Trend of Utility Affordability and Impacts of State Utility Concessions in Victoria PhD(Public Policy) (work in progress) Crawford PhD Conference 2013 4 November 2013

Noel Wai Wah CHAN Supervisor panel: Prof. Quentin Grafton, Dr Hoa Nguyen, Dr Karen Hussey, Prof Michael Ward (advisor), Dr David Stanton (advisor)

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Presentation outline

• Background • Research Questions • Theoretical Framework • Data and methodology • Preliminary results • Limitations & what’s next?

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Background

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Water price trends

Note: Consumer price index water and sewerage series, deflated by the consumer price index for all groups at major Australian cities. Source: ABS, Consumer price index, Cat. No. 6401.0

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Electricity price trends

Note: Consumer price index electricity series, deflated by the consumer price index for all groups at major Australian cities. Source: ABS, Consumer price index, Cat. No. 6401.0

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Gas price trends

Note: Consumer price index gas series, deflated by the consumer price index for all groups at major Australian cities. Source: ABS, Consumer price index, Cat. No. 6401.0

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Note: Consumer price index, deflated by the consumer price index for all groups at major Australian cities. Source: ABS, Consumer price index, Cat. No. 6401.0

Change of real price index (1998 to 2013)

Water Electricity Gas Sydney 42% 102% 65%

Melbourne 71% 72% 50%

Brisbane 85% 71% 80%

Adelaide 62% 96% 69%

Perth 33% 24% 86%

Hobart 33% 66% 32%

Darwin 111% 44% 31%

Canberra 88% 73% 69%

Australia 59% 78% 60%

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Household Income Quintile

Q1 Q2 Q3 Q4 Q5 Average

Mean gross household income per week (AUD$)

367 785 1327 2,024 3,937 1,688

Energy supply – domestic fuel and power (includes purchase of wood, heating oil etc) 2009-10 $/week 22.34 28.11 31.44 36.55 44.21 32.52

% expenditure 4.00 3.45 2.69 2.47 2.05 2.63 Water and sewage service 2009-10 $/week 4.89 6.32 7.97 9.53 12.26 8.19

% expenditure 0.87 0.78 0.68 0.64 0.57 0.66 Total energy and water

2009-10 $/week 27.23 34.43 39.41 46.08 56.47 40.71

% expenditure 4.87 4.23 3.37 3.11 2.62 3.29

Distribution of water and energy expenses among Australian households (2009-10)

Source: ABS Household Expenditure Survey (2011)

Victoria State utility concession policy

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Victoria State utility concession policy

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Water concession Energy concession

Main and non-main water concession - 50% on water consumption, sewerage disposal and service charge up to a maximum annual cap

• Annual Energy Concession • Winter Energy Concession • Off-peak concession • Service to Property Concession • Medical Cooling Concession • Life support concession • Electricity Transfer concession

Research Questions

• What is the trend of utility affordability? Increasing, decreasing, or unchanged?

• Who are the vulnerable groups with risk of utility affordability problem?

• What are the impacts of State utility concession to address utility affordability problem?

• Whether the utility concession policy effectively target the vulnerable groups?

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Theoretical Framework: Affordability analysis • Affordability Utility-burden ratio (rh) (OECD 2003)

– Actual expenditure as a proportion of household income

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• ‘Excessive burden’ if its expenditure share for utilities exceed the critical ‘burden-threshold’ level r u

• Head count index (HI) is the fraction of households with rh ≥ r u

where N is the total number of households, 1(.) equals one if its argument is true, zero otherwise

Theoretical Framework - Benchmark • UK Affordability benchmark

– 3% for water (Breisach 2004; DEFRA 2012) – 10 % for energy (electricity and gas) (Boardman 1991; Fankhauser

and Tepic 2007) – 13% for utility (total water and energy)

• Bottom 40% of the income distribution (equivalised disposable household income) (Harding 2004) – Exclude non-poor households who consume large amount of water

and energy (i.e. over-consumption)

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Theoretical Framework: Evaluation of Concession policy (i) Change of utility burden ratio for concession HHs

(ii) Targeting analysis (Sumarto and Suryahadi 2001)

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Utility burden ratio and Poverty status

High utility burden & poor household

(bottom 40% of income distribution)

Low utility burden ratio / non-poor

household

State utility concession program

Concession

HHs

Success targeting

Inclusion error (leakage)

Non-Concession

HHs

Exclusion error

(under-coverage) Success

exclusion

Data • 2001 & 2007 Victorian Utility Consumption

Household Surveys • 2013 data - adjusted from 2007 data • Derived Gross Household Income • Disposable Household Income • Equivalisation process (OECD modified scale)

– Assigns a value of 1 to the household head, of 0.5 to each additional adult member and of 0.3 of each child.

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Preliminary Results

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Trend of utility affordability – Disposable household income

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0.000.020.040.060.080.100.120.140.160.18

1 2 3 4 5 6 7 8 9 10

Util

ity b

urde

n

Income decile

Distribution of Utility burden (water and energy), under Disposal Household income

2001

2007

2013 (lower bound)

2013 (upper bound)

Trend of utility affordability – Equivalised income

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0.00

0.05

0.10

0.15

0.20

0.25

1 2 3 4 5 6 7 8 9 10

Util

ity b

urde

n

Income decile

Distribution of Utility burden (water and energy), Under Disposal household income in OECD modified scale

2001

2007

2013 (lower bound)

2013 (upper bound)

Decomposition of households in utility affordability stress % Households in utility stress (2006/07) – Melbourne vs Rural Victoria

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Melbourne Regional Average HH income (AUD) 32,737 31,693

Average water burden ratio 0.019 0.022 Average energy burden ratio 0.061 0.057 Average utility burden ratio 0.078 0.077

% of HH with wburden >=3% 19.6% 25.2% % of HH with eburden >=10% 12.3% 9.6% % of HH with uburden >=13% 12.7% 9.3%

• HH under bottom 40% of income distribution, • All computation is based on equivalised disposable household income (2006/07)

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Couple only

Couple w/ children

Single parent

Lone Person

Group HH

Average HH income (AUD)

21,713

21,185

17,064

19,399

20,653

Average utility burden ratio 0.118 0.120 0.136 0.084 0.119

Average water burden ratio 0.030 0.029 0.032 0.025 0.029

Average energy burden ratio 0.089 0.092 0.107 0.063 0.092

% of HH with wburden >=3% 36.6% 40.4% 43.1% 38.3% 42.6% % of HH with eburden >=10% 25.0% 37.4% 41.7% 10.3% 32.0% % of HH with uburden >=13% 23.1% 35.3% 45.0% 12.5% 39.9%

% Households in utility stress – by family type (2006/07)

• HH under bottom 40% of income distribution, • All computation is based on equivalised disposable household income (2006/07)

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% Households in utility stress – by tenure type (2006/07)

• HH under bottom 40% of income distribution, • All computation is based on equivalised disposable household income (2006/07)

Owner outwright Purchaser

Private renter Public renter

Average HH income (AUD)

19,959 21,019 20,331 20,460

Average utility burden ratio 0.113 0.127 0.090 0.078 Average water burden ratio 0.029 0.033 0.019 0.020

Average energy burden ratio 0.084 0.094 0.077 0.064

% of HH with wburden >=3% 36.1% 41.6% 42.7% 47.3% % of HH with eburden >=10% 23.4% 33.1% 27.4% 17.6% % of HH with uburden >=13% 26.4% 34.6% 20.1% 20.4%

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% Households in utility stress – by concession type

• HH under bottom 40% of income distribution, • All computation is based on equivalised disposable household income (2006/07)

Aged Concession

Non-aged concession

All Concession

Non-concession

Average HH income (AUD) 20,789 20,227 20,491 20,083

Average utility burden ratio 0.084 0.103 0.094 0.123

Average water burden ratio 0.024 0.026 0.025 0.031

Average energy burden ratio 0.062 0.081 0.072 0.094

% of HH with wburden >=3% 31.2% 40.1% 35.9% 42.7%

% of HH with eburden >=10% 9.7% 26.2% 18.4% 32.7%

% of HH with uburden >=13% 12.3% 25.8% 19.5% 33.3%

Summary findings • Decreasing trend of utility burden (across all household

income deciles) • bottom 40% households has high utility burden in 2001 • Within the bottom 40% income distribution, larger proportion

of certain HH types with utility affordability stress

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Water affordability stress

Fuel affordability stress

Utility affordability stress

Melbourne vs rural Rural HH Melb HH Melb HH

Family type Single parent Single parent Single parent

Tenure type Public renter Purchaser Purchaser

Concession type Non-concession Non-concession Non-concession

Evaluation of Concession policy Reduction of utility expenditure and utility burden for concession

households

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wsburdenwc4 932 711442 .0097458 .0078371 .0002824 .0585774 wsburden4 932 711442 .0136241 .0099476 .0005648 .0704651 wsbillwcon 932 711442 396.0082 208.8816 6.6 1389.3 wsbill 932 711442 540.3475 221.1929 13.2 1431.1 Variable Obs Weight Mean Std. Dev. Min Max

Water expenditure and water burden (hhwatcon=1)

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egburdenwc4 1412 1140390 .0330528 .0229791 .0026638 .3833695 egburden4 1412 1140390 .0358428 .0246499 .0044544 .3897325 egbillwcon 1412 1140390 1438.286 629.6529 58.3 8390.8 egbill 1412 1140390 1548.548 653.1013 180.4 8606.4 Variable Obs Weight Mean Std. Dev. Min Max

Energy expenditure and energy burden (hhegcon=1)

Target analysis of State concessions

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Concession coverage (%) Among HH in different income quintile

Ratio non-poor to poor

Overall Q1 Q2 Q3 Q4 Q5 (Q3 to Q5) Q1 to Q2

(Q2 to Q5) Q1

Utility concession 66.8% 69.3% 75.0% 76.5% 62.7% 49.3% 0.87 0.95

Water concession 40.0% 46.1% 47.9% 45.9% 35.3% 24.0% 0.75 0.83

Energy concession

64.2% 65.3% 72.5% 73.6% 60.1% 48.3% 0.88 0.98

Distribution of utility concession beneficial across income quintiles (2006)

Evaluation of Concession policy Targeting analysis

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Utility burden ratio and Poverty status

High utility burden & poor household

(bottom 40% of income distribution)

Low utility burden ratio / non-poor

household

State utility concession program

Concession

HHs

Success targeting

Inclusion error (leakage)

Non-Concession

HHs

Exclusion error

(under-coverage) Success

exclusion

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Success targeting

Inclusion error

Exclusion error

Success exclusion

Overall success

Overall error

(a) (b) (c) (d) (a) + (d) (b) + (c)

Utility stress benchmark (13%) & hhucon = 1

Disposable income 1.6% 65.1% 0.9% 32.3% 33.9% 66.0% Eq. Disposable income 7.0% 59.7% 3.7% 29.5% 36.5% 63.5% Water stress benchmark (3%) & hhwcon = 1

Disposable income 2.8% 37.2% 5.6% 54.4% 57.2% 42.8% Eq. Disposable income 6.0% 34.0% 9.9% 50.0% 56.0% 44.0% Energy stress benchmark (10%) & hhecon = 1

Disposable income 1.1% 38.9% 1.4% 58.6% 59.7% 40.3% Eq. Disposable income 4.2% 35.8% 6.1% 53.8% 58.0% 41.9%

Targeting outcome of Victorian utility concession to households in utility stress and below 40% Income distribution (2006/07)

Summary findings on State concession evaluation

• Substantial reduction of water and energy bills, and burden for eligible concession households

• Some proportions of HH in Q3 to Q5 also received water and energy concession

• Target ratio with very low exclusion error, but higher when adjusted with equivalised disposable income

• Target ratio with high inclusion error generous State concession policy and eligibility criteria?

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Limitations & future work • Refine data to reflect Victorian population • Combine datasets for pool regression analysis • Changed of Victorian concession policy in 2012, 2013 • Affordability measures and standards - Burden ratio

versus other residual income or subjective methods • Change of Victorian energy market (market offer vs

standard offer) (flexible pricing) (smart metering)

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Thank you.

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Limitations: Utility Affordability analysis

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Source: Gawel and Bretschneider (2011)

Concept of Indigence Area Rationale Burden share = (traditional) unaffordability

1a + 2a + 3a +4a

Household spends more on utility good consumption than the target ratio

Budget restraints 3 + 4 Household earns less than needed to afford the subsistence bundle

Under-consumption 2 + 3 + 4 Household consumes less than required

Area 1 Non-under-consumption

Area 2 Willingness deficiency-related under-consumption

Area 3 Under-consumption due to deficiency of willingness and of ability

Area 4 Purely ability deficiency-related under-consumption

Utility-burden ratios (benchmark indicator)

Theoretical Framework: Affordability analysis – Utility-burden ratios (benchmark indicator)

• Actual expenditure as a proportion of household income (OECD 2003; Tepic 2008)

• Twice the median approach (Moore 2012 on fuel poverty) • High cost/Low income approach (Hill 2011 on fuel poverty)

– Residual income methods (Budget standard approach) • Residual income methods (Stone 2006 on shelter poverty,

Burke et al. 2012 on housing affordability) • Potential Affordability indicator (Miniaci et al. 2008)

– Subjective approach • E.g. Temple (2008) for housing affordability study; Price et al.

(2012) for fuel poverty study

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Victoria concession policy

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Eligibility Card holders of Pensioner Concession Card, Health Care Card, DVA Gold Card

Water Concession Concession entitlements

2001 PCC/DVA card holders + owner occupiers: Concessions of 50%, up to a maximum of $67.5 per year, on service charge and up to $67.5 per year on volume charges. HCC card holders and tenants with PCC or DVA card: Concessions of 50% up to a maximum of $67.5 per year, on water usage charges and where applicable, up to $67.5 for sewerage disposal charges.

2007 All concession cardholders: 50% on water consumption, sewerage disposal and service charge up to a maximum annual cap. The cap in 2006-07 was $154.

2013 Same rule as 2007, cap of max rebate $277.00 for 2012-13.

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Eligibility Card holders of Pensioner Concession Card, Health Care Card, DVA Gold Card

Energy Concession Concession entitlements (2006-07)

Annual Energy Concession

17.5 % discount off household electricity bills all year round *

Winter Energy Concession

17.5% discount off mains gas on usage from 1 May to 31 October of each year *

Off-peak concession 13% reduction on the off-peak on electricity bills

Service to Property Concession

reduction on the electricity supply charge for concession households with low electricity consumption

Medical Cooling Concession

17.5 percent discount off electricity costs over a six month period from 1 November to 30 April cardholders with multiple sclerosis and other qualifying medical conditions

Life support concession quarterly discount on electricity bills for cardholder's household uses certain life support machines

Electricity Transfer concession

full waiver of the fee when there is a change of occupancy at a property