Future price limits for UK water utilities

There is much to be welcomed in Ofwat’s “Future Price Limits - statement of principles". Certainly focussing incentives carefully to deliver desired outcomes and reducing and removing regulation will be welcomed. But is there still too much emphasis on the Regulated Capital Value (RCV)?

RCV measures the money invested in the water business and the water company’s shareholders get a guaranteed return for the investment made. It’s a nice simple and easy method for the regulator. But is it in the best interest of customers? The big problem is that it encourages water companies to invest in capital solutions not revenue. So innovative ideas like managing the water catchment better to prevent pollutants entering the water course rather than paying to remove them get penalised as often they involve no significant capital expenditure.

Ofwat have looked at the issue of Capex bias and recognised there may be a problem. There is a natural tendency to want to engineer and build things – finding the right balance between Opex and Capex is not easy.   

Will social water tariffs make a difference?

The Government has announced today that water companies will be allowed to reduce water bills for those unable to pay – the so called “social tariff” This will be paid for by cross subsidy from other water customers.

On the face of it, it is an imaginative idea to solve the problem of escalating bad debts. This is already adding over 1% to customer’s bills. The Government is proposing that water companies must ensure that the increase in bills is kept to a level that customers find acceptable perhaps around 1.5%. If the introduction of social tariffs helps to significantly reduce bad debts then it is an excellent idea.

But will it actually work? There is a significant problem. At the moment local citizen’s advice offices are advising those in debt to pay their water bills last – after they have cleared all other bills. This is because there is nothing a water company can do (except plead) if a customer says they cant afford to pay. The result is that many ‘poor’ customers are choosing to pay their Sky bill but not their water bill – is that fair? Unlike other utilities cutting off the water supply is not allowed. So bad debts for the water companies have been escalating rapidly.

It would have been better for the government to suggest a much larger social tariff discount but then to back this up by restoring the right to cut off the water supply.  That is more likely to be perceived as fair to all customers.