I thank the hon. Gentleman for those comments. There is widespread acceptance that sustainability should be a core feature of Ofwat’s work, yet it seems that some people are setting their face against having that on the face of the Bill.
The UK has been faced with an increase in the number and severity of flood events, and it is vital for the Government to provide widespread and affordable household insurance in at-risk areas. I thus welcome the proposed new legal framework that seeks to establish Flood Re—a levy-funded reinsurance pool for high-risk individuals. If that is introduced, insurance companies must make their customers aware of the scheme and the opportunities it provides. A number of my constituents in Llangammarch Wells were really frightened by some press releases put out by the Environment Agency in Wales—now called Natural Resources Wales—about restricted insurance. After further consultation with Natural Resources Wales, we have been able to sort that matter out.
Water bills set a particular challenge for low-income families. There are no specific benefits such as housing benefit or council tax benefit to help with these costs, but the Government have stated that they will continue to support the WaterSure initiative, even though take-up has been rather poor. Other water companies can bring forward their own schemes, and Welsh Water provides a good example of how that can be done in practice.
The water industry is responsible for the most essential public services. Few things are more important for public health—or indeed for normal day-to-day living—than a safe and reliable supply of drinking water, and the efficient collection and treatment of waste water. More than 90% of health improvements over the last two centuries have resulted from the provision of safe-to-drink tap water and proper sanitation.
The water industry everywhere is very capital-intensive. Many of its assets—reservoirs, treatment works, water pipes and sewers—have very long lives, but, even when we allow for that and for the fact that investment doubled after privatisation in 1989, the average age of water company networks is increasing every day. The rate of renewal of sewers, for example, gives an average assumed age of more than 600 years. Investment levels are agreed with regulators every five years, and investment decisions are based on the priorities for the years ahead.
The water industry invests and spends more than it receives from its customers through bills. It finances its expenditure by raising money from investors in the
capital markets, and so far that money has come almost entirely from bonds and other borrowing. In other words, the industry is cash-flow negative, and that will persist, partly because of the backlog of asset renewal but mainly because of the new standards that must be met. As a result of that cash-flow negativity and continuing high and necessary levels of investment, the cost of capital and funds raised from the capital markets is key, and will become more and more important. The cost of capital on money raised since privatisation already absorbs a third of the bill, and relatively small changes in the allowed or achieved cost of funding. Every 1% saving on the cost of financing the industry’s “regulated capital value” reduces customer bills by 5%.
Given that so much of the value chain is represented by the network of assets, both the raw material and the retail element represent a very small part of the overall bill. The Water Bill proposes that business customers in England should be allowed to choose their water retailers, but the Welsh Government have decided not to go down that route. As Professor Dieter Helm has said, large business customers will argue that they should pay only marginal costs, and if water companies succumb to the pressure, it will mean higher bills for household customers.
The true cost per customer varies enormously, and the rural customer costs many times more than the urban customer. Averaging the cost in that way is good public policy. “De-averaging” poses a real risk by giving business customers choice, thus causing water companies to reduce their tariffs locally to satisfy demands from big customers and to recover the lost income from household customers who cannot exert the same pressure.
The water industry should be owned, managed and operated in the interests of customers. I do not believe that it should be re-nationalised, but this long-term industry provides us all with the most essential of public services. Few things are more important to public health, and indeed to modern life, than a safe and reliable supply of tap water.