1 Assessing the impact on consumers of
infrastructure investment
1. On the basis of a report by the Comptroller
and Auditor General, we took evidence from HM Treasury, the Department
of Energy and Climate Change (DECC), the Department for Environment,
Food and Rural Affairs (Defra), and the economic regulators Ofgem
and Ofwat on the impact of infrastructure investment on consumer
bills.[1] We also took
evidence from two utility companies, RWE Npower and Thames Water.
2. HM Treasury has identified more than
£375 billion of planned infrastructure investment that is
needed to replace ageing infrastructure, help meet policy commitments
such as climate change targets, and meet the long-term needs of
a growing population.[2]
Since privatisation of the public utilities in the 1980s, new
infrastructure has been increasingly financed by the private sector.
HM Treasury expects that at least two-thirds of the identified
investment will be in sectors where infrastructure is financed,
built, owned and operated by private companies and funded through
consumer bills.[3]
3. While median incomes did not rise
significantly in the decade to 2011, energy bills rose by 44%
and water bills by 21%, in real terms.[4]
Consumers face further significant increases in bills due to new
infrastructure investment. For example, DECC is projecting that
average household energy bills in 2030 will be 18% higher in real
terms compared to 2013.[5]
This will have a disproportionate effect on low-income households
as they spend a higher proportion of their income on energy and
water bills.[6]
4. Individual domestic consumers have
little influence over what, and how much, infrastructure is built.
Instead, Government departments and economic regulators seek to
protect their interests. HM Treasury has established a specialist
unit, Infrastructure UK, which is responsible for coordinating
and simplifying the planning and prioritisation of investment
in UK infrastructure, and for achieving greater value for money
on infrastructure projects.[7]
DECC and Defra are responsible for setting objectives and policies
in their respective sectors. The independent economic regulators,
Ofgem and Ofwat, have legal duties to protect consumers, and they
do this by promoting competition (as is the case in the electricity
generation markets), setting the price consumers can be charged
(as is the case for energy network and water sectors), and acting
to prevent and address market abuses. The regulators set the frameworks
within which private companies deliver infrastructure.[8]
5. HM Treasury accepted that it is responsible
for looking at the impact of infrastructure investment on consumer
bills "across the piece", and stated that it has an
overview across all important sectors.[9]
Infrastructure UK accepted that its remit includes considering
the impact of infrastructure on bills and consumer affordability,
although it told us that its particular focus was on reducing
the cost of new infrastructure being provided as part of Government
plans.[10] HM Treasury
agreed that keeping costs down was different from establishing
whether bills are affordable. Although HM Treasury told us that
the cost to consumers is central to its policy decisions in sectors
such as energy, it has not done any work to assess the long-term
affordability of bills.[11]
6. There is no clear guidance on who
is responsible for assessing affordability within sectors.[12]
Neither Defra nor Ofwat was able to tell us which of them were
responsible for determining whether water bills are affordable.
There is no target for the affordability of water bills and no
up-to-date official assessment of future bills.[13]
In the energy sector, DECC told us that keeping energy bills down
was one of its central aims, and that in November 2012 it had
introduced the Levy Control Framework to set a cap on the cost
to consumers of low-carbon electricity generating infrastructure.[14]
However, the Government's review of Ofgem in 2011 identified a
blurring of responsibilities between the regulator and Government.[15]
7. Regulators told us that they take
affordability into account by requiring companies to consult with
their customers to understand customers' priorities and willingness
to pay for improvements.[16]
Ofwat told us it that it seeks assurance from company business
plans and customer 'challenge groups' that engagement with customers
has been good.[17] Ofgem
recognised that relying on companies to ask consumers about their
ability to pay has shortcomings, since consumers do not have a
full view of all the bill increases that may be forthcoming.[18]
8. The best efforts to assess the affordability
of bills have been made in the energy sector, where every year
DECC forecasts energy bills and the numbers of households that
will be in fuel poverty up to 2030. DECC acknowledged the severity
of fuel poverty, and told us that it looks at the impact of its
policies on the future bills of different income groups. However,
it does not assess whether those in lower income groups will be
able to afford future bills.[19]
In the water sector, there are no official forecasts of future
bills, nor any assessment of their affordability. Both Ofwat and
Defra accepted that they could and should do more to look at the
long-term affordability of bills, however they said they were
not planning to undertake new work in time to inform Ofwat's decisions
for setting prices for the period between 2015 and 2020.[20]
9. HM Treasury told us they did not
think it would be sensible to aggregate the cost to consumers
of infrastructure across sectors, arguing that it would be meaningless,
for example, to combine the costs to passengers of High Speed
2 with a typical water bill.[21]
We questioned the validity of this argument, given the wealth
of cross-sector analysis undertaken on the cost of living and
the fact that it is at odds with the analysis HM Treasury carries
out when making decisions about tax, where it looks at the impact
of aggregate tax changes on different groups in the population.[22]
HM Treasury conceded that a combined picture of affordability
was much more achievable for the energy and water sectors than
in other areas, and it told us that the newly formed UK regulators'
network had made a commitment to start considering the affordability
of bills across sectors.[23]
10. HM Treasury told us it has to make
complex policy decisions involving trade-offs, for example, between
affordability and decarbonisation of energy.[24]
There are also Government schemes to support vulnerable consumers
in both the energy and water sectors. However, when asked, none
of the departments explained how Government and regulators could
take such policy decisions without a full understanding of the
impact of infrastructure investment on future bills and an understanding
of how many consumers are likely to struggle to pay.[25]
1 C&AG's Report, Infrastructure investment:
the impact on consumer bills, Session 2013-14, HC812, 13 November
2013 Back
2
HM Treasury, National Infrastructure Plan 2013, December
2013. Back
3
C&AG's Report, para 2 Back
4
Qq 198, 200; C&AG's report, para 11, Figure 2 Back
5
Qq 117, 199; C&AG's report, para 13, Figure 5 Back
6
Qq 118, 201; C&AG's report, paras 4, 12,Figures 3, 4 Back
7
C&AG's Report, para 6 Back
8
C&AG's Report, paras 5, 1.16 Back
9
Q 180 Back
10
Qq 189, 191, 194; C&AG's report, para 6 Back
11
Qq 181-182, 187; C&AG's report paras 2.28-2.31 Back
12
C&AG's report para 2.3 Back
13
Qq 95, 230-232, 236 Back
14
Qq 215, 241 Back
15
C&AG's report, para 2.6 Back
16
Qq 94, 95, 102 Back
17
Qq 101, 118 Back
18
Q 102 Back
19
Qq 120, 197, 202, 234; C&AG's report para 15, Figure 8 Back
20
Qq 118, 229 Back
21
Qq 188, 219 Back
22
Q 220-222 Back
23
Q 221-223 Back
24
Q 186 Back
25
Qq 233-237; C&AG's report para 16 Back
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