Examination of Witnesses (Questions 20
- 39)
WEDNESDAY 20 MAY 2009
MS ANNA
WALKER AND
MRS SUE
ELLIS
Q20 Chairman: Before we pass on to
specific questions about water meters, can I probe one thing with
you because in the terms of reference of your Inquiry you have
been asked to examine the current system of charging households
for water and sewerage services and assess the effectiveness and
fairness of current and alternative methods of charging, including
issues of affordability. Most of the focus will be, if you like,
on the user end, and how does the user pay for what they have
consumed, but in their evidence to us the Consumer Council for
Water said: "We have worked with the water industry and its
regulator since 2005 to get the best results for consumers. In
that time we have convinced companies to return over £130
million to consumers through either additional investment or keeping
prices lower."[1]
That says that the existing method, the Ofwat method of charging
for water, has, if you like, been questioned subsequent to the
last determination by the Consumer Council for Water to the advantage
of consumers to the degree of £130 million. That sounds to
me as if questions could be asked before you get on to discussing
water meters about whether in fact the Ofwat mechanism is as rigorous
and effective on behalf of consumers as it should be. Is that
an issue that you are looking at and have you formed any preliminary
conclusions on it?
Ms Walker: I do not know where
they think the £130 million came from. This question of whether
consumers are sufficiently involved is an issue that we have been
looking at and we have come at it in a number of ways. We do think
that more needs to be done for the vulnerable customer, and I
would be very happy to talk about that. We do think customers
need to be better informed in a number of ways about what it is
they are paying for and why. They do need more of a flow of information.
We do think, and I think I in particular among the Review team,
think that it is very important that the Ofwat assessment process
of companies going forward needs to weight customer experience
heavily in the framework of performance that it sets up, because
if you are facing a monopoly provider of services, which household
customers are, normally a customer can walk away, and if they
cannot walk away, then you have to have some method of catching
their experience. That was an issue we faced very much with the
NHS and one way of doing it is to weight customers' views quite
heavily in the overall assessment system. That is one of our recommendations
emerging in the report, too. Then finally, along with Martin Cave's
report, we think that it is worth looking further into something
to which I know that the Consumer Council for Water attaches some
importance, which is there could be a more participative local
and regional process for taking local customers' views not just
for non-household but household as well before final decisions
are reached on prices.
Q21 Chairman: One very quick question:
in paragraph 16 of your call for evidence you say that you are
looking at something that will be fair to companies and that "allows
them a return on their investments". Have you formed a view
of what a fair return on investment is for water companies that
is not just Ofwat's interpretation of that?
Ms Walker: No, we have not because
we do feel that that is outwith our terms of reference. The point
that we were really trying to make in that call for evidence—and
it goes back to the previous discussion that we were having—was
that we recognise that if companies are going to go on investing
they have to be permitted to have a reasonable return on their
investment. What exactly that should be is a matter for the regulatory
body and not us.
Q22 Chairman: Is it not an issue
that affects the determination of whether a charging regime is
fair?
Ms Walker: Certainly the return
on investment has a significant impact on the level of prices,
that is certainly true, but we have not sought to take a view
on that area, which we see as a judgment for Ofwat.
Chairman: Lynne Jones?
Q23 Lynne Jones: I will ask my question
but I apologise I will have to leave as I am already late for
a meeting that I need to be at. I want to ask about metering.
Could you just talk us through your current views on water metering,
the importance of water metering for reduction in consumption,
the fairness of the current, largely voluntary, system whereby
perhaps people with large rateable values are opting for water
meters which reduce their bills but then means that other people
have to pay higher bills, and the desirability of moving to universal
metering and how we actually achieve that?
Ms Walker: Overall, very much
based on the call for evidence and the discussion that we had
around the fairness principles, it was really very striking that
even those who came from areas where there was a lot of water,
and therefore there were questions about how fast that area should
move toward metering, believed that a charging system which charged
people according to the costs that they imposed on the system
and also incentivised the efficient use of water was actually
very important. What we have got at the moment is of course a
mixed rateable value and metering system. As I am sure you are
aware, the levels of metering are widely different in different
parts of the country. One of the things which I found most revealing
was that in the South West, where overall (although not totally)
there is plentiful water, it has one of the highest metered levels
in the country, and the reason of course for that is the high
water bills.[2]
The emerging conclusions from our report are that metering is
the right direction of travel, but the pace at which metering
is moved towards does depend upon whether water is scarce or not
in that particular area. Water is quite clearly more valuable
in areas where there is scarcity. Up until now the Government's
view has been that the areas of scarcity have basically been in
the east and the south of the country but the Environment Agency's
recent report, which was published just before Christmas, if you
look at water on the basis of catchment areas, and you look at
it not only from the point of how much is going to be available
but do you do damage if you take too much out of the ground, which
is also an important issue, the picture is very much more mixed.
Miss McIntosh: If I may, a couple of
points just following on, bearing in mind that water stress, as
you have emphasised, is probably the biggest challenge of policy,
what would you advise, universal metering or selective metering,
in areas of greatest water stress, and that may change obviously
with the climate changes? When you said about taking water out
of the ground, I probably represent one of the most rural areas
on the Committee—
Mr Cox: I do not know about that!
Q24 Miss McIntosh: We will not argue
about it! If policy were to change as regards the abstraction
of water, I hope it will be done very thoughtfully and sensitively.
In North Yorkshire especially I have visited a lot of farms where
there has been capital investment under successive governments
where there has been a drainage system put in without which they
could not have produced any food whatsoever. As I am sure there
will be changes to abstraction policy, this will greatly reflect
on agricultural policy and not just water policy.
Ms Walker: I absolutely understand
there. There are issues about whether there should be changes
to the abstraction licensing system, which Martin Cave's report
covers, and for that to take place legislation will be needed.
What our report will highlight is that when companies look at
metering, as they are already doing, they are required to carry
out a cost/benefit analysis, and there are some very significant
questions about whether that cost/benefit analysis is being drawn
sufficiently widely at the moment. Does it in areas of water scarcity
take on board the scarcity of water? To do that the Environment
Agency and Ofwat have to come to some clearer conclusions about
the value of water. Do those analyses take on board the carbon
savings and potentially incentivise companies to think about these
issues through allowing the water companies potentially to benefit
from carbon savings? We have not come to conclusions on those
issues but those are the areas where we think further work needs
to be done because we do believe that if you look on that wider
basis—and there is no doubt that we do need as a society
to do that—that the case for metering would be much stronger
in areas where there is water scarcity. We also think that close
consideration needs to be given to moving towards compulsory metering.
The Government's policy at the moment is for compulsory metering
in water stressed areas, which are not those defined by the Environment
Agency just before Christmas, because the language is difficult
here, they were administrative company areas which were defined
some time ago. It is quite clear, and a number of companies have
put this to us, that when metering gets to a certain percentage
(and you have to debate what percentage it is but it is probably
around 60 to 70%) two things are happening: you are running two
charging systems not one and that has its own cost, plus the fact
that those who remain unmetered are actually paying a lot. If
you look at the differential between the metered and the unmetered
bills, that is growing over time. There comes a point at which
there is so much metering in an area, the sensible thing is to
have some sort of transition to compulsory metering. If you are
going to do that—and at the end of the day I should stress
it is not for us, it will be for the Government to take a decision
on this—if you are going to have a transition like that,
it is a transition from one charging system to another and, like
the digital switchover, that transition has to be managed. I would
say that the issues which have emerged on surface drainage for
non-household activities are an example of where a transition
has needed to be managed.
Q25 Chairman: On that point, will
you also be making a recommendation as to whether in the light
of the drop in revenues to which you have just adverted that will
come with the increased use of meterage, you should then have
an automatic pro rata increase in the price of water to compensate
the company for the loss of revenue?
Ms Walker: I am not clear that
there is automatically going to be a loss of revenue. There are
issues about whether water demand in the country as a whole drops,
particularly in the recession, and we have seen Severn Trent for
example facing some issues. It is not clear that is going to happen
necessarily for household demand because some activities like
power showers use more water, and we have more households and
smaller households, so the issue that we have been looking at
has not been a drop in demand in households so much as the potential
scarcity of supply going forward, which means that we need to
incentivise people to think more about the efficient use of water,
if you see the difference between the two.
Q26 Chairman: I have had one lady
who has been bombarding me with letters saying, "Don't go
down the metering route; go down the optimising use of water route",
that is encourage the more efficient washing machines, baths,
taps, showers every device under the sun. Her thesis is that if
you did that you would not have to have all the expensive investment
in the infrastructure of meters and you would get the same result.
I paraphrase to make a point.
Ms Walker: You might or you might
not. The point about meters is a meter is just a system for charging.
What meters allows is an understanding of what a particular household
is using in terms of water and therefore it potentially gives
the customer both the knowledge and the incentive to do more about
actually saving water. In that there is a parallel with energy.
The other thing which I think that meters potentially do is allow
more choice on the part of a customer because, particularly if
you have smart meters, you can begin to look at the potential
for tariffs like rising block tariffs or seasonal tariffs which
would allow companies to charge much more during the summer months
when there is greater demand for water. It is about getting mechanisms
in place which could give the customer more choice in a number
of different ways and allow companies and the country to manage
demand better on the water network as whole.
Q27 Mr Williams: I think the Chairman
has covered one of the aspects of this because the question you
raised is about improved water efficiency. Does that include both
appliances such as the Chairman has mentioned but also a change
in behaviour as well?
Ms Walker: We believe that water
efficiency includes a lot of different elements. It certainly
includes looking at fixtures and fittings in homes and equipment
that we use to ensure that it is as water efficient as possible.
And indeed our report has got emerging recommendations on better
labelling schemes and potentially mandatory schemes. Clearly new
houses that are being built need to be built to good standards
in terms of use of water. Actually it is quite clear, as we have
delved into this, there are things that are really quite significant
that can be done for new housing. We do also think that more information
and more education is needed of consumers because that has had
a very major impact in relation to energy, although energy bills
are generally (although not always) much higher. We do also think
that more thought needs to be given to water efficiency. Some
of that goes back to the appropriate valuing of water because
if you value water differently where it is scarce then water efficiency
measures become more cost-effective. There is one final and really
important point I would just like to draw attention to on water
efficiency and it is something that we have been very struck by.
Sue and I personally went and visited a house in Plymouth where
the couple had been struggling to pay their water bill and had
help under the Water Sure scheme, which was partly about retrofitting
water efficiency measures, and that had helped reduce their bill
by between £40 and £50. We will, we think, be recommending
a water efficiency scheme, an element of which is angled to help
low-income families who are struggling to pay their water bills
because we believe it can make a difference.
Q28 Mr Williams: Does that mean you
will be incentivising water efficiency or perhaps penalising inefficiency?
Ms Walker: It is incentivising
water efficiency, yes.
Q29 Mr Williams: But that is specifically
aimed at a vulnerable group in society?
Ms Walker: That last one is and
that really does arise from this visit to Plymouth and understanding
what was going on in the South West and recognising that water
efficiency (and I tell this story against myself) which I had
somehow thought of as being to do with people who were environmentally
conscious—that it is not only to do with that, it is actually
to do with helping control their bills as well, which is of course
an exact parallel with what is going on in energy at the moment.
Q30 Mr Williams: It has sometimes
been suggested that people who do install water efficiency gadgets
like water butts for instance, should be rewarded in some way.
Are you suggesting anything along those lines?
Ms Walker: That is a really interesting
point and I think the honest answer to that is those thoughts
are not very developed, but I absolutely understand the point
you are making—really incentivising people overall. I think
that is what I was trying to say to Mr Jack in terms of meters
providing enough information to help people recognise that they
could make savings, but I think there is a broader set of incentives,
and we will take that away and give it some more thought.
Q31 Mr Williams: It is a huge task,
is it not, for water companies to try to advise every single household
on the types of behaviour or indeed the appliances that they could
use in their own particular setting?
Ms Walker: I think there are two
things. We do think it is possible in water bills, which, after
all, go regularly to people, to have information, and that information
can be about water that they use (as long as there is a metering
process which allows that to be found out) and to give them advice
on water savings. The second is actually going to people's homes,
and that is quite expensive. That is about £130 a visit,
and then there is the water efficiency equipment over and above
that, things like shower heads and ensuring that you can flush
the loo for a short flush. That equipment is not expensive but
the visit is expensive, and one of the things that we would like
to explore further is this question of could there be synergies
between energy and water visits because they are aiming at the
same thing.
Q32 Mr Williams: Do you think there
should be a water equivalent of the Energy Saving Trust like a
statutory body?
Ms Walker: The answer to that
is yes and indeed Waterwise, which was created by water companies
to look at research and evidence in this area, in a sense has
got some of that role. My understanding is that the Energy Saving
Trust now, and I do not know whether it sees itself or whether
it has formally been given a role, has a role in relation to water
savings as well as energy savings because we have certainly had
exchanges with and evidence from the Energy Saving Trust which
has been very helpful to us.
Q33 Mr Cox: I was very interested
to hear your observations about your reception in the South West,
representing as I do a constituency not much of a stone's throw
from Plymouth, and the feeling you describe is absolutely accurate;
it is a mixed one of anger and indignation. Can I ask you about
this: I have had many discussions with the Chief Executive of
South West Water about steps that he feels that the company would
like to take towards rising block tariffs, but the problem has
been, as I understand it, the parameters under which Ofwat are
currently operating, which I assume are legislative ones. Is there
a way round the current problem that they are not allowed to discriminate
between water users so that we can introduce a rising block tariff,
or will it require legislation?
Ms Walker: There are a number
of different issues there. The introduction of rising block tariffs
should not require legislation. There are trials going on at the
moment. In fact there is one in the South West. I do not think
it is the non-discrimination clause. I do not think that is really
the problem from Ofwat's perspective, although we ought perhaps
to take that away and check it. Rising block tariffs, to be successful,
do need customers to be metered because you actually have to know
how much people are using. You also have to know how many people
there are in the house because if the concept is of a certain
block at a cheaper rate then you need to know how many people
there are to have that. Unlike other countries, we do not collect
occupancy information. Other places which have introduced rising
block tariffs collect that as part of their national information
in a way that we simply do not. That is not fatal for the rising
block tariff but it makes it more difficult. The other issue that
we have identified—and we are not saying that we are against
rising block tariffs—is this: it is quite clear that there
are some people in this country, particularly, although not exclusively
in high-cost areas (and I would be happy to talk about this further)
who are going to need help in one way or another with their water
bills. We wonder whether a rising block tariff might not target
closely enough those who need particular help with their bills.
That is not to say you could not do something else as well.
Q34 Mr Cox: It would go alongside
your strategies for those on benefits which South West Water already
operate, and so on. I think what I am really saying is surely
the obvious trend of moving towards a full metered system is to
have a system of charges which rewards low usage and does not
penalise but discourages high usage?
Ms Walker: Or ensures that it
is really paid for. That is right and that is what you can introduce
with a metering system but you have to have a metering system
to provide that measurement.
Q35 Mr Cox: You would need, as you
say, these provisions, probably legislative, to require the collection
of certain information?
Ms Walker: Not necessarily. Some
companies are willing to go for a tariff which depends upon occupancy
information, and they are going to collect it voluntarily. They
recognise that there could be some deception there but they say
that they will handle it. The difficulties we have had in recommending
that as a national charging system is that that information is
not nationally available and there are no plans to collect it.
Q36 Mr Cox: Is it not compellingly
logical ultimately, particularly in an area like the South West
which has the highest metered usage in the country, that we should
move towards (a) 100% metering and (b) a rising block tariff of
some sort or another?
Ms Walker: South West Water is
one of the companies but not the only one who has put to us precisely
the point I was explaining before that you get to a certain point
and to be running these two is actually just inefficient. That
is why our interim report will open up this question of what is
the level when companies should be permitted to go for compulsory
metering. We think it is around 60 to 70% and the South West is
already at 60%. If it were to be around 60 to 70%, on companies'
current plans, a significant number of companies would actually
be there by the end of the next Price Review.
Q37 Mr Cox: But they will also have
to carry out an analysis of the price consequences and the consequences
to the company balance sheet from introducing it because you will
have an overwhelming number of people who are low users, I should
think, in the South West and therefore they will have all kinds
of analyses to do, will they not, in relation to their own accounts
and profits and so on?
Ms Walker: Yes. This question
about low users is an interesting one and one of the points that
our report will make is that it may well be that there are some
houses, particularly houses which are used very occasionally only
as second homes, where what they have got is a low users' tariff
and are not actually bearing their costs on the system as a whole.
Q38 Mr Cox: Quite.
Ms Walker: Actually a seasonal
tariff could be quite significant in terms of handling that. That
is why we are being a bit cautious about saying it should be a
rising block tariff or it should be a seasonal tariff because
we wonder whether, going forward, a mix of tariffs may be appropriate.
Q39 Mr Cox: I was not necessarily
confining my question to one peg in the basket. Can I ask you
two more questions. The first is this: I had understood up to
now that Ofwat's problem was the rule against cross-subsidy so
I would be very interested in hearing your views when you take
them away as to whether that is the problem.
Ms Walker: I can tell you what
I think Ofwat's issues are. Ofwat has a statutory duty in relation
to low-income customers, and it is one of Ofwat's duties dating
back from when it was first created on behalf of customers as
a whole. There is a category of three or four customer groups
who they are enjoined to look at not exclusively but to ensure
their interests are looked after.
1 Ev 16 Back
2
Note by witness: according to the Environment Agency's 2008 review
of water resources and Catchment Abstraction management Strategies
(CAMS), there is plentiful water available (although some specific
CAMS areas within the South West do not have water available,
are over-abstracted or overlicensed). Back
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