Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Memorandum by OFWAT (DWB 05(a))

INQUIRY INTO THE DRAFT WATER BILL

  Thank you for your letter of 23 January confirming the arrangements for my Council's appearance before the Environment Sub-committee on 13 February.

  When we spoke before Christmas you told me that the focus of the Environment Sub-committee's inquiry would be the draft Water Bill itself and not the draft Regulatory, Environmental and Equal Treatment Appraisals. I told you that my Council had particular concerns that the Government appeared to have made a serious under estimate of the costs of establishing and maintaining the Consumer Council for Water when compared with the costs of the new Gas and Electricity Consumer Council set up in November last year.

  My Council touched on this issue in its response to the draft Water Bill. We have elaborated our concerns in the response we have just made to the draft Regulatory, Environmental and Equal Treatment Appraisals. I attach a copy of our response (paragraphs 10-14 refer) which although outside the formal scope of the Inquiry may nevertheless be of interest to the Environment Sub-committee.

Roy Wardle

Secretary to the Council

Response by the Ofwat National Customer Council

DRAFT WATER BILL—REGULATORY, ENVIRONMENTAL AND EQUAL TREATMENT APPRAISALS

  1.   The 10 regional Ofwat Customer Service Committees (CSCs) have the statutory duty to represent the interests of customers of the water and sewerage companies in England and Wales. The Ofwat National Customer Council (ONCC) comprises the 10 CSC Chairmen.

PART ONE: REGULATORY IMPACT ASSESSMENT

Abstraction and impounding, drought, information, conservation

  2.   In general the benefits appear to be set out more clearly and fully than the costs. In particular we are not satisfied that the draft assessment and the Regulatory Appraisal table at Appendix A devotes sufficient attention to the potential impact on water customers' bills.

  3.   We note that attention is drawn, for example at paragraphs 2.26 and 2.45 in the draft assessment, to cost implications for water companies of the Government's proposals and the link to water bills. However, the impression is given that the Director General has wider ranging powers than he has in practice to act to prevent increased costs being passed on to customers. We are disappointed that the draft assessment side-steps the issue and fails to provide any estimate at all of the impact of the Government's proposals on water bills.

NEW REGULATORY ARRANGEMENTS

Benefits for regulated utility companies

  4.   We consider that it is questionable whether the provisions aimed at improving the way the regulator performs his functions will increase regulatory stability. In our view some of the proposals seem likely to have the effect of increasing uncertainty, which could put up the cost of capital and result in higher bills. Examples include the Secretary of State's new power to initiate new standards of performance and the proposed power to fine companies by up to 10 per cent of companies' turnover if they contravene their conditions of appointment or fail to meet any prescribed standard of performance.

  5.   The claim that there will be greater public acceptance of regulation as a result of implementation of the proposals is not well supported by evidence to explain how this will be achieved. While the public may welcome the creation of a strong independent Consumer Council there is a danger that water customers may view the move away from the current `one stop shop' as a retrograde step. Public acceptance will be further undermined if the Council's powers are not adequate for the job.

Benefits for consumers

  6.   The statement in paragraph 3.12 that the stronger emphasis on the consumer interest is expected to result in lower prices and higher service quality is, in our view, weak and unconvincing. We see little scope for the realisation of additional benefits to those already being delivered and question whether the benefits identified by the Government to be brought about by the proposed regulatory reforms will justify the costs of implementation. This is particularly so in relation to lower prices where the 1999 Periodic Review resulted in an average reduction of 12.3 per cent. The Government does not indicate by how much more customers might expect prices to fall as a result of its proposals. Competition should deliver lower prices but this does not yet form part of the draft Bill or of the Regulatory Impact Assessment. Since service quality continues to improve under the current system of regulation and consumer representation we further question why the Government believes its proposals will deliver higher service quality than would be expected to occur.

  7.   It is claimed that the Consumer Council will provide a clear point of access for enquiries and unresolved complaints and that it should help to improve the efficiency of companies' complaint handling procedures and reduce the causes of complaints (paragraph 3.13). We agree but these are precisely the same benefits as are already delivered by the CSCs under the current system of consumer representation.

  8.   In terms of complaints resolution (paragraph 3.14) it is again unclear what benefits the Consumer Council will bring over and above those already achieved by the CSCs as the Council will have no additional powers. Without powers to require companies to pay compensation the status quo will be maintained and no improvement on the current arrangements is likely to be seen by consumers.

COMPLIANCE COSTS FOR BUSINESS

For a typical regulated water company

  9.   We agree with the Government's assessment that the information gathering powers of the Consumer Council are not likely to place a major new burden on the water companies. We anticipate that companies will want to co-operate and be helpful so avoiding any disputes which could add significantly to the regulatory burden on them.

Other costs

  10.   The Appraisal indicates that the annual running costs of the Consumer Council would equate to a modest increase in the three million pound costs currently associated with the running of the CSCs. We think this estimate is unrealistic and fails adequately to take account of the consequences of full separation between consumer representation and regulation. In our judgement the annual running costs of a Consumer Council for Water that is properly resourced to carry out its functions effectively will more realistically be in the region of £5-£6 million.

  11.  Our estimate is based on:

    —  retaining the same or a similar regional committee structure and organisation to the CSCs;

    —  maintaining a new Head Office for the Consumer Council which employs its own specialist policy, legal and technical staff as well as support staff in human resources, services, IT etc;

    —  commissioning a substantial annual programme of market research and other studies by consultants;

    —  adopting a proactive and high profile external relations strategy nationally and regionally; and

    —  remunerating all members of regional Committees.

  12.  By way of comparison the Gas and Electricity Consumer Council (Energywatch) for the years 2002-04 has an annual running costs budget of £10.8 million which includes £1.3 million each year for new work including research. If the Consumer Council for Water is to provide a service that is not inferior to that of Energywatch an adequate (but not necessarily equivalent) level of resources must be provided from the outset. We cannot reconcile the reasons for the very wide difference in the Government's estimates of the running costs of two similar new Consumer Councils.

  13.  In terms of the estimated set-up costs of one million pounds for the Consumer Council for Water we find it difficult to judge whether this sum is reasonable as there are so many unknowns. Set up costs could be substantially higher if the Consumer Council Chair and Chief Executive were to decide on a radically different structure and changes to existing office locations. Additional costs could arise from the acquisition of new offices, disposal of leases of old offices, redundancy packages for staff who do not transfer and relocation packages for staff who do transfer.

  14.  We are unclear what the Government has in mind by the statement in paragraph 3.29 that it may need to bear some of the costs of the Consumer Council where it wants the Council to undertake activities or specific research which it would be inappropriate to recover from licence fees. We consider that this could compromise the Council's independence if it is not allowed to be in control of all of its activities funded wholly through licence fees.

FIRE HYDRANTS

  15.  Contrary to the statement at paragraph 8.7 that there will be no costs for householders arising from the new policy. Water companies will inevitably seek to recover the additional costs that will fall on them from customers.

INFORMATION ON WATER COMPANY PERFORMANCE

  16.  We remain sceptical about the benefits of legislation to give the Secretary of State (and the National Assembly) powers to require water companies to provide their customers with information about company performance. We are not aware of any evidence that customers want comparative information on how water companies perform nor is there any evidence that the provision of information to customers by companies will act as an incentive to improve performance.

  17.  We believe that the publication of information by the Consumer Council and the regulator will have a greater impact in spurring the companies to deliver improved performance.

PART TWO: ENVIRONMENTAL APPRAISAL

New regulatory arrangements etc

  18.  In our view the Appraisal places too much emphasis on expecting the Consumer Council to raise the profile of environmental considerations. The Consumer Council's focus will be on consumer issues and this should not be compromised. It will be for other statutory bodies and not the Consumer Council to examine the water companies' performances on environmental issues.

Information on water companies' performance

  19.  We consider it unlikely that the proposals to require companies to provide their customers with information about performance will directly benefit the environment. The case appears to be overstated and disregards the well established and powerful influence of the quality regulators—the Environment Agency and the Drinking Water Inspectorate—in this area.

PART THREE: EQUAL TREATMENT APPRAISAL

New regulatory arrangements etc

  20.  We agree that the Consumer Council will represent the interests of all consumers, including disadvantaged. But we would point out that this is something that the CSCs do already.

Appointments

  21.  We agree that the powers for the Consumer Council to remunerate members of regional and other committees should help to promote diversity.

Ofwat National Customer Council

January 2001


 
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