Wednesday, 7 May 2014

Water, water everywhere

We’ve had a lot of rain over the last year. The good news is that most reservoirs are full and aquifers have been topped up. The bad news is that many households are struggling to pay their water bills.

There is a cost of living crisis. Inflation has far exceeded income increases over the last 4 years. Inflation in utility, energy and housing bills has been even higher and lower-income working families have been the hardest hit. OFWAT estimates that 11% of households currently spend more than 5% of their income on their water and sewage bill. That’s 2.26 million households across England and Wales, 990,000 adults, 730,000 pensioners, and 540,000 families with children.

Water bills have increased by almost 50 per cent in real terms since privatisation in 1989. Many companies are using complex and ‘opaque’ financial structures, including worryingly high levels of debt, to minimise tax in the UK. The Chairman of Ofwat has warned of increasing levels of debt in the sector: “the overall proportion of equity has diminished from 42.5% in 2006 to 30% of regulatory capital value today with several companies at 80% gearing, thus obtaining only one fifth of their financing from equity”. Profit margins are exceptionally high, with the regional water companies making £1.9billion in pre-tax profit last year and returning £1.8billion of this to shareholders.

The Government’s voluntary approach, by which water companies can choose whether to offer a ‘social tariff’, has resulted in only three water companies offering a scheme, assisting fewer than 25,000 consumers nationally. Following significant criticism, last October, David Cameron’s spokesman briefed that there was imminently to be ‘decisive action on water bills’ from Owen Paterson and Defra. This turned out to be nothing more than a letter to the water companies asking them not to put up bills. You can guess what they did with it!

There is a Water Bill in Parliament at the moment. Cameron and Clegg ought to do three things now:
  • introduce a national affordability scheme – to replace voluntary arrangements - to help those struggling with their bills, funded by the water companies from their excessive profits, thus ending the current postcode lottery;
  • give OFWAT stronger powers to cut bills - when these monopoly providers benefit from favourable economic circumstances outside their control; and
  • enable OFWAT to take corporate structures and levels of investment, tax and dividends into account - when setting the regulatory framework for each company.

Will they do that? I wouldn’t bet on it.