Memorandum submitted by Mr Sean Creighton
SUMMARY
1. This note of evidence expresses concern
that the issue of "affordability" of water as a basic
essential for human life is being treated as a minor issue in
the Periodic Review, and that there could be adverse effects on
affordability if the regulator decides to allow a substantial
increases in water charges to fund large scale investment in the
basic infrastructure of the water supply and sewerage systems
as well as environmental improvements. It also argues that the
alleged rise in household water debt needs to be closely questioned
to avoid unnecessary increases in water charges to make up for
the revenue loss. It suggests a number of actions that would be
desirable to ensure that the water regulator and the water and
sewerage companies are publicly accountable for their activities
and decisions in relation to affordability of water prices and
debt.
2. This note is written on the assumption
that the Committee will receive more technical submissions on
these issues from relevant organisations.
AFFORDABILITY
3. While the issue of "affordability"
was mentioned in paragraph 7.7.1. of the "Initial guidance
from the Secretary of State to the Director-General of Water Services.
2004 periodic review of water price limits" (January
2003), it was ignored as a key issue in the August joint statement
by the Government and the regulators on the next stage of the
Periodic Review. It has been clear for several years that the
water regulator's priorities (like those of his energy and telecom
counterparts) have been dominated by economic considerations,
rather than sustainability considerations which seek to balance
the relevant economic, environmental and social factors. The whole
thrust of the January guidance was on environmental and economic
issues, downplaying social issues, including "affordability"
to a few paragraphs at the end of the document. This can be interpreted
as signalling to the regulator that the Government gives a low
priority to social considerations.
4. The Government says that financial support
policies to low income and elderly families are lifting people
out of poverty. A significant rise in water prices will be one
way in which this essential advance will be eroded, especially
where low income families are metered (new and renovated properties).
The danger is that such families will ration their use of water
lower than is necessary for personal and public health and water
play for young children, which was a problem identified by low
income family campaigns, Barnados and Save The Children Fund in
the 1990s.
PRESSURE TO
INCREASE PRICES
5. There is already a problem of affordability.
It is clear that the water regulator is under pressure to increase
water charges. How much worse will it become if there is an increase
in prices? What would a 5%, 10%, 15% increase in average prices
mean in monetary terms to households on low incomes or metered
households with high use of water because of medical conditions,
especially given the failure of the Vulnerable Groups regulations?
BASIC REQUIREMENTS
FOR THE
WATER AND
SEWERAGE SYSTEM
6. For the sake of the nation's health,
we need a water and sewerage system which does not burst causing
flooding, and that avoids the environment and the water table
being contaminated. Keeping the pipe system repaired and renewed
to minimise these dangers costs a lot of money. Failure of the
basic infrastructure could outweigh the environmental benefits
of other types of improvement funded to-date under the Government
supported requirements of European Directives.
7. The recent media coverage on the state
of the sewer system clearly suggests that the companies have been
negligent in keeping the system up-dated to avoid sewage flooding
and to prevent leakage into the soil and water table. It will
be all too easy for the companies to argue that they need large
price increases in order to carry out the necessary works to improve
the situation. Why should customers who have already paid large
sums of investment since privatisation have to pay yet more. The
companies can raise more from shareholders and by capital borrowings
as an alternative to loading costs onto customers.
8. But what exactly is the situation? It
does not seem to be being made clear in terms of information available
to the public. How much of the responses to current surveys on
consumer views are based on a lack of hard accurate information?
— What percentage of the sewerage pipe
system in each water and sewerage company region is:
— over 100 years old;
— 50-100 years old;
— 25-50 years old; and
— up to 25 years old?
— What percentage of each category
by age is considered to require replacement, strengthening or
remedial work?
— What is the estimate of the cost?
— If spread over 5, 10 or 15 years,
what would the price effect be?
— How would that affect affordability?
WATER DEMAND
IN THE
SOUTH EAST
9. There needs to be close questioning of
the problems involved in meeting increased demand for water in
water stress areas of a large increase in residential building
as part of the Government's community plans for the South East.
10. Could we see large increases in prices
so that the South East becomes much more expensive, like the South
West? And what would that do for affordability in the South East?
FUNDING INVESTMENT
THROUGH CHARGES
OR TAX
11. A portion of water charges are a form
of "stealth tax", in that domestic customers are expected
to pay towards the cost of environmental and water quality improvements
required under European law and by the British Government, instead
of being funded out of taxation.
12. As a result water prices are higher
than they would be if these improvements were tax funded. The
cost burden is unfairly shared by customers across the country,
most markedly in the South West where the household base is smaller.
13. Unless affordability is treated as a
major consideration in the regulator's setting of the next phase
of prices, there is a danger that the "stealth tax"
element will become even higher, especially if it allows in environmental
and water quality schemes, which while desirable, are not necessary
to meet EU requirements.
WATER DEBT
14. The Secretary of State's initial guidance
noted that Ofwat had "drawn attention to increases in the
level of household debt and the cost of debt recovery since 1
April 2000." It rightly noted:
"There is evidence that different companies
have very different levels of customer debt and costs. It is unclear
to what extent the variation is attributable to different circumstances
such as differences in social and economic characteristics of
the customer base and to what extent it is because some companies
are more effective than others in using the debt management methods
open to them. The absence of directly comparable date before 2000
or for other utilities also makes it difficult to decide on the
extent to which this is part of a long-term trend in consumer
debt or is a change only in water debt." (para 7.7.9)
15. This state of ignorance is deplorable.
Ofwat resisted representations made by Public Utilities Access
Forum from 1998 to undertake and publish a detailed analysis of
debt. Local authorities are expected to have a detailed understanding
of the nature of their tenant and Council payer debt, and housing
associations of rental debt. It is good practice to have robust
analysis.
16. Ofwat and WaterVoice research suggests
that 1:5 households may be in debt. The alleged total of household
water debt is £720 million. Since Ofwat does not have robust
data from the companies and the companies hide behind the argument
of "commercial confidentiality", the figure cannot be
taken seriously. It is not good enough not to have robust public
available analysis since companies can seek to have their current
price determinations reviewed to take account of rising levels
of debt. If customers are to be faced with price rises they should
have the right to know the exact nature of the problem.
17. And what could the exact nature of the
problem be? It is likely to be one of double-counting in the case
of customers who receive their water supply from a water only
company and their sewerage service from a water and sewerage company.
A very large percentage of the debt could be what would be classed
as "technical" arrears in local authority and housing
association contexts:
— customers whose cheque payments are
processed after the due date;
— landlords who resell water, collecting
the money from their tenants, but not making payments to the companies
by the due date;
— water direct payments being paid
late by the Benefits Agency;
— customers who are withholding payments
because they are in dispute with the company eg over meter readings,
over a supply failure; and
— debt which is subject to an agreed
payment plan.
18. It may even be the case that customers
who pay by monthly direct debit may be regarded as being in debt
until they have completed the full year's payment—although
this should mean that the total debt figure should decrease during
the course of the year. It has been suggested that the debt total
includes accumulated debt from previous years, therefore representing
an historical accumulation, instead of having a figure of new
debt outstanding at the end of each year, as well as accumulated
debt, so that the annual trends can be seen.
19. Debt can also vary according to the
approach being taken by each company. There may be differences
in the experience of debt between those on different payments
methods, or between those whose charges are based on rateable
value and metered properties.
20. It needs to be borne in mind that debt
is only one possible indicator of "affordability" problems.
Large numbers of households who experience "affordability"
problems run their lives to avoid getting into debt with the companies
if this means sacrificing some other aspects of their lives because
their incomes are inadequate to meet all their basic needs.
SOCIAL EXCLUSION
21. The issues of water affordability and
debt cannot be divorced from other aspects of the Government's
social and anti-poverty agendas, including social inclusion, regeneration
and neighhourhood renewal. It may well be that a high incidence
of affordability and debt problems are concentrated in areas with
a higher level of neighbourhood disadvantage, even if those areas
are not included in the funding regimes under the National Neighbourhood
Renewal Strategy.
22. A key component of social exclusion
and deprivation is problems of access, retention and affordability
of basic services such as energy, water and telephony. Water use
can also be higher than necessary because of the way in which
houses and flats are designed, eg because pipe lengths mean that
a lot of cold water has to be drained off before hot water comes
out the tap. In metered home, such water has to be paid for. Low
income households cannot afford the latest water efficient washing
machines.
23. It has been regrettable that addressing
the issues of access to and retention of basic household services
has not been regarded as a major component of the work not only
of Local Strategic Partnerships and Neighbourhood Renewal.
24. In addition to analysis on the extent
to which alleged "debt" is real or technical, there
is a need for research on the geographic and socio-economic incidence
of affordability and debt problems to inform the way in which
water charges contribute to the complexity of financial and multiple
debt problems faced by low income households.
25. It may also be instructive to undertake
analysis of the geographic distribution of supply and sewerage
infrastructure problems to see if they are concentrated in areas
of low income and neighbourhood disadvantage.
WHAT NEEDS
TO BE
DONE?
26. The following actions would help to
ensure that "affordability" and "debt" were
treated with more seriousness:
— The Government should require the
regulator to make the issue of affordability a major factor in
the Periodic Review.
— The regulator should analyse the
nature of companies' alleged household water charges debt to ascertain
the actual level of annual debt after stripping out any historic
accumulation and technical arrears.
— The regulator should analyse the
geography and socio-economic distribution of water affordability
and debt problems within each water company area, seeking the
advice of the Office of National Statistics and the Social Exclusion
and Neighbourhood Renewal Units on methodologies.
— The regulator should publish:
— the results of the geographic and socio-economic
research and debt analysis;
— details of the current percentage of
water prices of each company which fund environmental and water
quality improvements and infrastructure maintenance and improvements;
— the companies' proposed environmental,
water quality improvement, schemes and their price implications,
clearly indicating which schemes are requirements to meet EU standards
and which are desirable and their likely impact on charges; and
— the water supply and sewerage implications
of the Government's housing development plans, the cost of improving
water supply and sewerage connections to meet them, and the likely
impact on prices.
EXTERNAL EXAMINATION
27. The utility industries (water, energy
and telecoms) have a big impact on the life and economies of the
regions. Yet their regulators have resisted ensuring that their
policies and proposals interconnect with the economic renewal,
social inclusion, regeneration and neighbourhood renewal agendas.
The Regional Assemblies and Chambers are probably in the best
position to hold in-depth enquiries into the activities of the
utility industries and their regulators. They should be encouraged
to do so the coming months, looking as a priority at water demand
and supply issues, water and sewerage infrastructure needs, environmental
needs and affordability of water prices. They should seek evidence
from the relevant water and sewerage companies, the regulator,
the water consumer committees, advice, anti-poverty and environmental
groups, and local authorities.
17 October 2003
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