APPENDIX 9
Memorandum from the Ofwat National Customer
Council
INTRODUCTION
1. The 10 Ofwat Customer Service Committees
(CSCs) have the statutory duty to represent the interests of customers
of the water and sewerage companies in England and Wales. The
Ofwat National Customer Council (ONCC) brings together the 10
CSC Chairmen.
2. The setting of new price limits for all
water companies by the Director General of Water Services (the
Director) for the five years from 2000-01, final decisions on
which were announced in November 1999 dominated the work of the
CSCs and ONCC over the last two or three years. The CSCs and ONCC
were fully involved in representing customers' interests at all
stages during the price review.
RELATIONSHIP BETWEEN
CUSTOMER REPRESENTATION
AND REGULATION
3. The CSCs as the statutory representatives
of water customers and as part of Ofwat have a unique position
within the regulatory regime and enjoy a special relationship
with and access to the Director. During the price review CSC Chairmen
had the benefit of direct access to the Director and the CSCs
had the opportunity at key stages to make representations to him
in person as well as in writing.
4. The Director attended every meeting of
ONCC to report on the progress of the price review. He shared
information and briefed Council Members on key decisions in advance
of public announcements. This was appreciated and contributed
to a constructive working relationship between customer representatives
and the regulator, which is clearly in the best interests of customers.
PRICE CONTROLS
AND CUSTOMERS'
BILLS
5. Although competition in the water industry
is beginning to emerge few customers can as yet choose their water
or sewerage supplier. Customers must therefore rely on regulation
as the best substitute for competition to ensure that their interests
are protected especially in respect of the charges they must pay.
6. In the 10 years since privatisation complaints
from customers about charging issues, in particular increases
in water and sewerage charges, have dominated the CSCs' complaints
workload. In a typical year nearly one fifth of all customers'
complaints received by CSCs arrive in March when annual unmeasured
water and sewerage bills are issued. Over half of these complaints
are about charges compared to around one quarter in the year as
a whole.
7. This reaction from customers is not surprising.
Bills have arisen substantially since water industry privatisation
to enable companies to remedy the neglect of the past and meet
new quality obligations. Average water and sewerage household
bills increased by over 40 per cent in real terms by the year
2000 compared with 1989 (with the bulk of the increase—almost
30 per cent—occurring in the period up to 1994-95). The
picture varies across the country with South West Water customers
having seen the biggest increase of 60 per cent on average in
real terms.
8. By 1999-2000 the average water and sewerage
household bill in England and Wales had risen to £246 but
wide regional variations have developed because of the uneven
impact of environmental requirements. Thames Water had the lowest
average bill at £206 while South West Water had the highest
average bill at £356. The South West has one third of the
country's designated bathing beaches but only 3 per cent of the
population to meet the cost of improvements to waste water treatment.
QUALITY OBLIGATIONS
9. In representing the interests of customers
the ONCC and the CSCs do not focus solely on the level of water
bills regardless of the needs of the environment. We are pro customer
not anti-environment but we do want to see best value for money.
Although we do not directly represent the interests of users of
the water environment there are a number of powerful and effective
bodies who do.
10. In return for higher bills over the
last 10 years there is clear evidence of systematic and continuing
improvement in the water environment—in estuaries, rivers,
canals and bathing waters. Drinking water quality has risen too.
We have welcomed these improvements.
11. Decisions on the scale and pace of future
improvements in water and environmental quality are ultimately
for Minister to take having regard to obligations imposed by EU
Directives. The costs of achieving these improvements in quality
were a major component to be taken into account by the Director
in the price review.
12. In April 1998 the Director sent an open
letter to the Secretaries of State on Setting the Quality Framework
in which guidance was sought on drinking water quality and environmental
obligations for the period 2000-05. Ministers stated that in reaching
their decisions they were keen to strike the right balance between
investment to deliver desirable improvements and the level of
water and sewerage bills.
13. We wrote to the Secretaries of State
in June 1998 to support the Director's request for guidance. We
pointed out that Ministers were not faced with a choice between
lower bills and environmental improvements and that their decisions
were central to achieving an outcome in which both the environment
and customers benefited.
14. We have always attached great importance
to a proper assessment being made of both the costs and benefits
of any schemes that customers may have to pay for in water and
sewerage bills. Our analysis of information obtained from the
Environment Agency for proposed schemes in the North West region
appeared to indicate that 80 per cent of the environmental benefit,
on the basis of the scores from the Multi Attribute Technique
(MAT) used by the Agency, could be completed for 50 per cent of
the cost. In contrast, on the basis of the Agency's own priorities,
only 30 per cent of the benefit would be delivered for 50 per
cent of the costs.
15. We wrote to Ministers to draw attention
to these findings and published the letter. We see it as an important
issue of principle that customers should know the extent to which
the environmental schemes they are required to fund through water
bills will deliver the best possible value for money. Customers
should not in our view be expected to pay for high costs schemes
with low benefits. MPs and local authorities wrote to us to express
agreement.
16. In March 1999 Ministers announced their
decisions on the national environment programme prepared by the
Environment Agency, comprising lists of schemes at regional level
to improve water quality in the environment. We were disappointed
that the announcement was not accompanied either by any statement
of reasons for the decisions or by publication of the Environment
Agency's submission to Ministers on which decisions were based.
The position on the assessment of benefits and the relationship
to costs was less clear than we would have wished.
CUSTOMER CONSULTATION
AND MARKET
RESEARCH
17. Water companies have the primary responsibility—as
well as the resources at their disposal to do so—for researching
the views of their customers on the future level of price and
service. The CSCs and ONCC do not have the resources to carry
out research on the same scale.
18. In 1998 we commissioned a small scale
research project with management support from the Consumers' Association,
into the views of households on the lowest 30 per cent of incomes.
The study was criticised by the water industry and other bodies
because only 48 households were interviewed. Irrespective of sample
size the level of environmental improvements cannot, we recognise,
be determined by the views of low income households alone, but
it is important that the views of these customers are taken into
account in setting price limits.
19. Our study filled a gap in research by
other bodies and contributed to the bigger picture. The report
highlighted the very real difficulties and hardship faced by those
on low incomes in paying water bills (as well as other bills),
the preference for a cut in bills and the irrelevance or low priority
to them of environmental improvements. There is an acknowledgement
by the water companies themselves that even where there is willingness
expressed to pay for improvements this does not always reflect
the ability to do so.
20. The claims of customer support for spending
on environmental improvements made by the Environment Agency and
other environmental organisations during the price review were
in our view undermined by the lack of knowledge of customers.
They had not in our view been well informed about how much they
had been paying since privatisation for such improvements, about
how much progress had been made and about the current much improved
state of the environment. Our view was that claims by environmental
bodies that customers were happy with their water and sewerage
bills at the existing level and were content for them to continue
to rise at least in line with inflation to fund environmental
improvements should be treated with great caution.
21. At regional level CSCs undertook work
to establish customers' views including informal surveys, by writing
letters to MPs and local authorities, by placing articles in the
press and in water company newsletters and by analysis of trends
in complaints received. In August 1998 all water companies reported
to the Director on the outcome of their own customer consultation
work and outlined their preferred strategies for 2000-05.
22. In their reports to the Director on
the companies' strategies CSCs stated that much of the companies'
research had been of good quality. The CSCs broadly supported
the companies' conclusions about customer priorities for service
and/or environmental improvements. CSCs also endorsed the conclusions
of most companies that customers did not want bills to increase.
We were however disappointed that the companies did not consult
customers fully on the issue of possible price reductions linked
to continued improvements. Water UK told ONCC in presenting the
results of its research that this option was not offered because
most customers would have chosen it.
PRICE REVIEW:
CUSTOMER EXPECTATIONS
23. Since privatisation there has consistently
been strong customer dissatisfaction with increases in water and
sewerage bills above the rate of inflation exacerbated by high
profits and increasing dividends. In 1997 ONCC called for a reduction
in bills in 2000-01, the first year of new price limits, of at
least 10 per cent. This was controversial at the time but was
an objective that was taken up by Ministers.
24. We were delighted therefore that in
November 1998, the Director in Prospects for Prices indicated
that there was scope for an even larger initial reduction in bills
at national level of up 20 per cent in real terms. This equated
to a cut of up to £50 off the expected average household
bill in 1999-2000 of £245. The scale of the programme of
water and environmental improvements meant that prices would then
have to rise again over the next four years although at the national
level not back to where they were in March 2000.
25. The first year reduction in water and
sewerage bills (Po) was we were advised by the Director made up
of three components:
— a lower cost of capital compared
with that used in 1994 Review (which was a highly significant
factor);
— an adjustment to the "glidepath"
on the return on capital implicit in the 1994 price limits;
— outperformance ie additional efficiency
savings made by companies compared with those assumed in 1994.
26. We believed that the prospect of a substantial
reduction in bills announced by the Director was the news that
both household and business customers had been waiting for after
facing rising bills since 1989. If the regulatory regime was not
to be damaged in the eyes of customers it was in our view of paramount
importance that efficiency savings, in particular, were passed
back promptly to customers in the form of lower bills when price
limits were reset from April 2000. We stressed that customers
might feel they had been misled by the promises made at the time
of privatisation if they did not enjoy a direct cash benefit.
27. One of the key issues for the Director
and for customers in setting new price limits was the profile
of prices over the five year period 2000-05. In Prospects for
Prices the Director consulted on two alternatives:-
— a larger Po followed by rising prices;
— smaller Po followed by stable prices.
28. At national level ONCC believed that
customers would prefer the option of a larger price cut so that
money remained with them rather than with the companies. At regional
level one CSC preferred a more stable price profile.
29. In March 1999 the CSCs commented on
the business plans submitted by the companies to the Director
setting out their proposals on price and service. There was much
common ground between CSCs including concerns about the size of
the programme of environmental improvements Ministers wished to
see carried out over the next five years. There were concerns
too about the significant impact that the Government's free optional
metering policy would have on unmeasured bills. CSCs considered
that companies had submitted proposals for excessive increases
in prices.
30. At the end of September 1999 all CSCs
responded to the draft determinations of new price limits published
by the Director in July. CSCs then had meetings, as had the companies,
with the Director to make their final representations to him in
person before the final determinations were announced in November.
PRICE REVIEW:
OUTCOME
31. We have always believed that a top class,
tightly regulated and increasingly efficient water industry should
be capable of maintaining the momentum of water quality and environmental
improvements and reducing the cost to customers. We campaigned
consistently on behalf of customers during the price review for
a significant reduction in water bills.
32. We were pleased therefore that the Director
in announcing his final determinations of new price limits in
November 1999 was able to deliver at national level a substantial
price cut for 2000-01. In doing so efficiency savings were shared
50/50 between customers and the environment in accordance with
the conclusions drawn by the Director from all market research
undertaken and summarised in Prospect for Prices.
33. Only a few years ago an average cut
in bills at national level of 12.3 per cent (excluding inflation)
was unimaginable in an industry where the price escalator seemed
destined to go in only one direction. Customers of Anglian Water,
North West Water, South West Water and Wessex Water will see bills
rise again in real terms towards the end of the next five year
period because of the scale of the environmental programme decided
by Ministers. But their bills will still be below where they were
in 1999-2000.
34. In March 2000 CSCs did not receive the
usual peak of complaints about charges for 2000-01. In the absence
of other factors this points to customer satisfaction with the
reduction in water bills which emerged from the price review.
CONCLUSION
35. Customers rely on the regulator to deliver
a fair deal for them as well as for the environment and the water
industry. This is why full and active customer involvement is
such a vital part of the price review process. We are pleased
to record that the process set out and followed by the Director
meant that the customer voice was heard and had influence. The
Director said in announcing the new price limits in November 1999
that they were good news for customers, for water companies and
the environment. We agree but we will remain vigilant to ensure
that the companies in cutting costs do not adversely affect the
standards of service currently enjoyed by customers. We look to
the quality regulators to ensure that the programme of environmental
improvements to be funded by customers over the next five years
is delivered in full and on time.
May 2000
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