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:
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.
— 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.
ENVIRONMENTAL ACHIEVEMENTS
2000-05
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 ENVIRONMENT
PROGRAMME 2005-10
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.
ADEQUACY OF
DEFRA GUIDANCE
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.
AFFORDABILITY
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.
CONCLUSION
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
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).
