INTRODUCTION
AND SUMMARY
OF CONCLUSIONS
AND RECOMMENDATIONS
1. Each of the 29 companies supplying water or sewerage
services in England and Wales has an almost complete monopoly
in the area it serves[1].
This creates a risk that customers may be exploited, through excessive
prices, poor quality services, or both. The Office of Water Services
(OFWAT), assisted by ten Customer Service Committees, are responsible
for protecting customers against this risk, while allowing companies
to charge enough to finance the services they provide.
2. The companies supply over 21 million customers.
Since privatisation, the quality of service they have provided
has improved in a number of respects.[2]
The companies are permitted, however, to impose restrictions on
the nondomestic use of water to help balance supply and
demand. Such restrictions have been widespread in recent years,
affecting 40 per cent of the population in England and Wales
in 1995-96, and 31 per cent in 1996-97. In addition, domestic
supplies were also at risk in parts of Yorkshire in 1995. Regulating
the quality of service provided to customers is a central part
of the work of OFWAT and the Customer Service Committees, and
is an essential complement to their regulation of the companies'
prices.
3. On the basis of a report by the Comptroller and
Auditor General, the Committee examined OFWAT's regulation and
monitoring of the quality of service provided by the water companies
to their customers. Four key points stand out, which are relevant
not only to the work of OFWAT but also to other regulators of
monopoly providers of services to the public:
(I) Reliability of service
It is for the companies to provide a reliable service,
but regulators must have good systems for monitoring companies'
ability to do so. The Committee is very concerned that, by 1994-95,
30 per cent of the water distributed by the companies was
being lost through leaks. We are surprised that it has taken OFWAT
so long to commence improving the arrangements they inherited
in 1989 for monitoring the water companies' ability to provide
a reliable supply of water.
(II) Encouraging improvements in service
In a competitive market customers can go elsewhere
if their supplier does not provide a satisfactory standard of
service. Customers depending on a monopoly supplier do not have
that option. So monopoly suppliers like the water companies need
to be continually challenged by their regulator to meet customers'
reasonable expectations. We are not convinced that OFWAT's general
reliance in the past on drawing comparisons between companies
was a sufficient stimulant to securing improvements in each company's
performance. Setting specific targets for each company can provide
a more effective focus, and we look to OFWAT to monitor closely
whether the companies meet the target OFWAT have now set them
of reducing the level of leakage in 1998-99 by nearly a third
of its 1994-95 level.
(III) Investigating customers' queries
Each year customers raise some 15 million queries
about their bills. We look to OFWAT to complete urgently their
investigation of the reasons for these queries and to ensure that,
where they are the result of poor service, the companies take
remedial action.
(IV) Applying financial sanctions
where necessary
The water companies are currently achieving a rate
of return of around ten per cent, substantially above the
level of around five to six per cent that OFWAT consider
appropriate in the long term. This emphasises the importance of
regulators pressing companies to provide a satisfactory quality
of service for their customers in return for the prices charged.
We note OFWAT's imposition of financial sanctions on Yorkshire
Water, amounting to some £40 million, as a result of
deficiencies in that company's performance. In our view it is
right that regulators should be prepared to impose financial sanctions
where persuasion and the setting of targets have failed to produce
the improvements needed.
4. The Committee's detailed conclusions and recommendations
are as follows:
Adequacy of water supplies
(I) The ability of the water companies
to maintain water supplies is of course an essential part of their
service to customers. In recent years there have been, however,
widespread restrictions on the use of water and in one case essential
supplies to customers were at risk. We note that OFWAT are confident
that the companies have sufficient resources to maintain essential
water supplies for 1998, and that in the 1999 price review OFWAT
will be looking at the companies' assessments of their water supply
position for the years ahead. We expect OFWAT, in doing so, to
ensure that the companies have satisfactory plans to maintain
the reliable supplies of water that customers expect (paragraph 21).
(II) The arrangements OFWAT inherited in
1989 for monitoring the number of people at risk of water shortage
were unsatisfactory. We are concerned that OFWAT did not start
to try to improve these arrangements until 1995, and that their
review is not yet complete. We look to them to conclude it without
further delay and to introduce more reliable measures for monitoring
who is at risk and what is being done to reduce that risk (paragraph 22).
(III) By 1995, many water and sewerage companies
had not reduced leakage in line with the forecasts they had made
in 1990. The amount of water lost as a result of leakage was,
on average, some 30 per cent of the water put into distribution
systems. We recognise that leakage reduced slightly in 1996-97
and that targets now set by OFWAT require it to be reduced in
1998-99 by nearly a third compared to its level in 1994-95 (paragraph
23).
(IV) We are concerned, nevertheless, that
leakage reduction targets were not set earlier, and that OFWAT
did not act against the companies that failed to achieve the leakage
reductions they had forecast in 1990. We expect them to monitor
closely companies' progress in achieving their targets for reducing
leakage and to act promptly if any companies fail to achieve them
(paragraph 24).
Other customer service issues
(V) Because each company has an almost
complete monopoly in its area, it is not possible for ordinary
customers to take their business elsewhere if they are not satisfied
with the service they are receiving. For customers to be protected
adequately, the companies must be challenged to provide a good
service in a way that provides as strong an incentive for them
as would any threat of losing their customers' business. In the
past OFWAT have relied mainly on comparisons between companies
to provide this challenge. But some companies did not respond
sufficiently to this pressure and OFWAT are now setting targets
for those companies that are not performing properly, and are
assessing all companies in terms of whether their performance
has been "good", "satisfactory" or "poor".
We look to OFWAT to ensure that the targets they set are sufficiently
stringent to protect customers, and to act effectively against
any company that fails to achieve them (paragraph 44).
(VI) The Committee is concerned that OFWAT
have not themselves carried out any comprehensive survey to establish
customers' views of the service provided by water companies since
1992, and that their subsequent surveys of customers' views have
concerned mainly the level of water charges and issues relating
to water metering. We do not understand on what basis they argue
that only continuous monitoring of customer satisfaction has value,
since monitoring at intervals can also provide reliable information
regarding trends in customer satisfaction. We note that OFWAT
plan to work more closely with the companies to secure regular
information on customers' satisfaction. If satisfactory arrangements
cannot be made with the companies, OFWAT should give further consideration
to carrying out research of their own (paragraph 45).
(VII) In 1996 only 46 per cent of the customers
complaining to the Customer Service Committees were satisfied
with the outcome of their complaints, compared to 78 per
cent of those complaining to the equivalent bodies in the electricity
industry. We note that OFWAT plan to carry out a review to try
to identify the reasons for the low level of customer satisfaction,
but we understand that one reason for it may be that some of the
matters customers are raising are outside OFWAT's jurisdiction.
We recommend, therefore, that OFWAT should ensure that their review
includes consideration of whether their powers are adequate to
secure a satisfactory outcome for customers (paragraph 46).
(VIII) Customers raise some 15 million
queries about their bills every year. We are concerned that OFWAT
do not know why. We note that they are now planning to investigate
the reasons; we look to them to do so as a matter of urgency and,
to the extent that the queries arise because of poor service,
to ensure that the companies take remedial action (paragraph 47).
Financial issues
(IX) As a result of an investigation
of the performance of Yorkshire Water, and of its difficulties
during the 1995 drought, OFWAT pegged the company's prices at
a cost to the company of some £40 million. In addition,
the company has reported a provision in its accounts of £48 million
(at 1996-97 prices) for costs relating to the drought. We regard
the imposition of financial sanctions where companies have failed
to provide a satisfactory service to be important and we expect
OFWAT to consider carefully the application of such sanctions
if circumstances warrant them (paragraph 64).
(X) Following the privatisation of the water
and sewerage companies in 1989, all the companies were subject
to price limits set by the then Secretary of State. We note that
OFWAT reset the limits in 1994 with the aim that the rate of return
of the companies would fall over the ten-year period of the price
limits to what they regarded as an acceptable level of five to
six per cent by 2005 (paragraph 65).
(XI) OFWAT's adoption of this gradualist
approach has contributed to the companies currently achieving
a rate of return on capital of around ten per cent, which
is substantially above the level of about six per cent to
which OFWAT consider it could be reduced. We note that in OFWAT's
next review of prices, in 1999, they will set prices so as to
reduce immediately to that lower level the rate of return on capital
achieved by the companies. The high returns currently being enjoyed
by the companies are an additional reason why OFWAT should press
hard for a satisfactory quality of service from them (paragraph 65).
(XII) We note that OFWAT consider the level
of dividends paid by some companies to have been unacceptable
and unsustainable. Such dividends might put at risk investment
and the quality of service to customers. We therefore recommend
that OFWAT consider whether further safeguards are required to
protect customers (paragraph 66).
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