Conclusions and recommendations
1. HM Treasury has identified more
than £375 billion of planned investment in economic infrastructure
that the UK needs to replace ageing assets, replace assets which
don't comply with EU regulation, help meet policy commitments
such as climate change targets, support economic growth, and meet
the long-term needs of a growing population. Around two-thirds
of this investment is expected to be financed and delivered by
private companies but paid for by consumers through utility bills
and user charges, such as rail fares. Energy and water bills have
risen considerably faster than incomes in recent years, and high
levels of new investment in infrastructure mean that bills and
charges are likely to continue to rise significantly. Furthermore,
poorer households spend more of their incomes on household bills
relative to richer households, meaning that funding infrastructure
through bills is more regressive than doing so through taxation.
Separate Government departments set the overall objectives and
policies for each sector. Economic regulators set the frameworks
within which private companies deliver this infrastructure and
they have legal duties to protect consumers by, for example, promoting
competition, acting to prevent and address market abuses, and
in some cases setting the prices consumers can be charged.
2. The complexity and changing
nature of Government policies, particularly in the energy sector,
risk delaying much needed investment. We are concerned that
the complexity and changing nature of the policy landscape affecting
infrastructure investment, particularly in the energy sector,
may be causing investors to hold back from making investment decisions.
For example, we heard that although there is planning consent
for infrastructure that would provide 15 gigawatts of gas-powered
electricity generation, investors are not going ahead due to a
combination of unfavourable market prices for gas and electricity,
and lack of certainty with regard to the Government's electricity
market reforms. The shift to renewables is one of the reasons
for increasing bills for consumers. There is a challenge to the
adequacy of supply which is made more difficult by current market
interventions. There appears to be a lack of urgency in DECC when
so much of our coal fired plants are being decommissioned before
the end of 2015.
Recommendation:
Departments should explicitly factor in the potential impact
of complexity and uncertainty on investors when making or changing
policies affecting infrastructure. DECC needs to act quickly to
give certainty and unlock much needed energy investment or the
consequences for consumer bills will be worsened.
3. While HM Treasury accepts
responsibility for considering the impact of infrastructure investment
on consumer bills "across the piece", it has not produced
any work on the long-term affordability of consumer bills.
Within individual sectors, there is no clear guidance about who—regulators
or Government—is responsible for assessing affordability.
For example, in the water sector there is no definition of affordability,
and neither Defra nor Ofwat was able to tell us which of them
were responsible for monitoring and assessing affordability. The
failure of departments and regulators to assess the overall long-term
affordability of planned infrastructure means they are taking
policy and regulatory decisions which influence what infrastructure
is built and how, without a proper appreciation of consumers'
ability to pay. We are not persuaded by HM Treasury's argument
that it is not sensible to aggregate the costs to consumers across
sectors as the affordability of costs can only be determined by
taking into account all household bills, household incomes and
the wider costs of living. We welcome the recent commitment by
regulators to consider the affordability of bills across sectors,
but we strongly feel that both HM Treasury and Government departments,
which set policies that influence investment decisions, should
assess and consider affordability as an integral part of their
decision-making processes.
Recommendation:
HM Treasury should ensure that an assessment of the long-term
affordability of bills across the sectors is produced and published.
This should involve:
- establishing with departments
and regulators clear responsibilities in each sector for assessing
the long-term affordability of bills;
- bringing together sector-level
assessments, starting with energy and water, so that long-term
affordability for consumers can be considered in aggregate; and
- assessing the combined impact
of increased bills on different household types, including those
households most vulnerable to price rises.
4. Regulators are not getting
sufficient assurance on the long-term sustainability of companies'
operations. Regulators rely heavily on the information companies
provide to them rather than seeking independent assurance so,
for example, regulators do not check whether infrastructure has
been provided to the agreed specification and will be fit for
purpose for its whole expected life. We found this surprising
given that misreporting has in the past prompted the Serious Fraud
Office to impose fines on water companies. Given the nature of
the energy market, it is vital that regulators protect consumers'
interests by properly understanding the companies' finances. While
we welcome Ofwat's commitment to look more closely at companies'
financial structures, Ofwat recognised that it has struggled recently
to recruit the skilled people it needs, and it is not clear that
Ofwat has all the necessary skills to support effective scrutiny.
Recommendation:
Regulators need to improve their protection of consumers'
interests by paying closer attention to the financial structures
of regulated companies and by verifying, in a proportionate way,
whether infrastructure has been built to the standards expected.
They must have robust plans to address any gaps in their capacity
and skills to do this.
5. Regulators have been unacceptably
slow to respond to earlier calls for more joined-up working. We
are disappointed that despite the House of Lords Economic Affairs
Select Committee calling for much stronger joint working arrangements
in 2007, regulators have only very recently acted upon this. At
our hearing, regulators rightly recognised the limitations of
their previous cross-sector working arrangements. We welcome the
news that regulators' Chief Executives are now having regular
formal meetings and are in the process of establishing a permanent
secretariat and a joint work programme which includes a focus
on affordability issues.
Recommendation:
Regulators must ensure their reformed joint-working arrangements
deliver a coordinated approach to assessing the impact on bills
and affordability of infrastructure investment, and that this
is carried out in collaboration with Government.
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