Charging ahead? Exploring future approaches to water and sewerage charges
We asked industry experts to share their views on what should be considered for future approaches to water charging. Cathryn Ross, Strategy and External Affairs Director at Thames Water, is the second expert to share her thoughts.
Cathryn Ross, Strategy and External Affairs Director at Thames Water
Cathryn has been Strategy and External Affairs Director at Thames Water since June 2021, before which she was Group Director of Regulatory Affairs at BT Group. Prior to that Cathryn was Chief Executive of Ofwat for 5 years, a period that saw a major transformation of the organisation and which covered the delivery of PR14 and the creation of the PR19 policy framework.
Before joining Ofwat, Cathryn held a variety of roles in regulators including in the Office of Rail Regulation (now Office of Rail and Road), the Competition Commission (now Competition and Markets Authority) and Oftel (now Ofcom). Cathryn started her career as a regulatory and competition economist in consultancy, helping to set up competition and regulatory frameworks in the post-Communist economies of central and eastern Europe. Cathryn is a non-executive director at National Grid Electricity Transmission and National Gas Transmission.
She has also a held non-executive post at the Institute for Customer Service and served as the inaugural chair of the Regulatory Horizons Council.
The structure of charges in the water sector has been a pretty dry subject over the last few decades. We have moved from charges based on a property’s rateable values to volumetric charges. But that’s about it.
However, what the water industry needs to achieve over the next few decades will undoubtably challenge the status quo.
In AMP8 alone, company investment programmes have quadrupled in size compared to AMP7. An October 2023 report from Moody’s estimated that the sector’s investment needs total c. £272bn over the next 25 years. Much of this will be recovered by being added to companies’ regulatory capital value’ (RCV), flowing into bills via depreciation and the regulatory return on capital, reducing the immediate impact on bills. But it remains a cost to be recovered if the sector is to improve performance and resilience in the face of ageing assets, climate change and population growth.
We need to be thoughtful about how we do this, and we need to be clear on what we are trying to achieve.
Charges need to enable (efficient) cost recovery. But they also need to be affordable. This undoubtedly means we need to provide appropriate support to those who struggle to pay their bills. It has long seemed to me that a postcode lottery on social tariffs was unreasonable and unfair. CCW recommended a national social tariff in 2021 and I am pleased to see the UK Government progressing that now. We need to work with Government to implement this swiftly.
Beyond this, though, we need to recognise that the current structure of water and waste charges means that people with low incomes spend a larger proportion of their income on these services than those with high incomes. If water bills need to rise, and they do, it will impact the poor more than the rich. We need to consider whether and to what extent these ‘distributional effects’ matter, beyond the obvious need to provide support to those who cannot pay their bills. This must be a question for society (and its democratically elected representatives) rather than water companies or indeed Ofwat. If it does matter, there are tools available that might make bills more progressive. Indeed, the old system of ‘rateable value’ charging arguably approximated this.
As we have rolled out meters in our area, we have found that around 20% of our customers use around 80% of our water. High water use is correlated with larger properties, and larger properties with higher incomes. So, a shift to a rising block tariff, with prices per litre of water being higher beyond a given consumption threshold, could enable us to recover more of our costs from higher income customers.
Any such move needs very careful consideration. A high consuming property could be home to multiple families with lower incomes. High consumption may be driven by medical needs. It will be interesting to see the results of the rising block tariff trial currently being conducted by Affinity Water, and the trial that we at Thames Water are planning to do in AMP8.
A further question is whether it is a good idea to use charges to provide incentives for water efficiency. The move from rateable value charging to charging per litre of water consumed was welcomed by many both as being fairer (you pay for what you use) and because it was expected to encourage water efficiency. We do typically see a reduction of around 13% in domestic consumption when customers move from unmetered to metered supply. But we do not see reductions in domestic water consumption following our annual bill increase. This could suggest that customers do change their behaviour on knowing that they do pay for the water they use – but they do not change their behaviour according to the specific price they pay, at least where changes in price are relatively small. This in turn suggests that increasing charges for domestic customers would not be an effective tool to drive water efficiency, or that if they were to be effective, the increases would have to be so significant as to be unacceptable.
However, it also suggests merit in revisiting the question of wastewater charging and in particular charging for surface water drainage. In the mid-2000s some companies introduced site area-based drainage charges. It was not done well. Small differences in impermeable site area resulted in big differences in charges. Impermeable site area was not measured accurately. The process for customers to contest charges was not straightforward. And customers were not given sufficient notice of the new charges and were not supported to make changes (such as permeable paving or soakaways) that would have helped them reduce their bills. The charges became known as the ‘rain tax’ and generated concerted opposition from a wide range of groups including the Church of England, the Scouts and sports clubs. Other companies were deterred from taking the same path. But with an urgent need to reduce storm overflows in the face of more extreme weather and with a push for new housing and development, we should look again at this, albeit mindful of the lessons of the past.
There is also an increasingly pressing question about how some really large scale non-domestic customers should pay for their water services. Thames Water, like much of the south and east, is seriously water stressed. And yet there could be as many as 70 new data centres in our area over the next few years, with each one potentially using upwards of 1000 litres of water per second or the equivalent of 24,000 homes’ usage. While we can charge these new customers for the cost associated with meeting their demand, we know that the per litre price of water they will pay once they have been connected to the network does not reflect the opportunity cost of that water. When this demand is so large, and correlated with times of peak demand and low resource availability (ie hot weather) this seems likely to exacerbate water stress, impacting service for customers and the environment.
Whatever happens to water charging in future, as monopoly providers of essential public services our charges need to be fair and seen as fair. The future of charges is a knotty intellectual problem that will need some big brains to help solve it. But that isn’t all it needs. We need a broad debate – including industry, regulators, customers, NGOs, government at all levels – in which different views from across our society and economy can be heard and considered respectfully and constructively.
Given how far this is from the current nature of the debate in our sector, this could prove to be our biggest challenge.