Memorandum submitted by the National Consumer
Council
SUMMARY
1. The current price review process is not
yet giving sufficient emphasis to water consumers' interests.
In particular water company profitability needs to be openly and
publicly debated, and affordability of water prices for consumers
must be a key factor in determining prices.
2. The water companies have to be able to
finance their functions by raising money from customers' bills
and by securing a reasonable rate of return on their capital.
The profitability of the companies has a bearing on the size of
customer bills, and should be a legitimate subject for debate.
A full discussion of these issues and of the movement of finances
between unregulated and regulated parts of the business is essential
in a transparent price setting process.
3. We would like to see Ofwat, industry
and Government place far more emphasis on affordability as a factor
in price setting. High levels of consumer debt to water companies,
and the numbers of people who spend an unacceptable proportion
of their income on water are evidence of a growing problem of
unaffordable bills. This problem will only worsen if bills do
indeed increase beyond inflation as is being suggested. The solution
to the affordability problem will go far beyond the current review
of the Vulnerable Groups Regulations, and requires coordinated
Government, regulator and industry action.
About the NCC
4. The National Consumer Council is a Non
Departmental Public Body independently championing the consumer
interest to bring about change for the benefit of all consumers.
We have a particular remit to promote the interests of disadvantaged
consumers. NCC has a history of work on water policy dating back
to water privatisation in 1991. We successfully campaigned for
the ban on disconnections, and were active in promoting the consumer
interest in the last price review. Most recently we have published
Towards a Sustainable Water Charging Policy (2002), Lifelines—the
NCC's agenda for affordable energy, water and telephone services
(2003), as well as responding to Ofwat's consultation on the
framework and approach to the Price Review 2005-10, and DEFRA's
consultation on water bill reductions for vulnerable groups. We
have lobbied for the current Water Bill to strengthen the powers
of the forthcoming Consumer Council for Water, and to include
considerations of affordability for consumers.
EVIDENCE
5. NCC welcomes the introduction in the
Water Bill of a sustainable development duty on Ofwat, which will
give priority to social and environmental objectives alongside
economic goals. We are also pleased that Ofwat will have a new
primary duty to protect the interests of consumers. This is a
secondary duty at present. Ofwat will also have a duty to have
specific regard to the interests of consumers who are chronically
sick or disabled, or pensionable age, with low incomes or living
in rural areas. We also welcome the initial guidance from the
Secretary of State to the DG suggesting that this price review
should be characterised by due weight to the economic and social
effect of policies, especially the impact of water bills on vulnerable
customers. The DG has stated that bills must be as high as they
need to be in order for companies to finance their functions,
but no more than they have to be, as customers are prisoners of
a monopoly industry. We believe that the current price review
is in danger of failing to meet the second of these objectives,
as the process gives insufficient weight to two key consumer concerns:
affordability of bills and the profitability of companies.
Profitability and financial transparency
6. Too often the need to invest in the water
environment and developing sustainable water resources is portrayed
as conflicting with the consumer interest in low water prices.
It is, however, in the interest of current and future generations
of consumers that water resources are developed and managed so
as to be as sustainable as possible. We are pleased that the EU
Water Framework Directive and the proposed water resource
management plans move towards a long-term view of the environmental
measures needed to ensure sustainable water resources. Indeed
long term solutions to sustainable water resources could well
provide cheaper alternatives.
7. Public statements by the industry and
regulator have focused on levels of investment needed to maintain
infrastructure, and to carry out environmental improvements. The
DG has stated (evidence to EFRA Committee of 11 June 2003), that
prices will rise because of a lack of scope for further efficiency
in
8. the water industry. Whilst we defer to
the DG about efficiency scope, this statement ignores another
crucial factor in price setting—the profitability of the
water companies.
9. We are of course aware that Ofwat regulates
prices not profits, but this should not preclude a discussion
of profit levels, which were a major cause of public concern in
the 90's. Consumer concern about profit levels and distrust of
companies' motivations emerges again in the opinion research accompanying
the 2005-10 review (2004 Periodic Review: Research into Customers'
Views, MORI 2002). The periodic review presents a golden opportunity
to set out the facts clearly on profits, which are scarcely mentioned.
This avoidance of discussion seems unnecessary and to the detriment
of the public image of the companies and the regulator. OFWAT
has a primary duty to ensure that companies can secure a reasonable
return on their capital. What is reasonable is a legitimate matter
for debate. Whilst operating profits and dividends are down from
the 1990s, dividends are still showing growth and the sector outperformed
the FT All Share Index by 58% in the last two years (FT, 16
December 2002). Any perception that the industry is in the doldrums
is based on a comparison with the high rates of return on capital
employed and high dividends in the 1990s. We would suggest that
an industry as monopolistic and as safe as the water and sewerage
industry ought to be attracting modest returns and we therefore
see the present rates as more appropriate than was the case in
the past. Whatever the accuracy of our judgement, a significant
segment of the public clearly shares this view.
10. Also neglected by the review are the
flow of loans and dividends between regulated businesses and the
parent companies. We believe that this raises questions about
the need for clear reporting, not only of the core businesses'
accounts but also of the "fit" between them and the
parent company accounts. Common reporting standards need to be
implemented so that companies can be compared and the water aspects
of large companies are properly transparent.
11. A full discussion of these issues is
essential in a transparent price review. The companies have been
following agreed programmes of capital investment since the 1999
Price Review, and before. The water infrastructure has therefore
not been ignored, making the frequent analogies with the rail
industry unhelpful. The significant investment that is likely
to be entailed by the implementation of the EU Water Framework
Directive is barely touched on in this price review; it will
be a major issue in the review for 2010-15. We therefore remain
to be convinced that proposed increases vastly above inflation
can be justified.
12. One of the difficulties with the price
setting process is the, largely necessary, complexity of the process,
which makes it difficult for those outside the industry to assess
the merits of companies' plans. Regulators, industry and Government
should make greater efforts to debate these issues in lay terms.
Affordability
13. Price setting is about customers' water
bills. What customers can afford should therefore be an important
factor in Ofwat's approach to the review, but it is barely discussed.
14. Average household bills vary widely,
as do proposed price increases. An average water and sewerage
bill for South West Water in 2003-04 at £342 represents 12%
of the income of a single person on Jobseeker's Allowance, and
6% of the income of a single pensioner receiving Minimum Income
Guarantee. The proposed price rises will increase this proportion.
In the North West, where bills are currently not at the extreme,
the proposed 70% increase over five years would mean a single
person on current levels of Jobseeker's Allowance would be spending
a massive 15% of their income on their water bill
15. DEFRA's own sustainable development
indicator affordability measure is 3% income threshold. DEFRA
estimated that in 1997-98, 18% of households, some 4.3 million
spent more than this 3% threshold. These figures exemplify the
substantial numbers of water customers who struggle to pay their
water bill. Currently one in five households owe money to water
companies. There has been considerable debate about whether the
ban on disconnection is the cause of the rise in household indebtedness
to water companies. However, recent research by Ofwat and WaterVoice
found that the ban on disconnections does not influence payment
of the water bill with most customers convinced that they can
be disconnected. Indebted customers typically have the water bill
as one unpaid bill among many, and juggle which bill to pay next.
NCC's opinion is that a major cause of this indebtedness is that
many consumers are spending an unsustainable proportion of their
income on water and simply cannot afford it. Against this backdrop,
the kind of price increases that water company business plans
suggest are extremely worrying.
16. Current provision for tackling these
affordability problems is almost non-existent. The Vulnerable
Groups regulations are narrowly drawn, and are designed only to
cap the bills of metered customers who for reasons of ill health
or family size use a disproportionate amount of water. The scheme
has been a failure with only a 1.4% take up amongst eligible customers
in 2001-02. The scheme also cost more to administer than is paid
out to customers. The level of the cap is at the average bill
in that area, and so the scheme does nothing to tackle wider affordability
problems. The Government has made clear its view that customers
struggling with affordability should be helped through the tax/benefit
system.
17. NCC believes that the tax benefit system
currently fails to tackle the problem of the affordability of
water for a number of reasons. Firstly, the notional element of
income support intended to cover water bills has not kept pace
with actual water bills. Between 1988 and 1997 this amount of
benefit fell from 80% of the average water bill to just 55%. Secondly,
as highlighted above, some groups of vulnerable consumers on means-tested
benefits, notably households without children, spend a far greater
proportion of their income on the water bill than others. Thirdly,
the size of water bills varies hugely depending on region, and
yet the amount of means-tested benefit does not. Lastly, a perverse
cross subsidy exists through optional metering, which leads to
a situation where in some areas the difference between a metered
bill and an unmetered bill is as much as £116. At present
consumers can choose to opt for meter installation. In practice,
only those who will save on their water bill do so, and the cost
of installation, administration and billing is borne by all customers.
18. The Secretary of State's initial guidance
to Ofwat on the price review states that it will take decisions
on its recent consultation of the vulnerable groups regulations,
which will be reflected, in the principal guidance to be issued
in January 2004. NCC has submitted various suggestions as to how
the scheme could be improved, but we hope we have shown here that,
however amended, the problem of affordability is much wider than
the scheme's scope. Given this, strategic decisions have to be
taken by Government and the regulators as to how to tackle the
issue of affordability. Government should thoroughly re-examine
the assistance given to vulnerable groups and propose a strategy
that will achieve affordable water for all vulnerable consumers.
NCC has supported an amendment to the Water Bill that would set
a ratio of water charges to household income and require the Secretary
of State to give guidance to Ofwat on addressing water affordability
above this threshold. We would like to see the principle guidance
contain strong, clear and practical guidance to Ofwat on tackling
affordability. We would like to see Ofwat place far more emphasis
on affordability as a factor in price setting. The affordability
problem amongst households living on income support would be considerably
alleviated if the Department of Work and Pensions were to make
public the amount of income support intended to contribute towards
water bills and increase it to a level sufficient to cover the
bills of these households.
16 October 2003
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