The Committee consisted of the following Members:
John-Paul Flaherty, Committee Clerk
† attended the Committee
Mark Powles, Chief Executive, Business Stream
Cathryn Ross, Chief Executive, Ofwat
Alan Sutherland, Chief Executive, Water Industry Commission for Scotland
Rob Wesley, Head of Policy, Water UK
Dame Yve Buckland, Chair, Consumer Council for Water
Dr Peter Kenway, Director, New Policy Institute
Tony Smith, Chief Executive, Consumer Council for Water
The Chair: I welcome you to the first of nine sittings to consider the Water Bill in Committee. Those of you who have not done this before might need to know that we have two evidence sessions today, one this morning and one this afternoon. On Thursday, on the Committee Corridor in a Committee Room to be decided, we will set about the proper business of considering the Bill in detail.
I have a couple of preliminary remarks. Those of you who know me well will not be surprised to hear that I tend to the traditional side of chairing things. Eating and drinking—coffee, for example—are not allowed in the Committee Room. Order of dress and behaviour are the same as we would normally conduct ourselves in the main Chamber. Equally, anyone whose mobile phone goes off at any stage in Committee will be buying the rest of the Committee drinks for the rest of the year.
Now we have a couple of procedural matters. First, I and my fellow Chair will not be calling starred amendments that have not been tabled with adequate notice. The notice period in Public Bill Committee, as you will all know, is three working days, so amendments are to be tabled by the rise of the House on Monday for consideration on Thursday, and by the rise of the House on Thursday for consideration on the following Tuesday.
Before we set about the evidence sessions, we have to get through a number of formal motions, which we will do as swiftly as we can. First, we will consider the programme motion, which was agreed by a Programming Sub-Committee last week but can be debated for up to half an hour. We will then move on to motions to report written evidence and for the Committee to deliberate in private, as well as a number of other formal matters that we will talk through at the time. After that, we will move briefly into private session and I will ask members of the public to leave the room. We will move into our proper oral evidence session thereafter.
(1) the Committee shall (in addition to its first meeting at 8.55 am on Tuesday 3 December) meet—
(a) at 2.00 pm on Tuesday 3 December;
(b) at 1.00 pm on Thursday 5 December;
(c) at 8.55 am and 1.30 pm on Tuesday 10 December;
(d) at 11.30 am and 2.00 pm on Thursday 12 December;
(e) at 8.55 am and 2.00 pm on Tuesday 17 December;
(2) the Committee shall hear oral evidence in accordance with the following Table:
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedules 1 and 2; Clauses 2 to 4; Schedules 3 and 4; Clause 5; Schedule 5; Clauses 6 to 35; Schedule 6; Clauses 36 to 40; Schedule 7; Clauses 41 to 44; Schedule 8; Clauses 45 to 50; Schedule 9; Clause 51; Schedule 10; Clauses 52 to 57; new Clauses; new Schedules; remaining proceedings on the Bill; and
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 17 December. —( Dan Rogerson .)
That, in the Table in paragraph (2) of the Resolution agreed by the Programming Sub-Committee at its meeting on Thursday 28 November, in the second entry for Tuesday 3 December, leave out ‘Which?’.—( Dan Rogerson .)
(1) the Committee shall (in addition to its first meeting at 8.55 am on Tuesday 3 December) meet—
(a) at 2.00 pm on Tuesday 3 December;
(b) at 1.00 pm on Thursday 5 December;
(c) at 8.55 am and 1.30 pm on Tuesday 10 December;
(d) at 11.30 am and 2.00 pm on Thursday 12 December;
(e) at 8.55 am and 2.00 pm on Tuesday 17 December;
(2) the Committee shall hear oral evidence in accordance with the following Table:
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedules 1 and 2; Clauses 2 to 4; Schedules 3 and 4; Clause 5; Schedule 5; Clauses 6 to 35; Schedule 6; Clauses 36 to 40; Schedule 7; Clauses 41 to 44; Schedule 8; Clauses 45 to 50; Schedule 9; Clause 51; Schedule 10; Clauses 52 to 57; new Clauses; new Schedules; remaining proceedings on the Bill; and
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 17 December.
The Chair: May I welcome you all to this first evidence session on the Water Bill? I particularly thank our four witnesses who have agreed to give evidence to the Committee this morning: Cathryn Ross, chief executive
We have, broadly speaking, decided on a line of questioning for you. We have until 10.15 am, so we will try to keep questions and answers light and swift and not get bogged down. If we do get bogged down, I am a rude, tough and difficult Chairman and I shall interrupt people. First, I call Dan Rogerson.
Q 1 The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Dan Rogerson): Good morning. I will start by asking about the balance between what is in the Bill and what might come later in terms of regulation and guidance. Does the panel feel that the right balance has been struck?
Cathryn Ross: I suppose the first thing to say is that we welcome the strategic policy steer that we are receiving from DEFRA, which is very helpful. The thing that we are slightly nervous about is the requirement in the Bill for us to act “in accordance” with that statement. We think that that is a strong steer. I am sure that that is what is intended, but it seems to go against the thrust of independent economic regulation. We would be more comfortable with something that said we would have to have regard to it, take it into account, give it due regard, or something like that. “In accordance with” is quite a strong statement.
Alan Sutherland: It is understandable that the balance of the Bill has been struck in the way it has been, given the experience of the Water Act 2003. It has a less prescriptive approach after what was perceived to be a very prescriptive approach, but I do not think that that learns what I would see as the biggest lesson as to why nothing happened after the 2003 Act, which is a reliance on negotiation between those who want to enter the market and those already in it.
In addition, we should also bear in mind the corrective actions that were required in the Utilities Act 2000, which essentially had to deal with issues of a similar nature. We should learn those lessons and make sure there is a demonstrably level playing field. So how would I do that? I would make it an absolute requirement for each business to publish a wholesale charges scheme; no negotiation; no dubiety as to what is on offer for the entrant; introduce a statutory commitment to the creation of a level playing field, with the incumbent having a legal duty to behave, consistent with the level playing field, with a suitable governance code to make sure that that was going to happen; and I would make it very clear in the Bill that whatever codes are in place will apply equally to all, whether they are an incumbent or a new entrant.
Without such measures—confidence-boosting measures —I do not think you will get the entry that we desire, and, without that, you will not get the innovation or dynamism that the market should deliver.
Rob Wesley: The water companies had concerns about the balance between legislation, regulation and guidance in the draft Bill. We support the changes that have strengthened the role of Ministers and Parliament, and
Mark Powles: I would echo a lot of what the other people have said. I look at the retail part of the reforms. Business Stream is in a fairly unique position because we are an incumbent retailer in Scotland but a new entrant trying to break into England. In many ways, the Bill and the guidance have started to put right some of the things that are wrong in that retail market today. There are 27,000 eligible premises, but only about three customers have switched in that regime. The Bill will start to put right some of those things, for example by abolishing the access pricing regime and introducing sewerage services. It is light on the level playing field issue. I would like to see the Bill strengthened to put more obligations on the incumbents to show no undue preference and to ensure that there is transparency, fairness and openness in the way they deal with new entrants and their incumbent arms.
There is also the question of exit: should incumbent companies be forced to be retailers in a new market? I have never seen someone be successful in a vibrant retail market by being press-ganged into becoming a retailer. The market could become very complex if we have 22 wholesalers and up to 40 retailers fighting for 1.1 million customers. That sort of retail market will not be successful because you will not benefit from economies of scale. I question why that has not been included in the Bill.
Rob Wesley: We have said in the past that water companies should have the option to make their own choices about competing in or exiting the market. Our view is that an exit mechanism is desirable, but we are not convinced that it is essential for the opening of the competitive retail market. Ofwat has a range of regulatory tools that can be used to ensure that there is a level playing field, and they will be strengthened by the Bill. I wonder whether the question of exiting the market can be returned to at a later date, rather than being resolved at this point.
Cathryn Ross: I am not entirely in agreement with Rob on that point. Our view is that retail exit for incumbents is a critically important element of a functioning, effective retail market. Particularly important is the fact that if we do not allow incumbents to exit, essentially we are mandating inefficient retailers’ remaining in the market. That will basically be baking in cost that customers will have to pay for, which we can easily avoid.
Alan Sutherland: I completely agree with Cathryn. I find it strange that in December 2012 the Office of Fair Trading published a report that said that orderly exit was essential to the functioning of any market. It specifically
I cannot see how you can require people who are inefficient to stay in a market. It does not make any sense and it bakes in cost. The thing is that, whatever the parliamentary intention, the crafty guys in the City will work out a way of disposing of the asset in some shape or form. Once they have done that and once that has happened in a way that takes it somehow to the edge or outside of the regulatory ring fence, enforcing good behaviour by retailers that are on the other side will be incredibly difficult, because the only mechanism would be through the licence. If it is just small, low-level bits of bad behaviour, such as not reading meters on time, are you really going to take an enforcement mechanism through the licence and the wholesale business to get to that retail entity? I do not think so. It is quite a flaw in my view.
Q 3 Thomas Docherty: Scots are always very canny, but I am sure that lessons could be learned from how Scotland went about introducing reforms. Mr Sutherland, as a regulator for Scotland, what lessons can be learned? Has DEFRA learned them in preparing the Bill?
Alan Sutherland: I know that there has been a lot of conversation and dialogue between the Governments. There are three or four things on which there could be usefully be more clarity and the lessons have not been fully learned. One of those is separation. It was absolutely on the face of the Water Services etc. (Scotland) Act 2005 that Scottish Water had to separate an entity—that is functional separation—and it chose to go further and separate legally. That was one lesson.
The second lesson is that there were clear steers in getting the right incentives. A no detriment clause was put in for the wholesaler. Why is that important? That clause ensures that when the retailer is doing its thing—giving water efficiency advice and so on—it will not in some way be hindered, hampered or discriminated against by the wholesale business that fears loss of volumes in its business and therefore potential loss of profit.
The third lesson is that there was a clear statutory commitment to creating a level playing field and to ease of entry for potential new entrants. I am not sure that the Bill goes far enough. It goes back to the earlier experiential thing about what happened in 2003 and not wanting to put too much in the Bill. I can understand that, but there is a difference between being specific on inputs and being specific on the outcomes that you want to see. The Committee might want to think about that.
Q 4 George Hollingbery (Meon Valley) (Con): Mr Sutherland, can you explain something to me? As an noviciate in this area, I am not familiar with regulated markets and I find them very complex. In your original reply, I think you said that the City and others would find mechanisms through which retail could be separated out by the companies that did not wish to do it any more. That will make regulation extraordinarily difficult, because the regulation will apply only to the original retailer, rather than the one to whom it is licensed. Is that correct?
Q 5 John Penrose (Weston-super-Mare) (Con): You mentioned, Mr Powles, that you thought that exit was a good thing and you said that you thought, among other things, that it baked in cost. Is there not also an issue with the speed of competitive change? Presumably, if people are not leaving the market, entrants or would-be entrants such as yourselves will find it harder to get in and it will slow you down. Is that an issue, or am I inventing that?
Mark Powles: If I can build on what Mr Sutherland was saying as a way of answering that, we need to think about what we are trying to do. We are trying to create a market that benefits customers, and benefiting customers is about giving them more service or more innovation or keener prices. The more players there are in the market, the more cost and complexity you build into the model, for one. The more complexity, the higher the cost to serve is for retailers and the benefits we can share with customers will be less. One of the benefits of the model in Scotland is that it is very focused on the end customer, and I would use words like “fair”, in that new entrants and incumbents can compete on equal terms.
There is a level playing field. I have got the scars on my back from being the incumbent who was driven by a regulator to be totally separate and focused on customers and not getting an unfair advantage by being part of an integrated water company. I have some licence conditions that are there to slow me down, because I started with 100% of the market and it is always harder for a new entrant to come in and try to take customers away than it is for the incumbent to hold on to them. Those fairly tough conditions create that balance between a new entrant and an incumbent. I think that we need to create a fair, transparent and efficient market, because the more efficient it is, the bigger the benefits to customers.
Q 6 John Penrose: May I take that point on to Mr Wesley? The free marketeer in me says that if people are bad at something, allowing them to get the heck out of the way so that new entrants who are better at it can pick things up surely must be sensible. What is it about your organisation that makes you think that regulators can do that better than customers interacting directly with a supplier and choosing for themselves?
Rob Wesley: We would absolutely agree with the objective of a level playing field to allow retailers to compete on their merits for customers. The logic of, in time, allowing more flexibility in the structures to allow retail exit and entry would seem to be strong. The question to our mind is whether it is essential, at this stage of implementing the new market, for that to happen.
Within the sector, we are all working co-operatively and collaboratively to deliver the Government’s target for market opening in April 2017, but a significant amount of work needs to be done to achieve that objective. We wonder whether exit could be returned to at a later stage.
Q 7 Thomas Docherty: There was some debate on Second Reading about costs and benefits. Mr Sutherland and Mrs Ross, what do you estimate the benefit in terms of savings to the taxpayer and businesses could be from retail competition? Mr Sutherland, I think you did specific work on the loss of potential savings if we do not have exit.
Alan Sutherland: In terms of cost-benefit, our view, having looked at the numbers in Scotland and reading those across to England, is that the current impact assessment understates the value of retail competition quite considerably. If you were to compare on a like-for-like basis, we would say that there is potentially a net present value of about £750 million, compared with just less than £200 million in the DEFRA impact assessment. Even if I were to remove any allowance for dynamic efficiencies, I would still say more than £200 million in net present value just for Scotland, so I think that an estimate of less than that for the whole of England seems on the light side.
In terms of exit, we did a bit of work with Oxera, the economic consultancy, to look at the latest round of declared costs at retail issued by companies in England. To my mind, those looked very light, but we might get to that question.
Alan Sutherland: If they are right and they have been completely transparent and declared all their real costs in retail, not allocated them to wholesale slightly on the sly, and 40% of their customers—the public sector and the larger multi-site customers—were to be lost by 75% of the industry, on the assumption that 20% of their costs are fixed, the net present value of not having exit in loss would be about £400 million.
Q 8 George Hollingbery: Mr Wesley, Water UK and others in the industry were pretty concerned about the upstream reforms and the possible effect on pricing. Are you satisfied that the Bill now addresses those concerns?
Rob Wesley: Maintaining investor confidence is crucial to the sector as water companies will need to continue to invest, to maintain and enhance services, at about the current level of £5 billion a year. Funding that directly from customer bills would need bills to be about a third higher than at present, so companies raise finance from the external financial markets. Ongoing support from investors is needed, and the investor’s perception of risk is crucial there, as a 1% increase in the cost of finance would result in bills increasing by more than 5%.
We had concerns about the arrangements in the draft Water Bill, but with changes having been made in that, our view is that investor confidence can be maintained, provided that the upstream reforms are implemented sensibly. We all have an interest in ensuring that that happens. Much detail still needs to be developed on how that is best done, but all members of this panel and others are working together with the Department to ensure that the implementation approach delivers benefits without risking the loss of the investor confidence that is crucial to keeping water bills affordable.
Rob Wesley: The changes from the draft Water Bill are positive and have helped in that regard. Much needs to be worked out in the detail, but there is time to work that out and, if implemented sensibly, we are confident that the reforms could deliver both customer and environmental benefits and safeguard investor confidence.
Cathryn Ross: First, I want to say that the upstream reforms in the Bill are really important. To go back to Mr Docherty’s earlier question we think that, when combined with the retail reforms, the upstream reforms will deliver about £2 billion of benefits, so they are really significant.
We see a couple of missed opportunities in the Bill as it stands. First, it envisages what we refer to as a closed market for upstream trading in the sense that incumbent water companies will be able to trade with each other, but not with other potential water providers. Given that, at the moment, water companies extract about 50% of available resources, that is a much smaller market than could be the case. I understand why it is like that, but it is a missed opportunity.
Secondly, there is the restriction in the Bill on being able to introduce into the system only the water that you can demonstrate that you will take out of the system. That is an unhelpful restriction, which could constrain companies from dealing with system imbalances that could otherwise be dealt with efficiently through trading. Those are two points that we would like to see changed.
Q 10 Neil Parish (Tiverton and Honiton) (Con): My question is partly to Mr Sutherland and partly to Ms Ross. Scotland has one wholesale company, so dealing with greater retail competition is perhaps easier there than in England and Wales, where we have a number of companies. Is there enough competition in the Bill? Will it be easy enough for people to come in and out of the sector? Will we get real benefits from competition? In every other sector, and especially in energy, we say that more completion is better, yet I fear a little vested interest by the water companies. Perhaps I am being unkind.
Alan Sutherland: Mr Penrose asked whether the lack of exit would prevent entry, which is a crucial point. If I were an expert in business-to-business retail, how would I get into the water market? I cannot go out and acquire customers; I have to win one customer at a time. If I am a big player, am I going to commit capital and strategic management time to getting into the sector and generating the sorts of dynamism that one wants to get from markets if I cannot actually get a rump of customers in fairly quick order? I think there is a real question as to whether we are actually putting in place a free market that will allow real competition.
In terms of multiple wholesalers, the real question is how to make sure that those retailers that choose to stay in the market—hopefully there is exit—are able to trade with all of them on a transparent, straightforward basis. If we get the level playing field right, we will get real competition. Scotland is very instructive: although Mark Powles and Business Stream did not lose market share quickly, they found the need to behave very differently with their customers, and customers fed back to us that the change in behaviour was immediate and dramatic.
As long as the exit is there and there is clarity on the level playing field, you will get the competition and the benefits that will flow from that. If you do not do that, of course you will spend a lot of money setting something up and it will not work.
Cathryn Ross: I completely agree with Alan that exit and the level playing field are critical. The big challenge for us all is to make sure that at this point we really set ourselves up to succeed with this market. There are a couple of issues: one is the retail exit point that we have already talked about, and as the regulator we are concerned with the level playing field issues. There are a couple of things in the Bill that do not really nail that. The Bill does not contain provisions for us to modify water company licences on a collective basis, which will tie our hands somewhat in establishing the level playing field. Also, we are restricted to a period of two years after the relevant provision comes into force for making consequential licence modifications. Frankly, I do not think that that gives us enough time to see how the market is working and to make corrections to establish the level playing field. So it is not a bad job, but it could be better.
Cathryn Ross: That is the question we are looking at at the moment. Are we setting ourselves up to succeed, first, so that the monopolies we have already got can compete with each other—the business customers—and, secondly and crucially, so that we get challenger entry? That goes back to the points I made before.
Q 12 Hywel Williams (Arfon) (PC): The situation in Wales is somewhat different in that the Government have decided not to go ahead with the upstream and retail changes contained in the Bill. What effect do you think that that would have on the effectiveness of the markets in England and possibly in Wales as well?
Mark Powles: I have customers in Wales now who, if the market was available, they would like to switch to me. You have to think about multi-site retailers and commercial businesses that have branches or outlets both cross-region and cross-border, whether that be Scotland, England or Wales. It seems strange to some of the customers that they will be able to switch their sites in England and in Scotland, but not their portfolio in Wales. Ultimately, the buyers in the companies want one or perhaps two suppliers that can provide them with one electronic bill that enables them to manage their whole portfolio. There is a level of frustration among some that they will not be able to do that across the whole of England, Scotland and Wales.
Rob Wesley: While I respect the perspective of a retailer wishing to provide services, I am a representative of Water UK, not Water England, and we work with all the Governments of the United Kingdom and respect their right to develop their own policies based on their own view of their national interest. We are working hard with others to ensure that the competitive market in England is effective and delivers benefits to customers. We will also work with the Welsh Government to ensure that the legal and regulatory framework in Wales also delivers benefits to customers there.
Q 13 Hywel Williams: Welsh Water of course provides to some customers in England, and Severn Trent provides in Wales. Mr Powles, you referred to customers in Wales, and perhaps Mr Wesley would like to comment
Mark Powles: I do not have the level of analysis to be able to give you an answer today; I do not know whether Mr Wesley has. I think there are a lot of customers in Wales who would benefit from a competitive market, but that is down to the Welsh Assembly and yourselves. Welsh customers are not going to be able to benefit in the same way as English or Scottish customers are going to.
Q 14 Sheryll Murray (South East Cornwall) (Con): Clause 16 will place a duty on the Government to issue guidance to Ofwat about the content of its rules on the charges scheme. Do you support the introduction of that mandatory guidance and when should it be published to be most effective?
Cathryn Ross: We support the issuance of Government guidance on charges and think it should be issued as soon as possible. As you know, we will be taking decisions about charges as part of our periodic review in the coming year, so as soon as possible would be great.
Cathryn Ross: We believe so, yes. Ministerial guidance will be helpful, I am sure. As the regulator, one of the things we have been doing for some time is working with the companies to ensure that we have great clarity about the costs that are associated with the competitive and the non-competitive parts of the market, so that when charges are set for those parts of the market, we do not end up with unfair cross-subsidy between the two.
Alan Sutherland: One caution from our experience in Scotland is that guidance can only take you so far. Competition law could trump guidance, and we should remain acutely aware of that. As long as you allow a retailer to backward-integrate into the resources area through direct contracts or whatever, there is the risk that local costs and margin squeeze cases, such as the Shotton case, would start to apply. You could have a situation where the Government says something such as, “We do not want any deaveraging among businesses,” but because of competition law you end up with deaveraging for businesses.
If you want to go in that direction, that is a decision for Parliament. I have to say that in Scotland there would be a huge amount of nervousness about what would happen with deaveraging. We have done some work with Scottish Water, looking at all 260-plus water supply zones. The most expensive of those zones has a unit cost 60 times the cheapest. So be careful what you wish for when it comes to the risks of deaveraging.
Q 16 Dr Matthew Offord (Hendon) (Con): Ms Ross, I particularly want to ask you about clause 22, which places on Ofwat a duty to ensure resilience of water and sewerage provision. Do you think that any other concerns should be taken into account in achieving that objective?
Cathryn Ross: I have to say that we do have some concerns about the proposition on the resilience duty. Obviously, it is for Parliament to decide what statutory duties we have, but our concern is that a resilience duty might lead to a conversation concentrating on capital investment and might be seen by the companies in particular as a licence to build, which is precisely what we have been trying to move away from with some of the innovations in our periodic review.
We do not quite understand the problem that this is intended to solve. Looking back at decisions that we have taken in the past and thinking about how we might have done things differently with a resilience duty, it is hard to see that this duty would have changed the outcome in terms of standards of resilience compared with things we have done in the past because, obviously, resilience is a big part of the industry. It is important that supplies are resilient. It has been for some time, and we have taken that into account.
Rob Wesley: On the resilience duty, we take a somewhat different view from Cathryn. We see the introduction of the new duty as one of the most important clauses in the Bill. Customers’ No. 1 priority is safe, secure and reliable supplies of water now and in the future, and resilience was a central theme of the water White Paper, which was well received. Cathryn is right that companies have always been focused on resilience; it is in their DNA. We think that the new duty is a helpful reminder for us all in the sector to ensure that we continue to be focused on that. If we need a reminder of how important it is, we need only think back to the droughts last year and what could have happened if a second dry winter had been followed by a third or even a fourth.
Regarding Cathryn’s point about whether this could be seen as a licence for capital expenditure, I give credit to the changes that Ofwat has made to the regulatory framework. It has reweighted incentives between capital and operating schemes by introducing a new totex—total expenditure—approach bringing capital expenditure and operating expenditure together as a single assessment, and made other changes to lead to a more balanced approach. We saw the first fruits of that yesterday in companies’ business plans submitted to Ofwat. The duty refers to demand management explicitly and we see that as a positive.
Regarding the sustainability duty, we are aware that the point has been raised by others, but we have never been convinced that there is a need to change the current arrangements for that duty. The changes that Ofwat has brought in are going a long way towards achieving more sustainable outcomes, with companies working towards those in their business plans submitted yesterday.
Mark Powles: Not really, but as a retailer many of the services that we provide to customers are provided by wholesalers, so we want a stable, well funded and efficient set of wholesalers to make sure we can give customers the right services. In terms of sustainability, I think it is
Q 19 Anne Marie Morris (Newton Abbot) (Con): Consumers are always concerned about affordability. Mr Wesley, perhaps I can ask you first about bad debts. There was in previous legislation the ability to require disclosure of information by landlords to water companies, which was never enforced; what happened instead was a voluntary code of practice and an ongoing pilot. My water company, South West Water, is concerned that that is not the way forward and would like the legislation to be properly enforced. I am interested in your view, representing the water companies across the piece.
Rob Wesley: Yes. The short answer is that we agree absolutely. Bad debt in the water industry is a serious concern, adding around £15 to the bills of customers who do pay. Companies have two hands tied behind their backs in trying to manage bad debt. They cannot cut customers off—not that they would wish to do so—and they do not have contracts with their customers and so do not have enough information, particularly on who is living in rented properties. In the industry, we are spending more than £1 million on establishing a national website for landlords to provide information to water companies, and we have promoted that extensively with landlords. DEFRA has been very supportive of the measure, but experience has shown that a voluntary approach simply does not work.
Rob Wesley: An example of practical experience on the ground is that of Northumbrian Water, which for two and a half years has had an easy-to-use website for landlords to provide information. It has promoted that with landlord representatives but after two and a half years, only 7% of all rented properties are registered with the website. By and large, it is those landlords who previously provided information who are making use of that more efficient means of providing information. That is good and is a benefit, but it does not go far enough in addressing the problem.
We are pleased that the Welsh Government are proposing to make provision of information by landlords mandatory, so that companies in Wales or companies operating in Wales will have the information they need to bear down on the cost of debt. We continue to urge the UK Government to do the same in relation to England as well.
Cathryn Ross: Just to add to what Rob was saying, I am completely on board with the idea that bad debt is a really serious issue. The only thing that I want to emphasise is that companies have a number of tools in their toolkits to deal with it. Part of that is social tariffs, part of that is managing bad debt working with Citizens Advice, working in the community, and so on, but it would be helpful to have some statutory hook in the Bill that we can require access to information so that people are aware of who is eligible for the social tariffs. That would be a big help.
Q 21 Anne Marie Morris: You have taken us on to part two of the affordability issue, which is the social tariff. It is a real challenge for all water companies to address that. Although there has been the opportunity for water companies to introduce their own social tariffs in addition to the Government’s own WaterSure programme, only three have taken it up—I am pleased to say that my local company is one. Why have the companies not taken it up? Was it the wrong approach? What can we do about the gap that is left by WaterSure, which, frankly, does not cover all of those with affordability problems? What can we do to make it work better?
Cathryn Ross: I agree that there is scope for water companies to do more on social tariffs. I know from the business plans that we are seeing that some of them have done that. There are two issues for water companies: one is the extent to which social tariffs might be cost beneficial in themselves in how they reduce bad debt overall and in how they reduce the £15 that Rob said flows through on to the average bill from bad debt. The tariffs might be cost beneficial in themselves. There is an extra dimension, which we are starting to see come through in business plans, of companies’ customers saying, “We are willing to pay for a fairer tariff—a social tariff,” even where that goes beyond the extent to which it is cost beneficial. I am really optimistic that we will start to see more of that in the future.
Rob Wesley: Every company has a wide range of measures to tackle water affordability issues. This is not just about social tariffs; there are social funds, charitable trusts, flexible payment methods, restart schemes and support through Citizens Advice, and those things support hundreds of thousands of hard-pressed customers. Last year, after quite a delay, the Government published the guidance that companies have to follow to have a new social tariff approved by Ofwat, and already three companies have introduced a new social tariff at the earliest possible opportunity. I am confident that more will follow next year—subject of course to regulatory approval, as companies cannot just introduce new tariffs without them being approved—and in the year after. In the business plans published yesterday, many companies have set out plans for new social tariffs to come forward in April 2015.
The challenge that companies have faced is developing an approach to social tariffs that has broad support from their hard-pressed customers. Some companies are finding that they are having to go through two or three iterations to develop an approach that gets customer support, but they are very much committed to making progress on affordability through both social tariffs and a wide range of other measures.
Q 22 Anne Marie Morris: You are both saying that it will happen, and I suspect that if I asked you whether we need to go that step further and make it mandatory for the water companies to provide subsidy, you would say, “No, it is going to happen. What we have in place is sufficient.” Is that your position?
Cathryn Ross: It is. It is not necessary to make it mandatory, although were Government to choose to do so, that is entirely reasonable. I would echo Rob’s point: it is not a magic bullet; it is an important part of the toolkit, but it is not a universal panacea.
Rob Wesley: Likewise. There would be risks in a mandating approach. The current arrangements allow each company to develop an approach that is appropriate for their company’s region and customers, and allow innovation. It would be a shame to lose those innovations and that flexibility for companies to adapt to their local circumstances. Yes, the current framework is working. Earlier guidance would have been helpful, but now that companies have the guidance they are making good progress.
Q 23 Thomas Docherty: We all recognise that water companies are the heroes of our communities, Mr Wesley, and are being held back by the regulator and DEFRA from making progress, but is not the reality that we are three and a half years into a process but only three water companies have actually done it? We are looking at 2015 at best before we make real progress. Is not the reality that almost as many people are going to Citizens Advice because they are struggling with their water bills as are going because of their energy bills? Finally, is it not that the debate is not around whether there should be a centrally imposed, standardised social tariff, but around whether Government now need to step in and say that you must, by a certain date, have come up with your own scheme, which Government will sign off on, because too many customers are struggling to pay their bills?
Rob Wesley: Companies have to operate within the legal framework that they are given—they have no choice but to do so. I would say, from my discussions with companies, that they are finding Ofwat very helpful in terms of identifying what is needed for a social tariff to be approved. I would not characterise the situation as there being any blocks on progress, but the guidance was only published last year, which has meant that the companies have not been able to move as fast as they would like.
Affordability is a real issue. That is why companies have a wide range of measures to address it, including working closely with Citizens Advice. We held a workshop with Citizens Advice last week on precisely this sort of question: how companies can work in partnership with Citizens Advice at local level. Progress is being made. We see no need for intervention, because measures will be coming forward; they are already in place in some areas, and more are coming forward next year and the following year. This is just one of the many tools with which companies address the challenge of water affordability. Almost all customers who come to Citizens Advice with difficulties paying their water bills also have problems paying all their other bills. It is fundamentally a problem of hard-pressed consumers, and water companies have a role to play in helping to make water bills more affordable.
If I could pick up on something Cathryn raised earlier, it would be very helpful for water companies, in providing greater assistance, to have help from the Government in targeting that assistance. One of the real challenges is knowing who is in need of assistance, and the Government have the best available data on that from means-tested benefits. Allowing access to data from the Department for Work and Pensions would significantly ease the task for companies in providing the assistance that they wish to give.
Q 24 Dan Rogerson: I want to put a question to Cathryn Ross. One of the crucial roles that Ofwat will play is in the discussion about bills generally in future—the discussion not just about the bills of those struggling now, for whatever reason, but about winning the case among customers for social tariffs. If there is going to be some element of dealing collectively with the problem—that is, through bills generally—then the lower the bills are, the more likely we are to win customer approval for such schemes. Would you agree?
Cathryn Ross: Completely. The single most important thing that we as the regulator do to help people struggling to pay their water bills is to challenge the companies really hard to keep bills down across the piece. That is exactly what we are doing in the periodic review. I completely agree.
Q 25 Thomas Docherty: Where we probably agree, Mr Wesley, is that the take-up of WaterSure is simply too low. Are there any specific measures that water companies could take, either voluntarily or by mandate, to promote awareness further? For example, they could include with bills information about eligibility and how to go about applying for WaterSure.
Rob Wesley: Water companies do promote WaterSure and eligibility through a wide range of measures. However, I would return to the point previously made: water companies do not know who is in receipt of the means-tested benefits that are part of the eligibility criteria for WaterSure. It is others who hold that information.
Q 26 Thomas Docherty: Forgive me if I was not clear in my question, but I was not saying that you should target customers. I appreciate that you believe that water companies are perfect, but it might be a not unreasonable step to include in the bill information about what WaterSure is and how to apply for it if someone thinks they are eligible.
Rob Wesley: Different companies would be likely to take different approaches to communicating with their customers, but all companies will be looking to communicate eligibility for measures that could help people to afford their bills, both directly and—a key point—indirectly through trusted third parties such as Citizens Advice and local bureaux. Rest assured that each company actively promotes the affordability measures that it has in place—not just WaterSure, but their whole suite of measures.
Q 27 Neil Parish: I am keen that people struggling with their bills should be helped through WaterSure. However, there is also an element of perhaps £15 going on to bills because some people are not paying. Some of them will not pay, rather than not being able to pay. Is there enough in the Bill to deal with people who wilfully will not pay?
Rob Wesley: As far as I am aware, there is nothing in the Bill to deal with that. There is unfinished business here from previous legislation that was passed with strong cross-party support. We urge the Government to finish that business.
Q 28 John Cryer (Leyton and Wanstead) (Lab): Mr Wesley, you said earlier that the companies are struggling to make bills more affordable. The fact that bills have risen by 60% in the last decade would suggest that that is not quite the case.
Rob Wesley: Investment has been maintained at a steady and high rate of around £5 billion a year. Year on year for individual companies, there can be some fluctuations, but overall investment is at a sustained and high rate.
Looking forward in their business plans submitted just yesterday, companies are maintaining that high and steady rate of investment to ensure that customers across the country can continue to rely on their services, but they have looked hard at how they can constrain prices. Almost all companies have kept their plans in line with inflation—in some cases, significantly below inflation—both through challenging themselves to be more efficient every year and through reducing returns to investors to keep bills low.
Companies are much attuned to the need to respond to the hard-pressed environment for customers. Companies have been engaging and consulting their customers for a year or more, and we saw the results of that yesterday in the plans that they put forward, which will now be considered by the regulator, that keep bills in line with—or, in some cases, significantly below—inflation.
Rob Wesley: It is inevitable that there will be a financial consequence when one company has an investment project of a scale that the sector has never seen and that is equivalent to a tunnel the size of the channel tunnel in London. It is a large investment project that is necessary to meet statutory guidelines. The overall national picture is that, according to companies’ plans, bills will be in line with or less than inflation.
Q 31 John Cryer: So why do you think only three companies have introduced social tariffs? Are you seriously telling us that they are actually held back by the Government and the regulatory framework? Is that the only reason why only three companies have introduced social tariffs?
Rob Wesley: As with regulators, companies have to act within the legal and regulatory framework that they are given by Parliament and Government. The guidance that companies have to follow to have their tariffs approved was issued last year. Three companies implemented social tariffs at the earliest possible opportunity. Subject to regulatory approval, more will come forward next year and the year after.
I assure members of this Committee that there is no reluctance on the part of companies to implement social tariffs. Indeed, if I may go back to the Flood and Water Management Act 2010, it was very much with the support—indeed, the encouragement—of companies that the clause specifically enabling social tariffs was
Rob Wesley: Water companies, because of their major investment programmes, which total £116 billion over the past 25 years, have to raise finance from external markets. That is tightly regulated by the economic regulator, which makes an allowance for the return that investors, who have a choice whether to invest in the sector, would need.
In the current period, the overall return to investors is broadly in line with the assumptions made at the last price review of a return on the regulatory capital value of around 5%. That return will come down in the next period, as put forward in companies’ plans.
The point I would highlight is that one of the distinguishing features of the water industry is the sheer scale of capital investment. Routinely, investment on an annual basis is around half of the industry’s turnover —a far higher proportion than any other sector, even those that might traditionally be thought to be high- capital investment sectors, such as pharmaceuticals or petrochemicals.
Due to that massive investment, companies need to raise finance from external markets, otherwise bills for hard-pressed customers would be much higher. That high-level investment requires significant operating profits to provide a return to investors. Without providing such stable and predictable returns to investors, we would all be worse off, as our bills would all be much higher.
Q 33 Chris Evans: That seems a very long answer to a very simple question. Some £37 billion has been paid in dividends since privatisation. In the same time, only three companies have signed up to social tariffs. What is the average debt of a water company customer, considering that water is essential for life? Why are water companies so slow in introducing affordability schemes for hard-pressed customers when they have such massive profits?
Rob Wesley: With respect, companies have a wide range of affordability measures, such as social funds, charitable trusts, flexible payments, restart schemes and support for Citizens Advice. Hundreds of thousands of hard-pressed customers are supported every year.
Social tariffs are just one tool to address affordability. As Cathryn said, they are not the silver bullet to address affordability. Companies are addressing affordability now, and they will be addressing affordability in the future. In companies’ plans there are further measures to address affordability. We are well aware of the scale of the problem, and we are acting on it.
The Chair: We are rapidly running out of time. I think you have probably made your point slightly wide of the Bill. We have only two minutes left, and we ought to give the Minister the final question.
Q 34 Dan Rogerson: I want to pick up Mr Wesley’s point on access to DWP data. I understand why the companies feel that that would be handy for them, but does he not feel that customers might prefer more information with their bill, rather than having their private data passed over to a private company?
Rob Wesley: To tackle the affordability challenge, a range of measures will be needed. The Minister is quite right that companies need to communicate effectively through a wide range of measures, both directly, via their websites and call centres, and through trusted third parties such as Citizens Advice. Additionally, we think it would greatly assist the desire of all parties and all members of this Committee for further progress on affordability measures if companies had access to the best source of information on who would be an appropriate target group for further affordability assistance.
The Chair: I thank you all very much for your evidence. This has been a lively and interesting session that I think will advise the Committee’s deliberations on the Bill. I hope you have not found the session too stressful.
Examination of Witnesses
The Chair: I welcome all three of you, and thank you kindly for coming before us to give evidence in our consideration of the Water Bill. We have Dame Yve Buckland, the chair of the Consumer Council for Water, Tony Smith, the chief executive of the Consumer Council for Water, and Dr Peter Kenway, the director of the New Policy Institute.
Q 35 Thomas Docherty: We talked a lot in the last session, which I think you all heard, about retail for non-domestic customers. The Bill does not include measures to extend retail to domestic customers in England or Wales. Do you support that approach?
Tony Smith: Yes, we do. Customers would definitely support that. We know from our research of business customers that they are very keen to have competition right across the size range of business customers.
If you talk to domestic customers, however, the position is far less clear. Although a small majority of domestic customers support the principle of competition, when they start think about what it would mean to them and other customers, they roughly fall into three groups of about equal size: those in favour, those against and those who are slightly unclear. Their view depends very much on their experience in energy, which of course is very mixed. We absolutely support the approach of pursuing competition for business customers but making sure that we protect customers who are ineligible.
Q 36 Neil Parish: I have a question along the same lines, but I am slightly playing devil’s advocate. Some of the water companies say that if we create too much competition and you take out the bigger players and their bills are reduced, domestic customers may well have to pay more. What is your view on that?
Tony Smith: I do not think that that should happen. There should be benefits for business customers from efficiencies and more dynamism in the market. We look to Ofwat to make sure that there is no cross-subsidy going on between domestic customers and business customers. That is not a reason for saying that there should not be competition; I think competition in principle is definitely the right thing to do.
The issue is more about the fact that, at the moment, there is not the appetite among domestic customers in the same way as there is for business customers. The Cave review a few years ago identified that there is quite a big opportunity for business customers that can create a lot of value, so let us pursue that first and get that, and maybe in the future pursue it for domestic customers. There is a big demand among business customers, but there is far less demand among domestic customers.
Dr Kenway: I think the answer to the first question was no. The answer to the second question is that those concerns are very legitimate. Perhaps I should preface this by saying that there are some things to do with water that I know much more about than others. On this one, I am strongly persuaded by the arguments that I have read from Professor Helm, but it does chime with my experience. There is a huge fixed cost in this industry, as you all know. People may be able to insist on a very low price indeed for the marginal unit of water, almost cost-free, but that still means that the whole of the fixed cost has to be divided up between other business customers, or domestic customers, or investors. Where is the efficiency? This form of competition is fine if there is some form of real efficiency gain to be had. It is not clear to me where that is to be had. I think this is the wrong form of competition for an industry such as this.
Dr Kenway: There is a danger that we will go a long way back in my history. I have been involved in setting up competition. No. I am in favour of competition. The form of competition that I think is appropriate here is the competition for the market, not the competition in the market. In other words, broadly speaking, a franchise—the sort of thing we are familiar with in the rail industry. So it is a different form of competition. I am not coming before you and recommending that, but it seems more appropriate here than the competition that is being brought in by this Bill. I am fully in favour of it—I am a small business man.
Q 38 Dan Rogerson: We were hearing a lot from the previous panel about retail exit, when we open up markets for business customers. As well as the benefits of competition in terms of price, there are hopefully benefits to competition in terms of customer service and focus on delivering for customers. If we allow companies to exit from the business—more competitive—side, what effect do you think that might have on residential customers who, for very good reasons, as we have heard, will not be able to switch?
Tony Smith: We can understand the commercial arguments for allowing exit, but against that, from the customers’ perspective, there are two issues. One is whether companies can separate out their competitive retail businesses from their non-competitive ones, because
Dr Kenway: No, I simply echo Mr Smith’s points. Quite how the benefits will flow through is not clear. One of the great holes in this Bill is that it has not really paid sufficient attention to scrutinising the claimed benefits of the changes that are being brought in, so I think it is very reasonable to be probing that, but I have nothing specific to add.
Q 40 Dan Rogerson: We heard a bit about bad debt. Approaches were made directly about affordability, but the Bill does not specifically look at bad debt. That is one of the issues that the industry and those involved in the sector are looking at. Do you think that information sharing with landlords in particular, which is one of the issues that we were talking about earlier, has been effective in terms of a voluntary approach?
Dame Yve Buckland: We very much support the points that have been made this morning. We would like to see things go a lot further, in terms of pressure on landlords to release information. Clearly, bad debt is a very important issue. We have already referred to the fact that it is increasingly difficult for the water industry to separate the “can’t pays” from the “won’t pays”. The measure to which you refer seems to us to be one that would help more clearly target the “won’t pays”.
Dame Yve Buckland: The three with social tariffs at the moment are Wessex, South West Water and Bristol Water, but there is better news coming. We have been working very actively at the local level on the proposals that in the current price review. In addition to the three that we have already mentioned, we know that another nine companies are proposing social tariff schemes, and there is also the one being run by Welsh Water. That, in a way, has come through a lot of hard work at local level.
In relation to the debate earlier this morning, this is a thorny issue, and there is not a clear way forward. One in eight customers says they cannot afford their bill. As
There have been proposals for things to come through excess profits. Customers would see that as more advantageous, but a system founded just on excess profit is not really sustainable. We do not want companies to make excess profits, and it would be difficult to link a scheme to that.
What customers have been telling us—we have been established since 2005, and we have made this point to successive Governments—is that the fairest, most appropriate and most transparent way forward would be a Government scheme funded through tax or benefits, and there has just been no appetite to run that system. A monopoly water industry for domestic customers needs a system that is legitimate and credible and ensures things like data protection.
In addition to social tariff schemes, a lot of recommendations have come forward from the local level about additional social assistance. A social tariff scheme will not meet all customers’ needs; there have to be company-backed schemes with, say, credit unions and Citizens Advice to help customers, especially domestic customers, who are struggling to pay.
Q 42 Pat Glass: The chap from Water UK talked earlier about the reasons why there are only three schemes and for the tardiness in moving towards a scheme. He blamed Government regulations and customers. You said that it would cost customers £1 or £2 more, but that they are reluctant to pay that. Do you think they are aware that they are paying £11 on their bill for bad debt? If they were, would there be more enthusiasm for social tariffs?
Dame Yve Buckland: We have done a lot of research with customers on this issue. We have done qualitative research to help customers understand what they are already paying—the level of debt they are carrying on their bill. There has consistently been a limited appetite among customers for a social tariff; they see it as something they have to pay on top of their bill. In the recent schemes, Wessex Water, for example, found only a 50p tolerance on the part of customers for a social scheme. Customers also want schemes targeted squarely on the people they feel are the most deserving, such as people who are ill or particularly vulnerable or the elderly.
I think the reason why schemes have not come forward is that customers do not really want to pay for them. There is about a £400 million gap, and schemes like this might deliver about £40 million towards filling it, but they will not go the whole measure. However, in the absence of a tax and benefits scheme, this is one way forward. It has to be worked on carefully by the water companies, which also need to convince customers that those who are paying into these schemes will see the bad debt coming down, so there is, at least, a virtuous circle.
Dr Kenway: Very briefly, a couple of points. It seems to me that if one is going to have a social tariff, the model should be the warm home discount run by Ofgem
I think that there is a bigger point which perhaps illustrates what has just been said. Even that scheme, which I believe benefits some 2 million households in 2013-14, if you have a look at low income—what are now the conventional poverty numbers—something like 1.25 million pensioner households, 2 million workless households and 2.5 million working households are defined as being in poverty. That is a total approaching 6 million. Even a social tariff on the scale such as for energy, would reach only about one third of those who, from a different perspective, one might say needed it.
As everybody knows, the poverty line is only a line; it does not mean that people are above it. Although I would personally favour a social tariff as the right step, I do not think it is a substitute for a fair and modernised system of charging that addresses the affordability issues of a much wider group within the population.
Q 43 Thomas Docherty: On the issue of WaterSure, you heard the earlier exchanges of the water industry lobbyists. Do you think it is a reasonable suggestion that to encourage greater take-up, the water companies should be required to include information with the household bills that they send out about what the criteria are and how to go about applying?
Dame Yve Buckland: Certainly since 2007, we engaged actively with the industry to get the scheme rebranded, to make it simple, make the paperwork simpler and to promote it. Since 2007, we have seen a 350% increase in the take-up of WaterSure. We think about 72,000 customers are now taking it up and there are 20,000 on the Welsh Water assist scheme, with 20% this year. But arguably, it is still a drop in the ocean.
WaterSure is targeted at a very particular and rather narrow group of customers—you have to have a particular set of medical conditions, a large low-income family in receipt of benefits and then you have to be on a meter. Those are still some of the issues behind it. What we hear from customers where they have taken up WaterSure, and what we know has been working in part of the industry, is much better bill messaging and promotion, not just through the bills, but in call handling; if people ring the company, the call handlers are directing people to WaterSure if they need it, or WaterSure promoted through third parties—credit unions, local government schemes, Citizens Advice, money advice centres and even doctors’ surgeries.
Tony Smith: They are all doing something because as Yve just said, we have been pushing them to do so. I think the question is whether we carry on pushing them or whether it is mandated in some way. That is the question, but they have all been doing it, which has contributed to that 350% increase. The issue is that,
Some companies are even going further; they are talking to individual customers and finding out what their needs are, particularly when they introduce compulsory metering, which rapidly changes customers’ bills. They are actually talking to customers individually—not even just those on benefit, it can be those on low incomes—and they are finding out what their specific needs are. That is also encouraging. That is a specific case where you are rapidly changing the customer’s bill, and you have got to help that customer over the transition. There is a lot going on, but I think the point we are all making is that a lot more needs to be done on this issue of affordability.
Dame Yve Buckland: Just to help illustrate that, I have been working very closely with five companies. The ones that are probably best at targeting WaterSure are the small, local water-only companies, because they tend to have a much closer and more direct relationship with customers and greater knowledge. They, too, are targeting WaterSure alongside their own company schemes, so they have profit-funded company schemes to which they also direct people who are not eligible for WaterSure to get further assistance. They are demonstrably keeping the debt down in comparison with others.
Q 44 Mrs Emma Lewell-Buck (South Shields) (Lab): The Bill introduces a requirement that the water and sewerage companies need to make their charging schemes in accordance with any rules that Ofwat issues, but the rules that Ofwat issues have to be made in line with Government guidance. I am curious—does the panel feel that this approach does enough to protect households from subsidising the competition in the non-domestic sector?
Tony Smith: Well, I think there are two points there. One is that, as we discussed earlier, domestic customers for the foreseeable future will not benefit from competition, so it is absolutely crucial that it is clearly the will of Parliament that those customers should not suffer disbenefit from competition. At the moment, I think the proposal is to put that in guidance, which we think is the minimum. The question for parliamentarians is whether that should actually be in the Bill.
The second point to think about is the charges, and the guidance that is given to Ofwat and the companies. Obviously, Ofwat looks at the companies’ charging schemes. The issue for customers is that you sometimes get companies coming forward with proposals that look sensible from the economic regulator’s point of view, but we have found that there is often a danger in that situation that some customers can suffer a disbenefit. Although the proposal might make sense for customers as a whole, often the economic regulator does not look at the winners and losers. That is one of the reasons why we have been arguing, if you have seen our briefing, that companies’ proposals, the guidance to Ofwat about charges and Ofwat’s guidance must include reference to the consumer. It must look in particular at the details of customers who are opposed to the changes in charges or who may lose out from any changes. It is absolutely crucial in a monopoly industry that that happens.
Dr Kenway: Can I just add something on that? I am not sure whether it is strong enough, but what I want to say is that it is absolutely right that the matter be dealt with by Government and not the regulator—in some sense, ultimately, by the will of Parliament. There is very little economics in this industry. It is mainly about, from the charging point of view, how you are going to allocate the burden of cost. In some senses, it is a tax issue. This is fundamentally your province, and it is about political principles, although no doubt there would be disagreement around the table about what those principles should be. It is really important to understand that this is not something—I think it is different in energy—where economic principles play a big part. They play a part, but they play a small part. The question of who should bear losses and gains is absolutely properly something that Government should be pronouncing on and giving as little scope for regulatory discretion as possible. I would really encourage you to assert yourselves on this one, because it is entirely right to do so. Economics is quite marginal here.
Q 45 Thomas Docherty: There was an exchange earlier about de-averaging. As you understand it, is there a risk with the proposed upstream reforms that this could lead to de-averaging of charges for some customers?
Tony Smith: Yes, there is, in short. However, there are some major benefits—I think Cathryn Ross referred earlier to them—to the upstream reforms. If companies can be encouraged and incentivised to use their water more efficiently between them, that is beneficial to customers on average. We can see that there are potentially huge benefits, on average, to customers from those reforms. If the reforms affect average prices then that is okay, but there will be an issue if de-averaging starts. Earlier, Alan Sutherland referred to the statistic that one water supply zone might be 60 times more costly than another one. That is not atypical in this industry. If you start getting that sort of de-averaging, it could have a very big impact on some customers. It is all about thinking this through in order to get the average benefit from efficiency without causing huge concern among customers from the de-averaging.
Tony Smith: It is to do with their location relative to the supply, and very often it is to do with the size of communities. If you have to put in works and all the infrastructure around them for a very small community, then obviously the costs are much higher in that scenario.
Q 48 Thomas Docherty: To be fair to the Minister, he does not intend to allow de-averaging—I think his voters in Cornwall would be relieved to hear that—but, in your opinion, is there enough in the Bill as it stands to ensure that we do not accidentally end up with de-averaging, or do you think the Bill could do with some strengthening?
Tony Smith: Well, I think the proposals about upstream are obviously less developed than the retail proposals at this stage. The question is the timing and how those arrangements will work in practice, and whether or not there is therefore a de-averaging problem. This goes back to the point about our concerns being twofold. One concern is that domestic customers are not disadvantaged, and the other is to make sure that we do not have a problem with de-averaging. I think it is for you to decide whether that needs to go very clearly into this particular Act, but there is a risk that de-averaging could cause a problem down the line, further upstream.
Q 49 Thomas Docherty: Clauses 26 and 34 strengthen the enforcement powers of both the Minister and Ofwat. Clause 23 gives a general duty to the regulator to ensure that there is no undue discrimination by the companies. Going back to Mr Powles’s point, in your opinion are these measures sufficient to ensure that new entrants can come into the market?
Tony Smith: Yes, I think that can be handled by Ofwat. Ofwat would have to be very firm when making sure that there were no issues of there being an unlevel playing field, but I would have thought that Ofwat would have the powers to do that.
Dr Kenway: I find this a curious Bill. I wonder what problems it answers, and whose interests it serves. I would be suspicious about whether this in fact looks like a Bill by insiders, with an insider interest. I think that one should be very wary if there is any suggestion of that. I cannot give any more specific answer, but this does not look to me like a properly competitive model in which new entrants would necessarily feel very comfortable about coming in. I think the thing has to bend over backwards to reassure people who might want to come in. My suspicion is not out of line. You are facing a very powerful industry, a very mature industry which has had a 25-year relationship with its regulator. Public choice economics tells us very clearly what happens in those circumstances. There are risks of regulatory capture. It is a very settled relationship. I think that there are always grounds for suspicion in these cases.
Q 51 Dr Offord: I am directing this question particularly to Dame Yve and Mr Smith, but it would be interesting to hear Dr Kenway’s view on this issue as well. I am sure that you realise that universal metering can occur only in those areas that are severely water stressed, as designated by the Secretary of State. Do you agree with the Government? What is your view of the Government’s decision that consumers are most appropriately placed to discuss with water companies their metering needs?
Dame Yve Buckland: What we have heard consistently from customers is that they do not like compulsory metering schemes. If they are to be introduced, customers want to understand the reason why. Therefore, there is a stronger argument in areas of water scarcity for their introduction, but it is very important that the industry works carefully and closely with customers to take customers with them, because there can be implications for many customers as an extension of metering.
Metering alone does not necessarily encourage people to change their behaviour. It is a technical solution to a domestic and behavioural problem. A lot of other measures need to be put in place. Water companies need to work with customers on ensuring that their houses are water-efficient and so on. Therefore, we very much endorse and support the more cautious approach in this Bill to the way in which metering is being rolled out—the fact that it is not gung-ho.
We have seen lots of examples, even in areas of water scarcity. Anglian Water is one. By the end of the next price review, it will be up to 96% or 97% metering. That has been done without compulsion. It has been done carefully and over time, and the company has taken customers with it.
Q 52 Dr Offord: You describe universal water metering as gung-ho, but that is a little like not having an electricity meter in your home and just paying the rateable value for your electricity supply. I am looking towards the Minister, who represents a seat in Cornwall. People there have some of the highest water bills in the country. They have some of the highest rainfall as well. People there could benefit from lower bills as a result of being on meters and having universal meters. Can you explain why you made the assertion about consumers not being so keen on the installation of water meters?
Dame Yve Buckland: Where people benefit from opting on to meters, that is usually because these are smaller households and there is a clear financial benefit, but this is a zero-sum game. As more people opt on to meters, that leaves a residual group—usually very large, low-income families—for whom metering is not financially beneficial and who find their bills rising as a result. We have seen examples of that in the south-west, so universal metering does not necessarily deliver low bills. Equally, in areas that are not water stressed, the cost of metering itself adds significantly and sizably to bills—somewhere between £50 and £80, we estimate—so that has to be thought through very carefully.
Also, companies can meter over a steady-state period, through change of occupancy, through encouraging optants and through other schemes, without necessarily going for compulsion. What we hear in research is that the public do not like compulsion if it is not necessary. It gives them the sense that they are being coerced on to something. They do not necessarily trust the water industry, so although their bills might go down in the short term, they think that they will be stuck in the longer term. That is how it is expressed to us.
Dr Kenway: There are not many dangers in my job, but advocating water metering, I have discovered, is one of them. As I am sure you know, some people attach an importance to water that, to a simple-minded economist such as me, is nonsense, but that is not how it is—people do that, and so I say what I say with care. I favour metering, because I think that it is the way to resolve both economic and environmental issues, but—this touches on a point made a moment ago in the previous reply—the issue is not just the meter. I think that the key issue—we have studied this; we wrote a report on it a long time ago—is the tariff. You clearly need something. You use the meter to try to control and send signals about the use at the margin, but it is quite clear that larger families and households with children or an elderly relative have a much higher need for water in the first place. It was
Q 53 Sheryll Murray: Could I now turn to flood insurance? The Government intend to legislate through the Bill to ensure that domestic flood insurance remains widely affordable and available to people who live in a flood-risk area. Do you think that the provision of affordable flood insurance will have unintended consequences?
Tony Smith: General flooding is not really our area of activity. We tend to get involved only in sewer flooding, because that is the thing that involves water customers. It is true that customers’ views about flooding are strong, particularly among those who get repeat effects. Certainly with water, when a customer gets flooded, they get compensation through return of their bill. Often many companies will help with uninsured losses, which certainly helps those customers quite a lot.
The other thing is that the more imaginative companies—and, indeed, insurance companies—help customers to resolve, or minimise the damage of, future flooding problems, which means putting things into houses so that they are less prone to flooding. Although that is not an area in which we are directly involved, we do become aware of customers’ concerns about it. The sense is that not enough is being done about flooding generally, so it is really important that customers feel that they have protection from this sort of arrangement.
Dr Kenway: It is a fair question, but I wondered what “unintended consequences” meant. Are you thinking about the adverse consequences for further development on the floodplain—that it might, in some sense, leave developers too relaxed about developing in places where they should not? That is a very real concern, but the way to deal with it is through the planning system. It is absolutely right to protect the householders; they cannot do anything about where their home is.
We have always been very struck by the contrast over many years between the pressure that has successfully been put on banks to clean up their act—I am talking about their willingness to provide accounts to low-income customers and so on—and the pressure that has, or has not, been put on the insurance industry to ensure that it, too, provides sufficient universal coverage. Obviously, in this case, that means customers whom the insurance companies might prefer, by quite good logic of their own, not to insure. I think it is right to protect them and then worry about unintended consequences in the parts of the system that can do something about that, which would broadly mean planning.
Q 54 Mr Mark Spencer (Sherwood) (Con): May I ask Tony, in particular, about the obligation to connect? We have existing problems with that in a village. If an application for a new housing development comes about upstream, the obligation to connect does not always
Tony Smith: That would have significant consequences for development, I guess. It is an interesting question—it is not really one we have considered—but we can see the problem, given the effect it can have on water customers. The water companies may be better equipped to answer that specific question.
Q 56 Andrew Percy (Brigg and Goole) (Con): I just wanted to get your comments about the exceptions or exemptions under the new Flood Re scheme—so for buildings built after 2009, and perhaps band H properties. Do you have any views on those?
Q 58 Andrew Percy: That is regularly the case in my constituency. The area is drained marshland, so we regularly have floods. Unfortunately, assets fail reasonably regularly, so we have floods and consequently people cannot get flood insurance. There is a link, is there not?
Tony Smith: Yes, but the way we handle that with the water companies is that, in those circumstances, many of the companies help with the uninsured losses. They tend not to come to us to talk about insurance per se, so we do not become real experts on that question.
Q 60 Sheryll Murray: Could I put a scenario to you that you may find it helpful to answer? When we have heavy rainfall, a lot of the surface water flooding will flood the sewers, causing big problems where they both feed in. Do you have any thoughts about that with regard to my original question? You said you were more concerned with sewage flooding that comes up into people’s homes, but surely heavy rainfall could cause that to happen. Do you have any feedback on that at all?
Dame Yve Buckland: There are a number of grey areas that require a joined-up response at the local level. With the company plans that are coming forward, local people spent a long time scrutinising proposals. Increasingly, on those sorts of issues, we are seeing the water industry
That said, there is now a much stronger drive on the part of water companies to work closely with local authorities and the Environment Agency to look at joined-up and jointly funded solutions. It is not prescribed, and it tends to happen in a voluntary capacity, partly because of customer pressure and local constituent pressure for it to happen.
Q 61 Anne Marie Morris: I want to ask about the proposed exemptions that we believe will be introduced in secondary legislation. One is that band H properties will not be included, given the argument that people who own such properties should be able to afford their insurance. Another exemption is post-2009 properties, but would that be a sensible and fair cut-off point? I know it is to some extent historical, so I would be interested in your views about that. The other exemption—or exclusion, if you like—is properties that are “genuinely uninsurable”. Can anyone define what an uninsurable property is, and are we going to find people in difficulty who really should not be left in such circumstances?
Dame Yve Buckland: As we said in reply to an earlier question, that is not an issue that we have been consulted on or have especially strong views about. As I said, when I am seeing things happening, it tends to be companies acting voluntarily at the local level, so it is more through pressure from local customers that we are seeing action. We do not have anything specific to say about band H properties.
Dr Kenway: Presumably the “genuinely uninsurable” problem is there already. I do not often defend band H properties, but I do not really see any merit in an arbitrary cut-off. It does not follow that those people are going to be in a position to deal with that. It seems to me that it is being done, presumably, for purely symbolic reasons. If a property is a palace or something, perhaps there ought to be some kind of limitation, but the idea of excluding simply on the basis of band is very crude, and I see no merit in that.
Q 62 Hywel Williams: Things might be slightly different in Wales, where we had rebanding—it was abandoned as far as England was concerned—so the bands actually represent something more real in economic terms than they do in England.
Q 63 Neil Parish: On this particular issue, you could argue that if a band H property is listed and the family or whoever owns it is not actually that wealthy—they will have a lot of costs in keeping up the house—why are they singled out for exception?
Dr Kenway: I agree with that. We provide plenty of services universally. I am cautious about agreeing that people in any particular band should not be entitled to something, because that could be the thin end of a wedge. What you say seems to be perfectly reasonable.
Q 64 Dan Rogerson: I put a question to the earlier panel about DWP data being shared. Have customers fed back to you what they would feel about their data—Government data; sensitive data—being handed over to water companies?
Dame Yve Buckland: Customers are generally very cautious about water companies acting in lieu of Government. They do not think that water companies are best placed to do that. As I said before, they would rather that this were a Government scheme, run through a national system. That said, we agree that there needs to be a better way of targeting some of the help that must be available. We are an evidence-based organisation, so we tell you what customers think, not what we think, and customers do not like it.
Q 65 Hywel Williams: On a slightly broader issue, the theme of the Bill seems to be about competition and this frankly commercial model. As Dr Kenway said earlier, the economics do not actually stack up so neatly. May I ask for your general response to the situation in Wales, where we have a not-for-distributable-profit model for Welsh Water, which as far as I can see has led to low gearing, greater investment and lower-than-inflation price rises for the past three years?
Tony Smith: Yes, we can comment on that. We obviously can look at all the companies in terms of their overall performance, customer service aspects and the customer’s perception of things like value for money, service or complaints. Dwr Cymru—Welsh Water—is at the top end of performance. It is not necessarily out in the lead on any of those measures, but it is up at the top end. Although we look for patterns, we do not actually see whether any particular type of ownership—the Dwr Cymru model, or a market listed or private equity company—encourages differences in sense of service, but we do not really see any. Certainly Dwr Cymru is at the upper end of performance on customer service measures but, as I said, it is not necessarily out on top.
Dr Kenway: On the specifics of how water in Wales is organised, with the Glas model, it is a very interesting example that almost looks like the norm in many other European countries. The assets are in some sense publicly held, although it is not quite right to call Glas public. You then have an arrangement to decide which company or companies are best equipped to provide the service. There have been changes there recently, have there not? Things have been brought back in house, but it is closer to this model. In some sense, the assets are held, and then you get professional specialist private water companies in to do specific jobs.
It is unusual for England and Wales, of course, but it is not unusual more widely. I think it meets some political aspirations in Wales; that is my understanding of it. It would be nice if something like that could be available in some of the English regions that feel strongly about water.
Dame Yve Buckland: The model is very popular with Welsh customers. It scores highly in relation to popularity for value. It is less suspicious. We have been trying to
We have taken the lessons from that model. In the previous price review—before this one that is coming up—we worked with the industry in England, pushed it and Ofwat hard on these issues, and got companies to reinvest about £1 billion back into the business around customer priorities, or more social assistance, from their outperformance.
There is a lot more to do and further to go. It looks like the current price proposals that have come in from the English companies are starting to go even further. We have taken that example and said, “Look how popular the Welsh system is. You could do more sharing with your customers and build your reputation.”
Dr Kenway: I think this word “trust” that you use is terribly important in this industry when we know people feel so strongly about water—it is not just another commodity. One of the problems in England is the opacity, or lack of clarity, about the ownership structures. If you ask me as a consumer—as a Thames Water customer—what I think, I would say, “The trouble is I really don’t know where my money is going.” That reflects how there are often very elaborate structures through private equity.
You are not going to do anything about private equity through the Bill, but if there is any opportunity to make changes that would increase trust in the English water companies—or reduce distrust, because of their elaborate ownership structure—such as through transparency conditions, it would no doubt be a pain for the companies, but a good thing for the customers.
Q 66 Roger Williams (Brecon and Radnorshire) (LD): Until recently, Welsh Water paid a flat-rate dividend to all its consumers, regardless of the size of the bill. Do you see that as beneficial to customers?
As has been said, that is what we have been trying to encourage all companies to do. Whether it is abating their prices or investing in a network for the benefit of customers, that is what we expect every company to do. We heard the debate about excess profits, and we have been hard on that over the past few years. We believe that Ofwat was probably too generous in the previous price review. In addition to that, the companies have benefited from relatively high inflation and low investment costs, so they have actually made supranormal profits, in a regulatory sense, over the past few years. We have been pushing them very hard to invest back in the companies and customer benefits. That is what we expect to happen in future, and that is the thing that will start to drive customers’ view of not being ripped off and having a bit more trust, in the sense that they will view value for money as being better and get something when the companies are outperforming on the profits.
Q 67 Neil Parish: Going back to the cost of WaterSure and how we pay for it within the industry, a lot of people out there are wilfully not paying their bills. If we could get that money out of them, we could use it to
Tony Smith: Your point is correct, but as we discussed earlier, the problem is being able to identify the people who are wilfully not paying, those who cannot pay, those who are struggling to pay because they are not well organised, and the customers who are paying but cannot really afford to pay and are forgoing other things—there are a fair few of those customers. If you could target customers effectively and help those who really need it with the social tariff that we were talking about earlier, there would be a case for being tougher on customers who are wilfully not paying.
Dame Yve Buckland: Even the water industry is not pushing for the prospect of going backwards, in the sense of people waiting with a can for a drip to fill it. That would be a retrograde step. However, we should take tougher action on all bills and make the water industry proactively get out there, talk to customers and put schemes in place. We can see variations across the industry. Some people are better at it than others. The virtuous circle of linking assistance to debt coming down, so water companies cannot just allow their debt to rise because they have a safety net of assistance, has got to be part of the way forward.
Q 69 Thomas Docherty: I will not go into great detail about why Scottish water is even better than Welsh water. From listening to the debate, it strikes me that we have had lots of information about how customers perceive water as an economic resource. Members who served on the Select Committee on Environment, Food and Rural Affairs will have heard Ofwat say that there is not enough information or awareness about water as an environmental resource. From your research, is that something you have picked up? Do people not see water as a scarce resource?
Tony Smith: I think they do recognise that. In water, like any other market, there are different customer segments. Some are more active in the area of environmentalism than others. Generally speaking, our research suggests that customers are aware of the importance of water to them. They do not just see it as a commodity; they are also aware of the impact on the environment. The idea that customers are not prepared to pay for the environment is simply not true. As long as it is reasonable, paced and will not cause massive increases in their bills, they are happy to contribute. A huge percentage—I think it is about 80%—of customers are actively doing things to save water in their day-to-day lives. There is a very receptive audience out there for an environmental approach. The crucial thing for the industry is to address those things over the next 20 years or so in a way that does not alienate customers. Avoiding that is really important. The industry should not cause big changes in their prices. Trust is very important, and profit and value for money is a crucial part of that.
Q 70 Thomas Docherty: I am really struck that my five-year-old knows that when he puts the kettle on—or, more accurately, when his dad puts the kettle on—the kettle should not be filled up because it would use too much energy. Does your research show that young people are as aware of the environmental side of water as they are about energy?
Tony Smith: It is slightly less than energy. It is a bit behind energy, but it is catching up. It is interesting that the same customers who have that sensitivity about energy tend to have the sensitivity about water, and so on. The work that we have seen on energy conservation reflects water quite heavily—water is just less high in people’s minds. This is partly because of the size of the bill. That is one of the factors.
Dame Yve Buckland: One of the interesting things that has come through the local research this time—interesting for me, because there is certainly a difference between the last price review and this—is that customers have factored much higher up their list of priorities things like river water quality, more general environmental issues and looking at the future. They are not necessarily willing to pay that much for it, but these issues have come up much higher in their priority list. What local groups have then been doing with the companies is poring over the proposals to make sure that they look value for money and cost-effective, that they are paced properly and that water customers are not paying for problems that have been caused by other parties. It is the “polluter pays” principle. It is interesting that that issue is higher up the agenda this time.
Dr Kenway: I do not really have anything to add on that. I do not think I am an expert on what people think. What I would say is that I think raising awareness of this issue and metering with the right tariff help to achieve that. Of course, in some sense how much you fill the kettle is irrelevant from the water side. It is not irrelevant from the electricity side. Of course, in some sense, water is not used up in the same way that energy is used up; it goes round. I think it is always a question of getting people to understand that these things have some cost. We have heard the word “trust” several times. As long as people trust the messages that they are getting, then I think they will respond to that slowly.
Q 72 Thomas Docherty: I have just one final question. Based on the last couple of minutes of that quite interesting exchange, do you think that enough is being done to educate not just young people, but the public—customers—in general, about the environmental scarcity of water, rather than the cost scarcity? If you think that there is more to be done, is there anything in particular that you would recommend that could be included in the Bill, or that Ofwat or the water companies could do as a programme?
Tony Smith: I do not think it is an issue of legislation. Customers tend to recognise and respond to things which are very local to them. When companies do things in their local environment, to improve the environment, for example, or deal with leakage and things like that, then customers recognise that and it has two effects. First, it makes customers realise what is
Dame Yve Buckland: Interestingly, customers have also asked us to provide them with more education—that is a funny word to use, but more help, advice and information as a trusted third party. In relation to our own strategy this year, we have put in a new element, through the website or whatever, to tell customers what we think as an independent third party, if they are hearing two sides of an argument.
The NAO report two or three weeks ago spoke of the coming levels of investment in water. I think it suggested that it would be above £60 billion over three five-year periods, but it might have been more than that. If people then start sending the message, “There are all
As long as you have doubt about whether what companies, and indeed Ofwat, which is in the same gang, are telling people, when people like me wake up—most of the time we will not wake up, because it is not important enough—cynicism is liable to be quite a prevalent reaction. We have to address that; otherwise, the confidence the industry needs to undertake the very big changes that clearly are needed, may not have the public support needed. MPs will no doubt suffer as a result.
Q 73 The Chair: We never suffer. Unless colleagues have other questions to ask our witnesses, I will say thank you very much indeed for your frank, useful, interesting evidence. It has informed our consideration of the Bill quite considerably. We are most grateful to you for it. That brings us to the end of our morning’s business.