Select Committee on Environmental Audit Written Evidence


Memorandum from WaterVoice

  WaterVoice has statutory duties to represent the interests of customers of the water and sewerage companies in England and Wales. WaterVoice operates through nine regional committees in England and a committee for Wales.

The 10 committee chairmen form the national WaterVoice Council. The WaterVoice Council and its sub-groups deal with issues at national and European level.


1.  In November 2004, Ofwat will set water companies' price limits for the five years from 1 April 2005. This will be the third price review conducted by Ofwat since the water industry in England and Wales was privatised in 1989.

2.  Ofwat is conducting the 2004 review in an open and transparent manner. This is exemplified by the consultation process it has adopted and by the approach taken to market research where the key stakeholders, including WaterVoice and Ofwat, have worked together to commission research into customers' views. The first stage of that research was published in August 20021 with the second stage published in December 20032.

3.  WaterVoice benefits from a close working relationship with Ofwat. We have also developed positive working relationships with DEFRA, the Drinking Water Inspectorate, the Environment Agency, English Nature and Water UK meeting with them and sharing information. For our part we have published a series of briefing notes at key stages of the price review to keep customers informed of the main issues.


4.  In August 2003 water companies submitted their draft business plans to Ofwat. Of the £19.9 billion capital programme outlined in the companies' preferred strategies the main drivers are:
Environmental improvements £4.6 billion
Drinking water quality£2.3 billion
Asset maintenance
  —sewerage£4.5 billion
  —water4.5 billion
Security of supply£2.8 billion
Service improvements (including sewer flooding) £1.2 billion

  5.  We suspect that several companies may have overstated both the need for additional environmental schemes and its associated expenditure, and may have done the same on the drinking water quality programme. However, we are also aware of some omissions. Most companies have not included the costs of compliance with new designations under the Freshwater Fish Directive within their business plans. DEFRA has estimated the water industry's share of the cost of compliance at £800 million over the five years to 20103. Furthermore, the prospect of designation of the North Sea, North East Irish Sea and the Solent, among other water bodies, as sensitive waters under the Urban Waste Water Treatment Directive has the potential of at least doubling the proposed environment programme.

6.  In their draft business plans companies proposed:

    —  an average 31% real terms increase in the average household bill, taking it from £234 in 2004-05 to £306 in 2009-10;

    —  real terms price increases over five years ranging up to 70% in the case of United Utilities whose bills are projected to rise from £243 in 2004-05 to £416 in 2009-10;

    —  first year (2005-06) real terms price increases of up to 24%;

    —  average first year real terms price increases of around 13% (£14) for water and 11% (£14) for sewerage.

    7.  The size of the proposed increases are difficult to relate to estimates made by the Environment Agency, the Countryside Council for Wales and English Nature in "A good deal for water" (September 2003) 4 where they assert that the programme of environmental improvement "will contribute a modest portion of the household bill for water and sewerage, no more, on average than a fizzy drink in the weekly shopping for each household." We think the impact on customers in their bills has been down played if not under estimated.

    8.  The companies are due to submit their final business plans to Ofwat in April 2004. The plans will take account of Ministers' principal guidance to Ofwat; this has been delayed and has still to be published. There is a high probability that the projected price rises in final plans will exceed those set out in the draft plans. WaterVoice will examine the final plans, as we did the draft plans, to identify the key issues for customers. We will inform the Government, Ofwat and other regulators of our views and publish a summary of the representations that we make. Our views on the draft business plans were published in a WaterVoice Briefing Note5.


    9.  The Environment Agency is the main environment regulator of the water industry in England and Wales with a remit to safeguard rivers, estuaries, inland waters, coastal waters and ground waters from pollution and other damage. Its evidence to this inquiry will no doubt focus on what has been achieved (and what more needs to be done).

    10.  From a customer perspective we would emphasise that over the past five years water companies have continued to take action to reduce any adverse impact of their activities on the environment. At the 1999 price review Ofwat allowed companies £5.5 billion for environmental improvements (plus almost £0.5 billion for related capital maintenance activity6). This investment has been funded entirely through customers' bills. There has been no contribution from government grants or European subsidies. As a direct result of this investment nearly 99% of bathing waters now meet mandatory standards7 and 95% of rivers are of good or fair biological quality and 94% have good or fair chemical quality8.

    11.  This improved environmental performance has been achieved through the upgrading of sewage treatment works to meet tighter standards for the discharge of effluents and the decommissioning or upgrading of over 2,000 unsatisfactory storm water overflows; a further 2,200 are scheduled for completion in the final two years of this AMP period9. This reduction in pollution of the environment by the water industry was recognised by the Environment, Food and Rural Affairs (EFRA) Select Committee in the report of its inquiry into the Water Framework Directive (March 2003) 10, when it concluded that agriculture was now the biggest polluter of the water environment.


    The customer dimension

    12.  As part of the price review process the key stakeholders jointly commissioned research into customers' views. The first tranche of research was conducted in August 20021 and showed some support for work to maintain the quality of rivers and protect important areas of wildlife and plans. But there was also strong support for tackling sewer flooding and improving the taste and smell of tap water. The research did not detail any specific outputs or costs but did ask customers how much they would be prepared to pay to ensure their priorities were realised. While most customers were willing to make an additional contribution to fund improvement programmes no more than 27% were prepared to pay up to £2 per year, 31% between £2 and £5 per year, and only one in eight were willing to pay more than £5 per year.

    13.  In the second stage of customer research conducted by MVA in autumn 20032 customers were presented with a set of detailed proposals based on information contained in their local company's draft business plan. With this information available customers' priorities focused on the essential core aspects of water and sewerage delivery—drinking water quality, security of supply, and maintenance of the water and sewerage infrastructure, including prevention of sewer flooding. Two of the service areas with least support from customers relate to the environment, ie "managing the effect of water company activities on the water quality of rivers, wetlands and coastal areas" and "managing the amount of water taken from the environment to supply customers."

    Asset maintenance

    14.  At its simplest water companies are engaged in the collection, treatment and distribution of water and the collection, treatment and discharge of wastewater. If continuity of these essential services to customers is to be preserved it is vital that water companies avoid a backlog of maintenance activity on their water and sewerage networks.

    15.  Inadequate maintenance of water and sewerage networks can also have an environmental impact. For example, a failure to repair and upgrade the water distribution system could lead to an increase in leakage rates and a rise in the incidence and frequency of mains bursts. To make up for this loss of potable water, companies tend to increase their level of abstraction. Similarly, failure to maintain or improve the sewerage network is likely to lead to an increase in sewer blockages and collapses with the result that properties experience internal flooding while local watercourses become polluted by sewage flows.

    16.  WaterVoice, therefore, believes it essential that the effects of under investment in asset maintenance that characterised previous price reviews should be addressed at this review. This approach will clearly benefit customers but it will also benefit the environment through better leakage control, a reduction in mains bursts, addressing deterioration in treatment works performance, and a reduction in sewer flooding. Tackling sewer flooding is a WaterVoice priority for this review. In the Initial Ministers' Guidance to Ofwat11 (January 2003) the Government also recognised that "the public rightly see sewer flooding as something that should be tackled."

    Striking the right balance—Environmental improvement

    17.  WaterVoice supports further environmental improvements that represent value for money, but the scale and pace of the overall programme should be affordable to the customers who will pay for them. We support the principles behind the Agency's cost benefit analysis and have made what we believe to be a constructive contribution to the development of its benefit assessment guidance.

    18.  We are however, concerned that only schemes designated as `choices to be made' were subject to cost benefit analysis. We believe that schemes of a statutory nature should have been subject to the same rigorous analysis. We would expect the same degree of scrutiny to be undertaken before the Government signs up to a new EU Directive. This is a role, we suggest, that the Environmental Audit Committee itself might undertake. Undue haste in implementation may result in customers paying for inappropriate and costly schemes. Rather than rush to implement the provisions of various EU Directives, where the cost of doing so are not so clear-cut, several companies have suggested that they undertake studies to determine the optimum approach. WaterVoice supports this approach.

    19.  We recognise the concerns that have been expressed about the risk of EU infraction proceedings from missing deadlines for delivery of statutory obligations. We do not dispute that such obligations must be met. It is a question of how they are met. We believe there are sound reasons for adopting a more cautious and considered approach to implementing the provisions of various EU Directives. There are two specific benefits from following such an approach.

    20.  Firstly it is likely to deliver projects at lower cost. One example from the 1999 price review illustrates this well—Wessex Water's proposals to alleviate low flow rivers in the Wessex region. We raised questions about the value for money of the proposed £105 million investment which would have resulted in a permanent increase of £11 a year on customers' bills. Ofwat did not allow funding and asked the company to consider more cost effective answers to the low flow problem. Following reassessment an alternative solution was found costing a fraction of the £105 million originally proposed with minimal effect on customers' bills. In view of this it is vital that companies should explore all options and detail what alternatives have been considered to help demonstrate that the investment to be paid for by their customers clearly represents value for money.

    21.  Secondly a more cautious approach could allow companies and the quality regulators to ensure that agreed programmes meet rather than conflict with the principles underlying the Water Framework Directive, thereby avoiding abortive or wasteful expenditure. The timeframes of the 2004 price review and implementation of the Water Framework Directive do not match. It is not unreasonable, therefore, to expect some flexibility in the delivery dates of those aspects of the environmental programme where it can be shown that a more cost effective and better solution for the environment can be found through a phased approach.

    22.  It is crucial that the Agency engages with water companies and their customers (and with other agencies) in developing a holistic approach to managing the water environment. It is questionable for example for the Agency to insist that a company install a phosphate removal process if it does not tackle the issue of diffuse pollution in that locality at the same time. This is especially pertinent if action taken by the company alone would not improve the status of the watercourse. Similarly, it seems inappropriate for a water company to take no or limited action to reduce leakage from a local distribution system while at the same time arguing for retention of its full licence to abstract from a depleted source that feeds that leaky network.

    Security of supply

    23.  Water resources in the drier east and south east of England have come under increasing stress in recent years as a result of rises in household numbers and per capita water consumption. The Government's proposals to allow a significant number of new houses to be built in the Thames Gateway and the Stansted-Cambridge corridor exacerbate an already difficult resource problem. Companies in these areas are therefore seeking to improve their resources position by extending existing or building new reservoirs to meet projected shortfalls. Yet these projects may be compromised by the desire of the Environment Agency and English Nature to reduce or terminate abstraction licences. Proposals to reduce Portsmouth's licensed abstraction could have affected 75% of the company's deployable output. Similar reductions in Bournemouth & West Hampshire's abstractions on the Lower Hampshire Avon (which account for 75% of total available output at peak periods) have also been proposed.

    24.  WaterVoice accepts that a balance has to be struck between customers' needs for water and the possible adverse impact on wildlife. However, we are not convinced that the quality regulators have explored all available options with the water companies concerned. The last price review amply demonstrated that a willingness to think laterally could deliver similar results for lower cost.

    25.  In its current consultation on the review of water abstraction charging12 the Agency appears to see the price review and water customers as the means to fund the compensation it will be required to pay abstractors for the reduction or termination of any abstraction licences. Not only is the Agency proposing that water customers should pay the estimated £436 million for the loss of water companies' abstraction licences to protect rivers and wetlands but that they should also contribute to compensation estimated at £309 million for other abstractors. This is the antithesis of the "polluter pays" principle. This also reinforces our view that if new schemes are to be implemented as part of the environmental programme each scheme must deliver maximum value for money.


    26.  In her "Initial Guidance to the Director General of Water Services" (January 2003) 11 the Secretary of State wrote: "It is people who matter, whether paying their water bills or enjoying the benefit of clean water through the tap and in the environment, and our policies must strike the right balance in their interests." In our briefing note on the Initial Guidance we endorsed that statement and also commented on the seven key messages contained in the document.

    27.  We broadly welcomed the Government's statement on sustainable development but questioned how this equated with recent trends in under-investment in asset maintenance (paragraphs 15 and 16 refer) and the Government's sanctioning of proposals for substantial housing growth in south east England (paragraph 23 refers).

    28.  The Government's views on investment priorities, particularly those relating to asset maintenance and sewer flooding were similarly welcomed. And we endorsed the Government's challenge to quality regulators and water companies to ensure that "the means of implementation are fully explored and that this includes examining the cost effectiveness of any schemes in addition to their effectiveness in delivering the required environmental changes."

    29.  WaterVoice welcomed the Government's statement that "appraisal of measures should include an assessment of costs and benefits in order to show that a measure is clearly worth doing on the basis that the outcome including wider benefits, justify the costs". But it soon became apparent that the statutory schemes that constitute the bulk of the environmental programme would not be subject to any cost benefit analysis.

    30.  We also welcomed the Government's call for regulators and companies to liaise closely to identify schemes "where it is appropriate to take the future requirements of the Water Framework Directive into account". One example of where this has worked well is in the Northumbria region where the company, the quality regulators, and WaterVoice, have worked together to determine an environmental programme that takes a wider and longer term view of what is needed to deliver sustainable outcomes. The result is a proposal that will deliver the requirements of the price review at what those involved consider to be a reasonable cost to customers.

    31.  Although the Government states that "policies affecting water price limits must take account of the need for essential water services to be affordable", we have seen scant evidence that all parties have taken this message on board. Whereas the Drinking Water Inspectorate has recently taken steps to refine its advice, and thereby reduce the scale of the drinking water programme, our discussions with companies and the Agency suggest that the environmental programme is set to grow ever larger. Instead of a £4.6 billion programme outlined in companies' draft business plans we estimate that environmental schemes could cost as much as £5.5 billion.


    32.  In deciding the scale of the environment programme it is important to remember that it is water customers, not taxpayers, who meet the costs through their water and sewerage bills. Capital investment related to the environment programme already accounts for around one-third of the average household sewerage bill (the range is 24% for Northumbrian to 45% for South West). Extension of the programme will increase bills. The above inflation increases proposed by companies in their draft business plans are very worrying for customers, in particular those on low incomes.

    33.  The House of Commons EFRA Select Committee recognised in its `Water Pricing' report (December 2003) 13 that the "question of how great an increase in water and sewerage bills customers are willing to pay and can afford is a crucial one." The Committee said that "the difficulties some customers face in paying their water bills are a matter of great concern."

    34.  We agree with those views. But affordability is also a real issue now. A good example of this is in the South West which has an above average population of pensionable age and, in Cornwall, the lowest level of average earnings across England. In the South West the average water and sewerage bill has more than doubled from £147 in 1989-90 to £342 in 2003-04, largely to fund the company's Clean Sweep' programme. Water and sewerage charges in the peninsula are now currently on a par with the average standard gas bill from British Gas and around 50% higher than the standard domestic electricity bill14.

    35.  The recent WaterVoice/Ofwat Paying for Water research15 identified that some customers struggle to pay their current water bills, juggling them with other debts. If water bills rise these problems will grow and payment of bills will become less manageable for many more customers.

    36.  Outstanding revenue and the cost of recovering that revenue will rise. Ofwat figures show that at the end of 2002-03 charging year long-term debt levels (bills outstanding for 12 months or more) stood at £434 million16. The companies cannot yet identify how much of this is attributable to customers who do not pay their bills because they cannot afford to pay them rather than because they choose not to pay them. Better data is needed to help understand the scale of the issue but this will not, by itself, solve the problem.

    37.  We contend that the Government must take responsibility for finding solutions. Water debt has political and social dimensions. It is not appropriate that the water companies, as private enterprises, should assess customers' individual circumstances and ability to pay their water bills, or to move away from cost reflective charging principles.

    38.  The EFRA Select Committee recommended that "People suffering from serious difficulty in paying their bills should be helped through the benefits and tax credits system. The Government should review the way in which poorer households are helped with their water and sewerage charges. It should ensure that mechanisms to help people to pay their water bills take account of the regional variation in bills."

    39.  Extension of the vulnerable groups scheme or social tariffs will not address the issue. Rather it would create more cross subsidies within the tariff basket and not generate any new money. The vulnerable groups scheme has not been effective; it has poor take up and is not an efficient way to provide financial support to people with low incomes. We believe that the scheme costs more to administer than it provides in financial help.

    40.  We think that part of any solution must involve finding new money and alternative sources of finance to help those customers on low incomes who are least able to pay their water bills. The Government needs to provide this through the wider social security system and tax credit system. There are a number of ways in which this could be achieved. We have offered to work with the Government to examine the issues and identify solutions.


    41.  Customers know that they have to pay for reliable and good quality water and sewerage services, and are prepared to contribute to the costs of improving and protecting the water environment. But price increases of the magnitude seen in water companies' preferred strategies risk being counter-productive by turning customers against the industry, against the environment and against the Government, and resulting in a further increase in debt and financial hardship.

    42.  WaterVoice therefore calls upon all parties to look for a balanced outcome by being pragmatic about what can be delivered, realistic about what can be afforded, and focusing on outcomes rather than outputs. In doing so all parties will contribute to the achievement of sustainable development and help to meet the Government's objectives for the water industry:

    —  a secure supply of water of a quality safe for drinking;

    —  the use of water resources and sewerage services in a way that respects the environment; and

    —  the furtherance of social and economic policies.

February 2004


  1  The 2004 Periodic Review : Research into Customers' Views; MORI; (August 2002).

  2  Customer Research 2003 : Periodic Review; MVA; (December 2003).

  3  Regulatory Impact Assessment: New Designations under the Freshwater Fish Directive (78/659/EEC); DEFRA; (December 2003).

  4  A good deal for water; Environment Agency, the Consumer Council for Water for Wales, English Nature; (September 2003).

  5  WaterVoice's views on Water Companies Draft Business Plans; WaterVoice; (December 2003).

  6  Future water and sewerage charges 2000-05 : Final Determinations; Ofwat; (November 1999).

  7  Bathing Water Quality : Annual Report 2002; European Commission; (June 2003).

  8  River Quality : General Quality Assessment; Environment Agency; (September 2003).

  9  Progress with completing the National Environment Programme 2000-05; Ofwat & EA; (January 2004).

10  The Water Framework Directive Fourth Report; House of Commons EFRA Select Committee; (March 2003).

11  Initial guidance from the Secretary of State to the Director General of Water Services : DEFRA (January 2003).

12  Review of the water abstraction charges scheme; Environment Agency; (January 2004).

13  Water Pricing; House of Commons EFRA Select Committee; (December 2003).

14  Domestic electricity and gas prices; Ofgem; (September 2002).

15  Paying for Water Customer Research by Accent Marketing and Research; WaterVoice and Ofwat; (September 2003).

16  RD32/03; Ofwat; (September 2003).

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