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Examination of Witnesses

Water Bill – in a Public Bill Committee at 9:10 am on 3rd December 2013.

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Tony Smith, Dame Yve Buckland and Dr Peter Kenway gave evidence.

Photo of James Gray James Gray Conservative, North Wiltshire 10:16 am, 3rd December 2013

I welcome all three of you, and thank you kindly for coming before us to give evidence in our consideration of the Water Bill. We have Dame Yve Buckland, the chair of the Consumer Council for Water, Tony Smith, the chief executive of the Consumer Council for Water, and Dr Peter Kenway, the director of the New Policy Institute.

Q 35

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

We talked a lot in the last session, which I think you all heard, about retail for non-domestic customers. The Bill does not include measures to extend retail to domestic customers in England or Wales. Do you support that approach?

Tony Smith: Yes, we do. Customers would definitely support that. We know from our research of business customers that they are very keen to have competition right across the size range of business customers.

If you talk to domestic customers, however, the position is far less clear. Although a small majority of domestic customers support the principle of competition, when they start think about what it would mean to them and other customers, they roughly fall into three groups of about equal size: those in favour, those against and those who are slightly unclear. Their view depends very much on their experience in energy, which of course is very mixed. We absolutely support the approach of pursuing competition for business customers but making sure that we protect customers who are ineligible.

Q 36

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

I have a question along the same lines, but I am slightly playing devil’s advocate. Some of the water companies say that if we create too much competition and you take out the bigger players and their bills are reduced, domestic customers may well have to pay more. What is your view on that?

Tony Smith: I do not think that that should happen. There should be benefits for business customers from efficiencies and more dynamism in the market. We look to Ofwat to make sure that there is no cross-subsidy going on between domestic customers and business customers. That is not a reason for saying that there should not be competition; I think competition in principle is definitely the right thing to do.

The issue is more about the fact that, at the moment, there is not the appetite among domestic customers in the same way as there is for business customers. The Cave review a few years ago identified that there is quite a big opportunity for business customers that can create a lot of value, so let us pursue that first and get that, and maybe in the future pursue it for domestic customers. There is a big demand among business customers, but there is far less demand among domestic customers.

Dr Kenway: I think the answer to the first question was no. The answer to the second question is that those concerns are very legitimate. Perhaps I should preface this by saying that there are some things to do with water that I know much more about than others. On this one, I am strongly persuaded by the arguments that I have read from Professor Helm, but it does chime with my experience. There is a huge fixed cost in this industry, as you all know. People may be able to insist on a very low price indeed for the marginal unit of water, almost cost-free, but that still means that the whole of the fixed cost has to be divided up between other business customers, or domestic customers, or investors. Where is the efficiency? This form of competition is fine if there is some form of real efficiency gain to be had. It is not clear to me where that is to be had. I think this is the wrong form of competition for an industry such as this.

Q 37

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

You do not seem very keen on competition at all, if I may be so bold.

Dr Kenway: There is a danger that we will go a long way back in my history. I have been involved in setting up competition. No. I am in favour of competition. The form of competition that I think is appropriate here is the competition for the market, not the competition in the market. In other words, broadly speaking, a franchise—the sort of thing we are familiar with in the rail industry. So it is a different form of competition. I am not coming before you and recommending that, but it seems more appropriate here than the competition that is being brought in by this Bill. I am fully in favour of it—I am a small business man.

Q 38

Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs

We were hearing a lot from the previous panel about retail exit, when we open up markets for business customers. As well as the benefits of competition in terms of price, there are hopefully benefits to competition in terms of customer service and focus on delivering for customers. If we allow companies to exit from the business—more competitive—side, what effect do you think that might have on residential customers who, for very good reasons, as we have heard, will not be able to switch?

Tony Smith: We can understand the commercial arguments for allowing exit, but against that, from the customers’ perspective, there are two issues. One is whether companies can separate out their competitive retail businesses from their non-competitive ones, because  we think that there needs to be a degree of cohesiveness between the wholesale business and the retail business so that customer service is not damaged. Secondly, the other issue relates to what Martin Cave identified, which is that one of the benefits of competition is that it would not just be for business customers, as potentially there would be spill-over benefits for domestic customers. It is slightly unclear how those will come to pass, but if companies have exited the retail business, that may be less possible. Although we understand the commercial arguments, which we were hearing in the last panel session, for allowing exit, it is not clear necessarily that that will be finally beneficial to customers.

Q 39

Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs

Dr Kenway, do you have a view on allowing retail exit and what that would do?

Dr Kenway: No, I simply echo Mr Smith’s points. Quite how the benefits will flow through is not clear. One of the great holes in this Bill is that it has not really paid sufficient attention to scrutinising the claimed benefits of the changes that are being brought in, so I think it is very reasonable to be probing that, but I have nothing specific to add.

Dr Kenway: No, I do not.

Photo of James Gray James Gray Conservative, North Wiltshire

Minister, I think you want to ask about bad debt as well, do you not?

Q 40

Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs

We heard a bit about bad debt. Approaches were made directly about affordability, but the Bill does not specifically look at bad debt. That is one of the issues that the industry and those involved in the sector are looking at. Do you think that information sharing with landlords in particular, which is one of the issues that we were talking about earlier, has been effective in terms of a voluntary approach?

Dame Yve Buckland: We very much support the points that have been made this morning. We would like to see things go a lot further, in terms of pressure on landlords to release information. Clearly, bad debt is a very important issue. We have already referred to the fact that it is increasingly difficult for the water industry to separate the “can’t pays” from the “won’t pays”. The measure to which you refer seems to us to be one that would help more clearly target the “won’t pays”.

Q 41

Photo of Pat Glass Pat Glass Labour, North West Durham

We have heard that only three companies have a social tariff up and running. Can you tell us who they are?

Dame Yve Buckland: The three with social tariffs at the moment are Wessex, South West Water and Bristol Water, but there is better news coming. We have been working very actively at the local level on the proposals that in the current price review. In addition to the three that we have already mentioned, we know that another nine companies are proposing social tariff schemes, and there is also the one being run by Welsh Water. That, in a way, has come through a lot of hard work at local level.

In relation to the debate earlier this morning, this is a thorny issue, and there is not a clear way forward. One in eight customers says they cannot afford their bill. As  Anna Walker found in her review, there is not a straightforward solution. A customer-funded social tariff really adds to people’s burden, and there is no great appetite for one at the local level. Where we have been working with companies to introduce social tariffs, there is still a very limited willingness among people to pay perhaps only £1 or £2 on top of their bill to assist those struggling to pay.

There have been proposals for things to come through excess profits. Customers would see that as more advantageous, but a system founded just on excess profit is not really sustainable. We do not want companies to make excess profits, and it would be difficult to link a scheme to that.

What customers have been telling us—we have been established since 2005, and we have made this point to successive Governments—is that the fairest, most appropriate and most transparent way forward would be a Government scheme funded through tax or benefits, and there has just been no appetite to run that system. A monopoly water industry for domestic customers needs a system that is legitimate and credible and ensures things like data protection.

In addition to social tariff schemes, a lot of recommendations have come forward from the local level about additional social assistance. A social tariff scheme will not meet all customers’ needs; there have to be company-backed schemes with, say, credit unions and Citizens Advice to help customers, especially domestic customers, who are struggling to pay.

Q 42

Photo of Pat Glass Pat Glass Labour, North West Durham

The chap from Water UK talked earlier about the reasons why there are only three schemes and for the tardiness in moving towards a scheme. He blamed Government regulations and customers. You said that it would cost customers £1 or £2 more, but that they are reluctant to pay that. Do you think they are aware that they are paying £11 on their bill for bad debt? If they were, would there be more enthusiasm for social tariffs?

Dame Yve Buckland: We have done a lot of research with customers on this issue. We have done qualitative research to help customers understand what they are already paying—the level of debt they are carrying on their bill. There has consistently been a limited appetite among customers for a social tariff; they see it as something they have to pay on top of their bill. In the recent schemes, Wessex Water, for example, found only a 50p tolerance on the part of customers for a social scheme. Customers also want schemes targeted squarely on the people they feel are the most deserving, such as people who are ill or particularly vulnerable or the elderly.

I think the reason why schemes have not come forward is that customers do not really want to pay for them. There is about a £400 million gap, and schemes like this might deliver about £40 million towards filling it, but they will not go the whole measure. However, in the absence of a tax and benefits scheme, this is one way forward. It has to be worked on carefully by the water companies, which also need to convince customers that those who are paying into these schemes will see the bad debt coming down, so there is, at least, a virtuous circle.

Dr Kenway: Very briefly, a couple of points. It seems to me that if one is going to have a social tariff, the model should be the warm home discount run by Ofgem  and the Department of Energy and Climate Change. That raises issues that I was listening to earlier around data release from the Department for Work and Pensions which happens, as I am sure you know, with that energy scheme.

I think that there is a bigger point which perhaps illustrates what has just been said. Even that scheme, which I believe benefits some 2 million households in 2013-14, if you have a look at low income—what are now the conventional poverty numbers—something like 1.25 million pensioner households, 2 million workless households and 2.5 million working households are defined as being in poverty. That is a total approaching 6 million. Even a social tariff on the scale such as for energy, would reach only about one third of those who, from a different perspective, one might say needed it.

As everybody knows, the poverty line is only a line; it does not mean that people are above it. Although I would personally favour a social tariff as the right step, I do not think it is a substitute for a fair and modernised system of charging that addresses the affordability issues of a much wider group within the population.

Q 43

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

On the issue of WaterSure, you heard the earlier exchanges of the water industry lobbyists. Do you think it is a reasonable suggestion that to encourage greater take-up, the water companies should be required to include information with the household bills that they send out about what the criteria are and how to go about applying?

Dame Yve Buckland: Certainly since 2007, we engaged actively with the industry to get the scheme rebranded, to make it simple, make the paperwork simpler and to promote it. Since 2007, we have seen a 350% increase in the take-up of WaterSure. We think about 72,000 customers are now taking it up and there are 20,000 on the Welsh Water assist scheme, with 20% this year. But arguably, it is still a drop in the ocean.

WaterSure is targeted at a very particular and rather narrow group of customers—you have to have a particular set of medical conditions, a large low-income family in receipt of benefits and then you have to be on a meter. Those are still some of the issues behind it. What we hear from customers where they have taken up WaterSure, and what we know has been working in part of the industry, is much better bill messaging and promotion, not just through the bills, but in call handling; if people ring the company, the call handlers are directing people to WaterSure if they need it, or WaterSure promoted through third parties—credit unions, local government schemes, Citizens Advice, money advice centres and even doctors’ surgeries.

So, yes, we have to continue to promote it, but it is only one very small measure that needs to part of a raft.

Photo of Sheryll Murray Sheryll Murray Conservative, South East Cornwall

Are any water companies actually doing something with WaterSure to promote it, or is it general across the board that none of them are including information in their bills?

Tony Smith: They are all doing something because as Yve just said, we have been pushing them to do so. I think the question is whether we carry on pushing them or whether it is mandated in some way. That is the question, but they have all been doing it, which has contributed to that 350% increase. The issue is that,  despite that massive increase, huge numbers of customers who would be entitled to WaterSure still do not know about it. That is the challenge; it is the challenge in water and in energy, and it is very difficult to get at the customers who actually need it.

Some companies are even going further; they are talking to individual customers and finding out what their needs are, particularly when they introduce compulsory metering, which rapidly changes customers’ bills. They are actually talking to customers individually—not even just those on benefit, it can be those on low incomes—and they are finding out what their specific needs are. That is also encouraging. That is a specific case where you are rapidly changing the customer’s bill, and you have got to help that customer over the transition. There is a lot going on, but I think the point we are all making is that a lot more needs to be done on this issue of affordability.

Dame Yve Buckland: Just to help illustrate that, I have been working very closely with five companies. The ones that are probably best at targeting WaterSure are the small, local water-only companies, because they tend to have a much closer and more direct relationship with customers and greater knowledge. They, too, are targeting WaterSure alongside their own company schemes, so they have profit-funded company schemes to which they also direct people who are not eligible for WaterSure to get further assistance. They are demonstrably keeping the debt down in comparison with others.

Q 44

Photo of Emma Lewell-Buck Emma Lewell-Buck Labour, South Shields

The Bill introduces a requirement that the water and sewerage companies need to make their charging schemes in accordance with any rules that Ofwat issues, but the rules that Ofwat issues have to be made in line with Government guidance. I am curious—does the panel feel that this approach does enough to protect households from subsidising the competition in the non-domestic sector?

Tony Smith: Well, I think there are two points there. One is that, as we discussed earlier, domestic customers for the foreseeable future will not benefit from competition, so it is absolutely crucial that it is clearly the will of Parliament that those customers should not suffer disbenefit from competition. At the moment, I think the proposal is to put that in guidance, which we think is the minimum. The question for parliamentarians is whether that should actually be in the Bill.

The second point to think about is the charges, and the guidance that is given to Ofwat and the companies. Obviously, Ofwat looks at the companies’ charging schemes. The issue for customers is that you sometimes get companies coming forward with proposals that look sensible from the economic regulator’s point of view, but we have found that there is often a danger in that situation that some customers can suffer a disbenefit. Although the proposal might make sense for customers as a whole, often the economic regulator does not look at the winners and losers. That is one of the reasons why we have been arguing, if you have seen our briefing, that companies’ proposals, the guidance to Ofwat about charges and Ofwat’s guidance must include reference to the consumer. It must look in particular at the details of customers who are opposed to the changes in charges or who may lose out from any changes. It is absolutely crucial in a monopoly industry that that happens.

Dr Kenway: Can I just add something on that? I am not sure whether it is strong enough, but what I want to say is that it is absolutely right that the matter be dealt with by Government and not the regulator—in some sense, ultimately, by the will of Parliament. There is very little economics in this industry. It is mainly about, from the charging point of view, how you are going to allocate the burden of cost. In some senses, it is a tax issue. This is fundamentally your province, and it is about political principles, although no doubt there would be disagreement around the table about what those principles should be. It is really important to understand that this is not something—I think it is different in energy—where economic principles play a big part. They play a part, but they play a small part. The question of who should bear losses and gains is absolutely properly something that Government should be pronouncing on and giving as little scope for regulatory discretion as possible. I would really encourage you to assert yourselves on this one, because it is entirely right to do so. Economics is quite marginal here.

Q 45

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

There was an exchange earlier about de-averaging. As you understand it, is there a risk with the proposed upstream reforms that this could lead to de-averaging of charges for some customers?

Tony Smith: Yes, there is, in short. However, there are some major benefits—I think Cathryn Ross referred earlier to them—to the upstream reforms. If companies can be encouraged and incentivised to use their water more efficiently between them, that is beneficial to customers on average. We can see that there are potentially huge benefits, on average, to customers from those reforms. If the reforms affect average prices then that is okay, but there will be an issue if de-averaging starts. Earlier, Alan Sutherland referred to the statistic that one water supply zone might be 60 times more costly than another one. That is not atypical in this industry. If you start getting that sort of de-averaging, it could have a very big impact on some customers. It is all about thinking this through in order to get the average benefit from efficiency without causing huge concern among customers from the de-averaging.

Q 46

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

Would it be fair to say that geography is the biggest driver determining which it is?

Tony Smith: Yes, it is a major driver, although it is not the only one.

Q 47

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

So, taking the south-west region as an example, is it most likely to be those customers at the furthest points from the supply who are at greatest risk?

Tony Smith: It is to do with their location relative to the supply, and very often it is to do with the size of communities. If you have to put in works and all the infrastructure around them for a very small community, then obviously the costs are much higher in that scenario.

Q 48

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

To be fair to the Minister, he does not intend to allow de-averaging—I think his voters in Cornwall would be relieved to hear that—but, in your opinion, is there enough in the Bill as it stands to ensure that we do not accidentally end up with de-averaging, or do you think the Bill could do with some strengthening?  

Tony Smith: Well, I think the proposals about upstream are obviously less developed than the retail proposals at this stage. The question is the timing and how those arrangements will work in practice, and whether or not there is therefore a de-averaging problem. This goes back to the point about our concerns being twofold. One concern is that domestic customers are not disadvantaged, and the other is to make sure that we do not have a problem with de-averaging. I think it is for you to decide whether that needs to go very clearly into this particular Act, but there is a risk that de-averaging could cause a problem down the line, further upstream.

Q 49

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

Clauses 26 and 34 strengthen the enforcement powers of both the Minister and Ofwat. Clause 23 gives a general duty to the regulator to ensure that there is no undue discrimination by the companies. Going back to Mr Powles’s point, in your opinion are these measures sufficient to ensure that new entrants can come into the market?

Tony Smith: Yes, I think that can be handled by Ofwat. Ofwat would have to be very firm when making sure that there were no issues of there being an unlevel playing field, but I would have thought that Ofwat would have the powers to do that.

Q 50

Dr Kenway: I find this a curious Bill. I wonder what problems it answers, and whose interests it serves. I would be suspicious about whether this in fact looks like a Bill by insiders, with an insider interest. I think that one should be very wary if there is any suggestion of that. I cannot give any more specific answer, but this does not look to me like a properly competitive model in which new entrants would necessarily feel very comfortable about coming in. I think the thing has to bend over backwards to reassure people who might want to come in. My suspicion is not out of line. You are facing a very powerful industry, a very mature industry which has had a 25-year relationship with its regulator. Public choice economics tells us very clearly what happens in those circumstances. There are risks of regulatory capture. It is a very settled relationship. I think that there are always grounds for suspicion in these cases.

Q 51

Photo of Matthew Offord Matthew Offord Conservative, Hendon

I am directing this question particularly to Dame Yve and Mr Smith, but it would be interesting to hear Dr Kenway’s view on this issue as well. I am sure that you realise that universal metering can occur only in those areas that are severely water stressed, as designated by the Secretary of State. Do you agree with the Government? What is your view of the Government’s decision that consumers are most appropriately placed to discuss with water companies their metering needs?

Dame Yve Buckland: What we have heard consistently from customers is that they do not like compulsory metering schemes. If they are to be introduced, customers want to understand the reason why. Therefore, there is a stronger argument in areas of water scarcity for their introduction, but it is very important that the industry works carefully and closely with customers to take customers with them, because there can be implications for many customers as an extension of metering.

Metering alone does not necessarily encourage people to change their behaviour. It is a technical solution to a domestic and behavioural problem. A lot of other measures need to be put in place. Water companies need to work with customers on ensuring that their houses are water-efficient and so on. Therefore, we very much endorse and support the more cautious approach in this Bill to the way in which metering is being rolled out—the fact that it is not gung-ho.

We have seen lots of examples, even in areas of water scarcity. Anglian Water is one. By the end of the next price review, it will be up to 96% or 97% metering. That has been done without compulsion. It has been done carefully and over time, and the company has taken customers with it.

Q 52

Photo of Matthew Offord Matthew Offord Conservative, Hendon

You describe universal water metering as gung-ho, but that is a little like not having an electricity meter in your home and just paying the rateable value for your electricity supply. I am looking towards the Minister, who represents a seat in Cornwall. People there have some of the highest water bills in the country. They have some of the highest rainfall as well. People there could benefit from lower bills as a result of being on meters and having universal meters. Can you explain why you made the assertion about consumers not being so keen on the installation of water meters?

Dame Yve Buckland: Where people benefit from opting on to meters, that is usually because these are smaller households and there is a clear financial benefit, but this is a zero-sum game. As more people opt on to meters, that leaves a residual group—usually very large, low-income families—for whom metering is not financially beneficial and who find their bills rising as a result. We have seen examples of that in the south-west, so universal metering does not necessarily deliver low bills. Equally, in areas that are not water stressed, the cost of metering itself adds significantly and sizably to bills—somewhere between £50 and £80, we estimate—so that has to be thought through very carefully.

Also, companies can meter over a steady-state period, through change of occupancy, through encouraging optants and through other schemes, without necessarily going for compulsion. What we hear in research is that the public do not like compulsion if it is not necessary. It gives them the sense that they are being coerced on to something. They do not necessarily trust the water industry, so although their bills might go down in the short term, they think that they will be stuck in the longer term. That is how it is expressed to us.

Dr Kenway: There are not many dangers in my job, but advocating water metering, I have discovered, is one of them. As I am sure you know, some people attach an importance to water that, to a simple-minded economist such as me, is nonsense, but that is not how it is—people do that, and so I say what I say with care. I favour metering, because I think that it is the way to resolve both economic and environmental issues, but—this touches on a point made a moment ago in the previous reply—the issue is not just the meter. I think that the key issue—we have studied this; we wrote a report on it a long time ago—is the tariff. You clearly need something. You use the meter to try to control and send signals about the use at the margin, but it is quite clear that larger families and households with children or an elderly relative have a much higher need for water in the first place. It was  quite unjust to have a simple uniform tariff. You need a fixed charge; you need something that reflects people’s ability to pay; you need something that reflects their household composition and then you can put metering on top of it. It is needed. We are basing our pricing of water on a 40-year-old system, from 1973. It is obviously absurd. Meters are the answer. It is politically very difficult but the tariff is the key. That requires a lot of political involvement. It is not just something for Ofwat and certainly not just something for the companies.

Q 53

Photo of Sheryll Murray Sheryll Murray Conservative, South East Cornwall

Could I now turn to flood insurance? The Government intend to legislate through the Bill to ensure that domestic flood insurance remains widely affordable and available to people who live in a flood-risk area. Do you think that the provision of affordable flood insurance will have unintended consequences?

Tony Smith: General flooding is not really our area of activity. We tend to get involved only in sewer flooding, because that is the thing that involves water customers. It is true that customers’ views about flooding are strong, particularly among those who get repeat effects. Certainly with water, when a customer gets flooded, they get compensation through return of their bill. Often many companies will help with uninsured losses, which certainly helps those customers quite a lot.

The other thing is that the more imaginative companies—and, indeed, insurance companies—help customers to resolve, or minimise the damage of, future flooding problems, which means putting things into houses so that they are less prone to flooding. Although that is not an area in which we are directly involved, we do become aware of customers’ concerns about it. The sense is that not enough is being done about flooding generally, so it is really important that customers feel that they have protection from this sort of arrangement.

Dr Kenway: It is a fair question, but I wondered what “unintended consequences” meant. Are you thinking about the adverse consequences for further development on the floodplain—that it might, in some sense, leave developers too relaxed about developing in places where they should not? That is a very real concern, but the way to deal with it is through the planning system. It is absolutely right to protect the householders; they cannot do anything about where their home is.

We have always been very struck by the contrast over many years between the pressure that has successfully been put on banks to clean up their act—I am talking about their willingness to provide accounts to low-income customers and so on—and the pressure that has, or has not, been put on the insurance industry to ensure that it, too, provides sufficient universal coverage. Obviously, in this case, that means customers whom the insurance companies might prefer, by quite good logic of their own, not to insure. I think it is right to protect them and then worry about unintended consequences in the parts of the system that can do something about that, which would broadly mean planning.

Q 54

Photo of Mark Spencer Mark Spencer Conservative, Sherwood

May I ask Tony, in particular, about the obligation to connect? We have existing problems with that in a village. If an application for a new housing development comes about upstream, the obligation to connect does not always  make that connection between the existing problems and funding to solve the new problems that are going to arise with the extra flow.

Tony Smith: Yes, that is a very frequent problem, and it is a big concern to water companies, and therefore to water customers, as it can have a knock-on effect on them as well.

Q 55

Photo of Mark Spencer Mark Spencer Conservative, Sherwood

Would it be of benefit if the Bill made the developer pay for the obligations downstream to solve the problems within the network?

Tony Smith: That would have significant consequences for development, I guess. It is an interesting question—it is not really one we have considered—but we can see the problem, given the effect it can have on water customers. The water companies may be better equipped to answer that specific question.

Q 56

Photo of Andrew Percy Andrew Percy Conservative, Brigg and Goole

I just wanted to get your comments about the exceptions or exemptions under the new Flood Re scheme—so for buildings built after 2009, and perhaps band H properties. Do you have any views on those?

Tony Smith: No, we do not.

Q 57

Photo of Andrew Percy Andrew Percy Conservative, Brigg and Goole

But presumably consumers will be coming to you with strong views on that.

Tony Smith: Not really. Our involvement in flooding is around only sewer flooding—situations when the company’s system has caused a sewer to flood. That is our only involvement.

Q 58

Photo of Andrew Percy Andrew Percy Conservative, Brigg and Goole

That is regularly the case in my constituency. The area is drained marshland, so we regularly have floods. Unfortunately, assets fail reasonably regularly, so we have floods and consequently people cannot get flood insurance. There is a link, is there not?

Tony Smith: Yes, but the way we handle that with the water companies is that, in those circumstances, many of the companies help with the uninsured losses. They tend not to come to us to talk about insurance per se, so we do not become real experts on that question.

Q 59

Photo of Andrew Percy Andrew Percy Conservative, Brigg and Goole

So you have no views on any of the exemptions at all.

Tony Smith: No, not really.

Q 60

Photo of Sheryll Murray Sheryll Murray Conservative, South East Cornwall

Could I put a scenario to you that you may find it helpful to answer? When we have heavy rainfall, a lot of the surface water flooding will flood the sewers, causing big problems where they both feed in. Do you have any thoughts about that with regard to my original question? You said you were more concerned with sewage flooding that comes up into people’s homes, but surely heavy rainfall could cause that to happen. Do you have any feedback on that at all?

Dame Yve Buckland: There are a number of grey areas that require a joined-up response at the local level. With the company plans that are coming forward, local people spent a long time scrutinising proposals. Increasingly, on those sorts of issues, we are seeing the water industry  having to work closely with local authorities and the Environment Agency to ensure that the schemes fit across the board. We play an active role in that, but we are always very cautious about making sure that water customers are not necessarily picking up in their bills a cost that ought to be faced by others. We are sometimes quite cautious about that and we have to be very careful, because it can sometimes be easy, in our view, to think that water customers can pick those costs up when they need to be addressed through some other form of funding.

That said, there is now a much stronger drive on the part of water companies to work closely with local authorities and the Environment Agency to look at joined-up and jointly funded solutions. It is not prescribed, and it tends to happen in a voluntary capacity, partly because of customer pressure and local constituent pressure for it to happen.

Q 61

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

I want to ask about the proposed exemptions that we believe will be introduced in secondary legislation. One is that band H properties will not be included, given the argument that people who own such properties should be able to afford their insurance. Another exemption is post-2009 properties, but would that be a sensible and fair cut-off point? I know it is to some extent historical, so I would be interested in your views about that. The other exemption—or exclusion, if you like—is properties that are “genuinely uninsurable”. Can anyone define what an uninsurable property is, and are we going to find people in difficulty who really should not be left in such circumstances?

Dame Yve Buckland: As we said in reply to an earlier question, that is not an issue that we have been consulted on or have especially strong views about. As I said, when I am seeing things happening, it tends to be companies acting voluntarily at the local level, so it is more through pressure from local customers that we are seeing action. We do not have anything specific to say about band H properties.

Dr Kenway: Presumably the “genuinely uninsurable” problem is there already. I do not often defend band H properties, but I do not really see any merit in an arbitrary cut-off. It does not follow that those people are going to be in a position to deal with that. It seems to me that it is being done, presumably, for purely symbolic reasons. If a property is a palace or something, perhaps there ought to be some kind of limitation, but the idea of excluding simply on the basis of band is very crude, and I see no merit in that.

Q 62

Photo of Hywel Williams Hywel Williams Shadow PC Spokesperson (Education), Shadow PC Spokesperson (International Development), Shadow PC Spokesperson (Work and Pensions), Shadow PC Spokesperson (Health)

Things might be slightly different in Wales, where we had rebanding—it was abandoned as far as England was concerned—so the bands actually represent something more real in economic terms than they do in England.

Dr Kenway: Obviously that is true, but one wants to have grounds—a substantive argument—for exclusions. Arbitrary cut-offs create anomalies.

Q 63

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

On this particular issue, you could argue that if a band H property is listed and the family or whoever owns it is not actually that wealthy—they will have a lot of costs in keeping up the house—why are they singled out for exception?

Dr Kenway: I agree with that. We provide plenty of services universally. I am cautious about agreeing that people in any particular band should not be entitled to something, because that could be the thin end of a wedge. What you say seems to be perfectly reasonable.

Q 64

Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs

I put a question to the earlier panel about DWP data being shared. Have customers fed back to you what they would feel about their data—Government data; sensitive data—being handed over to water companies?

Dame Yve Buckland: Customers are generally very cautious about water companies acting in lieu of Government. They do not think that water companies are best placed to do that. As I said before, they would rather that this were a Government scheme, run through a national system. That said, we agree that there needs to be a better way of targeting some of the help that must be available. We are an evidence-based organisation, so we tell you what customers think, not what we think, and customers do not like it.

Q 65

Photo of Hywel Williams Hywel Williams Shadow PC Spokesperson (Education), Shadow PC Spokesperson (International Development), Shadow PC Spokesperson (Work and Pensions), Shadow PC Spokesperson (Health)

On a slightly broader issue, the theme of the Bill seems to be about competition and this frankly commercial model. As Dr Kenway said earlier, the economics do not actually stack up so neatly. May I ask for your general response to the situation in Wales, where we have a not-for-distributable-profit model for Welsh Water, which as far as I can see has led to low gearing, greater investment and lower-than-inflation price rises for the past three years?

Tony Smith: Yes, we can comment on that. We obviously can look at all the companies in terms of their overall performance, customer service aspects and the customer’s perception of things like value for money, service or complaints. Dwr Cymru—Welsh Water—is at the top end of performance. It is not necessarily out in the lead on any of those measures, but it is up at the top end. Although we look for patterns, we do not actually see whether any particular type of ownership—the Dwr Cymru model, or a market listed or private equity company—encourages differences in sense of service, but we do not really see any. Certainly Dwr Cymru is at the upper end of performance on customer service measures but, as I said, it is not necessarily out on top.

Dr Kenway: On the specifics of how water in Wales is organised, with the Glas model, it is a very interesting example that almost looks like the norm in many other European countries. The assets are in some sense publicly held, although it is not quite right to call Glas public. You then have an arrangement to decide which company or companies are best equipped to provide the service. There have been changes there recently, have there not? Things have been brought back in house, but it is closer to this model. In some sense, the assets are held, and then you get professional specialist private water companies in to do specific jobs.

It is unusual for England and Wales, of course, but it is not unusual more widely. I think it meets some political aspirations in Wales; that is my understanding of it. It would be nice if something like that could be available in some of the English regions that feel strongly about water.

Dame Yve Buckland: The model is very popular with Welsh customers. It scores highly in relation to popularity for value. It is less suspicious. We have been trying to  take some of the lessons from that model to work with companies in England on sharing the benefits of outperformance. That is what is popular about it: customers do not get the sense that they are being ripped off. They have a sense that there is a sharing of the benefits with them.

We have taken the lessons from that model. In the previous price review—before this one that is coming up—we worked with the industry in England, pushed it and Ofwat hard on these issues, and got companies to reinvest about £1 billion back into the business around customer priorities, or more social assistance, from their outperformance.

There is a lot more to do and further to go. It looks like the current price proposals that have come in from the English companies are starting to go even further. We have taken that example and said, “Look how popular the Welsh system is. You could do more sharing with your customers and build your reputation.”

Dr Kenway: I think this word “trust” that you use is terribly important in this industry when we know people feel so strongly about water—it is not just another commodity. One of the problems in England is the opacity, or lack of clarity, about the ownership structures. If you ask me as a consumer—as a Thames Water customer—what I think, I would say, “The trouble is I really don’t know where my money is going.” That reflects how there are often very elaborate structures through private equity.

You are not going to do anything about private equity through the Bill, but if there is any opportunity to make changes that would increase trust in the English water companies—or reduce distrust, because of their elaborate ownership structure—such as through transparency conditions, it would no doubt be a pain for the companies, but a good thing for the customers.

Q 66

Photo of Roger Williams Roger Williams Liberal Democrat, Brecon and Radnorshire

Until recently, Welsh Water paid a flat-rate dividend to all its consumers, regardless of the size of the bill. Do you see that as beneficial to customers?

Tony Smith: It is definitely beneficial to them. I think there was an issue about whether the customers realised they were getting it, but that was a different point.

As has been said, that is what we have been trying to encourage all companies to do. Whether it is abating their prices or investing in a network for the benefit of customers, that is what we expect every company to do. We heard the debate about excess profits, and we have been hard on that over the past few years. We believe that Ofwat was probably too generous in the previous price review. In addition to that, the companies have benefited from relatively high inflation and low investment costs, so they have actually made supranormal profits, in a regulatory sense, over the past few years. We have been pushing them very hard to invest back in the companies and customer benefits. That is what we expect to happen in future, and that is the thing that will start to drive customers’ view of not being ripped off and having a bit more trust, in the sense that they will view value for money as being better and get something when the companies are outperforming on the profits.

Q 67

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

Going back to the cost of WaterSure and how we pay for it within the industry, a lot of people out there are wilfully not paying their bills. If we could get that money out of them, we could use it to  pay for a lot of the social tariff. I know that reducing water to a trickle is not the flavour of the month, but is there an argument that you could restrict water pressure to those households? If they are wilfully not paying bills, why should they have water supplied to them with no restrictions whatever?

Tony Smith: Your point is correct, but as we discussed earlier, the problem is being able to identify the people who are wilfully not paying, those who cannot pay, those who are struggling to pay because they are not well organised, and the customers who are paying but cannot really afford to pay and are forgoing other things—there are a fair few of those customers. If you could target customers effectively and help those who really need it with the social tariff that we were talking about earlier, there would be a case for being tougher on customers who are wilfully not paying.

Q 68

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

Some payers and some areas have a history of not paying, and the companies know who they are.

Dame Yve Buckland: Even the water industry is not pushing for the prospect of going backwards, in the sense of people waiting with a can for a drip to fill it. That would be a retrograde step. However, we should take tougher action on all bills and make the water industry proactively get out there, talk to customers and put schemes in place. We can see variations across the industry. Some people are better at it than others. The virtuous circle of linking assistance to debt coming down, so water companies cannot just allow their debt to rise because they have a safety net of assistance, has got to be part of the way forward.

Q 69

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

I will not go into great detail about why Scottish water is even better than Welsh water. From listening to the debate, it strikes me that we have had lots of information about how customers perceive water as an economic resource. Members who served on the Select Committee on Environment, Food and Rural Affairs will have heard Ofwat say that there is not enough information or awareness about water as an environmental resource. From your research, is that something you have picked up? Do people not see water as a scarce resource?

Tony Smith: I think they do recognise that. In water, like any other market, there are different customer segments. Some are more active in the area of environmentalism than others. Generally speaking, our research suggests that customers are aware of the importance of water to them. They do not just see it as a commodity; they are also aware of the impact on the environment. The idea that customers are not prepared to pay for the environment is simply not true. As long as it is reasonable, paced and will not cause massive increases in their bills, they are happy to contribute. A huge percentage—I think it is about 80%—of customers are actively doing things to save water in their day-to-day lives. There is a very receptive audience out there for an environmental approach. The crucial thing for the industry is to address those things over the next 20 years or so in a way that does not alienate customers. Avoiding that is really important. The industry should not cause big changes in their prices. Trust is very important, and profit and value for money is a crucial part of that.

Q 70

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

I am really struck that my five-year-old knows that when he puts the kettle on—or, more accurately, when his dad puts the kettle on—the kettle should not be filled up because it would use too much energy. Does your research show that young people are as aware of the environmental side of water as they are about energy?

Tony Smith: It is slightly less than energy. It is a bit behind energy, but it is catching up. It is interesting that the same customers who have that sensitivity about energy tend to have the sensitivity about water, and so on. The work that we have seen on energy conservation reflects water quite heavily—water is just less high in people’s minds. This is partly because of the size of the bill. That is one of the factors.

Dame Yve Buckland: One of the interesting things that has come through the local research this time—interesting for me, because there is certainly a difference between the last price review and this—is that customers have factored much higher up their list of priorities things like river water quality, more general environmental issues and looking at the future. They are not necessarily willing to pay that much for it, but these issues have come up much higher in their priority list. What local groups have then been doing with the companies is poring over the proposals to make sure that they look value for money and cost-effective, that they are paced properly and that water customers are not paying for problems that have been caused by other parties. It is the “polluter pays” principle. It is interesting that that issue is higher up the agenda this time.

Q 71

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

Dr Kenway, you were looking thoughtful there. Do you want to—

Dr Kenway: I do not really have anything to add on that. I do not think I am an expert on what people think. What I would say is that I think raising awareness of this issue and metering with the right tariff help to achieve that. Of course, in some sense how much you fill the kettle is irrelevant from the water side. It is not irrelevant from the electricity side. Of course, in some sense, water is not used up in the same way that energy is used up; it goes round. I think it is always a question of getting people to understand that these things have some cost. We have heard the word “trust” several times. As long as people trust the messages that they are getting, then I think they will respond to that slowly.

Q 72

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

I have just one final question. Based on the last couple of minutes of that quite interesting exchange, do you think that enough is being done to educate not just young people, but the public—customers—in general, about the environmental scarcity of water, rather than the cost scarcity? If you think that there is more to be done, is there anything in particular that you would recommend that could be included in the Bill, or that Ofwat or the water companies could do as a programme?

Tony Smith: I do not think it is an issue of legislation. Customers tend to recognise and respond to things which are very local to them. When companies do things in their local environment, to improve the environment, for example, or deal with leakage and things like that, then customers recognise that and it has two effects. First, it makes customers realise what is  entailed in running a water system. But also important—back to the issue of value for money—they realise where their money is being spent. So I do not think it is an issue of legislation, but an issue of the companies being a bit more proactive in terms of communicating this very locally. We have been encouraging companies to think about their incentives and performance measures in that context. We think the customers’ perception around value for money is a really important measure of the health of the industry. Questions such as whether the regulatory system is working and whether the companies are doing the right job are strong measures of customer satisfaction. That is one of the things we have been recommending.

Dame Yve Buckland: Interestingly, customers have also asked us to provide them with more education—that is a funny word to use, but more help, advice and information as a trusted third party. In relation to our own strategy this year, we have put in a new element, through the website or whatever, to tell customers what we think as an independent third party, if they are hearing two sides of an argument.

Dr Kenway: I would not advocate sticking anything else in the Bill that is not going to be read. The difficulty is that the messenger is potentially compromised.

The NAO report two or three weeks ago spoke of the coming levels of investment in water. I think it suggested that it would be above £60 billion over three five-year periods, but it might have been more than that. If people then start sending the message, “There are all  these environmental concerns and that means we’re going to do a lot more investment, and because of the way the system works in water, the more investment we do, the higher our prices are allowed to be,” there is going to be doubt about whether the original claim that there is a huge problem is really accurate and whether there is a degree of self-interest.

As long as you have doubt about whether what companies, and indeed Ofwat, which is in the same gang, are telling people, when people like me wake up—most of the time we will not wake up, because it is not important enough—cynicism is liable to be quite a prevalent reaction. We have to address that; otherwise, the confidence the industry needs to undertake the very big changes that clearly are needed, may not have the public support needed. MPs will no doubt suffer as a result.

Q 73

Photo of James Gray James Gray Conservative, North Wiltshire

We never suffer. Unless colleagues have other questions to ask our witnesses, I will say thank you very much indeed for your frank, useful, interesting evidence. It has informed our consideration of the Bill quite considerably. We are most grateful to you for it. That brings us to the end of our morning’s business.

Ordered, That further consideration be now adjourned. —(John Penrose.)

Adjourned till this day at Two o’clock.