater unification of cost models and structures among
the different member states.
5.5 Encouraging the application of personalised consumption measuring.
5.6 Over the coming years, with the complete recovery of costs and the
reduction of subsidies, the tendency will be towards an increase in
potable water prices and wastewater management services, that could
be significant in some countries, depending on the level of costs
recovery.
5.6.1 These increases may affect the capacity of low level income
users to pay. The number of customers with payment
difficulties could increase proportionally to the prices, even
though, at present, they may not represent a significant group.
The water bill does not represent an excessive charge in the
domestic budget, in the EU, for a middle class family of four, it
does not reach 2% of the annual budget.
5.6.2 Opposition to items being included in the water bill that are not
related to the water cycle (e.g. waste collection).
5.7 The urban water sector has a social responsibility to provide
continuous and high quality potable water supply and wastewater
services. Nevertheless, it must not, nor can it, take charge of the
billed amount for social classes with minimal economic resources,
although it does have the obligation to attend to these users and
direct them to the social assistance services that the municipal
authorities place at their disposal. One solution would consist of
awarding subsidies to the most underprivileged classes, to be paid
from general tax revenues, and that such should then be paid to the
water service by the social assistance services.
Definitively, the price of water must reflect its real cost and cannot
be converted into an increase aimed at balancing out social inequalities.
5.8
Cancelling such crossed subsidies as occur, mainly between different
uses, and also when especially low rates are collected from one group
of consumers, which in turn are compensated by the collection of
higher rates from the remaining consumers.
Crossed subsidies do not encourage either efficiency or equity and
reduce transparency. Given that they can upset the balance of the
real cost of the water supply, and that this could mean that
consumers are less inclined to save.
5.9
An analysis of water demand is fundamental for this sector, and is a
function of the territorial organisation policy.
5.10 It must always be born
urban supply service is to
of a waste water service
the established standards
in mind that the maximum priority of the
supply water of optimum quality, while that
is to discharge water, which complies with
into the reception channels.
5.11 To provide campaigns and actions for the education of the population,
in order to:
5.11.1 Ensure that they value the product and the services in order to
overcome the reticence of users to paying more. In particular to
distinguish between the “natural water cycle” and the complex
processes required in order to treat water for public
consumption, transport it in a safe way and treat it after use.
5.11.2 Help users to understand that the price of water, based on the
use of physical units other than cubic metres (e.g. indicating
consumption in litres in the bill) or by showing the daily cost
equivalent of the billed amount.
6.
THE ECONOMIC REPERCUSSION OF THE WATER FRAMEWORK
DIRECTIVE ON THE URBAN WATER SECTOR IN SPAIN.
6.1 Average Price of the Total Water Cycle in Spain.
According to AEAS data, the average price of the total water cycle in the
urban sector in Spain, in 2000, was:
€ 0.65 per m3

Potable water:

Sewage systems: € 0.19 per m3

Treatment:
€ 0.25 per m3

Average Price:
€ 1.09 per m3
The average price in 2001 can be determined, approximately, by increasing
the previous value by 5%, resulting in:
€ 1.14 per m3
It must be stressed that 60% of the price of potable water, in respect of
the total, will decrease in the future, due to the increase of the
percentage for waste water, and due to the significant investments that
are going to have to be made in this field (the Urban Wastewaters
Directive is only being met at the present time in terms of 65% of the
equivalent population).
6.2 Average Cost of the Total Water Cycle in Spain
According to a study carried out by the National Institute of Statistics,
the average total water cycle cost in Spain, in 1999, was € 1.38 per m3.
By increasing this value by 12% we obtain the approximate average cost for
2001, that is € 1.55 per m3.
Thus in 2001 the average price was somewhere in the region of 26% lower
than the real cost.
This is mainly, and undoubtedly, due to the financing of many
infrastructures that have not been considered as a direct cost in the total
water cycle, but have been allocated to the budgets of the different
competent bodies or levied as taxes.
6.3 Economic Repercussion of the WFD
In order to implement the WFD it will previously be necessary to comply
with the Potable Water Directive (98/83), the Nitrates Directive (91/676)
and the Urban Wastewaters Directive (91/271), such being taken for
granted in the Explanatory Statement of the WFD Proposal.
In terms of Directive 91/676 there is no estimation of its cost, given that
it would be impossible, in the medium term, to decontaminate the
subterranean waters, which means that the technical and economic viability
of other solutions will have to be studied.
The cost of the investments necessary to comply with the above-mentioned
directives and the WFD will be very high. An unofficial figure that has
been estimated, for the urban water sector, is € 645 per inhabitant.
6.4 Increase of the Average Price
If we assume that the resulting amount, including the costs of the overall
supply services and waste water infrastructure can be spread over the next
20 years, then the average price would be 30% up on the present figure.
Nevertheless, the fact that the price of the total water cycle is around
0.9% of the annual budget of a middle class family of four people, then the
application of the resulting increase can be seen as feasible. Should such
not be met, then the sustainability of hydric resources in Spain, within the
forecast term, cannot be achieved. Thus it will either be necessary to
defray the investment through taxation, which is an indirect and
inequitable method given that the whole population pays, whether or not
they are users of the services for which charges are being collected for
the infrastructures being built.
7. CONCLUSIONS
7.1 Complete potable water supply and waste water services costs
recovery will be a basic factor in the achievement of a sustainable
waters policy. Nevertheless, we will previously come up against a
significant barrier: i.e. the reticence of users to the increase in the
price of a service that, today, in most of the EU member states are
billed at a value that is lower than the real cost.
In effect, the present and future financial needs that arise from this
will be very high.
7.2 An awareness must be developed in users with regard to the
breakdown of the price of water and this can only be achieved by
government information campaigns. Users must know that costs have a
repercussion on the price of water, i.e. financial overheads,
environmental costs and the costs of resources.
7.3 The application of subsidies is an easy solution, but is not equitable, as
it is generated from taxes that are levied on the population as a whole,
whether or not they are users of the service. The application of
specific rates or fees or self-financing is more logical, yet the equity
of these systems is also questionable, as they benefit future users. An
equitable financing would be obtained by means of loans or the
provision of capital, given that both present and future users would
then participate in the recovery of the cost.
7.4 It would be advisable to achieve unification at a community wide level
of the different types of costs. Efforts must also be made to avoid
the billing for the service being used as a tool to include certain taxes
that are not, in fact, related to the water cycle.
7.4 The price of water must reflect real costs and cannot be converted
into an increase aimed solely at balancing out sectoral inequalities.
7.5 The cost of water consumption for a middle class family of four in the
EU is less than 2% of their annual budget. This allows for a margin in
which to increase prices for potable water supply and waste water
services.
Barcelona, March 2002