*Research conducted by Accent for Utility Week asked water customers how they felt about cross-subsidy in the industry. The findings may surprise water companies, as Rob Sheldon explains.*

Water customers who pay their bills currently spend up to £14 a year subsidising those who do not, or cannot, pay their water bill. How do they feel about that? Is it fair? Does it encourage water companies to soft pedal on debt collection to some extent? Or is it an acceptable - maybe even desirable - social obligation whereby the better-off help the worse-off? Does it cause unwarranted hardship to low-income customers, perhaps tipping them from the "can pay" to "can't pay" categories?

Accent carried out research for Utility Week to find out. It talked to a number of water customers in group discussion format in the London area and individually by telephone in other parts of the country.

*Awareness*

Respondents knew that cross-subsidising goes on - at least to some extent - in other areas. They knew, for example, that they paid some additional, albeit unknown, amount in the supermarket to cover the cost of shoplifting, breakages and in-store damage to goods. They suspected that the cost of insurance premiums must allow for fraudulent claims. They were less aware that train fares include a subsidy to cover revenue lost through fare dodging, or that mortgage rates compensate lenders for defaulters, or that electricity and gas customers in rural areas are more expensive to service than those in urban areas but the cost is spread across all customers. There was no awareness at all of a cross-subsidy in the water bill.

There was an initial feeling that, if such a cross-subsidy for water was required, then it must be because water companies were not doing enough to pursue non-paying customers and claim the money owed to them. On reflection, respondents thought it likely that many customers struggled to pay their household bills, including water, and that this number would probably have increased in recent times as people were made redundant or had their incomes reduced through a cut in hours.

*Cross subsidies, no problem*

When respondents were told the current level of the cross-subsidy on their water bill, they did not think an additional £12 to £14 a year was a problem for them personally or, indeed, excessive. After all, they said, it was the equivalent of only £1 a month - "less than the cost of a pint of beer". They were all willing to pay what they considered to be a small amount to help finance those who could afford to pay their water bill. They spontaneously compared this with the use of prepayment meters for gas and electricity customers, where they said that those who struggled to pay were penalised with a higher tariff. Cross-subsidy was considered to be a far better and fairer option.

However, customers' approval of this cross-subsidy for water was accompanied by the caveat that it should be used only to help finance the bills of those who could be identified as genuinely unable to pay. It should not subsidise those who did not prioritise their household expenditure.

*Other options for helping poor*

Would other ways be more effective in helping customers in hardship? These could include promoting or expanding the Department of Work and Pensions payment scheme, providing a buffer for those moving between Job Seeker's Allowance and low-paid work, or implementing a social tariff.

Accent asked customers to consider the relative merits of a social tariff that could help those who genuinely could pay their water bill. For a number of reasons, customers were very wary. They wanted reassurance that the tariff would be available only to those suffering genuine hardship and not to those who were "just trying it on". Confirming genuine hardship would require means testing of some form, so who could best determine who was genuinely eligible for a social tariff?

There was a strong perception that water companies had detailed knowledge about their customers: that "they know all about us". Although the government already had this information (since it decided who qualified for benefits) and could, therefore, easily determine who would qualify for a social tariff, the problem of non-­payment was seen to belong solely to water companies, and not to the government. However, despite the assumption that water companies knew their customers' circumstances, it was thought that the administration costs attached to means testing and implementing a social tariff would be high. Inevitably, they said, those costs would be passed on to customers, in all likelihood resulting in a higher additional amount per customer than the current cross-subsidy.

*Distrust of change*

In addition to these concerns, there was an underlying distrust of any change to the current approach. Why, customers asked, was any change needed in the first place? They assumed that the cross-subsidy had been included in the way privatisation was set up initially and that the water companies had therefore signed up to this approach at that time. The dissatisfaction with privatisation, profits and fat cats are seemingly never far from the minds of water customers, accompanied by a deep suspicion of change. Any change, it was felt, was likely to conceal a financial benefit to shareholders at the expense of customers.

Despite their strong reservations regarding a social tariff, customers had some sympathy for those with unusually high non-discretionary water use on medical grounds and thought it right that they should have a more favourable tariff. They saw that the needs of these customers would be more easily verifiable than those of low-income customers. This could be done through a doctor's certificate, which would be both cost effective and safe from abuse.

There was little support for subsidising non-paying water customers through income tax. While respondents liked to rail against the privatisation of water, claiming that access to a good water supply and the removal of waste was both an individual's right and an essential social need, they baulked at any government involvement with helping customers pay for this social need.

*Conflict*

There was, perhaps understandably, some conflict in customers' perceptions of the role of water companies. They are both profit-making and providers of an essential service, and customers did not easily understand how these roles sat alongside one another. Their view was that the profit-making role precluded any government intervention in terms of funding, even if it was to help low-income customers. Only a couple of customers made a comparison with Housing Benefit or the Winter Fuel Allowance, where government intervention was considered acceptable.

Just one customer Accent spoke to was positive about how income tax may be a fairer means of helping those who struggle to afford their water bill. This approach, she said, would mean that every working adult would contribute to helping those who need subsidising. That would be fairer than taking a contribution on a per household basis, where single person or smaller households pay proportionally more than larger households.

There was little or no support for a free water entitlement for young children. The customers Accent spoke to (and who included parents) said that people choose to have children and, in doing so, should take into account how they will support them. As one customer put it: "Children are not a passport to handouts."

*Metering supported*

Customers suggested that there could be more gain - social and financial - in water companies penalising those they described as "extravagant" water users. They felt strongly that fresh water was a finite resource that many people wasted. They cited examples of neighbours watering trees and lawns unnecessarily or using hosepipes to wash their cars. They were in favour of metering and spontaneously mentioned the potential offered by smart metering. This led them to suggest that a rising tariff should be imposed on all customers, so that they pay more for discretionary use above a certain amount.

In summary, customers were confused in their responses to the issue of cross-subsidy. If a subsidy was needed in the first place, then they concluded that water companies were simply not doing enough to collect payments. They thought those customers who can pay their water bills, but who choose not to, should be disconnected and taken to court. Those who genuinely need help deserve to be supported by all customers.

*Industry responsibility*

Whereas the government was best placed to identify those genuinely in need of help, it was the water companies who profited from their customers. They should therefore be responsible for helping low-income customers. And the current system of a cross-subsidy was preferable because customers were likely to view any change with suspicion, assuming the water companies were trying to make even more profit out of them.

Customers were satisfied with the value for money associated with their water bill. They supported help for those in genuine hardship but they were also suspicious, constantly feeling that they were being short-changed somehow for the benefit of company profits and shareholders' dividends. It was difficult for customers to untangle these two threads, which means that any moves to replace the current cross-subsidy will have to be very clearly communicated.

Rob Sheldon is managing director of Accent.