Smith: sewer flooding and security of supply are customer priorities

CCWater chief Tony Smith is delighted that bills look set to be held down in 2010-15, but he says cuts should not be made at the expense of service. He talks to Annabel Andrews.

The Consumer Council for Water (CCWater) is one of a small band of organisations that supports Ofwat's draft price determination. Published in July, the draft set out the regulator's intentions on prices, and assume a cost of capital that many in the industry complain is far too low. However, the customer watchdog's chief executive, Tony Smith, says: "It looks like good news for customers."

Smith is happy that rises in customer bills have been kept to a minimum, but he is keen to point out that it is not just about the money. "It is not just about the price and the reduction in price," he says. "We wouldn't want to see service getting affected negatively."

Sewer flooding

Top of the list in Smith's book is sewer flooding, and it is something CCWater will be challenging Ofwat on. The organisation's research has revealed that customers rank sewer flooding highly as a concern, even if they have not been directly affected by it. "Ofwat has reduced the programme by about one-third across the whole country and we need to be absolutely clear that they've done that for good reasons rather than focusing just on customers' wallets," he says.

Security of supply is something that customers also value, Smith says. He will be asking Ofwat to confirm that each company has sufficient maintenance funding to ensure they can continue to deliver their service into the future.

Cost of capital cut?

The cost of capital proposed by Ofwat, at 4.5 per cent, is denounced as too low by many companies and investors. CCWater, however, thinks it could go much lower. "We think they've pitched the cost of capital at the top end of their advisers' recommendations and we'll be asking whether that's appropriate or not," Smith says.

Also of concern is "the speed implied by the metering proposals". Smith thinks it is important to take it slowly on metering. Time is needed to assess how well the process is going and to communicate to customers the need for meters in the first place. "If you like, winning hearts and minds," he says.

Metering

Smith thinks the metering target set out this year in the Environment Agency's water resources strategy - a move to full metering by 2015 in water-stressed areas - "sounds very, very rapid... particularly in areas where the penetration at the moment is not that high to begin with".

Equally, he says there are problems with the approach proposed by Anna Walker in her interim review of charges and tariffs, which would see a tipping point at around 70 per cent penetration where companies could then get the right to compulsorily meter. "I don't think you'd want a blanket 'when they get to a certain point you move it over', because the circumstances in different companies are different and I think you need to look at each case," he says.

He thinks the industry should not roll out mass metering until there is protection in place for any vulnerable losers in the move to volumetric charging. He says that safety net is not yet in place, and moving too fast before it is could prove disastrous for the industry, as well as customers.

"Our concern is that if metering is badly implemented as far as the industry's concerned, then it could cause quite a strong customer backlash, and possibly quite a strong political backlash," he says.

Backlash

That backlash "would jeopardise future plans", because keeping customers and government on side will be crucial as the water industry faces up to its many challenges over the next few decades. Smith maintains that it is "in the interests of everyone" that customers are kept on board as the industry upgrades its infrastructure and addresses flooding and climate change. He points to the furore earlier this year when United Utilities tried to implement changes to surface area charging as an example of how vociferous losers can be.

The vulnerable customer safety net, he says, is needed now. "The current facilities - the Water Sure scheme and everything - they're not adequate to deal with the scale of the problem. It's our strong view that there is an affordability problem now. It's most acute in the southwest of England but it is true everywhere."

Affordability

However, he says: "It's not just about water." Families that struggle to pay their water bills are facing "difficult choices" about how and when to pay for all of life's essentials. "So, the question is whether the benefits system is adequate across the piece. Does it reflect sufficiently the impact that water bills can have in terms of the difference across the country?"

CCWater research consistently finds that customers think the responsibility for affordability "rests with government" and that "they are likely not to be too happy with paying cross-subsidies to customers who can't pay".

Debt is closely linked to affordability. Smith says that it costs every bill-payer £11 a year to subsidise non-payers, and that does "exercise some customers when they know that fact".

Debt

He thinks that the traditional classifications of "can't pay" and "won't pay" over-simplifies the situation and leaves one group of customers in the lurch: those on the edge who struggle with money management. "There are large groups of people who find trouble actually managing their money, not just their water bills but the whole array of things they've got to pay for," he says.

He suggests companies should talk to these customers as early as possible and help them manage their bills through payment schemes in order to stop them falling into debt. "They really need a lot of help, actually, and that's still the opportunity for companies to work with those people so that they get to know them. Help them with their money management so they can pay their water bills," he says.

A Consumer Focus future?

It could be argued that the recognition that "can't pays" are likely to be struggling to pay all their bills, and not just their water bills, is reason enough that CCWater should be subsumed into Consumer Focus, which incorporates the old Energywatch and Postwatch.

Smith concedes that the bodies need to work together on some things, such as affordability, sustainability and shared areas of expertise. However, he maintains that they are doing that already, and the intricacies of the water industry mean it needs a special focus.

"Water is a monopoly industry. It's got unusual characteristics. Having five-year reviews, customers don't have a choice, so there are specific things about water that need a lot of semi-specialist knowledge as far as consumers are concerned, to represent the consumer's view. We think that the focus on water needs to continue, whoever it is that does it in the future, whether it's us or anybody else."

Negotiated settlements

CCWater has long argued for the use of negotiated settlements in the price review process and has over the past year seen the same thing recommended by Stephen Littlechild, Anna Walker and Martin Cave.

Smith is keen to point out that he is not proposing "some radical upheaval of the regulatory process". Instead, he says: "We think this time it's actually worked pretty well. It's not perfect but it's improved on the previous price review and now we want to move it on further."

To do this, he proposes bringing more "real" customers into the process and giving more feedback on consumer issues at an earlier stage. "That would be really good because it makes customers understand what's going on more, maybe empowers them to a greater extent."

Service Incentive Mechanism

One price review innovation for customers he does welcome is the introduction of the Service Incentive Mechanism, which will for the first time introduce a qualitative measure of the consumer experience (via surveys) into the incentive mix. But he has some concerns. He says the percentage loss or gain up for grabs is too small, with companies able to gain only 0.5 per cent or lose 1 per cent. "A bigger proportion of the focus of the companies should be on the satisfaction of customers... How important is this to the directors? We think it should be important," he says.

He also argues that it is wrong that the survey sample is limited to those consumers who have had direct involvement with their water company. "The other focus of the company should be its general perception out there. Everybody is a consumer of their product. That should be quite an important measure for them."

Business plans

He says the business plans submitted to Ofwat were a mixed bag for customers. At the start of the process, CCWater asked the companies individually to reflect customer views and wishes in their plans.

According to Smith, some companies clearly demonstrated that and others did not. Smith says some companies included consumer research in their plans, but "actually when we looked at it, it showed that only 50 per cent of their customers were happy with the plan - and in some cases significantly less".

CCWater has told Ofwat to challenge such plans strongly, "because we don't think it's what customers want". Again, Smith says that what customers want is not just a low price. "What we don't want is great swathes of what customers want taken out by Ofwat... what we do want is for those companies that were not reflective of customers to be challenged - and challenged hard."

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