The new Minister responsible for Water, Richard Benyon MP, has promised to review the high water bills in the South West in July
Torbay MP Adrian Sanders has welcomed the news and plans to co-ordinate a cross-party campaign from Devon and Cornwall’s MPs to convince the Minister to implement the recommendations of the Walker Review, which called for West Country water bills to be brought down to the national average.
The water regulator Ofwat is currently investigating how to implement these recommendations.
Adrian said: “While making favourable comments, the last Government dragged its feet on changing the unfair water charging system we have in the South West. There is now a chance in July to undo the damage caused all those years ago by privatisation.
“I will be working with MPs, hopefully from all parties, to convince the Minister to implement the Walker recommendations in full.”
• Reporting on the news of South West Water profits, the Devon Week said: “South West Water, which is constantly under fire for the high charges to its customers, has seen pre-tax profits rise by 8.7 per cent to £132.5 million. Pennon, which owns South West Water and waste management company Viridor, had a 14.2 per cent rise to profits, to £189.1 million.”
There is no dispute that since flotation in 1989, South West Water household bills for water
and sewerage services have been, and remain, the highest in England and Wales. The general
understanding has been that the charges of all the privatised companies had to be high because of the
cost of the capital investment programme necessary to make good past neglect, meet improved
standards for water quality and to protect the environment but that South West Water bills were
inordinately high because of the additional cost of “Clean Sweep”, the programme to install sewage
treatment works around the long peninsular coastline and to discontinue the discharge of raw sewage
from about 200 sea outfalls.
This explanation for the excessive South West Water household charges was true, at least in
part, until recently but is no longer so since Clean Sweep was substantially completed in 2007. This is
confirmed in the recent Walker report (Table 8, page 159) which shows` the capital expenditure per
household, by company, for the period 2010-15. It transpires that, for the next 5 years, South West
Water customers are to be charged an average of £558 per household to finance the capital investment
programme compared to the industry average of £549. That is, the present average South West Water
charge per household to finance the capital investment programme is actually less than £2 a year above
the industry average. The inordinately high South West Water household bills, obviously, can no longer
be attributed to the cost of the ongoing South West Water capital investment programme.
There is no doubt that South West Water household bills remain inordinately high, at around
40% above the average, and that this is certainly not, as previously understood, due to the cost of the
capital investment programme. However, we are fortunate that the explanation for the continuing
excessive charges is also given in the Walker report (table 7, page 158) which shows the average
Regulatory Capital Value (RCV) per property, by company, accrued since flotation. As might be
expected, on the basis of the excessive charges that have been paid by South West Water customers to
finance the capital investment programme, the accrued capital value for South West Water is well above
the industry average. In fact, the South West Water accrued RCV since flotation amounts to no less
than £3,053 per household which is more than twice the industry average of £1,441. The significance of
the figures, as the Walker report indicates (paragraph 14.3.1, page 159) is that customers are charged in
full on these post flotation assets in order to pay the companies, and their shareholders, a so-called
“return on capital”.
Ofwat and Defra, when questioned, attach great importance to “return on capital” as essential
to attract investors but this is an obvious sophistry which falsely implies that shareholders, not water
customers, have financed the capital investment programme. However, the assertion does at least
confirm that the return on capital element in the Ofwat financial projections is not intended to finance
any function but is intended to be accounted as profit. As can be seen in the Ofwat financial projections
given in Appendix 3 (pages 152 and 153) of “Future water and sewerage charges 2010-15:Final
determinations”, the 5 year aggregate “return on capital” for South West Water is £618 million.
Together with a tax provision of £110 million, the total “profit before tax” projected by Ofwat is no less
than £728 million within a total revenue provision of £2,082 million. At 36% this is a ridiculous profit
provision for a monopoly run-of-the-mill water and sewerage utility with all expenses paid even to the
inclusion of a fully funded capital investment programme.
The Walker review at least recognised that South West Water charges are excessive and
recommended “corrective adjustments” aimed at reducing bills by about £50. It is suggested that these
adjustments might comprise subsidies of around £33 million a year or a one-off transfer to South West
Water of about £650 million, these payments to be funded directly by the government or by other water
customers. These proposals have certainly caused a stir in the South West but are naive and not likely to
be implemented. Even if the payments were to be government funded, customers of other companies
with bills above average will no doubt argue that they too deserve some relief. If they are to be funded
by other water customers, there will no doubt be further claims for exemption from the additional
charges and, anyway, why should customers of other water companies contribute to the excessive
profits of South West Water? All this argument will inevitable prompt closer examination of the
excessive profits of other companies and the huge dividends taken by parent companies and obviously
draw attention to the so-called “return on capital” which, as discussed above, is an additional charge
based on assets for which customers themselves provided the finance. These charges are of course
unwarranted and clearly show that South West Water customers are not alone in being overcharged.
The demands for a complete review of the Ofwat regulatory regime will be irresistible.