Public Accounts CommitteeWritten evidence from HM Treasury

Ahead of your Committee’s hearing on the consumer costs of infrastructure investment to be held on 22 January, the witnesses thought it might be helpful to the Committee to let you know in advance how the Government proposes to respond to the central recommendation of the NAO’s report ‘Infrastructure investment: the impact on consumer bills’ that ‘...the Treasury should publish the expected overall impact on consumer bills, to promote transparency and debate about new infrastructure and bill increases’.

The witnesses (on all of whose behalf I am writing) naturally stand ready to discuss these issues further with the Committee at the hearing.

The Government and the regulators agree with the NAO that there is scope to improve the understanding of affordability in this important area. For example, Defra’s Strategic Policy Statement to Ofwat requires them to report annually on consumer affordability, and DECC already publishes a comprehensive annual report on future energy prices and bills and is considering how it can continue to develop this analysis in response to the NAO’s recommendations.1 The issues underlying the NAO’s recommendation are of course very complex. For instance:

the relationship between utility bills and the costs of capital investment in infrastructure is limited. It is very difficult to identify meaningfully what proportion of household bills reflects the costs of new capital investment in infrastructure as opposed to other costs. For instance, the costs of transmission, distribution and metering in energy markets have increased but it is complex and extremely difficult to distinguish what proportion of this is basic maintenance and renewal of existing assets, compared to capital investment in new infrastructure;

it is also very difficult to forecast in the long term how the many constituent components of utility bills will drive prices. For instance, digital communications are greatly affected by the extreme pace of technological change (the proportion of households with broadband was just 16% in 2004, compared to 75% in 2013) and, although DECC projects wholesale fuel prices and consumer bills, there is an acceptance that these contain an element of uncertainty. Attempting to aggregate these forecasts to conduct a cross-sectoral analysis would therefore entail the incorporation of numerous uncertain elements; and

there is no ‘typical’ consumer. Essentially all households consume energy and water, but use of telecoms, broadcast, rail and airport infrastructure varies extremely widely. For instance travel costs will consume a greater proportion of disposable income for commuters, compared to those who rely on digital communications to work from home. The multitude of tariffs and choices available to consumers in some of the areas adds further complexity. It is therefore inherently difficult, and misleading, to compare different notional households on a like-for-like basis.

Moreover, determining the appropriate balance of infrastructure requirements in a number of key sectors is the role of sectoral regulators which take their decisions independently of Government -and it would not be appropriate for the Government to attempt to forecast regulators’ future decisions. In some sectors, the Government has some role in determining infrastructure decisions. In others, it has little if any.

Nevertheless, as set out above, the Government and the regulators agree with the NAO that there is scope to improve the understanding of affordability in this important area. Accordingly, in response to the Government’s announcement in the National Infrastructure Plan 2013 of a joint HMT/BIS economic regulators study, the five key infrastructure

economic regulators -the Civil Aviation Authority, Olcom, Ofgem, ORR and Ofwat -recently announced that “the regulators themselves will undertake work to assess the overall affordability of infrastructure on customer bills; lessons from each sector on empowering consumers to get the best deals and how, working together, they can help to improve the environment for efficient investment in UK infrastructure”. The regulators are currently considering how they will take forward their work in this area, and we will ensure that the Committee is briefed in due course on their detailed plans.

https:Uwww.gov.uk/governmenVpublication~estimated-lmpacts-of-energy-and-climate-change-policies on-energy-prices-a nd-bills

14 January 2014