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
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
Secretary to the Council
Response by the Ofwat National Customer
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.
Abstraction and impounding, drought, information,
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.
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.
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.
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
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.
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.
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.
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
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 regulatorsthe Environment
Agency and the Drinking Water Inspectoratein this area.
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
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