Looking to invest in water? You already are!

Few people feel good about their water bill. Will it make you feel better to know that you are part of a major infrastructure financing scheme? It should. Though it is more fun to spend money on sweets and entertainment, investing in infrastructure is about the future. It is about the legacy we leave behind to our children.

When the rose-tinted glasses are removed, though, a few things might make you think twice about your investment: Did you know that the average water bill in Portsmouth is £94, but that the customers of South West Water in Cornwall and Devon pay more than twice that? And did you know that the difference between having a water meter or not could be as much as £50 a year? Not to mention the fact that all those who do not pay their bills are costing you about £15 a year?

So, though the financing of water in the developed world relies heavily on charging customers for the provision of water, this source of financing is a less than straightforward – both on behalf of the consumers and the water companies.

It is time to consider better ways to charge customers.

The basics of charging

The price of water in the UK is negotiated between each of the country’s 30+ private water providing companies and the regulator Ofwat. Anything you pay, the government has signed off in return for promises of sustainable provision of water.

When they pay more in Plymouth than in Portsmouth, this has all been agreed with Ofwat, which look into the following when agreeing on prices:

  • The day to day spending of the company
  • The financing of its capital investment programme
  • Liable tax
  • The financing of previous capital investment programmes.
  • Rewards for outperformance

There must be an allowance for profit in there somewhere, wouldn’t you think? And call me an idealist, but doesn’t ‘rewards for outperformance’ when we are talking utilities translate into something like ‘let the customers pay more – to a monopoly – than they need to’ ?

Surely, there must also be a good business case for outperforming – if nothing else, any capital saved wouldn’t have to be borrowed. And this would lower the price of future water. But of course, this ay matter less to monopolies than it should.

Anyway, the government is good enough to pick up the slack and the tab when the size of the bill becomes too much. This week, a Bill has been passed in parliament allowing the South West Water customers £50 towards their water bill. All footed by the government, ie taxpayers.

As you may have noticed, this all looks good from the point of a utility in need of financing.

The problem with user charges

Unfortunately, an increasing number of people do not pay their water bill.

As the average water bill goes up with about £20 in the United Kingdom this year, the bill the paying customers have to foot is about £15 higher on the average because of unpaid bills. The amount of outstanding debt to water companies in the UK has risen by 51% since 2005/06 and was £1.64bn in 2010-11, according to Defra.

Most of the debtors are in the rented property sector, where 19% – 1.4m – of rental households spend more than 5% of their income on water. Unsurprisingly, social tenants make up the larger part of these.

In the current economic climate, it seems unlikely that this trend will change any time soon. More unpaid bills should be expected, leading to higher bills for the paying customers which again will make water unaffordable for even more.

It is a vicious circle and one that should be considered carefully. Maybe this kind of financing is fatally flawed. Maybe other more drastic measures are needed to match the expense of water provision with the output. Restrictions on water use may be necessary to keep the business sustainable.

Enter the water meter

This is where the water meter comes in. With one of those, you pay for your actual consumption rather than your assumed consumption based on the size of your house. A single person living in a four bed room house would statistically be much better off with a metre, while the large family living in close quarters would not. In effect, the old un-metered system has been strongly biased towards the wealthier part of the population while making saving water economically futile.

Getting a water meter should be easy. Owner-occupiers and tenants with a fixed term tenancy of at least six months should be able to get one installed free of charge. And if their water bill goes up, they can switch back to unmetered if they do it within 12 months.

Why should you consider this? Well, the savings for going on a meter could be quite substantial. On the average, those with a water meter pay £159 a year, while those paying for unmetered water pay £199 on the average.

This difference is enough to make you wonder, if metering is in the interest of the water companies from a financial point of view.

I will argue that it is, albeit not in the short run.

Unless the demand for water goes down and the cost of providing water goes down accordingly, higher bills will lead to more unpaid bills and threaten user charges as a source of finance.

Only with meters will consumers get an incentive to save the water, so though the water companies stand to lose money from providing the meters and from the subsequent lower charges, over time this seems like the only way to go to provide sustainable financing through charges.

Hopefully, the draught will add to the urgency of changing and cause a representative from my local water company to turn up at my door step unannounced.

I shall sit him down for a cup of tea.

– Anne-Louise

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