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

Memorandum by S Beale, Campaign Against Monopoly Abuse (DWB 32)


"Water Bill—Consultation on draft legislation"


  1.  It is stressed that these comments refer specifically to the financing and regulation of the core businesses of the licensed water and sewerage undertakers of England and Wales unless otherwise stated. If there is doubt about any significant comment in this paper, whether due to inadequate explanation on our part or contradiction from elsewhere, we trust we shall be consulted and given the opportunity to clarify.

  2.  We note that in his Foreword to this consultation, Mr Prescott declares that "These measures will put the consumer at the heart of the regulatory process, making it more open and accountable". We assume the intention here is that customer interests are to be properly protected and, in particular, that water and sewerage charges should be no more than is necessary to provide a fair revenue to the company concerned. The meaning of "fair revenue" could of course be endlessly debated but might perhaps be considered to have been achieved if informed opinion on each side were to agree that the regulator had got it about right—or even if each side were equally dissatisfied! The key phrase here is "informed opinion" which emphasises Mr Prescott's point about making the regulatory process more open and accountable as discussed later. In the meantime, as a very minimum, it is assumed that the Government would consider it unfair on customers if charges were so high as to give the companies excessive profits but, on the other hand, unfair on companies if revenue were so low as to force them to incur heavy debt in order to finance the carrying out of their statutory obligations.

  3.  Since being taken into private ownership, the water companies have made considerable efforts to project the impression that, apart from being monopolies with price limits set by the regulator, they are just like any other private companies operating in a competitive market. However, this superficial view can be seriously misleading when considering company efficiency and standard performance indicators such as "turnover", profits, gearing, etcetera. Before offering detailed comments relevant to the draft Water Bill we therefore summarise the main points that distinguish a regulated water company from a "normal" private company of comparable size operating in an open competitive market.


  4.  The Appointed water and sewerage undertakers are regulated companies supplying defined water and sewerage services. As such they are not free to introduce new services or products or to discard the old. They are also monopolies so that there is no competition for market share—few, if any, go so far as to have a nominated Marketing or Sales Director—and the customer base is stable (some might say captive) since refusal of the services offered is not a realistic option.

  5.  The companies are subject to price limits set by the Director in which he is required to ensure that the companies can finance the proper carrying out of their functions as licensed undertakers. These price limits also include allowance for financing the capital investment programme for improving water and environmental quality standards. The fact is that, of the average annual household water and sewerage bill of £244 in England and Wales over the period 2000-05, as reported by OFWAT, no less than £135 (55 per cent) is accounted for by the surcharge added specifically to finance the capital investment programme for quality improvement. The average charges and the percentages attributable to the quality surcharges vary considerably according to company and are summarised in the attached table. Attention is also drawn to Tables 7 and 8 of the OFWAT publication Future water and sewerage charges 2000-05 which show that the total capital expenditure provided for in the 2000-05 price limits is no less than £15,613 million or about £3,123 million a year. This expenditure is included in the total of £50 billion to be invested by the water companies in the 15 years from 1990 to 2005, as reported in the same publication and, in the words of the Director, "all financed by customers"!

  6.  This method of raising investment capital—with no necessity for massive debt, or the issue of additional shares or cash demands on shareholders—has naturally been very good for shareholders. Such an arrangement is, however, only possible for monopoly companies supplying essential services and has been the major factor in the success of the water companies in private ownership. The price limits set by the Director provide the companies with an assured "turnover", sufficient to finance both the licensed utility functions and the capital investment programme, which is known within very narrow limits as least a year in advance and further, to the end of the current price review period. However, the quality surcharges have not been so good for customers, the majority of whom are paying more than double the basic water and sewerage utility charges in order to finance a capital investment programme for which they receive no compensation by way of shares in the equity of the companies and very little thanks. There must be some question as to whether this burden on customers, particular the more vulnerable pensioners and others on low incomes, which is of such benefit to shareholders, is fair and equitable and should continue without major review. Important considerations in such a review would be the financial probity of the companies, particularly in their disbursement of the quality investment receipts, and the extent to which customers have been given their due in terms of candour and honesty.

  7.  The companies can claim substantial assets, virtually all of which are essential in carrying out the statutory functions of Licensed Appointees and cannot therefore be disposed of piecemeal in any emergency. These assets are therefore of little or no value as security for loans. The companies obviously could not, in any financial emergency or crisis, simply dispense with a reservoir, a water treatment plant or a few miles of sewer in order to reduce debt.


  8.  By contrast, normal commercial companies do not suffer the same restrictions as regulated water and sewerage companies. Private companies normally have complete freedom as to the products they offer for sale and the prices they attempt to gain for them—a freedom that is balanced by the equal freedom of the public not to buy unless a product suits them and the price is acceptable. The resulting competition for customer favour forces companies into a continual search for new or improved products and more effective ways of protecting and/or increasing turnover and profit. Schemes to achieve these objectives may at times necessitate heavy investment programmes which cannot possibly be financed by customer surcharges. Investment programmes must generally be financed by debt which can only be justified on the basis of the additional profits that are expected to result and from which the debt can eventually be serviced and repaid. If the anticipated profits do not materialise, it may very well be necessary for the company to relinquish assets—shops, branch offices, subsidiary companies, etcetera—in order to maintain cash flow and remain in business.


  9.  The 1991 Water Industry Act (WIA), in subsection 2.3, requires that the interests of customers are protected as respects the fixing of water charges, subject only to the companies being able to finance their functions as defined in subsection 2.2. This limitation on the protection of customer interests in the fixing of charges is an obvious precaution since the underfunding of the Appointed companies would lead to inadequate water and sewerage services at least—with crisis and disaster if services were to fail completely. Understandably, this has led to the regulatory focus being on the proper funding of the companies as indicated by the standard "Notes to Editors" included in most OFWAT news releases, this from PN52 dated 10 November 2000:

    Philip Fletcher, the Director General of Water Services (the Director), is the economic regulator of the water and sewerage companies in England and Wales. His primary duty is to ensure that the functions of the companies are carried out and that they are able to finance them.

  This same concern, that sympathy for customers should not leave companies underfunded, was even more emphatically expressed by a representative of the Department of the Environment to the Monopolies and Mergers Commission in 1995, presumably speaking for the Secretary of State.

    It had to be remembered that the Director was required to ensure that the functions of the undertakers could be financed, whatever the financial impact upon consumers.

  10.  These statements are unequivocal and leave no doubt about the intention that water and sewerage charges should be sufficient to fully fund the companies in carrying out their statutory obligations. Indeed, the duty imposed on the regulator to protect the interests of customers as respects the fixing of prices has apparently long since ceased to be considered important enough to mention. This is confirmed by the draft Water Bill in which the duty is now omitted entirely to imply perhaps that customer protection is no longer of such importance. It is suggested that this duty to protect the interests of customers is reinstated and strengthened by emphasising that the regulator must do his utmost to ensure that customers are charged no more than is necessary to provide companies with revenue adequate for their obligations.

  11.  This renewed emphasis on the duty of the regulator to protect the interests of customers as respects the fixing of prices is a prerequisite for correcting the balance but will not be sufficient in itself. For customer interests to be properly protected it is also essential that there should be some verification that the revenue provided was justified and actually spent on the functions for which it was intended. This greater accountability can only be achieved if the whole regulatory process is made more open and transparent. The remainder of this paper discusses the various regulatory problems on which action is essential if customers are to be given a fair deal and Mr Prescott's objective of "the consumer at the heart of the regulatory process" is to be achieved.


  12.  In the Regulatory Impact Assessment (RIA) document, paragraph 3.3, there is a summary of what regulation should provide in the way of customer safeguards. The significant omission here is the need to ensure financial probity—to have some check, in fairness to customers, that funds provided in the price limits, in particular the huge quality investment funds, are not misappropriated by diversion to other purposes. It is equally important that there should be no significant overspend to require later provision for interest charges and debt repayment in the Director's price limits! Such an omission, together with a reference in the following paragraph, implies approval and continuation of the oxymoronic policy of "arm's length regulation"—defined by the previous Director as "concerned with outcomes not expenditure—with outputs not inputs" and claimed to deliver "a good deal for customers and for the environment" although the benefits have never been published and are not readily apparent.

  13.  The key strategy of this detached supervision is to allow the companies to count the quality investment element in their revenue as normal "turnover" just as if it were earned operating income. Since capital expenditure on the quality programme is not deducted with the operating costs, the whole of these quality investment funds—now averaging 55 per cent of total revenue—is added into the reported profit account. This profit bonanza gives a somewhat distorted impression of the profitability and performance of the regulated companies and also carries through to inflate the reported profits of parent companies. This of course accounts for the spectacular profit figures that parent companies have been able to report and enjoy since privatisation. The quality revenues vary considerably through the companies according to their quality programme, as can be seen from the attached table, so the additional profit from the quality revenue is by no means standard and therefore makes nonsense of any attempt to assess comparative performances from the published accounts. This has not prevented such comparisons being made or companies from boasting of their profitability.

  14.  A second pillar of this detachment is that the Director completely renounces any control over profits or dividends paid to parent companies. As far as we know, no customer benefits have been claimed for this aspect of OFWAT regulation. Possible disadvantages are discussed below.


  15.  It is essential for proper customer protection that regulated water companies are effectively ring fenced to ensure there is no possibility or temptation for the improper transfer of funds from the core business. The ring fence regulations are defined in Schedule F of the Licence and are frequently quoted to refute criticisms of laxity in financial regulation. Unfortunately, these regulations are not strictly imposed but are anyway of little significant. With the entire quality revenue included in the reported profit, and so not subject to regulatory accounting, any breaches of the ring fence are about as relevant as leaks in the side of a bucket with no bottom!


  16.  In private companies it is usual for capital investment to be funded by shareholders through reduced dividends, cash contributions, borrowing or additional share issues. However, the regulated water companies are permitted to fund their substantial investment programmes entirely from additional charges on customers—an arrangement only possible for monopoly suppliers of essential services whose customers, in practice, cannot even opt out. Since privatisation in 1989, these quality surcharges have risen steadily and for the period 2000-05 will average no less than 55 per cent of charges and company revenues. There is considerable variation in the levels of charge as can be seen from the attached table. As previously noted in paragraph 5 above, these quality surcharges are specifically intended to fund the capital expenditure of £50 billion over the 15 year period 1990-2005. As also noted, virtually all of this investment capital is credited to profit accounts over which the Director, the financial regulator, has declared he has no control.

  17.  Despite the frequent assertions by OFWAT—in consultation papers, reports, etcetera,—of the great importance attached to frank and open discussion, there is a remarkable degree of discretion shown by OFWAT and the companies when it comes to references to the quality surcharges. Readers can judge this for themselves from their own recollection of how many public references to quality surcharges they may have heard or seen. The reason for this reticence becomes evident when the annual accounts of both the core businesses and the group parents are examined in the light of this utility operations/quality investment split in the core business revenue.


  18.  Since privatisation the group parent companies of the regulated water companies have been able to report spectacular profits and are generally regarded as good examples of what can be achieved by privatisation. With their profits, most of the groups have built up impressive lists of associate companies, invested in the buy back of shares and at the same time mainained generous and progressive dividend policies. The 1999-2000 results reported for Pennon and its wholly owned subsidiary, South West Water, are a typical example:
£ million
South West Water
£ million
"turnover"467.0 281.4
operating profit167.1 146.8
profit (%)35.852.1

  Unfortunately, these results are not completely frank in that for 1999-2000, the quality receipts accounted for about 55 per cent or £155 million of South West Water "turnover". Extracting this figure from the above gives actual operational results as follows:
£ million
South West Water
£ million
"turnover"312.0 126.4
operating profit12.1 (8.2)
profit (%)3.9(6.5)

  Without the capital investment funds then, the Pennon profit comes down to a less impressive 3.9 per cent whilst the core company actually registers a 6.5 per cent loss! However, these results are again not necessarily all that they might seem as an examination of the operating costs will show—but first a brief look at the dividends.


  19.  From the adjusted profit or loss figures shown above there would appear to be little scope for generous dividends to be paid from the profits gained from the South West Water utility operations or from other Pennon group companies. Yet substantial dividends were paid—to the tune of no less that £64 million from South West Water to Pennon and £65.1 million from Pennon to its shareholders. From these figures it is clear that nearly a half of the estimated £155 million quality investment revenue was in fact transferred from the regulated core company to Pennon by way of dividend.


  20.  The apparent fact that, discounting the quality investment receipts, South West Water returned a loss on its utility operations revenue is another figure that cannot be accepted at its face value. There must be the thought that if the profits reported for Pennon and South West Water were much above the 35.8 per cent and 52.1 per cent respectively shown in the first table, it would invite comment and investigation with the possibility of adverse comment in the media and/or a further tranche of windfall tax. There might therefore be the temptation for operating costs to be exaggerated to save the embarrassment of profit figures that were too spectacular. The two main items in the South West Water 1999-2000 operating costs were "Other external charges" accounting for £43.8 million and "Depreciation" accounting for £44.6 million—each amounting to about one third of the total operating costs. These two items are briefly discussed below but it should be noted that for proper accounting the operating costs should be reported in greater detail with each item properly justified particularly where there is the direct transfer of funds to associate companies.

  21.  The item "Other external charges" is obviously insufficient to account for £43.8 million of the £134.6 million total operating costs but is a standard item in most company reports and for about the same 40 per cent of total costs. The 1995 Monopolies and Mergers Commission report on South West Water shows that a regular item in its costs was "Services from SWWPlc"—SWWPlc being the parent now renamed Pennon. In 1994, the total under "Other external charges" was £40.9 million of which £7 million was for "Services from SWWPlc". Assuming that 7 years later this figure has risen to about £10 million, it will now amount to about one third of the total South West Water manpower costs. This would buy an awful lot of service and clearly should be properly detailed and justified.

  22.  With the capital investment programme entirely financed by customers through the quality investment surcharges, the charge of £40.4 million for "Depreciation"—26 per cent of the total quality investment receipts of £155 million—seems excessive. As these charges are presumably "capital allowance" claims against tax, the bulk of these funds should be set aside for the investment programme but there is no obvious reference to this in the OFWAT report on the 1999 price review. Alternatively of course this might simply be a device to reduce corporation tax which raises the question as to whether the Inland Revenue, in accepting these capital allowances, was properly informed that the capital programme is financed entirely by customers through the capital investment surcharges. The weasel wording here would be that the investment programme is financed by shareholders "through the ploughback of profits", a formula that has been used by industry and company representatives in the past to confuse debate.


  23.  The 1999-2000 South West Water regulatory accounts show corporation tax of £11.4 million with £40.6 million paid the previous year. As demonstrated above, virtually all of the profit on which this tax is levied is in fact attributable to the receipts from the quality surcharges. In order that the companies are adequately funded, this tax has to be allowed for in the prices as the Director made clear in his report on the 1999 price review. This is an unfair tax for water customers on top of the quality surcharges and good reason in itself for the quality investment funds to be held in separate accounts with expenditure properly accounted for and allowable against tax. This tax is also discriminatory in that the companies with the higher rates of surcharge will generally report higher profits and pay more tax—the highest levels of tax will therefore be passed on to customers who are already paying the highest quality surcharges.


  24.  Also included in the 1999-2000 South West Water regulatory accounts is the item "Net interest payable" at £38.8 million—up from £32.5 million the previous year. This £38.8 million represents a loss of revenue equivalent to about £60 from the average 1999-2000 South West Water charge of £356. The company's net debt, at 31 March 2000, was £528.3 million or £800 per household. On an industry basis, the total net debt of the private water and sewerage companies in March 2000 was £12.22 billion, an average debt of over £500 for every household in England and Wales. Whether the Director has indeed ensured that the companies were able to finance their functions or not, there are serious questions to be asked about this colossal debt. Whether due to underfunding or overspending this debt must eventually be repaid and in the meantime there are the interest charges which, if the customer is not being made to pay, can only further increase the debt.

  25.  The total industry debt has almost quadrupled from (only) £3.54 billion in 1995 to £12.22 billion in just five years—representing an overspend of 25 per cent a year on an annual "turnover" of about £6.8 billion. If this debt is at all justified, the rate of increase can only accelerate under the pressure of increasing interest charges and this year's 10 per cent price cuts. It will then be only a matter of time before companies have to be bailed out if water and sewerage services are not to suffer for need of cash.

  26.  It is unfortunate that those who purport to represent the customer interest are generally not very well informed. An example is given by the House of Commons Environmental Audit Committee in their recent report Water Prices and the Environment, paragraph 234, which informs us

    The last regulatory price review has left some water companies, already with high debt levels, with serious financial difficulties. They are finding it increasingly difficult to raise the billions of pounds necessary for investment over the next five years and water share prices have been significantly downgraded since the price review. They are now looking for ways to restructure to create greater shareholder value, reduce their debts and avoid becoming take-over targets like Hyder.

  27.  This is a typical example of the lack of informed opinion which purports to represent customer interests in any debate on water regulation. In considering water prices it would be interesting to know what relevance the committee saw in "water share prices" and the problems in avoiding becoming take-over targets—in both cases referring of course to the group parent companies rather than the regulated core companies for which any take-over must be approved by the Director. The committee also blithely accepts the companies' story about finding it "increasingly difficult to raise the billions of pounds necessary for investment over the next five years" when a cursory examination of the OFWAT report, Future water and sewerage charges 2000-05, would show that this investment is in fact provided for in the price limits to the tune of £15.6 billion as indicated in paragraph 5 above. The committee is also surprisingly unconcerned about the present "high debt levels" which have been accumulated despite the £34.4 billion quality investment cash provided through the 1990-2000 customer surcharges.

  28.  Schedule F of the Licence of Appointment requires the companies to certify, with their annual report, that the company has sufficient financial resources to meet its obligations for at least the next 12 months. This from the South West Water, June 2000 report, is typical

    The Board of Directors of South West Water Limited has resolved that a certificate be issued to the Director General of Water Services confirming that in the opinion of the Directors, the Company will have available to it sufficient financial resources and facilities to enable it to carry out, for at least the next 12 months, the Regulated Activities (including the investment programme necessary to fulfil the Company's obligations under the Appointment).

  There would seem nothing to be achieved by seeking this assurance of sound finances if it were merely intended that the "sufficient resources" completely ignored debt and any necessity for additional borrowing. As an assurance of adequate financing it is utterly meaningless! In view of the inordinate debts in the industry, of which the Director is obviously aware, this seems to be yet another example of "arm's length regulation". Schedule F should either be enforced properly or modified to specify the level of debt that may be overlooked when giving assurances of adequate financing.


  29.  The Environmental Audit Committee also refers to the latest wheeze of the water companies which is to restructure "to create greater shareholder value and to reduce their debts". The basic plan here is to create mutual companies, wholly owned by the customers, which will purchase the assets of the regulated companies and subcontract the operation back to the present companies. The purchase price will presumably make due allowance for the assets already paid for by customers through their contributions to the quality investment programme. The mutual companies will also assume responsibility for the debt, be non-profit making and financed entirely by debt. Whether such companies can maintain the commercial acumen and motivation which were the objectives of privatisation in the first place is questionable. Certainly the proposals so far (from Yorkshire Water and Welsh Water) show no recognition of the problem presented by the mounting debts—that they are either due to funds being siphoned off to the non-core sector (which should perhaps be made good before any take-over) or due to underfunding (which can only be corrected by substantial price increases). The financing of the mutual companies entirely be debt also holds uncertainties for customers in that much of their water bills will be directly related to interest rates which, from present levels and in the long-term, will have a far greater scope for increase than for any significant decrease. The companies also claim that mutualisation will offer significant advantages for customers but these parts of the proposals are rather sketchy.


  30.  The charges for metered water comprise a fixed or standing charge plus the variable charge for the amount of water actually drawn. In a competitive situation, with individual customers having a genuine choice between at least two suppliers, these charges would of commercial necessity remain closely related to actual marginal costs. The charge to customers for a cubic metre of water would be strictly based on the additional cost to the company of that water being drawn. Likewise with the disposal of the waste water. The standing charge would be related to the cost of maintaining the infrastructure and availability of service without the additional costs associated with "throughput".

  31.  Two companies in competition would have some flexibility in pricing on the basis of customer perceptions of relative quality of service but domestic prices would have to remain both competitive and profitable through the range of light and heavy users. If one company were to fix on an artificially low standing charge but compensating with a higher metered charge, it would no doubt gain the majority of the less profitable low volume users but lose the potentially very profitable high volume users to its competitor. Similarly if the standing charge were to be set higher with reduced metered charges, the less profitable high volume users would be attracted but the more profitable low volume users would be lost. Customers, given the choice, will cherry pick!

  32.  The monopoly water companies do not have these problems and their charges, if not properly regulated, can be well out of balance. For example, the present annual standing charge for South West Water is £36.60 with a metered charge of £2.18 a cubic metre. Quite apart from the quality surcharges which complicate any assessment, it is fairly obvious that a customer running a cubic metre of water down the drain will not cost South West Water anything approaching an extra (say) £1. Similarly, assuming all 680,000 customers were metered, the revenue from the standing charge alone—about £25 million—would not even cover the 1999-2000 manpower costs out of the total operating costs of £134 million.

  33.  This excessive loading of the metered charges has a number of unfortunate consequences for customers. As a rule of thumb for South West Water customers, normal household water usage will cost about £100 a year for each person plus the standing charge. For a family of three the bill might on this basis be about £350 compared with the average household charge of £312. The charging scheme is therefore particularly attractive to those with high unmetered charges—living in larger houses—but no children. This represents a loss of revenue for the company which it is permitted to recover by rebalancing—by increasing the charges to all other customers!

  34.  Families with children do not generally find the metered tariff so attractive but might choose it on the basis of potential savings. Such families, particularly if on low incomes can be driven to economise hard. A couple with three children, for example, with normal water usage might expect an annual bill of £500 to £550. If they were to aspire to restrict their bill to about £300, consumption would have to be cut almost by half—to about 16 gallons a day for each person. With 10 gallons estimated as the normal daily consumption per person for cooking, washing and drinking; two gallons for each toilet flush and six gallons for a shower, the necessary economies could only be achieved through lower standards of cleanliness and hygiene with attendant health risk. For many struggling families the pressure to economise must be vicious when, for example, at South West Water prices, a daily shower for a family of five will probably cost more than £100 a year on the water bill!


  35.  It is Government policy to encourage competition between the companies which might eventually be a good thing for customers. However, there is the question as to how long it might be before householders in general have an effective choice of suppliers. One disadvantage of what little competition there is at present is that it gives the companies justification to claim commercial confidentiality where transparency would be more appropriate in ensuring that customers receive a fair deal. Commercial confidentiality is of course vital for companies genuinely contending for market share—it is important that marketing plans and improved techniques do not become known to competitors. However, as far as the water companies are concerned, it would benefit everyone if there were more transparency. Innovations and improved techniques could yield efficiency savings for all if they were made known throughout the industry instead of remaining within one company because of what little effective competition there is. Any slight disadvantages to shareholders in this greater transparency would surely be a small concession for the £50 billion investment programme that has been entirely financed for them by customer surcharges.

  36.  It is not as if these attempts to introduce competition hold no threat for household customers. As it is, competition is largely available only for bulk users but the revenue loss must be made good, as with the losses on metered customers, by rebalancing—increasing the prices for others. This is clearly to the particular disadvantage of household customers. There is also the question as to whether the reduced prices for bulk users should include the full contribution to the quality programme or whether that too should be "rebalanced" to domestic customers? This problem is further complicated in that the competing companies will have different rates of quality surcharge. Clear guidance is obviously necessary to protect the interests of the ordinary domestic customer.

  37.  There would be considerable benefit for all customers if there were greater transparency with a free exchange of information to ensure that advances in one company can be paralleled throughout the industry for the benefit of all customers. On this basis, and taking into account other concerns expressed in this paper, it would be of far greater benefit to customers if any further attempts to foster competition were deferred until some order is established in the financial affairs of the companies and there is some solution in sight for the present horrendous level of debt.


  38.  The Director, in the OFWAT report Future water and sewerage charges 2000-05, stated that the companies will show an increasing capital value and therefore profits will also show "an increasing trend as companies will earn a return on the growing capital base". This implies that the Director has made provision in the current prices for increased returns for shareholders on the strength of the quality investment programme which, in the Director's own words was "financed entirely by customers". This is clearly outrageously unfair on customers. The salt in the wound is that customers who pay the most in capital surcharges will also pay the most for these additional, quite unjustified, payments to shareholders.


  39.  The Government requires that certain vulnerable household customers on metered tariffs should receive help to ensure that they do not have to reduce their water consumption below the level of need. Those who might qualify are households with a member in receipt of state benefit and obliged to use significantly more water because of a medical condition. Families in receipt of benefit and with three or more children under the age of 16 may also qualify. The water supply must be metered but the maximum annual charge is set by OFWAT and is guaranteed to be no more than the company's average annual domestic charge. For South West Water customers in 1999-2000 this maximum charge is £310.

  40.  For beneficiaries with an unavoidably heavy water usage who, even with stringent economy cannot reduce their bill below £310, this scheme will obviously be of considerable benefit (although even wealthy customers of other companies might still consider this bill to be a bit steep). However, £310 represents a consumption of only 76 gallons a day, compared with a typical family consumption of about 25 gallons per person per day. The metered charge being set as high as it is (at about a penny a gallon), there will still be a strong incentive for some low income families in the scheme to economise more than is prudent in order to keep their metered bill below £310.


  41.  The private water companies are subject to normal commercial audit which is no doubt thorough and meticulous. Such audit is, however, only appropriate for normal commercial companies. It is by no means adequate for monopoly suppliers of essential services whose captive customers, in addition to the normal utility service charges, pay more than the same again in quality surcharge in order to finance a capital investment programme which would normally be the responsibility of the capitalist shareholders. In fairness to customers, the accounts should be examined by an auditor appointed by the Director with the specific responsibility to ensure that the principles of the ring fence are strictly observed and that expenditure of the funds intended for the quality programme is confined to the projects for which it was intended.

  42.  For greater accountability, the water and sewerage segment accounts should be separated and of course split between utility operations and quality investment programme. Apart from facilitating more effective audit, this will enable sensible comparisons to be made without the quality revenue falsely inflating "turnover" and profit figures. The separate segmental accounts will also enable sensible comparisons to be made between sewerage operations and between water operations throughout all the companies.


  43.  To enable customers to be better informed, and make sensible comparisons between prices through the companies, the water and sewerage charges should be given individually on all bills, with the quality element separately against each. It is also important that the utility/quality split in all special tariffs, those for bulk users for example, are made easily available for public scrutiny.


  44.  The annual regulatory reports are currently made available, on request, with no publicity or news release, some weeks after the publication of the parent company annual reports. The regulatory reports therefore, as no doubt the companies intend, go completely unreported by the media. The companies should be required to include their full regulatory report as an appendix to the annual report of the parent company.


  45.  Reference has been made, in paragraph 26 above, to the lack of concern for the customer interest in the Environmental Audit Committee. Whether other organisations who claim to speak for customers have anything worthwhile to offer will no doubt be evident from their contributions to this consultation. Of particular interest will be the submissions from the various OFWAT Customer Service Committees who, whilst probably effective enough as far as any shortcomings of water companies are concerned, remain staunchly loyal to their OFWAT associations on the subject of financial regulation. The establishment of a truly independent Consumer Council for Water is therefore most welcome. It is of course important that the Consumer Council should not be dependent on the approval of the Director in pursuing the interests of customers in areas, such as financial regulation, where the Director has direct responsibility. It is also important that the present OFWAT Customer Service Committees are not seen as a model for the proposed Consumer Council for Water. There should also be serious thought before any OFWAT staff or members of the Customer Service Committees are appointed to the new Consumer Council.

January 2001


Average bill
Utility charge
Quality surcharge
Quality per cent
Water and sewerage companies
South West31299 21368
Welsh26497 16763
Anglian245119 12651
Wessex24058 18276
Southern23898 14059
North West22531 19486
Yorkshire20970 13967
Northumbrian19671 12564
Severn Trent19583 11257
Thames18182 9955
Water companies
Tendring Hundred130 844635
Dee Valley12277 4538
Folkstone & Dover120 408067
Mid Kent11744 7362
South East11151 6054
Essex & Suffolk109 644541
North Surrey10565 4038
Three Valleys10461 4341
Bristol10250 5251
Sutton & East Surrey101 524949
Birmingham & West Hampshire97 455254
York8551 3440
Cambridge8453 3137
South Staffordshire83 434048
Portsmouth7643 3343

  Details extracted from the Ofwat report Future water and sewerage charges 2000-05 with average bills taken from the Individual Company Summaries given in Part 3 and the quality elements from Table 8.

S G Beale


January 2001

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