HELLENIC MINISTRY OF DEVELOPMENT The incentive dimension of water pricing: price elasticity in Athens. by Maria Ghini Hellenic Ministry of Development

HELLENIC MINISTRY OF DEVELOPMENT km ATHENS R. Asopos R. Evinos R. V. Kifissos R. Mornos Kopaida Marathon reservoir Perissos Lake Yliki Evinos reservoir Mornos reservoir Menidi Aspropyrgos Kiourka The Athens water resource system

HELLENIC MINISTRY OF DEVELOPMENT Characteristics and particularities of water supply system Covers large geographical area. Possibility to use alternative solutions of water resources (reservoirs-boreholes) groundwater losses from carstic system of Yliki and overflow from Evinos reservoir.

HELLENIC MINISTRY OF DEVELOPMENT Athens Water Supply and Sewerage Company The Company΄s introduction in the Athens stock exchange market (up to 49%) 4 million consumers, 1,150 million m 3 /day water pricing by increasing block tarrif Sewerage cost is 52% of the water supply price

HELLENIC MINISTRY OF DEVELOPMENT

The incentive dimension of water pricing: price elasticity in Athens. Objectives of the work  Develop a Data base of quarterly water consumption data for domestic use.  Examine the water consumption statistical characteristics.

HELLENIC MINISTRY OF DEVELOPMENT Objectives continued  Develop consumption clusters and investigate the demand elasticity of the water supply, in respect to water price change in each cluster  Investigate the possibility of reducing the domestic consumption by increasing the water price for all the other scales except the lower one which is of vital importance.

HELLENIC MINISTRY OF DEVELOPMENT Data processing. Three-month water consumption data were analysed for a period of 11 (eleven) years,from 1989 to 99, for 1000 domestic consumers in selected representative neighbourhoods of Athens. The time series of consumption are examined for outliers and missing values and they are filled in by interpolation between readings before and after. In order to gain insight about the distribution of consumption in various levels, the mean historic quarterly consumption is estimated for each time series (consumer).

HELLENIC MINISTRY OF DEVELOPMENT Figure 1 : Density and Distribution Functions of the mean quarterly consumption for Athens.

HELLENIC MINISTRY OF DEVELOPMENT The time series are clustered on the basis of the mean value of each time series. The time series clustering follows the increasing block tarrif structure of Athens and also is taking into consideration the Distribution Function of the quarterly consumption of Athens.

HELLENIC MINISTRY OF DEVELOPMENT Figure 3 Mean water consumption per cluster.

HELLENIC MINISTRY OF DEVELOPMENT Figure 4. Total water consumption per cluster.

HELLENIC MINISTRY OF DEVELOPMENT According to the classical elasticity theory, we have the following relation: Development of Macroelasticity Models.

HELLENIC MINISTRY OF DEVELOPMENT In the present work following Stoll, 1980, the macroelasticity concept is introduced, in order to account for autoregressive effects of water consumption:

HELLENIC MINISTRY OF DEVELOPMENT The macroelasticity of water consumption in direct analogy with the theory of elasticity is derived:

HELLENIC MINISTRY OF DEVELOPMENT Multi Regression Analysis Mean water consumptions for each quarter Q t are calculated, for all quarters and for each cluster. Mean water prices p t, for each quarter and for each cluster are calculated and they are reduced to constant prices of The mean quarterly consumption data Q t for each cluster are correlated with Q t-1 and the corresponding mean water prices p t-1, using standard time series techniques.

HELLENIC MINISTRY OF DEVELOPMENT Statistical criteria to test the correlation models. The coefficient of determination R² and the t-student criterion for each parameter estimated, requiring that |t|>2.

HELLENIC MINISTRY OF DEVELOPMENT Table 3 : Multi-Regression analysis results

HELLENIC MINISTRY OF DEVELOPMENT Results of Multi-Regression analysis  All correlations developed on the basis of model (16) are statistically significant since the t-student criterion was always satisfied for all terms (|t| >2)  The overall coefficient of determination R² ranges from 52 to 67%, which indicates that there exist other independent variables, not included in the model (number of persons per consumer, area of consumer premises etc.)  Since model parameters α, λ and c are estimated with rather high confidence level, due to satisfied t-student criterion, the same can be said for macroelasticity ε Μ.

HELLENIC MINISTRY OF DEVELOPMENT Macroelasticity Estimation. The macroelasticity coefficient ranges between -0,58 for small consumption scale and -0,87 for larger consumers. Consequently water pricing can be used as measure in controlling water demand. For example with macroelasticity being equal to –0,5, then a 50% increase of water tariffs will cause water demand reductions by 18,4%. In case that we double the water prices, water demand will be reduced by 29,3%. In both cases, water consumption will progressively be reduced by the above mentioned percentiles over the next 3 to 4 quarters by the time of the initial increase.

HELLENIC MINISTRY OF DEVELOPMENT Summary and Conclusions Water price elasticities for Athens range between –0,58 for small consumption scales up to –0,87 for larger consumption scales (>45 m³ per quarter). This combined with the fact that a significant portion of consumption is realized in the higher consumption scales, indicates that pricing policy can be used as an effective instrument to control water demand by increasing the water prices in the larger consumption scales. Therefore the development of Databases in all sectors of water consumption is considered of vital importance, in order to develop coherent pricing and demand side management policies.

HELLENIC MINISTRY OF DEVELOPMENT The incentive dimension of water pricing: price elasticity in Athens. by Maria Ghini Hellenic Ministry of Development For the International Seminar : “The Implementation of the Water Framework Directive in the European Union and beyond” In Hilton Hotel, Athens,Greece, on June 2003