Select Committee on Environment, Food and Rural Affairs Written Evidence


Memorandum submitted by Mr Sean Creighton

SUMMARY

  1.  This note of evidence expresses concern that the issue of "affordability" of water as a basic essential for human life is being treated as a minor issue in the Periodic Review, and that there could be adverse effects on affordability if the regulator decides to allow a substantial increases in water charges to fund large scale investment in the basic infrastructure of the water supply and sewerage systems as well as environmental improvements. It also argues that the alleged rise in household water debt needs to be closely questioned to avoid unnecessary increases in water charges to make up for the revenue loss. It suggests a number of actions that would be desirable to ensure that the water regulator and the water and sewerage companies are publicly accountable for their activities and decisions in relation to affordability of water prices and debt.

  2.  This note is written on the assumption that the Committee will receive more technical submissions on these issues from relevant organisations.

AFFORDABILITY

  3.  While the issue of "affordability" was mentioned in paragraph 7.7.1. of the "Initial guidance from the Secretary of State to the Director-General of Water Services. 2004 periodic review of water price limits" (January 2003), it was ignored as a key issue in the August joint statement by the Government and the regulators on the next stage of the Periodic Review. It has been clear for several years that the water regulator's priorities (like those of his energy and telecom counterparts) have been dominated by economic considerations, rather than sustainability considerations which seek to balance the relevant economic, environmental and social factors. The whole thrust of the January guidance was on environmental and economic issues, downplaying social issues, including "affordability" to a few paragraphs at the end of the document. This can be interpreted as signalling to the regulator that the Government gives a low priority to social considerations.

  4.  The Government says that financial support policies to low income and elderly families are lifting people out of poverty. A significant rise in water prices will be one way in which this essential advance will be eroded, especially where low income families are metered (new and renovated properties). The danger is that such families will ration their use of water lower than is necessary for personal and public health and water play for young children, which was a problem identified by low income family campaigns, Barnados and Save The Children Fund in the 1990s.

PRESSURE TO INCREASE PRICES

  5.  There is already a problem of affordability. It is clear that the water regulator is under pressure to increase water charges. How much worse will it become if there is an increase in prices? What would a 5%, 10%, 15% increase in average prices mean in monetary terms to households on low incomes or metered households with high use of water because of medical conditions, especially given the failure of the Vulnerable Groups regulations?

BASIC REQUIREMENTS FOR THE WATER AND SEWERAGE SYSTEM

  6.  For the sake of the nation's health, we need a water and sewerage system which does not burst causing flooding, and that avoids the environment and the water table being contaminated. Keeping the pipe system repaired and renewed to minimise these dangers costs a lot of money. Failure of the basic infrastructure could outweigh the environmental benefits of other types of improvement funded to-date under the Government supported requirements of European Directives.

  7.  The recent media coverage on the state of the sewer system clearly suggests that the companies have been negligent in keeping the system up-dated to avoid sewage flooding and to prevent leakage into the soil and water table. It will be all too easy for the companies to argue that they need large price increases in order to carry out the necessary works to improve the situation. Why should customers who have already paid large sums of investment since privatisation have to pay yet more. The companies can raise more from shareholders and by capital borrowings as an alternative to loading costs onto customers.

  8.  But what exactly is the situation? It does not seem to be being made clear in terms of information available to the public. How much of the responses to current surveys on consumer views are based on a lack of hard accurate information?

    —  What percentage of the sewerage pipe system in each water and sewerage company region is:

—  over 100 years old;

—  50-100 years old;

—  25-50 years old; and

—  up to 25 years old?

    —  What percentage of each category by age is considered to require replacement, strengthening or remedial work?

    —  What is the estimate of the cost?

    —  If spread over 5, 10 or 15 years, what would the price effect be?

    —  How would that affect affordability?

WATER DEMAND IN THE SOUTH EAST

  9.  There needs to be close questioning of the problems involved in meeting increased demand for water in water stress areas of a large increase in residential building as part of the Government's community plans for the South East.

  10.  Could we see large increases in prices so that the South East becomes much more expensive, like the South West? And what would that do for affordability in the South East?

FUNDING INVESTMENT THROUGH CHARGES OR TAX

  11.  A portion of water charges are a form of "stealth tax", in that domestic customers are expected to pay towards the cost of environmental and water quality improvements required under European law and by the British Government, instead of being funded out of taxation.

  12.  As a result water prices are higher than they would be if these improvements were tax funded. The cost burden is unfairly shared by customers across the country, most markedly in the South West where the household base is smaller.

  13.  Unless affordability is treated as a major consideration in the regulator's setting of the next phase of prices, there is a danger that the "stealth tax" element will become even higher, especially if it allows in environmental and water quality schemes, which while desirable, are not necessary to meet EU requirements.

WATER DEBT

  14.  The Secretary of State's initial guidance noted that Ofwat had "drawn attention to increases in the level of household debt and the cost of debt recovery since 1 April 2000." It rightly noted:

    "There is evidence that different companies have very different levels of customer debt and costs. It is unclear to what extent the variation is attributable to different circumstances such as differences in social and economic characteristics of the customer base and to what extent it is because some companies are more effective than others in using the debt management methods open to them. The absence of directly comparable date before 2000 or for other utilities also makes it difficult to decide on the extent to which this is part of a long-term trend in consumer debt or is a change only in water debt." (para 7.7.9)

  15.  This state of ignorance is deplorable. Ofwat resisted representations made by Public Utilities Access Forum from 1998 to undertake and publish a detailed analysis of debt. Local authorities are expected to have a detailed understanding of the nature of their tenant and Council payer debt, and housing associations of rental debt. It is good practice to have robust analysis.

  16.  Ofwat and WaterVoice research suggests that 1:5 households may be in debt. The alleged total of household water debt is £720 million. Since Ofwat does not have robust data from the companies and the companies hide behind the argument of "commercial confidentiality", the figure cannot be taken seriously. It is not good enough not to have robust public available analysis since companies can seek to have their current price determinations reviewed to take account of rising levels of debt. If customers are to be faced with price rises they should have the right to know the exact nature of the problem.

  17.  And what could the exact nature of the problem be? It is likely to be one of double-counting in the case of customers who receive their water supply from a water only company and their sewerage service from a water and sewerage company. A very large percentage of the debt could be what would be classed as "technical" arrears in local authority and housing association contexts:

    —  customers whose cheque payments are processed after the due date;

    —  landlords who resell water, collecting the money from their tenants, but not making payments to the companies by the due date;

    —  water direct payments being paid late by the Benefits Agency;

    —  customers who are withholding payments because they are in dispute with the company eg over meter readings, over a supply failure; and

    —  debt which is subject to an agreed payment plan.

  18.  It may even be the case that customers who pay by monthly direct debit may be regarded as being in debt until they have completed the full year's payment—although this should mean that the total debt figure should decrease during the course of the year. It has been suggested that the debt total includes accumulated debt from previous years, therefore representing an historical accumulation, instead of having a figure of new debt outstanding at the end of each year, as well as accumulated debt, so that the annual trends can be seen.

  19.  Debt can also vary according to the approach being taken by each company. There may be differences in the experience of debt between those on different payments methods, or between those whose charges are based on rateable value and metered properties.

  20.  It needs to be borne in mind that debt is only one possible indicator of "affordability" problems. Large numbers of households who experience "affordability" problems run their lives to avoid getting into debt with the companies if this means sacrificing some other aspects of their lives because their incomes are inadequate to meet all their basic needs.

SOCIAL EXCLUSION

  21.  The issues of water affordability and debt cannot be divorced from other aspects of the Government's social and anti-poverty agendas, including social inclusion, regeneration and neighhourhood renewal. It may well be that a high incidence of affordability and debt problems are concentrated in areas with a higher level of neighbourhood disadvantage, even if those areas are not included in the funding regimes under the National Neighbourhood Renewal Strategy.

  22.  A key component of social exclusion and deprivation is problems of access, retention and affordability of basic services such as energy, water and telephony. Water use can also be higher than necessary because of the way in which houses and flats are designed, eg because pipe lengths mean that a lot of cold water has to be drained off before hot water comes out the tap. In metered home, such water has to be paid for. Low income households cannot afford the latest water efficient washing machines.

  23.  It has been regrettable that addressing the issues of access to and retention of basic household services has not been regarded as a major component of the work not only of Local Strategic Partnerships and Neighbourhood Renewal.

  24.  In addition to analysis on the extent to which alleged "debt" is real or technical, there is a need for research on the geographic and socio-economic incidence of affordability and debt problems to inform the way in which water charges contribute to the complexity of financial and multiple debt problems faced by low income households.

  25.  It may also be instructive to undertake analysis of the geographic distribution of supply and sewerage infrastructure problems to see if they are concentrated in areas of low income and neighbourhood disadvantage.

WHAT NEEDS TO BE DONE?

  26.  The following actions would help to ensure that "affordability" and "debt" were treated with more seriousness:

    —  The Government should require the regulator to make the issue of affordability a major factor in the Periodic Review.

    —  The regulator should analyse the nature of companies' alleged household water charges debt to ascertain the actual level of annual debt after stripping out any historic accumulation and technical arrears.

    —  The regulator should analyse the geography and socio-economic distribution of water affordability and debt problems within each water company area, seeking the advice of the Office of National Statistics and the Social Exclusion and Neighbourhood Renewal Units on methodologies.

    —  The regulator should publish:

—  the results of the geographic and socio-economic research and debt analysis;

—  details of the current percentage of water prices of each company which fund environmental and water quality improvements and infrastructure maintenance and improvements;

—  the companies' proposed environmental, water quality improvement, schemes and their price implications, clearly indicating which schemes are requirements to meet EU standards and which are desirable and their likely impact on charges; and

—  the water supply and sewerage implications of the Government's housing development plans, the cost of improving water supply and sewerage connections to meet them, and the likely impact on prices.

EXTERNAL EXAMINATION

  27.  The utility industries (water, energy and telecoms) have a big impact on the life and economies of the regions. Yet their regulators have resisted ensuring that their policies and proposals interconnect with the economic renewal, social inclusion, regeneration and neighbourhood renewal agendas. The Regional Assemblies and Chambers are probably in the best position to hold in-depth enquiries into the activities of the utility industries and their regulators. They should be encouraged to do so the coming months, looking as a priority at water demand and supply issues, water and sewerage infrastructure needs, environmental needs and affordability of water prices. They should seek evidence from the relevant water and sewerage companies, the regulator, the water consumer committees, advice, anti-poverty and environmental groups, and local authorities.

17 October 2003


 
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