Memorandum submitted by UNISON (Ofwat
16)
1 INTRODUCTION
1.1 UNISON is the UK's leading public services
union, representing 1.3 million people across local government,
the health service, housing, the utilities, transport and the
voluntary sector.
1.2 In the water industry our members include
engineers, scientists, technicians, industrial workers and staff
working in offices and call centres.
1.3 They deliver a safe and wholesome drinking
water supply, maintain the sewerage system, provide a wide range
of customer services and staff the phone lines for emergency calls
from the public.
1.4 In addition to being a key stakeholder
on industrial and occupational issues, our members also actively
engage in public debates about all our public services and utilities
from a citizenship perspective.
1.5 Although UNISON has not engaged with
the OFWAT price review we do note that the Committee's current
enquiry into the review overlaps with a number of wider issues
that are of interest and concern to our members:
— how long-term planning for climate
change and environmental improvements should be paid for;
— affordability of water services;
and
1.6 With this in mind we are submitting
this short note setting out our position on each of these areas.
2. PAYING FOR
CLIMATE CHANGE
AND ENVIRONMENTAL
IMPROVEMENTS
2.1 We think there is a strong case for
environmental costs to be stripped out of water charges and added
to general taxation. This would help to reduce significant regional
variations in water charges and reflect the wider public benefit
of environmental goods.
2.2 We believe that water charges should be fair
across customer groups, fair to water companies and encourage
sustainable use of water and sewerage services. Expecting areas
with vulnerable coast lines or susceptibility to flooding to pay
more threatens to undermine these principles.
3. AFFORDABILITY
OF WATER
SUPPLIES
3.1 UNISON is concerned that the current
system of water charging is leading to affordability issues. This
is because the volunteristic, optional shift to metering is, in
general terms, resulting in lower bills for those who switch and
ever higher bills for those who do not. In many cases the former
include households in high rateable value properties who previously
paid most and the latter include larger families in low rateable
value homes who would, in many cases, have previously paid less.
This, we would argue, is leading to the worst of possible worlds:
— the social cross subsidy inherent
under rateable value is breaking down and so far there is nothing
to replace it;
— water companies have little option but
to compensate for loss of income from high rateable customers
by increasing the bills of those remaining on unmeasured tariffs;
and
— absence of comprehensive means for
encouraging sustainable use of water and sewerage services.
3.2 In our view there is a strong case for
moving to a fully metered system as soon as possible, underpinned
by a fair and progressive rising block tariff system that provides
lower average bills for modest users and creates an incentive
for more efficient use. This should be based on volume usage,
with the lower tariff payed for the essential use block (and more
for subsequent blocks) but also recognise and compensate those
on low incomes and essential users, such as large families with
children and those with special needs, ie medical. Moreover, any
fair charging system must be able to clearly identify the service
provider (the water company) and the customer (the user). This
requires a clearer, more formal link between the two parties concerned
that will assist in the identification of households in need of
special assistance.
3.3 We note that water affordability will
always have to be defined relative to income and that previous
government analysis suggested that 40% of the lowest income households
could be paying more than 3% of their disposable income on water
and sewerage bills. There would, we believe, be value in establishing
a water affordability standard. This should be defined as less
than 3% of disposable income.
3.4 When metering is introduced Government
should simultaneously introduce a national scheme designed to
incentivise the public to scrap their old and inefficient domestic
equipment, including showers, washing machines and boilers. This
could reduce water consumption by up to 50% with consequential
benefits for the water environment and a reduction in the need
for capital investment by water companies which in turn will help
keep prices down.
4 THE CAVE
REVIEW
4.1 UNISON is concerned that there is an
a priori assumption underpinning the Cave Review that unbundling
or competition will lead to efficiency gains, improvements in
service quality, or innovation. We note that the experience in
the UK and the EU with sectors such as electricity and rail, as
well as the international evidence from the water sector, suggests
otherwise.
4.2 Internationally, vertical unbundling of the
water sector is unusual, and the few examples involve public sector
companies—not competing private suppliers.
4.3 Unbundling would undermine the principle
of integrated river basin management (IRBM), pioneered in England
and Wales, which has since been emulated in a number of countries,
and which has become an established principle eg in Agenda 21.
The problems caused by the fragmentation of responsibility through
outsourcing have been clearly seen in the railways industry both
in the UK and also the USA, and were evident in a case of multiple
deaths from water contamination in Canada 8 years ago. Moreover,
in the electricity sector, the private companies have consistently
pursued a policy of vertical reintegration.
4.4 Experience with sectors liberalised
under EU directives, such as electricity and gas, do not support
the assumption that competition will follow, nor that there are
benefits to consumers.
4.5 Experience in electricity markets in
the UK, EU and USA shows that the transaction costs of switching
electricity suppliers are higher than any possible benefits from
prices. Tacit collusion between companies is widespread, and,
in the USA, prices are clearly higher in states that liberalised
than in states which did not.
4.6 There are weaknesses in the current
regulated system. The private companies' records on investment
and efficiency are not as good as asserted by OFWAT, which itself
has a poor record of dealing with "gaming" by the companies,
or dealing with leakage. However, there is no evidence at all
that unbundling or competition would solve these problems. Nor
does the experience of other sectors support the assertion that
competition would generate innovation: in electricity, expenditure
on R&D has clearly fallen, both in the UK and throughout the
EU, since liberalisation. The complex social, health and environmental
issues surrounding water are better addressed through stronger
regulation driven by government initiatives. Other countries are
seeing increased public participation as a way of developing democratic
pressure for innovation.
4.7 In a capital-intensive industry such
as water, the cost of capital has a greater impact on prices than
operating costs. This area is virtually ignored by OFWAT and does
not feature in the Cave Review's TORs, despite the facts that
controlling capital costs has been a major problem for OFWAT.
In respect of "capital market competition", the review
report should look at the private equity and infrastructure funds
whose capital costs are both obscure and exacerbated by uncompetitive
allocation of "management fees".
4.8 Greater reliance on competition risks
being a dangerous distraction from the business of delivering
benefits to communities in a complex sector where the interface
between social, environmental and technical dimensions have implications
going beyond the tenets of traditional economic theory. Strengthening
the current regulatory and institutional arrangements remains
the most credible approach to containing the preponderant capital
costs characterising the water industry.
4.9 Finally, there has never been any "competition
for the market"—the water supply and sewerage companies
were given monopoly licences in 1989 without any competition.
These licences expire in 2014, so there is an opportunity for
the first time to conduct a comprehensive review of water services
and their regulation by OFWAT.
UNISON
February 2009
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