Memorandum submitted by Consumer Council
for Water (Ofwat 13)
The Consumer Council for Water (CCWater) is
a non-departmental public body representing the interests of water
and sewerage consumers across England and Wales. We have four
regional committees in England and a committee for Wales.
We represent business and domestic water consumers'
views to water companies, regulators and government and use consumer
research and direct contact with consumers to identify their priorities
for change. We help consumers with complaints about water companies'
service and take up their complaints to get compensation or refunds.
We have super-complaint status under the Enterprise Act.
We have pressed and worked with the water industry
and its regulators since 2005 to get improvements for consumers.
In that time we have influenced companies to return over £130
million to consumers through either additional investment or keeping
prices lower, dealt with over 42,000 complaints and returned over
£4 million to customers in compensation. We cost 25p on each
water bill a year.
We welcome the opportunity to submit evidence
to the Efra inquiry into the Price Review 2009. Our response places
the consumer as central to the sustainability of the industry
at this price review and beyond and addresses the terms of reference
accordingly.
1. SUMMARY
1.1 The water industry and the way it has
been regulated to date has served consumers reasonably well in
terms of delivering environmental, drinking water quality and
service improvements. Consumer satisfaction levels with water
and sewerage services compare very well with other utility sectors.
However, customer satisfaction levels with value for money are
not as good as they are for delivery of the basic service. Increasingly,
water bill payers will need to see tangible benefits for any additional
money that they are asked to pay.
1.2 With statutory pressures from government
and the EU on companies and regulators, prices have risen sharply
since privatisation in 1989 and will continue to rise over the
next 20 years. In a monopoly industry, customers need to have
confidence in the way the industry is regulated and run, and accept
the price they have to pay, for this to be sustainable. The way
the industry is regulated and managed needs to be more directly
driven by consumer views.
1.3 The 2009 price review is different to
previous price reviews. This is the first water price review where
there has been independent consumer representation. We are pressing
for the outcome of the price review 2009 to reflect the priorities
of the consumers and communities who will be meeting the costs
of companies' investment plans. The effect of this change has
helped in the price review so far. Companies' draft business plans
propose an average bill increase £55 lower than the same
stage in the 2004 price review.
1.4 There is still work to be done to ensure
companies and Ofwat act on what customers have said in research.
And, given the current economic climate, there is a high degree
of uncertainty over the costs of funding capital investment programmes
and the cost of capital. As such, there need to be assurances
that these uncertainties will not cause high increases in customers'
bills. Customers broadly accept paying for environmental improvements,
provided that this is done at a pace that doesn't cause prices
to rise too sharply and provided they are made aware of the benefits.
1.5 The Consumer Council for Water is working
towards effective consumer representation in all future price
reviews. A more consumer-centred, negotiated process can address
the statutory needs of regulators and government and ensure customers
get what they want at a price they will accept. This approach
has been identified by Professor Stephen Littlechild.
1.6 However, the increasing significance
of water charges, in terms of the typical household budget, has
led to a growing affordability problem, especially in the current
economic climate. With prices set to rise further in the future
and the government's decision to move towards universal metering
in areas of water stress, the problem of affordability is likely
to grow. We are calling on government to help vulnerable customers
by using the tax and benefits system.
1.7 We also believe the regulatory incentives
on customer service need some modifications to improve companies'
focus on this issue. Ofwat's Overall Performance Assessment (OPA),
the incentive mechanism by which companies are currently incentivised
on service, is driven by compliance with measurable environmental,
drinking water and customer service standards. We believe that
for the future, the OPA must focus far more on the actual experience
of the consumer as measured by consumers' views, and that a bigger
incentive may be appropriate.
1.8 Business customers are keen to have
a choice of supplier so we support the proposals of the independent
Cave Review of competition and innovation in water markets on
competition for business customers. However, domestic customers
are more ambivalent about competition and want to see clear financial
or service advantages.
2. PRICE REVIEW
2009 AND BEYOND
2.1 We are working hard to represent consumers
in this price review, with a high degree of success so far. However,
there is still work to be done and we will continue pressing until
we get a result at a price consumers accept. For the future, we
would like to see better involvement of consumers along the lines
suggested by Professor Stephen Littlechild in his paper: Constructive
engagement and negotiated settlements—a prospect in the
England and Wales water sector?
2.2 In the past, price reviews have not been
sufficiently focused on consumer priorities and customer willingness
to pay. This has contributed to a perception amongst consumers
that the regulatory system allows companies to make excessive
profits at their expense. We think that consumer priorities, willingness
to pay and affordability considerations must be central to the
price setting process. Our own research shows that consumers have
major concerns about value for money, particularly as many of
the improvements made by the water industry go unnoticed or are
hidden. There are real concerns about consumers' lack of receptiveness
to further price increases.
2.3 This is the first water price review
where there has been independent consumer representation. We are
pressing for the outcome of the 2009 price review to reflect the
priorities of the consumers and communities who will be meeting
the costs of companies' investment plans.
2.4 In November 2006 we set out our view
on what the 2009 price review should deliver for consumers and
the environment. In summary, we considered it vital to the sustainability
of the industry that consumers accepted that the price review
represented:
— a good outcome in terms of improving
the safety and reliability of the services they pay for, and enhancing
the local and wider environment; and
— a fair price for what they receive.
2.5 We set out to encourage each water company,
with their regulators involved, to create business plans that
would address the requirements of their customers. We said we
would support those that did this and would press those that did
not. We have periodically met with each company, the Drinking
Water Inspectorate, the Environment Agency (and in some regions,
Natural England) to discuss future investment needs set against
the backdrop of customers' views of existing services and their
willingness to fund these improvements. In Wales, the Welsh Assembly
Government and the Countryside Council for Wales make up the Wales
Forum with water companies and the other regulators.
2.6 We were encouraged by the inclusion
of consumers' views within most companies' 25-year Strategic Direction
Statements that they submitted to Ofwat in December 2007 and their
draft business plans in August 2008. The final draft business
plans will be submitted to Ofwat in April 2009.
2.7 We welcomed the fact that most companies'
proposed average bill increases in PR09 draft business plans are
lower than those at the same stage in PR04; from an average proposed
increase of £84 in 2004 to £29 this time around (£55
less).
2.8 These draft plans show:
— an average 8.9% real terms increase
in the average household bill, taking it from £326 in 2009-10
to £355 in 2014-15;
— over the five-year period from 2010-11
to 2014-15 real term increases ranging from near 0% (Dwr Cymru
Welsh Water) to 31% (Bristol Water); and
— in the first year (2010-11) real
term increases ranging from -3% (Dwr Cymru Welsh Water) to 15%
(Bristol Water).
2.9 For some companies, their plans remain
higher than customers are willing to pay, as evidenced by consumer
research. More generally, we are concerned about the very steep
proposed rise in prices in 2010-11, the first year of the next
pricing period, for the customers of some companies.
2.10 Consumer research in late 2008 shows
customers' willingness to pay the price increases their company's
draft business plans proposed. Companies like Northumbrian, Yorkshire,
Severn Trent and Dwr Cymru Welsh Water who are proposing increases
of 5% or less all have over 75% of customers willing to pay this;
with a company like Yorkshire it is as high as 93%. On the other
hand, companies proposing prices increases of 20% or more, like
Bristol, South East, Folkestone and Dover, willingness to pay
is less than 50%. Only 26% of customers found Bristol Water's
plan acceptable.
2.11 Since our inception in October 2005
we have sought to adopt a pragmatic and evidence based approach
to the key issues affecting the water industry. We recognise a
continuing need for companies to obtain funds to invest in the
maintenance of the water and sewerage networks, to reduce adverse
environmental impacts and to fund expansion of the networks to
meet projected demographic changes and population growth. These
will all impact on customers' bills. Our research confirms that
consumers value the services they receive, particularly their
safe, reliable water supply and disposal of sewerage waste, and
would not want to see a deterioration in companies' performance
levels. Water is a long-term industry that requires long term
planning and investment.
2.12 We are not advocating lowest possible
price increases. We accept real term price increases where these
can be supported by robust consumer research and where the investment
proposals have been subject to cost benefit analysis. The customers
we represent want to see a sustainable water industry.
2.13 We believe there should be scope for
a significantly enhanced role for consumer representation in setting
prices. Moving forward, local customers' views need to drive companies'
strategic thinking and planning. A consumer centred process can
address the statutory needs of regulators and government and ensure
customers get what they want at a price they will accept. This
is the approach identified by Professor Stephen Littlechild as
having worked well elsewhere in the world and having potentially
greater application in water.
2.14 We are working with Ofwat and the water
industry to modify Ofwat's Overall Performance Assessment (OPA),
the incentive mechanism by which companies receive a reward (up
to 0.5% on price limits) for providing good service or a penalty
(up to 1.0% off price limits) for poor service. The current OPA
is driven by compliance with environmental, drinking water and
customer service measures. We believe that the OPA must focus
more on what consumers experience and think. The OPA should therefore
measure what consumers think about the services received and this
should sit alongside a reduced number of existing metrics. A larger
incentive/penalty might also be appropriate.
3. AFFORDABILITY
OF WATER
SERVICES AND
THE INDEPENDENT
WALKER REVIEW
OF HOUSEHOLD
CHARGING FOR
WATER AND
SEWERAGE SERVICES
3.1 With continuing upward pressure on prices,
there is a growing water affordability problem. Vulnerable customers
need government assistance, especially as the government want
to see universal metering in areas of water stress.
3.2 The significance of water charges, in terms
of the typical household budget, has increased considerably in
recent years, leading to a growing affordability problem. Defra
stated that 12% of all water customers would face problems of
affordability (where water and sewerage bills exceed 3% of disposable
income before housing costs) by 2010 and that the figure could
be as high as 30% in the South West where water bills are higher
and incomes lower. However, this depended on assumptions that
incomes would grow in real terms at all income levels. For those
on lowest incomes this has not been the case since 2005.
3.3 We welcomed the independent Walker Review
as an opportunity to ensure that customers will receive fair,
affordable and cost-reflective charges.
3.4 For a charging system to be considered
by customers as "fair", it needs to reflect the actual
costs that are incurred by the water companies in delivering the
services provided. The charges recovered from customers should
be broadly in line with the costs of providing services to that
customer or type of customer.
3.5 By 2010 water and sewerage companies
will have delivered an investment programme of almost £80
billion since privatisation. This is being paid for by customers
and, as a result, charges are now over 40% higher in real terms
than they were in 1989. Almost one third of some water companies'
bills to their customers are now made up of financing costs alone.
3.6 This is a social policy issue and customers
think there needs to be government intervention to provide a safety
net for vulnerable customers. This should be through targeted
assistance and funded by tax payers, using existing mechanisms
and enabling the costs associated with this support scheme to
be redistributed according to income. Customers are opposed to
addressing water affordability through further cross subsidy between
customers.
3.7 The cost of customer debt in the water
industry currently adds £11 to each household water bill.
Outstanding customer debt (more than three months old) has passed
through the £1 billion mark for the first time.
3.8 Only around 24,000 customers are currently
on the WaterSure scheme that provides targeted protection for
selected households that have high water usage. Defra estimates
that as many as 300,000 households could be eligible. There is
a great deal to be done by water companies in this area. However
CCWater's work with the industry to re-brand the scheme and introduce
a standard simplified application form was successful in helping
to boost uptake of the scheme by 49% in 2007-08.
3.9 From our charging research, a majority
of customers (57%) thought the fairest billing option was charging
people based on how much water they used. However, 27% would oppose
compulsory metering. Most customers favour water meters but there
will be issues with implementation as there will clearly be winners
and losers.
3.10 The limited evidence which is available
suggests that metering could encourage some customers to make
a conscious effort to reduce water usage. It may therefore play
a useful role in addressing current and future water resource
problems. We believe that through careful monitoring and evaluation
of the current and planned metering schemes, governments can carefully
establish whether investment in metering will actually achieve
the primary objective of reduced water use.
3.11 This step by step evaluation approach
will allow progress but also ensure the necessary close attention
to cost benefit analysis and value for money, determine the appropriateness
of metering to communities, and consider appropriate pace.
4. COMPETITION
AND INNOVATION
IN THE
WATER INDUSTRY
AND THE
CAVE REVIEW
4.1 We support the roll out of competition
to business customers because business customers are keen to have
a choice. We agree with the independent Cave Review of competition
and innovation in water markets that domestic competition should
not be pursued as an end in itself.
4.2 We know that most business customers want
competition in the water industry because our research tells us
that 84% are supportive of it. We support the review's proposal
to initially reduce the non-domestic customer threshold and want
to see competition for all businesses.
4.3 Business customers tell us that they
want to see more innovative customer service such as e-billing,
remote meter reading and the ability to monitor water consumption
online. Our 2007 research with business customers showed that
60% felt that the current competitive water market compared quite
or very unfavourably with the market for suppliers of energy and
other utilities.
4.4 We agree with the Cave Review that domestic
competition should not be pursued as an end in itself. However,
if it can be clearly demonstrated to be the most appropriate means
of securing service improvements and increasing value for money
for consumers, then competition should be progressed. According
to our research, 57% of domestic customers said that they supported
the principle of competition in the water industry. When they
understood that in practice some customers could be worse off,
only a third of those surveyed still supported competition, one
third did not, and the rest were unsure. Those customers that
welcome competition believe that it would lead to lower prices,
with most saying that they would expect to save 20% by switching
supplier. Less than half of those surveyed (48%) thought that
competition in gas and electricity has been good for customers.
Consumer Council for Water
February 2009
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