Future flood and water management legislation

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE    To be published as HC 522-i

house of commons

oral evidence

taken before the

Environment, Food and Rural Affairs Committee

FUTURE FLOOD AND WATER management LEGISLATION  

Wednesday 13 October 2010

REGINA FINN and KEITH MASON

TONY SMITH

Evidence heard in  Public Questions  1 - 75

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the  Environment, Food and Rural Affairs Committee

on  Wednesday 13 October 2010

Members present

Anne McIntosh (Chair)

Tom Blenkinsop

Thomas Docherty

Bill Esterson

George Eustice

Mrs Mary Glindon

Neil Parish

Dan Rogerson

________________

Examination of Witnesses

Witnesses: Regina Finn, Chief Executive, Ofwat, and Keith Mason, Director of Finance and Networks, Ofwat, gave evidence.

Q1 Chair: Good afternoon. May I welcome Regina Finn from Ofwat. Thank you very much for joining us today. Would you like to introduce your colleague for the record?

Regina Finn: Thank you. This is Keith Mason, Director of Finance and Networks at Ofwat.

Q2 Chair: I am going to ask about the previous Government’s policy, but following your submission––thank you for your help with this inquiry––may I ask how Ofwat balances its social and economic roles?

Regina Finn: Balance is at the core of what we do. Our job is to protect the interests of water customers now and in the long term, and the way we do that is by seeking to make decisions that deliver a sustainable water sector. That means a sector that will meet customers’ needs today but also allow the needs of future customers to be met. We see that as having three legs. There is environmental sustainability, which means we have to live within our environment, but it is also important that we have social sustainability. That means customers need to be both aware of what they are paying for and willing to pay their bills, so bills should be as affordable as possible across the board. Then we need to balance that with the third aspect of sustainability, which is financial sustainability. That means making sure the water sector can continue to build on the £90 billion investment it has already made over the past 21 years to continue to deliver that sustainable contract in the long term. We take all of those aspects into account when we set price limits, which is essentially the price and service contract that each company has to deliver over a five-year period. We balance those issues. We listen to customers’ views. We did extensive customer research as we set the price limits this time around. We heard what customers told us about the difficult economic times they were in; we heard what the markets told us about the need to ensure that investment was stable; and we heard what the companies told us about what they needed to do to deliver their services. We struck a balance that I think is a fair one and has been accepted. It meant that bills, before inflation, were set broadly flat over a five-year period for an investment package of £22 billion over the same period. That is a pretty good outcome for customers, and the feedback was that customers were fairly satisfied with that. That is what we do at a high level. In the long term we need to make sure that our regulatory tools and framework are fit for purpose to deliver that sustainability in the face of significant challenges that the sector sees ahead. I think there is general acceptance of those challenges: climate change; population growth; the stressed economic times; the need for further investment; continued environmental drivers; and indeed customers’ demands for high levels of service and, at the same time, concerns about affordability.

Q3 Chair: How do you think that the views of the customer would best be heard in the process?

Regina Finn: Over the past number of years we have worked to develop how we take into account customers’ views, specifically in the price-setting process. In our most recent price round we did extensive joint research with all the other stakeholders: Defra, the Welsh Assembly Government, CC Water, the Drinking Water Inspectorate and the Environment Agency. That was very helpful because we were able to consider the views in those surveys when we came to set prices and understand customers’ views on willingness to pay. However, there is a challenge ahead in terms of how we can strengthen customer engagement in the price review process. Earlier this year we launched a project to review how we use our price-setting tools in future, and one stream of that is about customer engagement. We are looking at a range of options on constructive engagement, negotiated settlement and understanding customers’ preferences and choices to see whether there is a more effective way to ensure that customers can be communicated with and we can understand their views during the process.

We also want to work on using the views of customers when we look at how we carry out compliance reporting. Therefore, when we look to see how companies are meeting what their customers want them to do, rather than have a data-heavy approach where we examine every company every year, we look at how we can better hear from customers what their concerns are in terms of the service they receive so that we can take a more risk-based and targeted approach and listen to customers that way and engage them. We have done a number of bits of research. A number of academics have done some papers for us, which we shall be publishing next week, along with a draft report on how we might take forward this process. We are conscious that quite a lot of reviews are going on at the moment, both institutional reviews, reviews of the competition and consumer framework, and indeed a review of the water regulatory framework proposals for a Water White Paper. We shall have regard to all those developments, too.

Q4 Chair: Could you outline what you think the benefits are of having a separate regulator for the water industry?

Regina Finn: I have worked at regulating a whole range of industries. I have regulated the telecoms industry, electricity, post, gas and indeed broadcasting in various jurisdictions, so for me the concept of economic regulation has some commonality across networked industries where there are particular monopolies that you want to regulate to deliver for customers. What I have found in all the sectors in which I have worked is that there are also individual characteristics that you need to learn about. When I joined Ofwat three or four years ago I was new to the water sector. I certainly had a good understanding of economic regulation because I had been doing it for all my career, but there were water-specific issues that it was important for me to learn about. There is some sectoral expertise quite specific to the different sectors, and I think it is important to have that.

I will be perfectly frank and will not give an opinion on institutions because you can create any institution you want. What is important is that you have that specific sectoral expertise, wherever it sits, in order to ensure that your regulation is fit for that sector, you understand the long-term challenges that the sector faces and you can make sure your regulatory tools drive the right behaviours for customers and the environment in the long term.

Q5 Chair: What would your message be to Defra on the outcome of its review? How would you like to see the end of the review process leave Ofwat? What do you think the timetable should be, without impacting on the next price review?

Regina Finn: Timetables are tight. We set price limits for a five-year period but, frankly, it is a big, three-year process. We will have to publish how we are to set price limits by the end of 2012 so that companies can start to understand what they need to do and we can start the engagement process. But I think we have a fantastic opportunity between now and then because we have just set price limits for five years so we have quite a stable environment. We will be setting them again in 2012. We will have to talk about it before then, but from 2012 we will start the process to set them from 2015.

We have a very good opportunity with the Water White Paper, the Natural Environment White Paper, which has water aspects to it, the Defra review of Ofwat, in which we are very pleased to participate, and our own review of our tools that we have been carrying out since we last set price limits. We think that together all those need to look at how we can make this regulatory regime a more flexible, modern one that can adapt to the really big challenges––climate change, weather volatility, flooding and drought––where we do not know what they will deliver for us. We do not know what the outcome will be but we would like clarity from the outcome and any legislative proposals within that window. We think that is doable.

It would be good if the various reviews and the policy look at the sector helped us look at our tools, such as our licensing system, which is 20-odd years old. We have 20-plus different licences, each of which has different terms and conditions. There is a lot of legal redundancy in there; frankly, it is lawyer heaven when you try to start using them. We could usefully have a much more simplified, modern, streamlined, modular licensing system that would be clearer for companies, for us to enforce and for customers to understand to what they are entitled.

To come back to your first question, it would also be useful if the review focused on how we can best engage customers and the policy framework around customers. That includes the Government’s position on social policy and social assistance for water customers, just as in other income-deprived areas in the country. It would be very useful for us to understand Government policy around that so that we can build the appropriate frameworks on which to deliver over time, and, again coming back to what you said, to make sure that we have systems and processes to ensure customers can be heard and are at the heart of this. If there are changes to that aspect of the regime we want to make sure we can capture and have access to that customer voice by hearing what customers are complaining about, understanding the issues they are raising with their companies or making sure we can keep that intelligence as part of the regime.

Q6 Chair: Do you think that the previous Government got the assessment right in their policy paper Future Water for 2030? Were there bits that they should have implemented but have not? How do you think this was reflected in the legislative framework?

Regina Finn: We were very pleased that Future Water tried to grapple with putting the whole story together around water and waste water because it is a huge sector and it is fundamental to our economy as well as our health and lives. We thought it was a really good first step. It did start to highlight the challenges, and we now have a pretty common consensus on those challenges, so that is very positive. It paved the way for important further works. Work was done by Anna Walker and Martin Cave in their reviews, so it started some of that going.

In the period of time between then and now, through our dialogue with our stakeholders, we have learnt how crucial valuing water is at the centre of developing our policy and frameworks around water. That was certainly touched on, but probably we did not develop it then as well as we have now. Essentially, if we do not really understand the environmental, economic and social value of water, we do not necessarily make the right decisions about how we use it. I am not talking here just about customer pricing but about the companies that have to deliver the infrastructure. They know the cost of collecting it, treating it and moving it around, but not necessarily the relative value of it between a water-scarce area and a water-rich area, so the concept of understanding and valuing the resource is perhaps something that could be developed.

In the light of more experience and what we have learnt in the period since Future Water, the point you raised about understanding the role of the customer and how the customer’s voice can be engaged is something that could be developed further. The final point is that obviously a lot of actions have not moved forward because they were the subject of further work and none of the recommendations––apart from a few from Anna Walker’s or Martin Cave’s reviews––has yet been taken forward into proposals for legislation. That has not been done.

Q7 Mrs Glindon: You have talked a lot about improving the engagement process. From all the work you are doing, have you been able to identify customers’ priorities?

Regina Finn: Yes, in that we do an awful lot of research with stakeholders. We did a lot of joint research throughout the periodic review process. One of the difficult things in engaging with all customers in the country is that you have a lot of voices and it is very hard to hear them all, so we needed to try to use surveys to do that and ensure we used a common set of surveys so all stakeholders understood customers’ priorities, because if you do your bit of research and I do mine we may well get different views. That was an important way to make sure we could understand customers’ priorities.

We also asked all companies to do customer research locally so they could understand customers’ priorities when they put together their business plans. CC Water also does research on customers’ priorities and publishes that and we also have access to their views, which is very helpful. That has been reasonably successful. There are difficulties with it. One of them is that it is inter-generational, so you have today’s customers and we must protect the interests of tomorrow’s customers and tomorrow’s customers are not there to tell us their priorities, so that is a balancing act we need to do. The other issue is that we have tended to survey customers as a whole.

One of the things we are now learning when looking at how we might improve engagement is that they are not all the same; different types of customers have different priorities––for example, large and small businesses, SMEs and household customers––and different customers have different priorities in different areas, and their priorities change over time. Because we did a number of surveys over time, we captured information that was as up-to-date as possible when setting price limits. The challenge for us now is how we can make that a richer and more-informed debate with customers going forward, so we think there is more to be done.

Q8 Mrs Glindon: This is a different aspect of the customer’s point of view. You have also mentioned changing the regulatory burden and making it more flexible. How can that change be balanced with the need to retain the customer’s confidence in any regulatory outcomes?

Regina Finn: That is absolutely right. The first priority of which we are always aware is that our job is to protect customers’ interests. Where they do not have any choice, customers need somebody to protect their interests. As you have just alluded to, they need to believe that somebody is protecting their interests. We need to do that and ensure that they are aware of it. When we talk about simplifying the regulatory burden and potentially reducing data collection, we would not make a change in our processes; that would not be beneficial or enhance our outcomes. The outcome we want is to deliver for customers now and in the long term. We want to ensure that we do that in the most efficient, value-for-money, effective way, and we think the continued heaviness of the way we look at data might not be the best way. We are not looking at changing it for the sake of changing it; we just think there may be better ways to do it, better ways to serve the customer interest, and better ways to hear those customers and focus our limited resources on the things that customers want us to focus on rather than a kind of blanket approach to everything.

Q9 Dan Rogerson: Mary’s first question to you was about what customers’ priorities were and you set out quite clearly the methodology of how you consult and also said there was a range of responses. Are you able to give us a flavour of what those priorities are?

Regina Finn: The first priority for customers remains, frankly, safe, clean drinking water. We all turn on the tap and take it for granted after so many years, but if you ask customers to think about it they will say that the most important thing is that that water keeps coming out of the tap and that it is safe, clean and they know they can rely on it and do not have to worry about it. They want that at affordable prices; prices they feel are fair. They are certainly willing to pay for it but they want to feel they are paying the right amount. You will remember that when we did this research in the price review period we went through the credit crunch and all of that economic uncertainty and we saw customers’ priorities changing a bit. They became concerned about some of the investment that we call discretionary. There were some things they wanted; they wanted a certain amount of resilience; they wanted to be sure they had back-up supply; and they wanted the environment to be clean, but they were second-order priorities and the primary priority was safe drinking water. Keith, do you have anything that you want to add to that?

Keith Mason: Only to say that the point about safe, reliable drinking water was clearly well ahead of any other priority that they had. One that was very specific for certain groups of customers was sewer flooding. It affects only a very small minority of customers but when it happens it is not pleasant, so clearly those who were affected thought that was very important to them. We have tried to address that by including within price limits just over £1 billion to do that, but it does become very expensive. That is probably the only other one I would draw out.

Q10 Chair: I have one small question about Ofwat’s view. Obviously, if customers do not pay their electricity, telephone or other bills they will be cut off. Obviously, bad debt is growing incrementally and all the paying customers are paying quite a bit. If everybody has the right to water, but those who can pay won’t, what should we be doing?

Regina Finn: You are right. The difference with water is that if household customers, not businesses, do not pay their water bills they cannot be disconnected. That is a clear policy decision for which there is obviously a good reason because you cannot do without water; it is essential for life and health. It contributes to a difficulty in the sector, and bad debt is much higher in this sector than, for example, in the energy sectors; currently, it is running at £1.56 billion or £1.6 billion. For those who do pay, that adds about £12 to their bills. The point we would make here is that in that group of people who are in bad debt there are some who are seriously vulnerable and have genuine difficulties in paying their bills; they have an affordability problem, and we need to identify and target those vulnerable customers. We believe that is very important. It is only when we do that that we gain the legitimacy to try to tackle those customers who frankly can afford to pay but just do not pay. They think they are ripping off the water company by not paying, but they are ripping off their next-door neighbour who is paying.

We put forward some proposals in the last legislative round, and through the Flood and Water Management Act, about how we could better tackle that by giving water companies some tools to do it. For example, that included a tool better to identify whom to chase for the bill when they do not pay, so there is a hierarchy: if you cannot find the tenant because they have done a skit, you can eventually find the landlord and somebody who has a liability to pay that bill, and there are a number of variations on that. I know that is subject to discussion and needs regulations, but we think that those tools would give water companies slightly better means to collect bad debt.

Let me not be complacent here: water companies really need to get better at this as well; they need to focus on collecting this bad debt, but sometimes it can cost more to chase the bad debt than what we get back, so we understand there is a cost-benefit there. We think it is important that the proposals that were accepted in the primary legislation but are being consulted on and need regulations are brought forward. There will always be more that water companies can do and that is partly about them getting to know and understand their customers better. The third point would be that, if we do focus on those genuinely vulnerable customers and try to help and protect them, it will be easier and people will understand when water companies try to collect outstanding bad debt.

Q11 Chair: Have you had any indication that this will be included in the White Paper?

Regina Finn: My understanding is that the White Paper will look broad-brush at the priorities for the water sector as a whole, including Government social policies, so I would assume that the social goods that Government want out of the water sector would be included in that. But even before that there is an opportunity to move this forward because this is the opportunity to put the tools in place through regulations, and I think that is in train at the moment.

Q12 Thomas Docherty: Going back to the point you made earlier about how water is perceived, I think the phrase often used is "valueless commodity". You said that you felt it needed to be challenged. For example, we recognise that there is both a monetary and environmental cost to electricity. Could you expand on what steps you think should be taken to get that across to the customer?

Regina Finn: There are two aspects to this. There is the end customer, the household customers who use water and their understanding of its value, and, from the point of view of our regulatory framework, there is a need to ensure that the sector that is delivering the water understands the value. Just to unpick the two of them––both are very important––this sector has invested £90 billion and that is what the average bill of £330 goes to pay for. It is a huge amount of money, and it is going to be more. In deciding what to invest in, water companies make choices, and when they make choices they add up the costs and benefits. For example, in a water-scarce area or where a river such as the Thames is over-abstracted and we do not want to abstract more from that river, clearly, water has a value there, but there is not a monetary value on it. Then we have areas of the country where there is excess water. If a company in the Thames area that has to satisfy its customers thinks it will have a water shortage, it may well want to build a new reservoir or desalination plant because those are the options. As you say, the water it takes out of the environment is not valued. If there was a relative value on that compared with an area where water is plentiful, instead of building a desalination plant it might build a pipeline and move some water from the water-rich to the water-poor area.

That is a made-up example, but we think it is important to use some market forces to reveal that value within the value chain so that companies can make sustainable investment choices. That means they should not invest in things we do not need but in things we do need, and we think that should be at a lower cost to customers overall. That is the first place where we see valuing water as being of fundamental importance. We think the tools are perhaps a degree of water trading between companies and the ability to trade abstraction licences. We have a project with the Environment Agency to help develop that.

At the customer end, undoubtedly there is more we need to do in terms of customers’ understanding of how valuable the product is. The purist approach is to say that you respond to price signals and if the price goes up you will be more careful about it, and that is true to a degree. We do see that metering customers gives them fair signals about how much they are using and then they can understand to conserve water, and that is true to a degree. But one of the things we want to learn more about––it is part of the work we are doing and in our review––is whether there are other ways to engage with consumers and help them change their behaviour. The buzzword is ‘nudge economics’ or ‘behavioural economics’, which just means: how can we understand what drives the choices that customers make so we can help inform their behaviour? It is not always just price; it is many other things as well. We think that is a piece of research and work we need to do. We think water companies need to do it and engage with their customers. We have set water efficiency targets that require water companies to drive water efficiency through their customer base and get them to use water more efficiently. We have done a number of things there already, but there is more to be done on how customers see and value water.

Chair: We shall be coming to some of these items.

Q13 Tom Blenkinsop: Has Ofwat quantified the potential benefits to be gained from lowering the threshold for competition in water supply?

Regina Finn: We provided input to the Cave review. Martin Cave’s review did a cost-benefit analysis on lowering the threshold to allow for competition, so the answer is, "No, but yes," in that we provided data and information for Martin to do that cost-benefit analysis and worked with him and his team. That is why Martin Cave’s report to the Government based on that cost-benefit analysis showed a positive net benefit and recommended that the threshold be reduced, so we gave that information and helped do that analysis.

Q14 Tom Blenkinsop: Could Ofwat have been more proactive in progressing competition under the current legislative framework given the anticipated benefits for the customer?

Regina Finn: We have highlighted that the current legislative framework has difficulties. When we talk about the areas where we would like to see change they are to give us more flexible and proactive tools to develop the competitive regime. Having been through market liberalisations before, I recognise that it is very reactive. The current regime says that somebody really has to want to come into the market; they have to come along and try to negotiate getting into the market and only when it all fails can they go to Ofwat and only then can Ofwat try to help. Traditionally, when you are trying to open a market that is a huge barrier and cost for a new company. It has no guarantee that it will get in; it has no idea if it will get over the hurdles.

We would like to see a more structured framework whereby ex ante––that is, up front-a new entrant can see how he can get into the market, what the terms and conditions are, what it has to do, how to get a licence, how to connect and what it has to pay. We have been working on that. Under the legislation we are not allowed to set ex ante prices-it is too restrictive-but we have been preparing the ground as to how we would do a lot of that on the basis that, if the Cave recommendations were to be taken forward, we would be able to develop the tools to do that. We think it is a bit restrictive, including the cost principle that sets the access-pricing regime and restricts how we can do that. Could Ofwat do more? We can always do more, but I think that the framework as it is will not work; it does need change.

Q15 Tom Blenkinsop: Earlier you brought up the point about customer-led intelligence and priorities. How will you ensure that customer interests are protected during the review of your organisation? What do you believe is a reasonable timeframe for the review and the knock-on changes that will obviously affect it?

Regina Finn: In the first instance we are reviewing how we use our tools and throughout that our central ethos and duty is to protect the interests of consumers now and in the long term, so I can assure you that customers’ interests are at the heart of everything we do when we look at how we use our tools. When we look at the wider review of Ofwat that Defra is doing, how we sit within the broader water policy framework, ultimately even in the White Paper, and how all of that work is taken forward, we will be making sure that in our representations and submissions the interests of the consumer are strongly represented because that is what we are there to do. There are other routes by which the consumer voice will be heard: through CC Water, to whom you will be talking later, and business forum customers as well. They can stand up and give their own views in that review, which is good, but in so far as we continue to have a duty to protect customers I can assure you we will do everything in our power to make sure their interests are represented.

The timetable is a bit tight before we come to set price limits again. Ideally, if the review carries on over the winter and Christmas we would like to see it coming out with ideas in time to feed into the White Paper which will be published in the summer. If that is published in the summer we think that will be very helpful, because we will be able to think about that as we set our framework for setting prices. I think that timetable would work. The one wild card is that, if some of the issues in the White Paper need legislative proposals, we would want to know very quickly what the legislative timetable would be for that to provide clarity and a road map. You can deal with change but usually you need a road map to manage it.

Q16 Tom Blenkinsop: Just one last question: if water companies are to be required to separate retail from network operations what is Ofwat’s calculation of the impact on water companies’ costs?

Regina Finn: First, we have developed a system called accounting separation whereby we get companies to account for their retail business and their network business. That is one of the first things we need to do to try to understand costs. Second, we have asked companies for their views of the costs of separating out their business. We know there is a wide range. Some companies that have structured their business with a separate customer arm can do it quite easily because they have their billing systems and account managers. They have set it up that way anyway. Other companies have not set it up and think it will be a more difficult job because they have to separate out their retail units. That is a function of how a company runs its business and sets itself up. It is not necessarily a function of separating a business; it is a function of where they are coming from. That will differ from company to company. We look to companies in the first instance for their estimates of that.

Keith Mason: I think the proportion of total costs for a company represented by retail is not that large; on average it is probably only 10%. As Regina said, there is a wide spread around that and for some companies it is much smaller than 10%; for some companies it is a lot bigger. In those companies where it is quite large they have to work out exactly why their costs are so high, but it is just not a big proportion of the total costs. Some companies have structures such that it will be easier for them to move; others do not, and perhaps others have taken time. They probably do these things only once every 10 years, but they have to upgrade their customer billings systems in any event, and those with more modern systems will probably find it easier to do than those that still have relatively old systems.

Q17 Chair: In your view is the Scottish model working?

Regina Finn: The Scottish model has given us quite a lot of information and is very helpful. We are conscious it is coming from a different base because it is one company that is publicly owned and has split off Scottish Business Stream, which is the business side of serving business customers of that publicly owned company. There are then a small number of competitors in there. We hear from colleagues in Scotland––we look at what they are doing quite frequently––that that has driven down overall costs and driven up quality of service significantly. I hear personally from big customers that it is the driven-up quality of service that has been the most outstanding thing for them. They are so pleased to get one electronic bill for their site instead of 560 paper bills, and that is a benefit to any business; it is taking a cost out of the business at a difficult time. We have heard that anecdotally. We certainly have seen figures that show that the total cost has been driven down; and we have heard from some of the English water companies that have become competitors up there. They feel that there are some learning points to come out of it for our sector as well, so overall the answer is, yes, it is working and delivering benefits. It is not an exact map across to what we do in England because we have a different situation, but there are good lessons to be learned.

Q18 Neil Parish: You have talked a bit about the Anna Walker report. One of her conclusions was that the current charging system is creaking at the seams. Does Ofwat agree? Under what circumstances should water companies be mandated to require all customers to have metered supply? Should these be intelligent meters in all cases? The final facet of the question is: how does Ofwat think the regulatory framework can help to keep down the costs of metering and ensure that affordability is not compromised for larger water users on low incomes?

Regina Finn: The first thing to say is that the charging system that we have, albeit we can bring it into disrepute, has delivered an awful lot of benefits and water bills are a hell of a lot lower than energy bills. The average water bill at £330 is a lot lower than the average energy bill, so we start from a good position. We think Anna is right in that the issue of affordability and the level of a water bill for some customers is now on their agenda whereas it may not have been in the past, so we think that is true. It is also true that we see other pressures on the system. Where a company has already metered a high proportion of its customers and they have moved on to metered charges there is a consequential impact on the unmetered customers because their bills are going up. Those issues are creaking; I agree we need to address those. We need to address the core issue of affordability and find out who is vulnerable and having difficulties and have a framework to help them.

We also need a framework to help manage the impact of that metering roll-out. One example is Southern Water. We have approved near-universal metering roll-out for them. When they started to consider how they would do that we found that it would have big impacts on some customers. Some would be big winners; some would be big losers, and we have made the company work very hard on a transition programme that helps manage the transition; otherwise, it will not be acceptable to customers. We think that customer legitimacy is very important when you change charges.

As to metering generally, we think it is the fairest way to pay. The rateable value system that we use is creaking and the inherent cross-subsidy in it, depending on the size of the house you live in, is not well targeted; it does not necessarily help the people who need it most. We think that is true. Anna recommended that companies should be able to meter compulsorily where it is cost-beneficial. Clearly, that is a policy choice. It is a choice for ministers and so it is not one that we would make, but we will help with the analysis to see whether that would be more cost-beneficial for customers. The argument is that, for example, at the moment in a water-stressed area companies can choose to meter compulsorily and that is why Southern is doing it. If it were cost-beneficial to roll out meters by street instead of by individual household, then under Anna’s proposals it would be possible to do that. I know that is a proposal on which Ministers will be consulting over the winter in parallel with preparations for the White Paper. That is a policy choice.

As to what we can do, with Southern it is almost like working with a test case. We can gather that data and information about what happens when you do this to help inform the policy choices of ministers. That is really important. We are learning a lot from the process that Southern is going through. We can help with development of these transitional mechanisms whereby tariffs will be phased in over time, and I think that within any framework the Government sets around social policy on affordability we can implement anything like that that helps target vulnerable people. If you are moving on to more meters you will be unwinding cross-subsidies for people who do not need them and some people who do need them. You need to find those and make sure that they are helped through that transition. We are working closely with Southern as a case study and we will work with other companies that want to do more compulsory metering. Following any final decision by Ministers on how this is to be rolled out, our job will be to make sure the evidence base and cost-benefit methodology is clear and helps inform those decisions.

Q19 Neil Parish: But you would largely support metering?

Regina Finn: We would agree that metering is definitely the fairest way to pay and I think customers also agree with that. The main issue is that customers generally like choice, so compulsion feels uncomfortable to them, but they recognise that it is the fairest way to pay.

Q20 Neil Parish: What regulatory changes are required to reduce the level of bad debt for water? We talked about £12 on the customers who do pay, and we talked about the people who cannot pay, but how can you distinguish between those who can’t pay and those who won’t pay?

Regina Finn: If we could do that, we would not have £1.6 billion of bad debt. That is exactly the difficulty with which water companies are grappling. Frankly, they are in the front line; it is their customers. We are a small organisation regulating 20-odd companies around the country. It is those 20-odd companies that have a relationship with their millions of customers. They are the ones that need to understand their customers better and the characteristics of the "won’t pays". Some of them do: some of them are transient student populations, some of them are tenants and things like that, but we think that in the first instance it is a matter for companies to do that. What we do is collect information on their bad debt collection policies and how they do this. We publish best practice; we compare them and try to show them the best of the best. We continually drive forward new ways to do it, but we cannot do that; we are not in the front line; companies must do it.

From a regulatory point of view we have supported the introduction of proposals to make landlords more responsible because they account for a big bunch of the ‘won’t pays’, if I may call them that. Rather like the energy bill, if there is somebody with whom the water company has a relationship effectively, they can seek payment from that individual. Consultation is taking place at the moment on draft regulations on that point. Ultimately, a water company does not have a contract with its household customer in the way you would have a contract with your energy supplier. The water company does not have a contract; it has a duty to supply the premises. It may be there is a possibility of making that relationship more contractual in future. It is not, strictly speaking, a water regulation issue; it is a customer contract issue that could be considered in the longer term.

Q21 George Eustice: On the subject of the Walker review and specifically the South West, Anna Walker recognised there was real unfairness there, and, as a result, bills in the South West are significantly higher. What options are you looking at now seriously? I know that the Government has asked you for feedback in this area.

Regina Finn: Anna was asked to look at this issue. In the South West water customers pay the highest bills in the country. Anna identified, broadly speaking, three groups of options and they are the ones we have been looking at, but we have looked around the margins. The three groups of options are: first, if there were to be a financial injection into the South West, such that all bills could be reduced by a flat £50, how could that be done? We have had a look at that and how much it would cost. It would cost about £750 million. That would have to come from somewhere. That is not a choice we would make; obviously, that is a policy choice, but an injection of about £750 million would reduce bills overall. We have modelled that and we will be providing that data to Defra Ministers.

The second set of options––there is a whole subset within it––is to do with what you might call a cross-subsidy. Anna suggested there could be a cross-subsidy from water bill payers in the rest of the country to the South West. We have modelled what that might look like and we are working on the figures to see how much that cross-subsidy would need to be to bring bills down by about £50. We have to remember a couple of things. First, even by bringing bills down by an average of £50 they will still be among the highest in the country. Second, what is the rationale for any such cross-subsidy? What is the basis and reason for that cross-subsidy? Clearly, there would have to be equity and fairness. If the cross-subsidy was to pay for an environmental good we would have to consider whether there might need to be other cross-subsidies in future to pay for environmental goods, so the comparison is: if the cross-subsidy was to pay for the environmental good of clean beaches in the South West there might be an argument to say that the building of the Thames Tideway tunnel to clean up the Thames river is an environmental good and there should be a national cross-subsidy for that. Therefore, there is a question for policymakers as to what they want around that, but we are modelling those options so as to provide the evidence of who would be impacted, how much it would cost and how much money that would bring into the area. There are a number of options around that.

The final set of options as to what could be done is focused less on the high bills and just reducing everybody’s bills. Remember, some people in the South West can afford their bills, but there are some who genuinely have affordability issues because of those high bills. That set of solutions is a different one. There we are looking at whether there are any packages of options, including water efficiency advice, or particularly targeted subsidies, or assistance for vulnerable customers in particular, that could help with their bills, which would address the affordability concern, but not necessarily the overall concern about high bills. There are lots of subsets or variations within that, but broadly speaking those are the three areas on which we are punching the numbers.

Q22 George Eustice: To press you on the second one, from memory I think Anna Walker’s report estimated that to get a reduction of £50 to £100 in the South West it would add about 13p per month to the average household bill in other parts of the country. Are your figures in that ballpark?

Regina Finn: We are working on the figures. We have talked to a number of MPs in the South West before about this work, and we have said we will share that work with them at the same time we share it with Ministers. I think we shall be doing that on the 21st of this month. I do not have the final figures yet, but you are very welcome to come along to that briefing. At the moment I think our figures will show––they are still moving––that the amount on everybody’s bill around the country would be a couple of pounds and it would reduce bills in the South West only by about £50. I put a caveat on those numbers because we are still finalising them, but we shall be talking through those numbers with both the Minister and South West MPs to explain what it looks like.

George Eustice: You will appreciate that the second option is the favoured and fairest one as far as we in the South West are concerned. When it comes to the criteria, clearly the point is that the real unfairness came about because, when South West Water was privatised, inadequate account was taken of the fact that EU legislation was around the corner that would require it to do this work. It was not just an environmental improvement; it was required by law. Obviously, that is the difference between that and the Thames project to which you referred. It is also the fact that, because of the very low population in the South West, that unfairness has led to a huge spike in bills, whereas London with a population of millions can absorb it more easily.

Q23 Neil Parish: Can I add to that? The big problem in the West Country is that it has 3% of the population and 30% of the beaches.

Regina Finn: I am not arguing here about history, gentlemen; my job is to implement the regulatory regime within the framework of the policy that Government sets, and that is what we are going to do. I am suggesting that we need to be coherent and consistent. We will model the numbers and show the options. It is not our decision; obviously, it is a policy decision. Our job is to work within the Government’s policy framework and be accountable to Parliament, which we will do. What we have agreed to do is share the information with this Committee, other MPs and Ministers so everybody understands the impacts. Anna did look at why bills are so high. Frankly, one of the key reasons bills are high is that in the South West there was no sewerage system and the population was dumping sewage straight into the sea. That was what we did and to do that in a modern society is not acceptable. I think that is the core reason.

Q24 Dan Rogerson: Based on that, Ofwat having been the regulator over the period since privatisation, do you think it has done a good enough job for the people in the South West in terms of regulating and allowing that disparity to occur? I appreciate the reasons for not calling for legislative change and for something like this to happen earlier. How has Ofwat responded to this over the past 20 years?

Regina Finn: Frankly, not just Ofwat but the regulatory regime as a whole has served customers extraordinarily well. Looking back 20 years not just at the South West but elsewhere in the country, I think we had a reputation as the dirty man of Europe; we had appalling river and water quality; pretty poor customer service; we had crumbling and, in some cases, no infrastructure, which was the case in the South West; a need for investment; and no money. The independence, transparency and certainty of the regulatory regime that was set up enabled £90 billion to be invested in the sector. I said earlier that customers’ priority is that the water coming out of the tap is clean. They have become so used to it because of that regime. Average bills have been kept about £110 lower than they would have been without the regulatory regime. That rigour has applied to the South West just as it has applied to the rest of the country. Working within the policy framework and delivering on our duty to protect consumers now and in the long term, I believe Ofwat has done a pretty good job within the framework it has been given. There is more to be done in future and that is why we are now talking about reviews. I think there are opportunities and challenges we need to rise to, but we are lucky because we have quite a good platform on which to do that.

Q25 George Eustice: I want to move on to the second point about water efficiency on which you touched earlier. Do you think that Ofwat’s remit needs to be changed to reflect that and give it greater focus? A second linked point, which you also touched on, is about the market incentives to prioritise water efficiency. You talked about abstraction licences. Can you expand a little on how that might work?

Regina Finn: To be honest, our overarching duty allows us as an organisation to have a vision called Sustainable Water, which is about long-term sustainability for the environment, customers and the sector’s security. I think that enables us to consider the role of water efficiency and its importance because it is one part of a bigger picture. I do not think we need any change in duties, and the evidence for it is that, for example, we have imposed water efficiency targets on companies, which never existed before; in other words, we have required them to deliver more water efficiency over time. In the five-year periodic review, along with water efficiency targets, metering and fixing leakage, we shall gain more water out of the savings side than the new resource development side. Therefore, it is already well embedded in our vision and in our communication with companies on how they do their business planning that we must make this sustainable, and that includes managing water wisely and efficiently.

That message is there. I do think, as I said earlier, there is a lot more to do here. The concept is one of valuing a scarce resource and making sure we use it wisely, not just in terms of how it comes out of the tap but in terms of where we take it from and move it to, how far we move it and whether we build a new large reservoir or move some water around. Those choices need to be informed more by the long-term sustainable impact that they have on our environment and society. That is what I mean by revealing the value of water in what we call "upstreams" where choices are being made about what to invest in. The example I gave was that a company might decide that if it needed extra water it would be cheaper to buy it from a neighbouring company as opposed to building a new reservoir or treatment plant. If two companies on either side of their boundary needed more treated water, you might find them both building treatment plants, on each side, with the carbon impact that has and the investment cost to the two sets of customers, whereas one plant and a sharing of water might be sufficient, but because there is not a value on the water those companies cannot make that calculation and do not have an incentive to deliver the more sustainable solution. That is where we want to see potential change in the framework and do more and drive a flexible framework that will help companies make better decisions in the long term.

Q26 Chair: What is your view on water abstraction?

Regina Finn: Water abstraction and the licensing of it is done by the Environment Agency, so clearly the Environment Agency is in the lead here. We have had a project going with the Environment Agency which itself is looking at how we can deliver a more sustainable level of abstraction. There are parts of the country where there is over-abstraction, as in too much water has been taken out; there are parts where there is over-licensing. Maybe not all of it is being used but it is licensed to be used. We have been working with the Environment Agency to try to help them develop tools to restore a more sustainable abstraction level. We have been exploring with them the possibility of abstraction licence trading whereby, if the holders of the licences can trade them, the water will be used in the more valuable areas and the unsustainable abstractions, which will be high cost, will be traded out. That is a nice idea but it is a complex one. That is a long-term project on which we are working with the Environment Agency. Clearly, we have a common goal, which is to get the water valued and used efficiently for society and the environment, but we recognise that it is a complex issue on which we need to work with them.

Q27 Chair: The Environment Agency is looking for a voluntary approach on the sharing of information on water supply and demand purposes, particularly for energy, agriculture, navigation, industry and commerce. Do you go along with that view, and do you think there is a role for Ofwat as a regulator in that regard?

Regina Finn: Our role is the economic regulation of the water industry. We do not have a role in regulating the other sectors that abstract and use water. Clearly, there is a wider stage that the Environment Agency needs to consider as opposed to the area that we regulate which is just water companies. There are significant interactions between water companies as water users and abstractors. I think they account for about half the water that is abstracted. As you say, there are power companies and everybody else who have abstraction licences. Our view is that better information and clearer processes for trading licences should help, and that is part of the project we are talking about.

Q28 Bill Esterson: I want to ask about linking energy saving and water efficiency and get your views on the regulatory issues and what prospects there are for Ofwat and Ofgem to work more closely together.

Regina Finn: This is a really interesting topic; there is a lot we do not know about yet but there is a good deal of potential.

Keith Mason: Heating water in the house accounts for about 25% of electricity bills. We think that is a very important link and one that is perhaps not made across both parties. We also think that smart meters, to which we referred before––but we did not pick up the point––could be useful, and we are exploring with Ofgem how we can piggyback a little bit on their roll-out of smart meters and learn from what they are doing there. There is a cost-benefit point to smart meters in that they give you a lot more information. They certainly give the companies a lot more in terms of good or different types of tariffs that they cannot do now. They are more expensive to buy and put in, but they certainly have operating cost savings. Therefore, there is a cost-benefit trade-off, but it is important that we explore with Ofgem how we can join together because there are a lot of links between water and energy, not least the point about heating water, which produces a lot of carbon and is expensive for customers.

Regina Finn: To add to that, we have worked with Ofgem as they have developed what they call their Smart Meter Prospectus to make sure it is possible, in the case of water, for that information at some stage in the future to be sent over the same data protocol so as not to close down options. The extra bit in this is that you have energy and water but, interestingly, you have carbon. If you could reduce your water wastage and maybe not heat as much water and then let it cool down again and, therefore, save energy, you would also save carbon, so there could be a virtuous cycle here. How smart meters will deliver that information and help us get there I do not know, but potentially it is quite exciting.

Q29 Bill Esterson: What about some of the current barriers where companies cannot claim credits for savings from the same device?

Regina Finn: We have talked to Waterwise, the Energy Savings Trust and Ofgem about that. We can see the concern there and we are working to try to see if there is a way to resolve it. We agree that is something that needs to be dealt with. We are conscious of it and are trying to deal with it.

Q30 Tom Blenkinsop: In terms of joined-up thinking, recommendation 39 of the Pitt review says: "The Government should urgently put in place a fully funded national capability for flood rescue, with Fire and Rescue Authorities playing a leading role, underpinned as necessary by a statutory duty." Do you think if that was put in place it would reassure local authorities about further expansion of sustainable drainage systems?

Regina Finn: Obviously, the Pitt review talked about SUDS and other drainage issues but was talking much more widely about flooding of the landscape. The issue of a national flood authority or the EA’s role is outside our remit. It is for Government to decide what structures it wants to put around that. For us the important thing is the word "sustainable", so it is how we can make our drainage system sustainable in the long term. We have all seen what happens with floods. Keith mentioned customers’ priorities. If there is sewer flooding it is an absolutely awful thing to happen to anybody. We need to think about how we can manage that, and sustainable urban drainage systems are a part of that because they are necessarily a way of stopping water getting into the drainage system and causing flooding.

We have encouraged and allowed water companies to adopt those or build on them where they are the best solution instead of building more sewers because, frankly, digging up all the sewers and making them super-sized will not make this problem go away, and it would be enormously costly. I think our role is to ensure that the sewerage companies try to make sure they deliver their services in the most sustainable ways. Michael Pitt’s review talked a lot about who is responsible for these things and joining up these things a bit better. I know that the Flood and Water Management Act went some way towards implementing those recommendations. Our view would be that there is more to be done to clarify rules and understand who is responsible for what beyond water companies. I am not talking just about water companies here; you mentioned local authorities. I think––

Q31 Chair: I want to come in here because this is my pet subject. You will recall that at the Committee stage there was a proposed amendment that did not find favour. Does Ofwat have a view about who should own SUDS in all their various forms, whether they are highway, ponds or whatever? First, who should own them? Second, who should maintain them? Should it be the local authorities or the water companies? I think it would be a mess to do both, but do you have a view?

Regina Finn: Our view is that the problem with SUDS means an awful lot of things. In some cases it is a big engineering project and a water company should build it because it is exactly part of its infrastructure, and it really helps in terms of being cost beneficial, diverting flood water and making sure it does not go into its drains. We would encourage them and allow them to have it, manage it, fund it and for customers to pay for it. I think water companies largely have the expertise to deal with that type of asset and they should do that.

I am not sure that water customers should pay for, and therefore water companies should manage, every type of SUDS because some are local solutions, which I think are more appropriate to local authorities. I think the key here is the one you have hit upon: who has the skill-set to maintain and manage these things? That is the bit that needs to be clarified, along with who pays for them. You can do that a number of ways. We see a lot of contracting and out-sourcing. You get people who are good at something and you pay them to do it. From our point of view you will not be surprised to hear that the important thing is to protect water customers and make sure they are paying for the service they get, not for protection for other people, and we would be keen that that be clarified.

Q32 Chair: There are two points. One is existing SUDS as you have mentioned. The worry is that we do not know where they are, who necessarily who owns them and whether they are being maintained at all. The other is future SUDS. I do not want to put words into your mouth, but it strikes me that the local authority should be responsible for the planning and development of new SUDS, but responsibility should pass to the water companies both to engineer them and maintain them afterwards. But it strikes me that in the Bill the difference between existing and future SUDS is a bit of a grey area. Do you agree?

Regina Finn: My concern––I think we said it at the time––is that the entity that is planning and requiring somebody to spend money to do something should be the entity that is responsible to the people who have to pay for that. We would be very concerned if water companies or local authorities were able to tell sewerage companies to build things, whether or not those companies wanted to or thought it was a good idea, and that had to be paid for by the sewerage companies’ customers. We do not think that would be a good result for customers. Essentially, if you take away accountability––effectively, the sewerage companies are accountable for draining their areas––and let somebody else dream up what to do you break that link. That is a very bad thing for customers. We think that is extremely important.

In terms of new SUDS, water companies may plan and opt to use SUDS because they are cost beneficial; they are the best thing to do instead of building a new sewer or link. We think that is absolutely sensible. We would be concerned if a local authority decided that a SUDS was needed, but it was not cost beneficial and it should not be there, and the water company was somehow required to deliver that asset. That would be unfair to customers. I think it is the governance that needs to be sorted out. Who is accountable? Whoever makes the decision should be accountable to the customers who have to pay for it.

Q33 Chair: But in one sense do not the same people who pay either way? All of us are either council taxpayers in the area of the SUDS or water company customers. The question is how the funds are raised.

Regina Finn: What I am saying is that, through our regulation, a water and sewerage company has a responsibility to ensure they deliver fairly for their customers. They have a responsibility to listen to their customers and show that something is cost beneficial for those customers. We already have a situation where sometimes, because of legislation, a water company has to do something that is not cost beneficial, so customers have to pay for it. It may be an environmental improvement for which they have to pay. That is a difficult issue. What I am trying to say is that, in terms of the choice of what needs to be built, where, why and how much it will cost, the entity that is doing that should be the one responsible for collecting the money and paying for it; otherwise, you lose accountability. We are part of the public sector. It is hard to hold a public sector organisation accountable for a spend that it does not have to justify because it is coming from somebody else’s bill. That is what is important.

Q34 Chair: What would you like to see in the comprehensive Water Bill that we are expecting after the White Paper? Do you have any indication of when we might expect it?

Regina Finn: What we are really positive about is the nature of the reviews that are taking place now and their timing. It is a good opportunity for us to think about how we can improve the regime and make it more sustainable, to use that buzzword. We will be feeding our views on the key issues into the Water White Paper response and the Defra review, but, if I were to focus at quite a high level on some of the things that we think are important, the first one would be that we need the tools to ensure we reveal the value of water throughout this value chain and start to understand how companies can make the best possible investment decisions now and for future generations. We think there are a number of tweaks to the legislation that would be needed to help us do that, and we will be explaining those. That includes using market forces where we can through water trading and the possibility of an interface with the Environment Agency around abstraction licences. I think that will be a very important area for any future legislation to look at.

The second area that we think is very important is that we do not want to write legislation every two years; we want to ensure that we put in place a framework that will stick the pace and will be flexible enough as the challenges that we know are there become real. We know there is climate change and weather volatility. We do not quite know how it will pan out, but we need to be ready to adapt to that. Therefore, I think we need a modern, transparent and potentially simplified regulatory regime. To come back to the example about licences: instead of having quite a complex set of 21 old licences that has grown up over 21 years, with different clauses everywhere, if we streamline them into a more modern, modular licensed approach we can perhaps have a more flexible regulatory regime so it is clearer to everybody what their obligations are and it will allow us to manage it more effectively.

The third set of things that probably needs to be there is essentially what was left over from Martin Cave’s and Anna Walker’s reviews-the issues that were not tackled because of the time through the Flood and Water Management Act. I think they are important issues about innovation, giving business customers the choice that they really want right now, particularly when they are trying to survive in a tough economic climate, and affordability, social policy and frameworks for social assistance for vulnerable customers. All of those matters raised in the two reports would be the third area I would like to see addressed in this legislation.

Q35 Chair: To be clear, you think they require legislation and have not been fully dealt with?

Regina Finn: Some of them do, yes.

Q36 Chair: I want to ask a very technical question. Where a plumber has repaired a wastewater pipe in someone’s home and unfortunately it has been connected to the surface water system, which clearly should not happen because it is causing damage to the main infrastructure, in your view who should pay?

Regina Finn: This is the issue of misconnection and whether there should be some regime to deal with it. Keith, do you want to handle that?

Keith Mason: I think we will have to come back on that one. Initially, you would go back to the person who had misconnected it in the first instance. That will probably be the developer. One suspects they are unlikely to be around some time later, but perhaps we can write to you on that particular point.

Q37 Chair: That would certainly be helpful. One other point on which perhaps you can write to us is the percentage of non-paying domestic customers. I think it is well documented, but can we have that figure for our inquiry?

Regina Finn: The percentage of bad debt that comes from domestic households?

Q38 Chair: Yes.

Regina Finn: We will get that for you.

Chair: Thank you both for being so generous with your time. I am sure we will have many opportunities over the coming months and years to invite you back.

Examination of Witness

Witness: Tony Smith, Chief Executive, Consumer Council for Water, gave evidence.

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 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 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 a 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.