§ Mr. Roger Freeman (Kettering)
I am pleased to have this chance to raise the question of how we charge for the supply of water. I appreciate that my hon. Friend the Parliamentary Under-Secretary of State for the Environment is in the Chamber, and I hope that he will be replying to the debate. He has a keen interest in the water industry and, of course, in the environment. I look forward with special pleasure to his contribution.
I shall concentrate on water authority charges that are levied on the domestic consumer in England. I want to dwell on how those charges are levied rather than on the absolute level. I believe that there is a widely-held feeling of injustice, and that that has become much more apparent since the separation of water rates from the general municipal rate—a process that began in 1974. I and many other hon. Members are well aware of the fact that our constituents are basically discontented about the method of assessing water charges by using the rateable value of the consumer's property. Many consumers believe that that method is inaccurate and discriminatory.
We understand that water charges are likely to rise in the next financial year by somewhere between 8 and 13 per cent. In my area, the Anglian water authority warns of a rise of about 13 per cent. Those increases will only accentuate the inequities of the present method of charging.
I do not want to concentrate in this debate on the reasons for the increase in water rates, except in passing to refer my hon. Friend the Minister to the report of the Select Committee on the Treasury and Civil Service, on which I serve, which reported on 3 December. I draw my hon. Friend's attention to paragraphs 51 and 52 and simply read out the relevant sentences. In paragraph 51 the Committee says:We consider that it is unnecessarily disruptive to increase industry's rate of return over such a short period.The Committee is referring to the fact that the targets for the water industry are to be increased from approximately 1 per cent. rate of return on the assets valued at replacement cost to something like 1.9 per cent. over a four-year period.
In paragraph 52 the Committee concluded:the time has come for a re-appraisal of the relative rates of return for all nationalised industries.Those two recommendations are apposite to the water industry. I hope that we can return at some other suitable time to debate the way in which the water industry finances itself and the level of charges. But that is not my concern in this debate. My concern is how we charge for water, not what we charge.
The Water Act 1973 required the industry by April 1981 to ensure that its charging policy should be so organised and arranged that there should be no undue preference towards and no discrimination against any class of persons. That laudable aim has never been fulfilled.
By 1980 the National Water Council, which has now disappeared, in considering the basis of charging for water, baulked at the introduction of metering. It said:Neither the economic benefits nor the benefit to consumers justify a commitment to universal metering at present.How it could have reached that firm conclusion without evidence and extensive trials I do not know, but that was the conclusion then.
449 By the time we came to the 1983 general election it had become clear that there would be no wholesale reform of the rating system. Therefore, the pressure on the water industry to come up with an alternative method of charging had disappeared.
Since 1981 the Government have supported the earlier recommendation of the National Water Council, that the best way to proceed was optional, not universal, metering. Optional metering is unjust because the choice of installing meters is only really available to the comparatively rich, and certainly the careful and diligent. The present policy of optional metering does not answer the basic charge of inequity in the system.
I welcome the decision recently announced by the Government to establish a steering group, headed by the chairman of the Thames water authority, which is to report early in 1985 on the possible extension of domestic universal metering. Attitudes may be ready for change, and I welcome that.
It may be helpful to comment briefly on the present tariff and to note that the water industry has introduced standing charges and increased those standing charges as part of the total water bill in recent years. Essentially, the argument is that by introducing standing charges—fixed amounts—which the customer has to pay in addition to an assessment on the rateable value of his house, the inequity is to some extent modified. That may be true, but it is not a satisfactory answer to the basic charge of the inequity of the present system.
One might believe that people, being encouraged by the water authorities and the Government to opt to install meters, would do so with great alacrity and enthusiasm. That is not the case. Figures show that less than 1 per cent. of domestic households are metered.
Why is there such a lack of enthusiasm? There are two reasons. The first is the lack of promotion by the water authorities. The second, and probably more important, reason is the relatively high cost of installing a meter. At present, the installation and associated costs must be paid by the consumer up front, and those charges can be significant.
The case for universal metering for domestic consumers rests on three arguments. The first is equity. To charge by the rateable value method is grossly unfair, as I shall illustrate. Two families may live in similar houses next door to each other. A retired couple may live in one and a large family in the other. The large family may own two motor cars, if both husband and wife are working, and there may be a line of nappies out each day. I do not make a judgment on the relative social importance of both families, but their water charges are likely to be the same, although it is clear which family consumes most water. The method of charging is, therefore, unfair.
Secondly, universal metering would provide a better control of leakage. Experts in the industry estimate that water authorities lose about 25 per cent. of the total water supply before it is consumed in the household. The Government fully accept that figure. Leakage often goes beyond the curtilage of the household and the tap. That is a large percentage. With universal domestic metering, the chances of identifying and controlling leakage would be enhanced, but it would take time. Until we have electronic remote reading, it is unlikely that the householder will be able to detect leakage promptly and that the water authority will be able to put the pipes in good working order as quickly as it would otherwise do.
450 Thirdly, universal metering would have the value of introducing the price mechanism. The water industy should be regarded in the same way as the electricity and gas industries. The price mechanism should be available to match supply and demand. If we had universal metering, some of the investment decisions made in past years, including the Kielder project in Northumberland, might not have been made. The water authorities would have had better economic information against which to measure likely future demand.
The hon. Member for Linlithgow (Mr. Dalyell) says that the Kielder system is good. If he studies the use of the reservoir in recent years, he will agree, as my hon. Friend the Minister for Housing said, either that over-provision was made for Kielder or that the reservoir was built too early. I make no specific comment. I merely point out that, with the availability of price mechanism in the water industry, investment decisions could be more carefully taken.
The Government said that this year about £230 million is to be spent on reservoir construction. How is that large sum to be spent without the necessary information that other utilities have about the interplay between supply and demand provided by price mechanism? As financial pressures on the consumer mount, with higher water rates next year and perhaps in future years, the only equitable tariff structure would be one using universal meter.
I shall briefly mention the three principal arguments used against universal metering. The first is that it is regressive. However, social inequalities should be corrected by the welfare state, not by cross-subsidisation by the utility.
The second argument relates to public health. It is said that, with universal metering, some consumers would make false economies — reduce their consumption of water excessively and so endanger their health. There may be something in that argument. If we have a programme of universal metering, it must be introduced gradually and with a careful review of its public health impact.
The final argument against universal metering is that it is inordinately expensive. The present costs of optional metering are not directly relevant to an assessment of whether the nation should embrace universal metering and whether the Government should encourage it, largely because the economies of scale in a programme of universal metering would be such that present estimates of the cost of installing a meter to the consumer who has an option would not be relevant. The announcement of a universal metering programme would so stimulate the research into and development of new meters and methods of installation that costs would be reduced in that direction. The installation of meters could be privatised with benefit, as was the case with conversions to North sea gas. Private contractors could be charged with the responsibility for introducing meters on an area-by-area basis, and consumers could be asked to pay the cost, through the water authorities, during a 10 or 20-year period, rather than to pay the cost up-front, as is the case at present.
The reading of meters is expensive because it is carried out by inspectors on a meter-by-meter basis. If we have universal metering, there should be joint reading of gas, electricity and water meters, and eventually the introduction of electronic remote meter reading, which 451 would revolutionise the way in which the customer and the utilities could mutually control the supply of water, gas and electricity.
To sum up the economic case, I believe that when the National Water Council, in 1980, estimated that a saving of about 20 per cent. in domestic usage would be needed to justify universal metering, it was being too pessimistic. It said that the cost to the nation, and the cost to be borne by the consumer, could be justified only if consumption were reduced by 20 per cent. I believe that, because of the economies of scale argument that I have deployed and because of new techniques and meter designs, that figure is far too high. I would put it closer to 10 per cent. All the experience in Britain and other countries is that universal metering causes a reduction of at least 10 per cent. in consumption. Hence, the costs of metering could be paid easily.
I encourage the Government to consider a rolling programme of compulsory universal metering, to be paid for by the consumer over a long period, with the installation of new meters being performed by private plumbing contractors under the supervision and control of the water authorities. Initially the meters should be read jointly with the other utilities, but, in the long run, we should encourage the introduction of electronic remote meter reading, as that would enable both the consumer and the utility to control better the supply of this valuable and scarce resource. The time is now ripe for a new approach.
§ Mr. Patrick Nicholls (Teignbridge)
I welcome the opportunity to contribute to this debate. I apologise to the House and to my hon. Friend the Member for Kettering (Mr. Freeman) for the fact that I missed the first few moments of his speech.
Water charges concern us all. I have one particular problem, to which I should like to draw the attention of the House. My hon. Friend touched briefly on reservoir building programmes and how they can affect water charges, and as I come from the west country, that theme strikes a particular chord with me. The House will be aware of the problems that there have been in that area. I shall not detain the House by cataloguing the various miseries that we in the west have undergone. To draw the strands together, I remind the House that my hon. Friend the Minister for Housing and Construction was in the west country this summer, standing in the middle of a reservoir, which was completely devoid of water, and which looked like a lunar landscape. The irony was that as he stood there, he had an umbrella over his head because it was raining.
The privations that we have undergone in terms of water shortages probably exceed, or at least equal, anything that any other part of the country has undergone. However, the end to these problems is in sight, because we are now to have our third strategic reservoir. When the Roadford reservoir is finally built, it will be approximately 15 years after the South-West water authority first asked that it should be provided. It will be 25 years after the predecessor authority identified the need for that reservoir. Although the end is in sight, it has not yet come, and when it does, it will not be a moment too soon.
The subject of this reservoir is directly referrable to water charges, through an unusual way. One of the 452 consequences that loss of regional status will have for the south-west of England will be on the way that the reservoir is funded. In turn, that will have an effect on water charges. Already, the South-West water authority is contemplating increasing water charges by at least twice the rate of inflation, and possibly by three times the rate of inflation. Therefore, anything that increases that process has a bearing on the water charges in the west country.
I am sure that I would be ruled out of order at once if I tried to twist the debate round, and made it a debate about the loss of regional aid in the west country, so I shall not do that. However, the direct effects that that has on Roadford are that whereas the South-West water authority could have expected at least £17 million in grant towards the project, it will now receive about £8 million, which is a loss £9 million. It has been receiving grants of £3 million a year for various projects, and that will go as well. There is some doubt about whether the authority will still be able to go to the European Investment Bank, from which it has already borrowed £35 million on rather advantageous terms and with which it is negotiating to obtain more.
One way in which that problem could be redressed would be if the water authority's capital programme were increased. I am aware, and I am grateful for it, that there has been a relaxation already, and that the Minister has said that the water authority can increase its capital programme by about £2 million. Even £2 million a year over the next three years will be more than accounted for by what is necessary to be able to implement the Control of Pollution Act 1974, an Act that was passed in times that were less frugal than ours. Although that makes some contribution, it does not begin to reduce the problems about Roadford that face us.
The people of the west country are in a unique position when considering the problems they have faced because of water shortages. Water is a regional resource, funded on a regional basis. That is the policy, and so be it. Many of the problems of the west country stem from the massive influx of tourism and the demand for water resources generally. It is at least arguable that we must examine the problem faced by the South-West water authority. We must do so, if not on a national basis, then on something approaching a national basis. I should like to believe that it may be possible to do something on a national basis to help the south-west to alleviate its problems with the Roadford reservoir.
In asking for an increase in the capital programme or for some other gesture by central Government to provide an exceptional course of action, I am saying that the west country is faced with an exceptional problem. People will be unhappy if they see, this late in the day, that the withdrawal of regional aid will mean that the long-awaited reservoir may impose, even now, an even greater burden in terms of water charges.
Obviously, regional aid and the effect on the various regions if it were withdrawn has been carefully considered by Government. I wonder whether anyone realised, at the time the measure was applied to the west country, its effect on the building of our third reservoir. Perhaps all too often people expect Government to be able to anticipate everything. I suspect that in this case the effect was not realised. An exceptional problem will probably now call for an exceptional remedy.
§ The Parliamentary Under-Secretary of State for the Environment (Mr. Neil Macfarlane)
I am grateful to my hon. Friends the Members for Kettering (Mr. Freeman) and for Teignbridge (Mr. Nicholls) for raising an important subject in a national and a parochial sense. The remarks of my hon. Friend the Member for Teignbridge will be noted. He comes from a region of the United Kingdom which has been perhaps most adversely affected by the lack of water supplies for a long time. I believe that my hon. Friend knows that I am a part-time resident of the south-west and am well aware of the great difficulties suffered by people in the region. I pay tribute to the water authority, especially to its chairman, Mr. Len Hill. I am also well aware of the privations suffered by the people. We understand fully what those people have had to put up with. I commend them for their tremendous efforts in overcoming the difficulties in the summer months. I hope that, by the end of this decade, the provision of additional facilities will guarantee that tourists who flood into that region will no longer cause the imbalance that occurred during the past two or three decades.
The point made by my hon. Friend the Member for Kettering about the price mechanism and people's attitude when there is a widely held feeling of injustice is absolutely right. The problem faced by the centre and by the water authorities in presenting their case is to explain how charges are levied and how they have built up so swiftly during the past 10 years.
I do not want to be drawn into the problems of the Kielder dam. That case was based mainly on industrial demand growth forecasts. Such demand is already metered. Those of us who are concerned about overprovision in some regions must bear in mind the fact that reservoirs have a great deal to offer other than the major provision of water. They can provide a great diversification of interests for many people. That will be one of the attractive features that will assist the south-west of England. I can understand the anxieties of conservationists, but I believe that they must look wider to ascertain what greater diversification can mean.
§ Mr. Tam Dalyell (Linlithgow)
My wife and I visited the area in the summer, and we were most impressed by what the people had done there.
§ Mr. Macfarlane
Those of us who have visited the area are well aware of what the hon. Gentleman has just said. There is a greater range of diversification.
I greatly welcome the opportunity to respond to the most interesting speech by my hon. Friend the Member for Kettering. He opened this debate by raising the question of metered charging for water. That is .an important question and it is very timely for hon. Members to be giving it their attention. As my hon. Friend said, my hon. Friend the Minister for Housing and Construction has announced a new study of metering, under the leadership of Roy Watts, the chairman of Thames water. A first report is expected early next year. My Department will treat that with great urgency.
My hon. Friend referred to the disappointing outcome of previous studies under the auspicies of the former National Water Council. I share something of his sense of disappointment, but I think that it is important not to underestimate the significance of the fact that the 454 option of a meter, and hence of a volume-related charge, is now available to every consumer who cares to take advantage of it. The main reason for not going further up to now has been the dauntingly high cost of universal metering, which he mentioned. The meters are not expensive — perhaps £10 to f15 — but installation can cost significantly more, and those figures, when applied to some 18 million households, lead one to very large sums of money. Private contractors normally install meters and that is something of which we take note. Whoever picks up the bill, it is obviously right to ensure that outlays of that order are well justified.
However, there have been developments which could favour greater use of metering in the future—for for example, better technology, with the possibility of remote reading; the opportunity to take a new look at the savings that might result, whether from reduced leakage or postponement of major investments: and the authorities' positive interest in achieving a more businesslike relationship with their customers I look forward to the results of the study now being undertaken by Roy Watts, and I assure hon. Members that and my colleagues in the Department will keep the House informed of progress. We treat the review seriously and with urgency.
The subject of water charges is well chosen, for it is one which arouses much anxiety. It has aroused much press speculation which has been wrongly directed in recent months.
I am glad to have this opportunity to help my hon. Friends understand better what the Government have decided for water investment and water charges. I hope that what I say will prove a useful antidote to some of the more alarmist rumours that are being circulated. There have been some rather one-sided publicity campaigns.
One water authority has indeed gone so far as to offer hon. Members floating lectures on current cost accounting, with floating refreshments, on our very doorstep. That makes it all the more necessary to give Members a balanced account of the position.
Desirable objectives for the water industry include, first, higher investment to deal with problems and to raise standards, which have been lacking for several decades; secondly, greater efficiency to keep costs as low as possible; thirdly, a reasonable rate of return on the assets employed in the industry; fourthly, moderate charges increases; and, fifthly, a reduction in borrowing requirements, which count as public expenditure.
The problem is to arrive at a proper balance between those objectives. Higher investment has to be financed; and a low rate of return may help to keep charges down, but it can only add to the financing problem.
In recent years we have given priority to efficiency improvement. I am pleased to say that the response of the industry has been good. The performance aims agreed for 1983–84, which were to get real operating costs below their 1979–80 level, were bettered by about £10 million. New performance aims to bring further real cost reductions over the three years to 1986–87 have been agreed. Manpower in the water authorities is now 15 per cent. below 1979 levels. The new smaller boards which took office in October last year have brought a new dimension and a more businesslike approach to the management of the authorities. Hon. Members will appreciate the importance of good management when I remind them of 455 the size of this industry: turnover about £2 billion; net assets about £30 billion; annual investment over £700 million. I commend what the authorities have recently achieved and look forward with confidence to further progress in the future.
It was a previous Government who, between 1974 and 1979, reduced water services investment by half. However, since 1982, water investment has been on a rising trend because the reduction in inflation —particularly the steadiness of contract prices for construction work—has, enabled the water authorities to do more work within the cash limit. In 1983–84 water investment in England was planned to be £672 million, but the outturn was £711 million. This year the planned figure is £686 million, but again the indications are that a higher level will be achieved.
I am sure that hon. Members need no reminding of the importance of the investment programmes of the water authorities. I think that this goes to the heart of some of the problems in post-war Britain. Although water resources schemes amount to less than 5 per cent. of water investment, this includes projects like the Roadford reservoir in the south-west, to which my hon. Friend the Member for Teignbridge referred, where the drought this summer stretched resources to the limit.
In water supply and distribution, we are fortunate in having 99 per cent. of the population receiving a piped supply of potable water. But the conditions of the mains in some areas gives cause for concern and there are quality problems — discoloration, rising nitrate concentrations and plumbo solvency, for example — which require attention and expenditure.
Worries about crumbling sewers have attracted much attention, but these problems can be overstated. I remind hon. Members that nearly half of our sewers are of post-world war 2 vintage and that the failure rate nationally is only about 16 events per 1,000 km per year, of which three quarters affect pipes of less than 9 in. diameter. Nevertheless, there are undoubted problems of deterioration in some regions, notably the north-west and Yorkshire. In other regions, new development has increased the load to be carried by the sewers beyond the design capacity so that foul flooding can occur when there is heavy rainfall.
The right approach to these problems is to press on with survey programmes in critical areas, which the authorities have been doing for some years. This year has seen the publication of the Water Research Centre's sewerage rehabilitation manual, which will help to put that work on a more systematic basis. Often the survey results are reassuring rather than the reverse, but, where problems are identified, the authorities provide in their investment plans for necessary remedial work.
Sewage treatment and disposal is the other main investment requirement. River quality improvement and upgrading of estuaries depend to a large extent on further improvements in sewage treatment works. Similarly, improvement in coastal waters may require long sea outfalls. Hon. Members will have noted the Government's recent response to the 10th report of the Royal Commission on environmental pollution, published as pollution paper No. 22. That says:The Government have told water authorities that … they intend that there should be a significant increase in their 456 investment thus reversing the previous trend. An important purpose is to provide for a faster rate of improvement in the aquatic environment generally, including estuarine and coastal waters on a priority basis.This is one part of a larger change in our policy. The Government have reviewed their stragegy for water services investment and their financing. Their decisions are reflected in the external financing cash limit for 1985–86, which was announced in the Autumn Statement. The Government now wish to see an increase in investment in the water industry so as to make more progress with the maintenance and renewal of sewers and water mains and to secure further improvements in the quality of rivers, estuaries and coastal waters. We want to see the rate of return on water authority assets at a higher rate than the present average of about 1 per cent., and a reduction in water authorities' borrowing. For the English authorities, the increase in investment in 1985–86 is expected to be about £80 million to £769 million—both figures excluding land drainage. Future years' figures are provisional but should be about £820 million in 1986–87 and £870 million in 1987–88.
Financial targets will be set to raise the average rate of return achieved by the water authorities from its present average of about 1 per cent. to about 1.4 per cent. next year, 1.7 per cent. in 1986–87 and 1.9 per cent. in 1987–88. That will be done by setting targets for individual authorities so as to secure a 5 per cent. return on new investment from 1 April 1985 while raising the rate of return on assets existing at that date to about 1.75 per cent. by 1987–88. The targets will differ from authority to authority because of differences in the rate of return presently being earned and because of differences in investment levels, but the policy will be applied to all authorities.
The effect of these policies will be to enable the English water authorities' new net borrowing, excluding Ministry of Agriculture, Fisheries and Food grants for land drainage, to be reduced from £237 million this year to £169 million in 1985–86, with further reductions in later years. The position will again vary from authority to authority, with some still borrowing in 1987–88 and others repaying debt, as Thames water is doing already. The higher financial targets will inevitably mean charges rising above the general rate of inflation. The figures that my hon. Friend the Member for Kettering quoted in his opening remarks, when he said that there were variations between 8 per cent. and 13 per cent., are about right.
It is the cash generated by higher charges that enables higher investment to be funded and borrowing to be reduced. It is difficult to forecast precisely the increases that will be necessary, because they depend on real operating costs in each authority, including savings due to efficency improvements and cost inflation, as well as on the financial targets set by the Government. But the precise effect will become evident only as authorities set their budgets in about February each year. Our present best estimate is that the average increase may be about 5 per cent. above general inflation in 1985–86 and rather less in 1986–87 and 1987–88. There will be differences between regions, with relatively low increases in areas where efficiency savings are large — for example, in the Thames water authority area—or where investment is not increasing, as in the Northumbrian area.
Before concluding, I should like to say that I do not see how rates of return of between 1 and 2 per cent., as has 457 been said in some quarters, can constitute "monopoly exploitation" or "back-door taxation". They clearly do not. We have absolutely no intention of privatising the water industry. The Government have no plans to urge that upon the water authorities. There has been some press speculation about it in the past, but there is no intention to do so.
The average household bill this year is about £78, or 21p per day, so, if next year's increase is 10 per cent., it is an extra 2p a day. I do not believe that those are large sums when one considers the services provided—not just water supply, but sewerage, sewage treatment, facilities for water recreation and sea defence—and the enormous infrastructure of assets that has to be maintained, renovated or extended to keep those services at a high standard.
Several points were raised by both my hon. Friends. In the interest of time, I hope that they will allow me to write to them when I shall take up those points. These are serious and important issues. However, I believe that the targets that we have now set throughout the rest of the decade will ensure that there is a strategy for the water industry, and that can only be good for the consumer and the United Kingdom.