Water sector says it has to ‘catch up’ with investment amid scrutiny over bills

Water industry leaders have said they are playing catch up on investment after years of bill curbs, as they were challenged by MPs over price hikes and poor performance.

The parliamentary Environment, Food and Rural Affairs (Efra) committee quizzed industry bosses and experts amid widespread public anger over the degraded state of coasts and rivers, rising bills, shareholder dividends and executive bonuses.

The hearing comes after regulator Ofwat ruled in December that water companies could raise bills by 36% on average, before inflation, over the next five years to pay for a £104 billion upgrade to the sector including new reservoirs and action to curb sewage pollution and protect the environment.

Water UK’s chief executive David Henderson told MPs that poor performance was down to not having “sufficient funds to invest” in the face of growing challenges from climate change and increased water demand, as Ofwat kept down bills.

Lawrence Gosden, boss of embattled Southern Water, said utilities had suffered from 10 to 15 years of “flat bills” while he defended the company’s proposals to hike bills by 84% over five years to pay for “very large forward investment plans for water resources”.

But Mike Keil, from the Consumer Council for Water, said water companies “need to be better at reading the room” as he described public anger over pay and bonuses, and warned a million households would be in water poverty with rising bills.

Mr Henderson told MPs he recognised the anger from the public over the state of the water sector and pollution.

“This is one of the reasons why we apologise for failing to keep up with shifting public expectations around company performance, we have owned up to our role in that, and, more importantly, we put a plan to put it right.

“Fundamentally, people, I think, are frustrated because performance has been not anywhere near where it should be and the main reason for that is not having sufficient funds to invest.

“Our system is increasingly failing to cope with climate change, it’s increasingly failing to cope with the changing business needs for water, data centres that are very hungry for water, and it’s increasingly unable to cope with population change.”

He promised the package approved by Ofwat – which can still be challenged by companies – would allow noticeable benefits from when it starts in April.

He said investment had been cut “consistently” by the regulator since 2010, with water bills 25% lower than they would be if they had kept pace with inflation.

“As a result of that lack of bills rising with inflation, we’ve got a system that has not had enough investment, so we’re having to play catch up.

“Sadly it’s going to be more expensive than it would if we could done this investment 10, 15 years ago, when interest rates were near zero.

“Nonetheless, it would be much more expensive if we don’t get on and do it now,” he argued.

He acknowledged increased bills would be hard and pointed to a tripling of support for vulnerable customers.

Tom MacInnes, director of policy at Citizens Advice, warned there was a “classic postcode lottery” for customers benefiting from social tariffs for their water supplies.

He said: “We’ve seen a rising number of people come to see us about water debts, but also these debts are connected to other debts, so if you see it as part of the whole problem, we’re seeing a big impact.”

He warned that before the price review some 7% of vulnerable people struggling with debts were in water poverty, and with the price rises that would go to 14%, before social tariffs.

He added: “Those social tariffs vary so widely from one place to another that the effect is a classic postcode lottery.”

Dr Keil backed a single social tariff across England and Wales with consistent criteria, funded by a central pot.

Appearing in a subsequent session before the committee, Mr Gosden argued water companies needed to stand up for the investment the country needed while supporting those who would struggle to pay for bill increases – with Southern Water providing a 45% to 90% discount for those customers.

He was quizzed over the company’s proposals to hike average household bills from £420 to £768 a year – the sharpest proposed increase of any water firm and much higher than Ofwat’s final determination that costs for Southern Water customers could rise by 53%.

He said it was too early to say if the company would appeal Ofwat’s decision, but said they were “mid-dialogue as to how we can bridge that gap or not” between the two figures.

And he argued that part of Southern Water’s higher investment need “relates simply to geography” because the south-east of England is designated as water stressed and has a huge population.

He said there were forward investment plans ranging from a reservoir to water recycling, to safeguard against climate change.

“That is on top of a very significant environmental improvement and investment programme to redesign sewer systems basically, so effectively there is double the impact of investment in this part of the country because of the geography of the region,” he said.

He also pointed to the impact of curbs on investment for water firms, even as he acknowledged a series of recent damaging outages in Southern Water’s region should not have happened and the company had not responded well enough.

Mr Gosden, who previously worked for struggling utility Thames Water delivering capital projects and turning around environmental performance, said in the case of both companies, “this last decade or 15 years’ worth of flat bills has certainly done damage”.