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by Liam Kirkaldy
18 April 2014
Trickle down

Trickle down

Ask most people what they think of water provision and – in stark contrast to their views on other utilities – it is unlikely they will have much to say. Research by Customer Forum, the body tasked with negotiating with Scottish Water on behalf of the customer, found that most people could not even say how they paid for water.

The forum was set up following years of criticism of Scottish Water, the monopoly provider in Scotland. It held thousands of interviews with individual household customers – up to an hour long – along with 500 business customer interviews, in an effort to draw an opinion on water from an otherwise fairly disinterested public.

Peter Peacock, chairman of Customer Forum, says: “We ran a lot of focus groups to try and get a better handle on what people actually did think and what their priorities were. I guess the overwhelming thing that comes out of that is that people don’t think about water. If you ask people what they pay for water, they generally don’t know. That’s where people are at with water, it’s not top of their mind, when they turn on the tap, it’s there, they drink it and it is good quality. When they pull the plug in the sink, it disappears, so they don’t think about it much. They don’t really understand what they pay for water at all and their impression can range from £30 to £300.”

Part of the widespread ignorance over water supply probably stems from the fact that the cost is met as part of council tax. But, if pushed to actually consider their water provision, the Scottish public are generally quite proud of the quality of their supply.

Peacock says: “The other thing that comes out about the price of water – once they realise what they pay – they generally think that it’s pretty good value for money. But they also thought that water pricing, like any utility, would always rise above the rate of inflation, and they were pretty fatalistic about that, thinking, ‘all utility prices go up, and there’s nothing we can do about it’. Preference did not seem at all relevant to them because the assumption is that prices rise.”

Customer Forum negotiated the new pricing agreement with Scottish Water in a context of high inflation, compressed wages, and a benefits increase behind the rate of inflation. Despite the cynicism of the public, prices have fallen in real terms.  

Douglas Millican, Chief Executive of Scottish Water, says: "Our household customers continue to benefit from among the lowest average charges in Britain. At the start of April, our charges increased by 1.6 per cent – only our second increase since 2009 – which is less than the rate of inflation. In that time our charges have in fact reduced by 10.2 per cent relative to the rate of inflation. Our research with customers and engagement with the Customer Forum highlighted clearly that continued stability in charges is a priority for customers. As a consequence, Scottish Water and the Water Industry Commission, working with the Customer Forum, have committed to maintaining low level increases in charges throughout the period to 2021.”

Peacock believes that public resignation about rising prices is driven by perceptions of power companies, which have levied record increases in price onto already strained household budgets.

So one question raised by the success of the water industry is, why is the energy market so different? The two are, after all, both essential utilities, without which we could not live. If big energy can hold customers to ransom, so can big water. If the public have either no opinion of water provision, or are generally positive, why do they have such a low opinion of energy providers, and of the Big Six in particular?

One explanation is obvious – energy is privatised, while water is supplied by a monopoly provider. To Alison Johnstone, Green MSP for Lothian and a member of Holyrood's Economy and Energy Committee, the difference lies in the market.

"Heat, power and water are basic requirements and there are clear risks to leaving them in the hands of market forces. It's significant that in Scotland we have a successful public ownership model for our water. It delivers investment in our infrastructure while keeping customer charges under control.

She continues: "By contrast, the free market energy sector lacks real competition, is constantly squeezing customers, and faces allegations of price fixing. Perhaps there are lessons to be learned from how we regulate water and set charges based on public priorities rather than the desire for profits.”

But the Scottish water market does have some competition. In 2005, the Scottish Government passed legislation to create a competitive retail market for non-domestic water provision. Opening in 2008, it was the first in the world.

Scottish Water was required to split in two, with the wholesale arm – Scottish Water – responsible for pipes, infrastructure and water quality and the standalone retail arm – Business Stream – responsible for billing, customer service and helping customers to increase efficiency.

Mark Powles, CEO of Business Stream, says: “I think that by anyone’s definition, it has been a big success. Competition made us raise our game and focus more on service. Once you have choice, it makes you engage more, it is not just a bill that comes through. If you pick a provider that best suits your business then you can look at it as a commodity, as a service, and try and get the most out of it.

“We have saved our customers £70 million since the market opened, but we’ve also provided lots of added services that allow them to understand when, how and why they use water, and have a partner in us who will help them save money. The Scottish public sector went out to tender three years ago and we won it, a £300 million contract, and we will have saved them around £37 million by the time it comes to an end,” he adds. 

But Stephen Littlechild, of Judge Business School, at the University of Cambridge, argues that the comparison between water and energy is a slightly unfair one.

“Energy prices in the last fifteen years have gone up more steeply than they had done before in living memory. There is a widespread customer perception that the reason for these increases is exploitation by the energy companies. Now my own view is that this is not the case, they don’t seem to be making excessive profits, and it seems to me that one can explain these increases through increases in wholesale costs and also in increasing costs of meeting government climate change policy, energy efficiency, and some redistribution to help poorer customers. So I think there are reasons to explain the increase that don’t reflect badly on the energy companies, but I do think most people think it is the energy companies’ fault.”

The wholesale market may well explain the rise in price. Wholesale gas prices have fluctuated wildly over the last few years and energy companies face huge challenges, from climate change, diminishing oil supplies, and the need to invest in renewable energy, in delivering power to Scottish homes. Unlike gas, water is free, but the industries have more in common than it may seem.

Peacock identifies several challenges to water provision over the coming decades. “There is a misperception is that there’s tons of water in Scotland, that it is forever falling out of the sky and we don’t have water shortages. But actually, that’s not true – one of the interesting things about Scotland, strategically, is that the population is moving west to east and the east is much dryer than the west, so if things continue we could be quite challenged with water supply in the long term.

He continues: “With climate change, we are getting more periods of drought and more periods of intense rainfall, which can lead to things like peat and nutrients getting into the water, forcing you to treat it more. It can lead to flooding and we know that the number of people potentially affected by flooding increases as climate change increases. A few hundred people are affected by sewer flooding each year, and that is absolutely catastrophic for them when it happens. Too many families are still affected by water pressure problems, which means their dishwasher or washing machine won’t work. They want Scottish Water to do the right thing by the environment, in other words, they don’t want them to fall short and to dirty clean lochs and clean rivers, but they don’t necessarily want to pay more for it, so it is a matter of delivering those improvements by making efficiency gains through innovation.”

The markets may not be the same but there is no doubt that energy giants could learn lessons from the way that the water industry has engaged with its customers, helping them to understand the reasons behind the charges they pay.

Littlechild says: “During negotiations over water price, both sides have thrown themselves into it, both parties have been amazingly enthusiastic and constructive in negotiations – they have found it extremely helpful to understand the other side’s point of view. The companies have been amazed to find out what customers think, and customers appreciate finding out about the challenges of supplying water, and they have both been keen to find agreement.”

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