PR19: Are bill-payers in for a shock?

James MacKenzie, Policy Manager at CCWater
James MacKenzie, Policy Manager at CCWater

Claims that water bills could reduce by an average of 4% in 2020-25 may not be all they seem, with added extras creating an uncertain future for bill-payers. James Mackenzie, Policy Manager at the Consumer Council for Water, explains.

Last autumn, water companies across England and Wales published their initial business plans for 2020-25, which set out how they intend to invest in service and infrastructure during the period, and also indicated how much their customers could pay. But are the prices presented in these plans painting an accurate picture for consumers, or could bill-payers be in for a shock if these plans go ahead?

With most of the current business plans presenting bills in ‘real terms’ – i.e. before inflation is added – it’s not until we include the cost of inflation that we see a more realistic picture of potential bill levels. Contrary to the reductions implied by business plans, customers of all but three companies will see their bills increase once an assumption of 2% per annum inflation is taken into account. Once inflation is added, some customers could even see bills go up by as much as 10% over the five-year period. That being said, bill-payers in some areas could still see a decrease, even after inflation is added.

Perhaps even more worrying than inflation is the potential impact of Outcome Delivery Incentives, or ODIs. This is a concept introduced in the last price review, which aims to link bills more directly to company performance, allowing water companies to claim financial rewards – funded from customers’ bills – for exceeding their objectives. These will mostly be applied ‘in-period’ in 2020-25, meaning that customers could see bills rise with little to no warning.

While scrutinising water companies’ business plans, CCWater has identified an inconsistent approach to ODIs across the industry, with some companies bidding for significant rewards for performance levels that aren’t particularly stretching. Furthermore, we believe ODIs should only be applied by companies where there is strong customer support for them doing so.

So far, business plans have failed to evidence strong industry-wide customer support of the concept of ODIs. Although companies did conduct research with customers that was diverse both in terms of methods and quality, the evidence shows that some customers do not support the concept of paying rewards for improving performance, or did not support the specific package of ODIs companies developed. Only six companies demonstrated clear customer support for the overall concept of using ODIs, while others scaled back their proposed rewards to reflect the views of their customers. What is of greatest concern is where companies have applied ODI rewards with little or no customer support, and it’s important that companies re-think this in the coming months while changes to business plans can still be made.

With so much uncertainty about the future of water bills, companies should be transparent with customers about how incentives will impact bills and what customers will receive in return for rewards. Water companies still have time to amend their business plans to better reflect the needs of customers, and CCWater will be keeping a close eye on whether these changes address the issues that matter most to customers. We will also be calling for Ofwat to consider in its draft determinations that any ‘real terms’ presentation of bills may not reflect what customers will actually see over the five years.

Categories: Price Review