Spending money like water

The unique model for regulating the industry that supplies water and sewerage services in England and Wales calls for investment plans and charges to be set every five years. It is not surprising, therefore, that these decisions are arrived at after a great deal of debate. The latest review started in autumn 2002, and must be concluded in November so bills can be sent out in the first quarter of 2005.

It is clear that the director-general of Ofwat is going to have to perform a conjuring trick, as did his predecessor, somehow achieving a compromise between the need for money to maintain and improve basic infrastructure, the cost of projects aimed at preserving and enhancing the water environment, and his duty to ensure that the 22 water companies are financially sound. All this is set against the risk of a backlash from customers feeling the impact of rises in council tax and increases in gas and electricity prices.

So what does the picture look like as all concerned wait for the next key phase in the process to begin? In their draft business plans of last year, water companies projected a requirement for an average increase of 30% (excluding inflation) by April 2010 to fund an investment programme of £20bn. Expressions of concern at the impact of such rises on householders and businesses were countered by the Environment Agency, which suggested that 50p/week was a price worth paying, that water was cheap and that the reductions in the 1999 review had gone too far.

Regional differences

There are a number of weaknesses in this argument. The overall numbers mask big regional differences. For example United Utilities’ preferred strategy calls for the average customer to pay £90/year (again excluding inflation) on environmental improvements alone. Similarly, Southern Water (another company with an extensive coastline) has estimated that their customers would have to cough up an extra £54/year on top of inflation if all their environmental enhancement obligations are to be discharged. No wonder then that Ofwat asked ministers to consider whether it was practical to trim £5 billion of total capital expenditure.

In addition, it is difficult to feel confident that there will not be further demands for expenditure on the environment during the course of the next five years. Most companies have not included the £800m earmarked for achieving compliance with new designations under the Freshwater Fish Directive in their plans up to 2010 and there is also the threat of extra costs in meeting the requirements of the Shellfish Waters Directive.

Let us be clear however – WaterVoice accepts that increases are inevitable and customers know that they have to contribute to protecting the water environment. The issue is one of phasing and affordability.

The impact of higher water bills on domestic budgets cannot be ignored when determining the scale and pace of environmental improvements to be paid for by customers. Already, about a third of the average sewerage bill goes towards funding environmental programmes; ranging from 24% in the case of Northumbria Water to 43% for South West Water.

People matter

In January 2003, secretary of state for the environment Margaret Beckett declared that it is “people who matter, whether paying their water bills or enjoying the benefits of clean water through the tap and in the environment – and our policies must strike the right balance in their interests”.

WaterVoice agrees and seeks a reasonable allocation of resources between environmental requirements (primarily defined by European directives, the Environment Agency and English Nature) and the areas customers have identified as their priorities. According to the research jointly commissioned by all the main industry stakeholders and published in December, these key areas are drinking water quality, ensuring reliable supplies and the prevention of sewer flooding in homes and gardens.

In our view, it is essential that the Agency should engage with water companies and their customers in developing a joined up approach to managing the water environment. Environmental programmes cannot be seen in isolation.

Many are inter-dependent and some rely on the actions of others if they are to be effective. For example, it is questionable whether water companies should proceed with schemes to remove nitrates and phosphates if diffuse pollution is not addressed at the same time.

When companies submit their final business plans in April, WaterVoice will look for evidence of pragmatism about what can be delivered and realism about what customers can afford. If this is the outcome, then the strategies will be in line with the government objectives for the water industry:

• a secure supply of water, safe for drinking;
  
• use of water resources and sewerage services in a way that respects the environment; and
  
• furtherance of social and economic policies.

Customers are under no illusion that they have to pay for all of this, but rises of the magnitude set out in the companies’ preferred plans risk souring consumer attitudes to the industry, and further increasing both debt and financial hardship.