Examination of Witness (Question Numbers
39-75)
Tony Smith
13 October 2010
Q39 Chair:
Good afternoon, Mr Smith. Thank you very much indeed. Could
you introduce yourself for the record?
Tony Smith: My
name is Tony Smith and I am Chief Executive of the Consumer Council
for Water. We are the organisation that represents business and
domestic water customers in England and Wales.
Q40 Chair:
At the outset can you say how strong a voice for consumers you
believe the Consumer Council for Water is?
Tony Smith: I think
it has been pretty strong. We have been going for five years.
We have tried to find out what the customers' priorities are
and make sure we address those forcefully and as quickly as possible.
As was touched on earlier, their priorities are about safe and
reliable water supply, a sewerage system that works, value for
money, competition for business customers and, increasingly, the
problem of affordability, particularly in the South West.
What have we done to move forward those things?
We played quite a big part in the previous price review in 2009.
We negotiated with each of the water companies to try to get
them to frame their business plans and proposals to Ofwat in a
way that addressed their customers' priorities and were bounded
by what customers would accept in terms of prices. Obviously,
that varied quite a lot across the country. In the South West
there was a lot less acceptance of price increases, but the end
result was that the companies put forward plans to Ofwat that
were much better than in the past; they were much more customer-focused,
and probably £1 billion better for water customers than
in previous price reviews. That is worth £55 a customer.
Therefore, Ofwat received business plans that were much more
customer-focused and, if you like, regulated by the water companies
themselves, because they realised that we would tell their customers
what we thought of those plans.
The other key measure was that we tested customers'
views of the whole process of the regulatory system. We found
over 80% acceptability of the outcome of the review. Interestingly,
that measure has never been done before in the history of price
reviews, so we have no idea what customers thought of previous
price reviews. We know they liked this one.
I think the second area is improvement of service
for customers. We encouraged the companies and Ofwat to put in
the right priorities for customers. You heard Ofwat refer to
over £1 billion for sewer flooding. We have negotiated
with Ofwat and the water companies a new incentive system for
customer service and complaint handling. In turn we have put
pressure on the poorly performing water companies in terms of
complaints to such an extent that complaints are now rapidly dropping.
Customers now tell us that complaint handling in the water industry
is twice as good as that in the energy industry. That sounds
good but it still has a long way to go before it is right for
customers.
Q41 Chair:
Given the comments you have made, would you say that was down
to your organisation or the regulatory framework?
Tony Smith: Both.
We have tried to pull the right levers. We are a very small
organisation. We cost the water industry about £5 million
and they pay according to the number of customers they have.
It is all about trying to get other organisations to do the right
thing. We have tried to put pressure on the companies to do the
right thing in terms of accountability to their customers. We
have also tried to influence the regulators, not just Ofwat but
the Environment Agency and Drinking Water Inspectorate, to address
customers' priorities. We have tried to get Ofwat to change its
approach to regulation. I mentioned the incentive regime; that
is quite a powerful tool that causes companies to do the right
things. That has had a good contributory effect on things like
complaint handling and companies' focus on customer service.
Q42 Chair:
What would you like to see coming out of the Ofwat review and,
through it, how do you believe customer interests can best be
represented?
Tony Smith: The
really important thing we would want to see echoes, to a reasonably
large extent, Ofwat's view that the regulation over the past 20
years has delivered pretty well for customers, but our comment
would be that, for it to be fit for purpose in future, it needs
to be much more customer-oriented for two reasons. One is the
nature of the regulator. You have heard Ofwat say that it is
the economic regulator. Therefore, it is really good at looking
at the economics, and those are the sorts of discussions you have
just had. If one considers the nature not just of Ofwat but all
economic regulators, Consumer Focus did a recent report that rated
regulators. It asked the question: how customer-focused are the
regulators? The answer across the piece is: not very. Therefore,
the focus of the customer needs to be balanced against all the
other conflicting things that are going on in the industry. Ofwat
said--I think it is absolutely right--that it has to balance all
the pressures on the industry. If you think of them as a set
of scales, on one side you have the quality regulators telling
the water companies that they have to do a lot to improve their
systems, which is usually high cost; you have 22 water companies
with lots of information about their businesses and they are very
convincing; and you have a relatively small number of investors
and lenders to the industry. That is a very powerful lobby all
pushing effectively against the customer. On the other side of
the scales you have 25 million customers--individuals and businesses--who
are relatively uninformed and not too interested in water issues,
except when prices go up or something goes wrong--apart from the
South West probably--but it is quite important that those pressures
on the one side of Ofwat's scales are counter-balanced by a strong,
concerted and independent consumer view.
Ofwat has to do two things: it must protect customers,
as you heard Regina Finn say, but it must also finance the functions
of the water companies, which means it has a slightly conflicting
set of objectives that it must deliver. It is really important
that you have a strong consumer view in this slightly weird industry.
You have price setting every five years and it is a very particular
process. The drivers of price increases are all about improving
the environment and drinking water, and other pressures that we
have talked about here. I hesitate to say that we are a bit 'techie'
but we need to be so we can represent water customers and bring
their views to the party in a way that water companies and Ofwat
will listen to them.
Q43 Chair:
What is your understanding of the likely role for Consumer Council
for Water following the review on arms-length bodies?
Tony Smith: Whatever
happens, I think it is really important that that strong and independent
counter-balance is there. It need not necessarily be the Consumer
Council for Water, but it definitely needs to be there in a strong
form in order to avoid problems of legitimacy in future. Probably
the biggest issue for water customers going forward is the whole
question of legitimacy and value for money. If you ask customers
what they think of the service in the water industry it is pretty
good; if you ask them what they think about value for money it
is pretty much on a par with energy, and energy is not rated very
highly by customers as a whole.
The problems are particularly acute in the South
West where you could argue that the regulatory system is beginning
to lose legitimacy. There are very high levels of concern. That
is a big worry anyway today so we have to fix that one, but the
problem is that other areas may also have problems if, as expected,
prices continue to rise in future. What customers are really
concerned about is rapid price rises of the sort we saw particularly
in the South West and they cannot see anything for it. Therefore,
the issue of legitimacy is very important. Whatever happens,
a consumer body needs to be there to put forward issues not just
about prices but also about the quality of the service and improvements
to it. That is a really important thing for the next 20 years
of successful regulation in the water industry.
Q44 Chair:
In terms of delivering regulatory regime changes, would you like
to see something in the Water White Paper just to ensure the balance
comes down in favour of water customers as opposed to water companies'
shareholders?
Tony Smith: We
would like to see three fundamental things in the White Paper.
One is that the regulatory system becomes more customer-focused
than it has been in the past for the reasons I have just given.
The second is that large business customers and SMEs are very
keen on competition, and I think we need to make progress on that.
Domestic water customers are less concerned about it, but business
customers definitely want to see progress on competition. The
third area is the whole issue of affordability. We need to resolve
that problem because now one in six customers tell us that they
find their bills unaffordable, and in the South West it is more
than half of customers.
To an extent the issue of affordability in the water
industry has for many years fallen between the cracks of water
companies, the regulator and Government. We had a lot of input
into the Anna Walker review and we think that the bones of the
solution are there. We have done a lot of research into these
issues, including the South West issue. Customers' starting point
would be that it is really for the Government tax and benefit
structure to put in an adequate system. However, they also recognise
that the system is probably inadequate for two reasons: first,
the very big differences in prices; and, second, changes that
are to come. If you start to roll out metering, particularly
if you do it compulsorily, there will be very rapid effects on
some customers' bills, up to £200. Therefore, the issue
of affordability really needs to be addressed.
The other big strategic thing for the country as
a whole is that whereas customers generally are reasonably receptive
to paying for further improvements into the future--environment,
flooding, resilience and maintenance--the people who are less
receptive are, naturally enough, those who struggle with their
bills today. As that proportion rises the level of discontent
about future price rises increases dramatically. Taking a 20-year
view, the risk must be that the regulatory system could lose legitimacy,
and of course the whole system is based on customers' willingness
to pay.
Q45 Thomas Docherty:
As to the timings of these things, the next period price review
will take place in 2012.
Tony Smith: It
will probably start in 2012.
Q46 Thomas Docherty:
What would be the most helpful timing of the White Paper to coincide
with that review?
Tony Smith: As
soon as possible for exactly the reason you give. The price review
will probably be set in 2014, which means that it will be very
intense in 2012 and in reality will probably start in 2011. I
think that is one reason for a degree of clarity for Ofwat, particularly
if the White Paper included things about their approach to consumers
and changing regulation. That is quite an urgent piece. The
second urgent thing is affordability, because companies are already
considering social tariffs as they roll out their metering programmes.
They are wondering whether to use existing legislation--in other
words, the Flood and Water Management Act--or whether something
will come in a White Paper and subsequent legislation that they
need to think about then. There are, therefore, issues today
that are important for customers and those water companies.
Q47 Tom Blenkinsop:
The previous Government kept you separate from Consumer Focus,
recognising the value of having a separate body championing water
customers' interests in the 2009 price review. How do you see
your role going forward particularly given the review of Ofwat?
Tony Smith: Yes.
We think it is important to be separate from Ofwat for the reasons
I gave. There is a danger if you have a captive consumer body
inside the regulator, which Ofwat had for the first 15 years--after
privatisation they had their own consumer body inside the organisation--that
they have to do two things: finance their functions and protect
customers. Inevitably, that can cause a bit of internal friction,
so it needs to be separate for that reason. One of the crucial
things we did in the previous price review was to try to encourage
water companies to take greater accountability before their customers
for their plans. We would want to encourage that even more in
the future. Therefore, rather than do the customer research that
we did last time with Ofwat and others, we would try to encourage
them to do it in a reasonably standard way. As Regina Finn said
earlier, we cannot afford to have different types of customer
research because then you cannot compare it, but, if we can encourage
the companies to be much clearer with their customers and put
forward their plans to their customers, we think it would have
an incentive effect on the companies themselves, because if it
is hidden from the customers they will have a tendency to bid.
In the past there has been a tendency for companies to bid high
and then Ofwat will reduce their proposals. What we really want
is a situation where the companies themselves put forward reasonable
plans. Inevitably, Ofwat play an important role in that to ensure
that the plans put forward are efficient, but, as far as the customers'
view is concerned, we would like to work with the companies to
try to ensure that every plan is based on customers' views. I
reckon that in the previous price review we got about half the
companies to do that; we want to get the other half to do it.
Therefore, half the companies' plans were good; the others were,
to an extent, bidding. We want 100% of plans where companies
would be happy to stand up and say that these are the plans and
they have their customers' agreement.
Q48 Bill Esterson:
I want to go back to your comment about the role of the revenues
and benefits system. I thought for a minute you were to talk
about some kind of water benefit rather like Council Tax Benefit.
Is that the thinking?
Tony Smith: It
could be.
Q49 Bill Esterson:
I want to tie that to the issue of customers in one part of the
country potentially subsidising customers in another. That seems
to be wrapped up in the same issue.
Tony Smith: Yes.
One way of doing it is to have a tax and benefits-oriented system
for water customers. The reason we suggested that as an option--we
were pragmatic enough to realise that it might not be acceptable
in the current circumstances--is that customers would start by
saying that is probably the best answer because then it is progressive
and it can address those who really need it. That is the starting
point. However, this is where you need to do research and push
customers to make they understand the issues, so they are no longer
typical customers at this point. The research we have done shows
that if you go beyond that and ask about some of the issues to
do with water customers, particularly in the South West, or customers
across the country who have trouble paying, or concessions for
site area charging--which we may come on to later--when customers
understand the reasons for it they are receptive to those sorts
of things within fairly limited amounts of money. Therefore,
the questions you asked Ofwat earlier about subsidising the South
West would become very important. Customers say that, yes, they
will pay a little extra for these various social tariffs, if you
like, but it is a limited amount, it must be specifically for
problems to do with water and nothing else and it needs to be
transparent. Although customers start off by saying that the
tax and benefit system is the right answer, if you say that that
will not come up with the goods you can convince them that there
is an alternative, but it will not be easy to convince people
in the round through the media or whatever way you try to talk
to customers. It is possible to do it.
Chair: We are coming to
this, so if there is a separate point on it that we will not cover
later we can deal with it, and then I will turn to Dan.
Q50 George Eustice:
I just want to ask a very simple question: how engaged are you
in the development of the White Paper on this issue?
Tony Smith: On
the South West issue?
Q51 George Eustice:
On the Water White Paper that Defra is putting together. Have
you engaged with the Minister or had the chance to explain your
concerns to Defra?
Tony Smith: We
have talked about the top issues for water customers with the
Minister, and we have been invited by Defra officials to give
our top 10 issues for consideration in the White Paper. Obviously,
we knew we were coming here. We would expect to be pretty closely
engaged as it develops.
Q52 Dan Rogerson:
It is nice to see you, Tony. You said in your written evidence
that one of the reasons customers suffer is that there is not
competition.
Tony Smith: Yes.
Q53 Dan Rogerson:
Have you had a chance to quantify what you think the benefits
would be of competition? Do you think the Cave review goes far
enough, or are we talking about more than that in terms of allowing
householders access to a market in the same way as energy customers?
Tony Smith: We
did a lot of work with the Cave review and worked closely with
them on their cost-benefits and customers' views. I think the
customer view splits up into various customer segments. The most
urgent thing is to get competition for business customers. Martin
Cave suggested retail competition. That will be a step in the
right direction, as we have seen in Scotland. Our only question
is whether that will deliver enough to fulfil the expectations
of those customers because, as Ofwat said, the retail competition
element accounts for only about 10% of the price of the bill.
In some cases customers' expectations are higher than that, so
they may end up being disappointed. We should, nevertheless,
pursue that.
If we go to the other extreme, interestingly domestic
customers are very ambivalent about the issue of competition,
largely because of their experience of the energy market. We
find that initially a small majority of customers say they are
in favour of competition, but when they understand how it would
work and the similarities with energy they break down as follows:
one third of customers still want it; a third definitely do not
want it; and a third in the middle say they are not very sure
or have no opinion on it. For that reason, we do not strongly
advocate domestic customer competition until the business customer
competition has proved itself. I think that is pretty much where
Cave came out and we therefore agree with that.
Q54 Dan Rogerson:
Is legal separation rather than functional or total separation
of retail from the upstream activities the most effective way?
Tony Smith: To
be honest, we are not sure. That would definitely be a question
for Water UK. I worked in the energy sector just as competition
was coming along. I can see the cultural benefits of splitting
up the businesses. In energy, eventually one is moving towards
complete competition across the whole market, so it was well worth
it then. Here we are talking at least initially about something
that is much more limited. Cave pointed out that it took about
17 years to pay back the costs of legal separation. You have
to ask the question: is that worth while? I think accounting
separation is a step in the right direction because it puts a
discipline on the people inside those businesses to understand
their customers and costs better in serving those customers.
If that is the compromise--that it is not too costly but it begins
to impose discipline on managers--that is probably the right answer,
but it is not an area in which we have particular expertise and
we rely on others to answer those questions.
Q55 Dan Rogerson:
To come back to the South West, as we have from time to time this
afternoon, do you think there would be potential gains in terms
of equalisation of the costs of providing these services across
the country if you could in some way look at a network with retail
on top of that; in other words, if that infrastructure was conglomerated
into some form of national way of doing it?
Tony Smith: I suppose
our concern is that, like energy, customers may think they are
getting competition and therefore their bills may go down. What
happens is that there are underlying pressures to push prices
up. In the case of energy it is gas and oil prices; in the case
of water it is all the investments that must be done. I still
think those underlying pressures will be there. It is an interesting
point you make about having a national--
Q56 Dan Rogerson:
To take energy, if a power station is built and the energy is
sold on to the grid, people who live near that power station do
not find that suddenly they have to pay for the costs of the power
station.
Tony Smith: But
the nature of water is that it is localised. Water sources and
the sewerage system are both very localised. I am not quite sure
that the cost dynamics in the water industry are similar to that,
but I think the solution for the South West is: is there a legacy
problem that needs to be resolved? If so, who pays for it? Our
only concern is the point made by Ofwat, which is the precedent
issue. Where does it end?
Q57 Thomas Docherty:
I have a very quick point on competition and its merits in the
domestic sector. Scotland does not have domestic competition,
so will you be looking at that model as well as the competition
model? Are you looking at what works in Scotland for domestic
customers? My understanding is that, compared with the English
regions, Scottish customers have the third lowest bills and a
pretty good level of satisfaction.
Tony Smith: We
work with Scotland a lot. Although there are differences for
the reasons you give they are also comparable. At the moment
Scotland is ahead of England and Wales in terms of competition,
so we have to catch up in that regard. We advocate a drop down
to a level that is not all business customers because we do not
think the systems could cope at the moment. I think there are
1.2 million businesses in England and Wales and the systems for
switching between companies just would not be able to cope with
it. We advocate dropping down to about 25,000 customers. We
would want to see that it works and delivers what customers want
to see and then consider domestic competition very much as Cave
suggested. Therefore, you prove the system works and delivers
and then you consider rolling it out for water customers because
of the level of domestic water customer concern about competition.
Q58 George Eustice:
The Walker review said that the current charging system is creaking
at the seams. Is that analysis one that you share?
Tony Smith: We
would, yes. There is a need to move gradually towards water metering,
and we would agree that that is the fairest way to charge customers.
There are issues about the pacing of the moves towards water
metering and protection for the customers who will lose out, but
probably the biggest area of creaking is the lack of adequacy
of the arrangements to protect customers who cannot pay and the
South West issue.
Q59 Neil Parish:
I see that the consumer council wants meters implemented without
consumer backlash. Fifty-seven per cent of customers say they
like it; 27% say they do not want them put in; and 40% support
the introduction, so there seems to be an anomaly there. The
question is: do you want this mandated, and do you think they
should be smart meters?
Tony Smith: Customers
favour in principle the idea of a water meter. Most of them want
a choice. The difference in the numbers arises because, if you
start to talk about compulsory metering, inevitably the percentage
of customers who are wary of that rises dramatically. More than
one quarter of customers would be against compulsory metering.
Some of that is just fear, which you can overcome over time by
word of mouth. As customers get more bills--sorry, meters--they
become more positive about them.
Q60 Chair:
A Freudian slip there!
Tony Smith: Yes.
They get over that because they hear from their neighbours that
they think a water meter is a good thing. But there needs to
be protection for customers who genuinely will suffer. This takes
us back to the social tariffs point. In some cases it is probable
that there will need to be transitional arrangements as well.
If you have very rapid compulsory metering, you need to ensure
you do not get a backlash. If you go from low to high levels
of metering very quickly, the customer reaction is likely to be
quite harsh unless you have the right protections in place.
Should it be mandated? Yes, it should. First, obviously,
it should be in the areas of water shortage. Should it be smart
meters? There are some advantages to smart meters, obviously
not least that they are being rolled out in energy at the moment,
but I think the case for their use in water is not yet proven.
We have not really done any business case on it and so we do
not know how far a customer would observe a smart meter. We know
that customers will react to knowing what is on their bill, how
much it was compared with the previous year and how it compares
with the bill of a customer having similar characteristics, but
you do not need a smart meter to give you that information. We
need to trial smart meters pretty quickly so we start to get an
early view of the benefits. If it is justified, we should roll
it out.
Q61 Neil Parish:
We seem to be South West-dominated. If we had a national levy
that helped pay for the beach clean-up in the South West, which
amounted to £2 per person for customers in the rest of the
country, could it be sold to those other customers, or not?
Tony Smith: I am
afraid the answer is: it depends on other things that are happening.
We ask customers about social tariffs across the whole country;
we ask them about the South West issue and about concessions for
site area charging. When you help them go through the thinking
about why they needed to do this, they said, in the round, "Okay,
a few pounds for those things." It depends on what else
is happening to their water bill. If their water bill is rising
for other reasons, for example the switch from private sewers
over to water companies, or indeed any other price increases in
future, they will be less receptive, so a lot depends on what
else is happening. To answer your question straightforwardly,
yes, I think it can be sold but it will not be easy.
Neil Parish: Thank you.
That is the answer I wanted.
Q62 Dan Rogerson:
On the issue of social tariffs, you have been cautious about the
potential level of support. How do you think Ofwat can ensure
that guidance to water companies maintains the right balance?
Tony Smith: I think
Government can be clearer in its guidance to Ofwat about what
it expects the regulator to do and the role of social tariffs
paid for by the water customers. I think that would be helpful.
Even if that did happen, however, we have a concern about the
legitimacy of an economic regulator, or a privatised water company,
coming forward with proposals on social tariffs unless those proposals
are backed by that water company's customers. It goes back to
the point that, if we are to be in a position to respond to the
occasional angry customer asking why he should pay for this, we
need to be able to say that customers in the round support these
things. Remember, if you leave it just to the economic regulator
or privatised water company, customers have no choice unlike energy,
so that has quite a big effect on their receptiveness. If it
is being imposed on them it is almost like a tax, so for the customer
legitimacy is really important. The approach we advocate is what
we call consumer-led regulation where we test things on customers
in a particular company's area. This is a good example of where
you need to do that to retain legitimacy.
Q63 George Eustice:
I think we have covered some of the areas I was going to talk
about. I want to ask specifically about the issue of precedent
about which you and Ofwat seem to have a concern. Is it beyond
the wit of man to have a threshold whereby if one were within
a certain variance against the national average water bill, one
would not be eligible for some kind of cross-subsidy, whereas
if there is a substantial variance against the average, you would?
Therefore, you would not have lots of trivial variances with
everyone making claims, but where you had a major dislocation
of, say, 50%, which is happening in the South West, the system
would recognise that?
Tony Smith: I am
sure it is possible to do that. There are two issues here: one
is the absolute level against alternative water company customers--obviously,
customers in the South West are an acute problem--and the other
is the speed of increase. I heard reference earlier to the Thames
Tideway. At the moment Thames customers' bills are among the
lowest in the country but very rapidly they will rise probably
by £50 or £60 as a result of the Thames Tideway, which
is a multi-billion-pound project. I think there are two issues:
one is the absolute level as against other companies and the second
is the speed of the increase.
Q64 George Eustice:
Do you think it would be possible to write into a set of guidelines
or regulations some kind of guidance that tidied that up?
Tony Smith: I think
that is an issue for Government but, yes, in principle it could
be done.
Neil Parish: Could sparsity
of population also be added in?
Chair: Rurality as well.
Q65 Tom Blenkinsop:
In the main you advocate collective consumer solutions as opposed
to individual consumer solutions to these problems?
Tony Smith: Yes.
In the absence of competition it is not either individual customer
or everybody. What we have tried to do with the water companies
and the regulator is highlight the fact that, as in any other
market, there are customer segments that take different views
about these things. A problem in the past with the water industry
is that as soon as you reach 51% agreement, "That's okay
then, we've done it," rather than understanding that although
the majority of customers might support something there is a sizeable
minority that does not. We need to understand why that is and
how you are to overcome it.
You are right that in the absence of competition
we are advocating a need to listen to customers in the customer
segments. If there is one thing that is true over the past 20
years in the water industry it is that customers have not been
listened to enough, and that is one of the upshots we are now
talking about. Although customers are reasonably happy with the
service they are not happy with value for money and we need to
listen to that. One of the things we shall suggest for the White
Paper is that the regulator should have a measure of outcome.
Regulation should be much more outcome-focused. One of the key
outcomes that the regulator should look for, among other things,
is the measure of customer satisfaction with the service and value
for money provided by the water industry. Those are crucial measures
about how well the water companies are doing and how well the
regulatory system is working for water customers. That is one
of our strong suggestions for the White Paper and to this Committee.
Q66 Mrs Glindon:
Perhaps another side of fairness and customer satisfaction is
how bad debt is tackled. Why should all customers carry £12
for all those who either cannot pay or, moreover, will not pay?
Tony Smith: That
is a big concern for us and the industry. A number of things
can be done to help. One is that at the moment the companies
can, if the costs of bad debt rise, come back for an increase
in price. It is called an interim determination and is a regulatory
process. We do not think that is right. To let costs rise does
not incentivise companies. We think that incentive should stop.
We suggested that in the previous price review and Ofwat did
not listen to that point.
The companies can do more themselves. There are
broadly three groups of customers who have problems with debt:
there are those who cannot pay; those who won't pay; and there
is a very big group of customers in the middle who find it difficult
to pay because they are not very well organised with their money.
That is not just about water; it is about customers' handling
of money across all their bills. We think that provides a big
opportunity for water companies to work with those customers and
help them manage their debts and not get into debt in the first
place. We also think that the extension of the DWP's Water Direct
scheme would help. At the moment customers can use the Water
Direct scheme if they have already been in debt. The problem
is that it does not help customers who may get into debt. The
scheme allows the money for the water bill to come off before
the benefits are paid to the customer, so it is top-sliced and
goes direct to the water company. We think--customers agree with
this--that helping them not to get into debt in the first place
by doing that would be a helpful development. We think there
are a number of things that the regulator could change by a fairly
modest tweak of DWP rules and that the companies could do.
Q67 Mrs Glindon:
To come back on fairness, obviously to help people clear their
debts is fine, but is not that kind of direct payment perhaps
a way of capturing the people who cannot pay but not solving the
issue of the people who won't pay? It seems harsher on those
who already have limited incomes, while I understand it is a way
of getting some payment back.
Tony Smith: I totally
agree. I suppose the encouraging thing is that the customers
who won't pay are a relatively small proportion, but that is not
to understate the size of the issue. To go back to the discussion
about social tariffs, mention was made earlier of disconnection.
We would be concerned if there was any restoration of the right
to disconnect while there are insufficient protections in place
for customers who cannot pay. If those protections were put in
place, there is a stronger case to be tougher on those people
who won't pay, which is your point. We would agree with that,
but the protections need to be there first.
Q68 Bill Esterson:
How would you identify the people who won't pay? From what you
say, you would use some of the same approach with those people
as you would perhaps with the people who are not so good at managing
their money. However big or small a group that is, clearly it
is a key group of people.
Tony Smith: Companies
do that all the time already. It is not true to say that they
do not have fairly tough sanctions against customers who won't
pay. They cannot disconnect but there are county court judgments
and charges on properties, which is a pretty significant penalty
they can impose on customers. They are trying to identify these
people all the time. Many of them will be working with people
like Citizens Advice Bureau and so on to try to identify them
and differentiate between those who are not very good at managing
their money and those who just won't pay, so they are already
doing that to a reasonably large extent. The debate is about
what you do with those people at the end of it.
Q69 Chair:
Not unconnected to what you said in response to Mary Glindon,
if water efficiency measures could be encouraged, which is the
reverse side of bad debt, do you think that Ofwat's remit needs
to be changed to deliver that? I know Anna Walker has done a
lot of work on this, but do we need legislative changes to bring
that about?
Tony Smith: I am
not sure you need legislation to do that. It could well be written
into guidance to Ofwat, but I am not sure legislation is necessary.
I am not an expert but I would have thought it could be--
Q70 Chair:
Just the regulations under it?
Tony Smith: Yes.
Q71 Chair:
In terms of the legislative framework, you mentioned once or twice
the White Paper and looked ahead to the bigger Bill. What do
you believe the legislative priorities are in regard to the Act
that was adopted this year and prospectively for the future Act?
Tony Smith: Far
and away the most important thing is to make progress on the flooding
issue. When that Bill was going through Parliament we accepted
that it was very narrowly based and did not address the issues
of affordability and competition because customers were telling
us in the research we did on flooding that this was an urgent
issue that needed to be resolved. Therefore, making progress
with the Michael Pitt recommendations was a real priority. I
think implementation of those things, so there is clarity about
who should do what--the responsibilities--and various other elements
to help with flooding, is definitely the priority.
Q72 Chair:
That is very helpful. Referring to the debate on SUDS, who do
you believe should pay for maintenance? Do you believe there
is a distinction between existing SUDS, where it is quite likely
their full extent is unknown, and SUDS yet to be developed?
Tony Smith: I think
the costs should fall on those who are responsible for delivering
whatever the benefit is locally, so if it is a water company and
a problem that is being resolved through SUDS it should be the
water company; if it is the local authority it should be the local
authority. It is important that the relevant body is sufficiently
incentivised to minimise the problem in the first place. To split
it up artificially is I think philosophically incorrect.
There is some concern that, over 20 years of a privatised
water industry, water customers are seen as a bit of a soft touch
relative to other payers of bills. We have talked about the South
West. Were the hurdles to be gone through in agreeing to the
directives that went into the legislation that drove those bills
given the same degree of scrutiny as other things had taxpayers
been paying for it? Anna Walker pointed out that there has been
a tendency for Government to sign up to directives from Europe,
for environmental improvements and so on, without understanding
the impact on the end customer. Therefore, things happen every
few years which have significant effects on water customers' bills
and they are piled on top of other things: maintenance programmes,
private sewers, social tariffs and so on.
Q73 Chair:
To press you on SUDS, there is a whole host of issues to which
we can revert to probably under the Natural Environment White
Paper. As to those responsible for delivering, if it is a pond
or a highway for surface water runoff, which in most cases was
the main cause of flooding in 2007, the end is to stop the water
going into someone's home or to stop a dam bursting downstream.
Can you be a bit clearer?
Tony Smith: Whoever
is responsible for managing that watercourse or feature should
be the one who funds it.
Q74 Chair:
I may be completely wrong, but I get the impression that often
these things are planned and then just left. What I want to see
emerge from the legislation, which I hope you agree with, is that
if it is infrastructure for surface water runoff, would it not
be more appropriate for the water company to take responsibility?
I quite accept that planning should remain the responsibility
of the upper tier, but I believe that the 2010 Act is very fuzzy
on it and we need greater clarification.
Tony Smith: Yes,
as long as that does not involve water customers artificially
paying for something that is somebody else's responsibility.
Q75 Chair:
We can debate this when we see more concrete proposals. Given
there is now consultation on private drains and sewers and we
still do not know their extent in each water company area, in
your view what would be the cost to water companies and what should
be done to minimise the cost to individual water customers of
the transfer of private sewers? Obviously, one cohort of customers
will be delighted because they are offloading the responsibility
on to someone else; for others the cost will be spread. I am
told that the amount is very small, but that might differ according
to each water company area.
Tony Smith: Estimates
vary, mainly because water companies do not know what is coming
their way. I have seen estimates of between £3 and £14
per bill, so it is a reasonably sizeable amount. This comes on
top of the view that customers were getting reasonably flat bills
over the next five years so this will be a bit of a shock. As
you say, there will be some benefits to customers, so there is
quite an important issue of communication. Again, it reinforces
the need to address the problem of affordability because this
just adds to that issue. We have suggested in our response to
consultation on the subject that one of the things missing at
the moment is one set of vulnerable customers who will not benefit
from the transfer: those who live in residential caravans and
things like that. We suggest that they be included in the regulations.
Chair: That is very helpful.
Your comment about environmental responsibilities is something
we would like to revert to, but we thank you for being so generous
with your time today and for being here to present evidence to
us. We are very grateful.
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