| Summary of water quality in England and Wales for the years 1990 to 1997, using % determinations taken in the year which contravene the PCV (prescribed concentration or value).
Several major rivers have benefited from the clean-up programmes. The Trent, for example, is now considered suitable as a raw water source for potable supplies. Further improvements can be expected by the year 2000.
In 1989, 76% of designated bathing waters in England and Wales complied with the EC mandatory coliform standards. By 1997, compliance with mandatory standards had improved to 89%, and 37% of designated beaches met guideline standards. Water quality in our estuaries has also improved.
Current investment is mainly driven by the EC Urban Waste Water Treatment Directive (UWWTD). The benefits to the environment will largely be experienced during the next few years as programmes are completed. These include: - The provision for the first time of primary treatment for nearly 150 continuous discharges to coastal waters serving a population equivalent of seven million.
- The provision for the first time of secondary treatment for over 350 continuous discharges to estuarial water, serving a population equivalent of 15 million.
- The upgrading of 600 sewage treatment works discharging to freshwaters, serving a population equivalent of 19 million.
- The upgrading of over 2,400 combined sewer overflows to reduce the environmental impact of their discharges.
By March 2001, over 32 million people should be benefiting from schemes completed under the UWWTD programme. This will result in the upgrading of significant stretches of estuaries, rivers and canals, including specific class upgrades to some 1,000 km of rivers (or 3% of all rivers) by the year 2000. Eutrophication will be eliminated or reduced in 33 sensitive areas designated by Ministers in 1994.
To date, expenditure on environmental improvements has been driven by a system of regulation that does not take account of differences between polluters in the costs of pollution reduction. The DETR has commissioned a study into the potential for economic instruments (either some form of charge or a system of tradable permits) to deliver environmental objectives in a cost effective way by exploiting differences in the costs of pollution control. The study has yet to be completed but the Director is supportive of measures to achieve environmental objectives at least cost.
Maintaining the infrastructure
The maintenance of companies' capital assets is crucial in ensuring continuing delivery of services to their current and future customers. The Director assesses companies' plans for future maintenance of water and sewerage assets principally through an examination of trends in serviceability to customers of those assets. Serviceability has been maintained or improved for the majority of customers.
It appears that, generally, there has been no significant change in the amount of companies' assets in poor condition. For some companies, the programmes carried out to meet quality standards on certain assets have had a positive impact on the condition of those assets.
Levels of service
Service provided to customers has improved significantly for both water and sewerage since 1990-91 as shown in Figure 2. The key improvements are: - Companies maintained essential supplies during the prolonged periods of low rainfall since 1990, especially the 1995-96 drought. However, the need for restrictions in garden watering focused public attention on leakage levels. As a result, leakage has fallen across the industry from an estimated 5,100 megalitres per day (Ml/d) ( one million litres per day ) in 1994-95 to an estimated 4,000 Ml/d in 1997-98, that is by 7% of distribution input. Companies report that, taken with the investment to increase security of supplies, this has reduced the risk of supply restrictions.
- Interruptions to supply and problems of low pressure have fallen significantly.
- The number of houses most at risk of flooding from sewers has halved since 1990. Actual incidents of sewer flooding have fallen by around 35% since 1992.
Some of the improvements listed above have been achieved by companies reinvesting efficiency savings achieved since 1994-95, rather than by a specific allowance within permitted price limits.
Customer service
Customer care has improved substantially, with companies increasingly taking notice of customers' requirements, as shown in Figure 3. For example, companies' handling of contacts with customers, such as billing complaints, has improved significantly; the number of customers disconnected for non-payment of bills has declined substantially since 1990 and companies have introduced charitable trusts to assist customers who have difficulties in paying their bills.
Companies have also introduced a range of additional services. These have included: cheaper (or free) optional meters; longer opening hours for customer contacts; free or subsidised supply pipe repair or replacement; improved customer information, such as newsletters or magazines; and improved access to flexible, low-cost payment methods.
Improving customer satisfaction
Customer satisfaction with the overall quality of the services provided by companies has increased, as shown by tracking surveys carried out on behalf of Water UK, the trade association for the industry. Customers, however, are less satisfied with the value for money of the services delivered.
Figure 2: Levels of service performance 1990-91 to 1997-98
Figure 3: Customer service performance 1990-91 to 1997-98
Cost of improvements
The level of capital investment has had to increase dramatically to secure the improvements identified above. This is illustrated in Figure 4, which shows capital investment since 1980. The total net capital investment (including capital maintenance expenditure) over the period 1990 to 2000 (ie since privatisation) is estimated to be almost £36 billion (in 1997-98 prices). This is equivalent to an increase in the average household customer's bill of approximately £85 (in 1997-98 prices) over the ten year period.
Customers' bills
Bills have not risen by the full cost of the net capital investment because of efficiency improvements made by companies.
The initial price limits were set in 1989 by Ministers. These assumed some improvements in efficiency, but a high return to shareholders. The Director reviewed these in 1994 on the basis of challenging efficiency assumptions and a lower estimate of the cost of capital. He also passed on to customers the efficiency savings made by companies up to 1992-93. While the overall rate of increase in bills slowed, customers' bills nevertheless continued to rise, primarily to finance the programme of water quality and environmental improvements.
Average household bills will have increased by over 40% in real terms by the year 2000 compared with 1989 (with the bulk of the increase - almost 30% - occurring in the period up to 1994-95).
This is shown in Figure 5 for water and sewerage separately and highlights the increase in average household bills from 1989 to 2000. The picture varies across the country. For South West Water, customers have seen their combined water and sewerage bills increase in real terms by 60%, on average, compared with 40% nationally, whereas customers in Anglian Water and Yorkshire Water have seen smaller increases of 27%, on average. Certain companies have, however, passed some efficiency savings to customers through cash rebates or by not raising prices to the full extent of their price limits.
In order to secure and maintain balanced tariffs between customers who pay on an unmeasured basis (ie those paying by reference to rateable values) and those who pay on a measured basis, the former group has tended to experience increases over this period that were slightly above the average, while measured customers have experienced a smaller increase.
Figure 4: Capital investment 1980-2000 (1997-98 prices)
Figure 5: Average household bills 1989-90 to 1999-2000
4. CUSTOMERS' VIEWS ON THE FUTURE
This chapter reviews the evidence of customers' views on future priorities and prices. It draws largely on a number of national surveys and companies' customer consultation work conducted during 1997 and 1998. The CSCs, which have generally been closely involved in this work, have reported on the companies' assessment of customers' views in their regions.
Companies' reports on the work that they have done, together with the CSCs' reports to the Director, are lodged in Ofwat's library. Some companies have stated that they will continue to consult with their customers to test the acceptability of their proposed packages of improvements and future bills.
Customer satisfaction
Generally there are high levels of satisfaction with current services, with some companies reporting 85% or more. This is in line with national research, which has shown increasing levels of customer satisfaction over recent years. There remain, however, a number of dissatisfied customers. Key reasons for dissatisfaction are concerns about security of supply, leakage levels and high bills. Customers do not cite environmental performance as a reason for dissatisfaction, which may reflect the poor understanding of companies' environmental responsibilities revealed by many of the surveys. Despite the improving levels of satisfaction, customers would appear to perceive a need for continued improvements for some services in almost every region.
Priorities for improvements
At a national level, the Water UK research concluded that leakage and maintaining reliability of supply were uppermost in customers' minds for improvement, together with minimising sewer flooding. The company-specific research has confirmed this, although priorities for service improvement vary across the regions. Leakage always features in the top three areas for improvement in over half of the companies. This is sometimes associated with reducing the incidence of hosepipe bans, but more generally is associated with maintaining a sound security of supply. In general, however, customers appear to give relatively low priority to reducing the frequency of hosepipe bans per se.
Customers place significant emphasis on maintaining and improving the quality of drinking water. This includes taste, discoloration and hardness issues, the replacement of lead pipes and reducing the risk from cryptosporidium.
Environmental issues, river and bathing water quality and low flow rivers are of importance to customers, but their relative priority, against some other service improvements, varies. Where specific, costed improvements are presented, they tend to be seen as less attractive. When set against other environmental issues, global warming and air pollution are perceived to be as important as protecting the water environment. Furthermore, in relation to other social issues (for example, health care or education), protecting the environment is generally afforded a lower priority.
Customer service improvements such as speeding up letter writing or answering telephone calls more quickly are not high among customers' priorities.
Where surveys gave respondents choice about the pace of improvements, results show that customers did not generally choose the most advanced improvements offered, particularly if this would increase the pressure on bills. For example, the DETR survey suggests that the aspirations of the majority of customers fall short of the full programmes that were considered in Setting the quality framework and in the EA's paper A price worth paying. The message seems, therefore, to be support for steadily paced improvements, but no more.
The balance between bills and services
The critical question remains as to whether customers are prepared to pay for their aspirations. In their attempts to ascertain the level of customers' willingness to pay, companies and others have used a variety of methods. One approach, which was used in some of the national surveys, was simply to ask customers whether they were willing to pay more on their annual bill to fund improvements to services. Where this approach was used, results are somewhat contradictory. Few companies have used this approach in their regional surveys.
Questions about willingness to pay tend to reveal more about customers' values than the decisions they would actually make when confronted with real choices. They also tell us little about customers' ability to pay. Moreover, when customers are asked who should pay for the improvements they have chosen, well over half indicate that householders should not have to pay. Customers consider that other bodies such as large industrial customers, businesses, farmers and the water companies themselves should pay for improvements.
The approach adopted in other national surveys and by most companies was to offer customers a variety of bill increases/reductions (above or below inflation), each associated with different levels of service and environmental improvements. This provides an indication of customers' views on the balance between future bills and service, albeit at a very broad level since the improvements were not quantified.
The Water UK results, at a national level, are set out in Table 3.
| Table 3: Summary of results of Water UK's national survey of customers | |
| Options presented to customers in the survey | |
| Your bill goes up by more than inflation, but there are many major improvements in the water company's services and its contribution to the quality of the environment.
Your bill goes up at the same rate as inflation and there are a few major improvements in the water company's services and its contribution to the quality of the environment.
Your bill does not increase as fast as inflation, so you pay roughly the same amount of money as now, and you receive roughly the same service and the same contribution to the quality of the environment.
You pay less than now, that is your bill falls even though inflation is going up, and the service you receive is reduced.
Don't know.
Note: Percentages have been rounded to nearest whole number. | 13%
44%
39%
4%
1%
|
Where companies adopted this approach, the results were generally consistent, with some companies finding stronger support for stable prices or prices "marginally above inflation".
An alternative approach asked respondents to allocate efficiency savings already achieved between improvements and bill reductions. The national Water UK survey results indicate that, on average, customers would like to see approximately half of possible efficiency savings used to reduce their bills. The larger the available saving, the larger the amount that they would want returned to them in cash. Regional research has confirmed this. There is some evidence that customers would not support more than £10 per annum per customer of any saving being reinvested in improvements to services or the environment.
Only broad conclusions can be drawn from either of these approaches since respondents were usually not presented with detailed and costed improvements that they could trade-off against specific bill reductions. This issue was tackled in a survey by Thames Water, where customers were offered a choice of a number of specific improvements with precise bill implications against possible bill reductions. Thames Water, which has a relatively affluent customer base and low current bills, found that, on average, customers would prefer to see most (90%) of a potential £10 bill reduction spent on improvements they wanted. But when offered a £20 reduction, its survey showed that customers would prefer to see the extra £10 returned to them in the form of bill reductions, rather than invested to provide further service improvements.
The profile of bills over the period 2000-05
In their surveys, the companies explored customers' views about bills falling in 2000-01 but then, in subsequent years, increasing in real terms. The results suggest that, given a choice, customers prefer a small reduction and stable bills thereafter, rather than large reductions followed by increases.
Low income customers
The Director emphasised to companies that they should ensure that the views of customers on low incomes were gathered during the customer consultation process. In-depth interviews or specific surveys with customers on low incomes have been undertaken by some companies. The results would seem to show that, in terms of priorities for improvements, low income customers have similar priorities to the rest of the customer base. There is less willingness to pay for improvements, but the difference is not that marked.
Research commissioned by the ONCC suggests that low income customers might be much more concerned to see bills reduced rather than further improvements in services. This may be because the issues were explored in the context of the household budget and the affordability of water bills.
There is an acknowledgement among the water companies, however, that willingness to pay does not always reflect the ability to do so. Some companies say that problems of affordability should be resolved through the social security system or through charging and tariff policies. Although it would not be appropriate to base the price-setting process on the ability of those on low incomes to pay water bills, the Director is concerned that the views of these customers are taken into account.
Business customers
Generally, business customers have shown that their priorities lie in areas which would directly affect their businesses - interruptions to supply, pressure and water quality. They place more emphasis on customer contact and information than domestic customers do.
Although business customers are generally less willing to pay for improvements in areas which might be classed as part of the water companies' basic services, they have shown some willingness to pay for environmental improvements.
Companies' views of findings
Companies have generally concluded that customers want improvements in services in specified areas, provided bills remain stable in real terms. A few companies believe that customers would support modest real price increases. The companies have concluded, therefore, that there is little or no support for an initial one-off reduction in prices and that the scope for improvements should generally be determined by the scale of past and future efficiency savings.
The views of the CSCs
The CSCs have submitted reports to the Director with their assessment of customers' views and the extent to which they consider companies have reflected these views in their preferred strategies. They have also undertaken work of their own to establish customers' views, which are summarised in their reports. Some have carried out surveys of customers, articles have been placed in the local press or water company magazines, and complaint trends have been analysed to obtain a feel for customers' priorities in each region.
It was the Director's intention that companies should involve the CSCs closely in their customer consultation processes. With the exception of Mid Kent Water, Portsmouth Water and Severn Trent Water, the CSCs report general satisfaction with the way they were involved and consulted. They feel that their comments and suggestions were taken properly into account. The CSCs also consider that much of the companies' research work was of a good quality, especially that carried out by the water and sewerage companies.
CSCs broadly support the conclusions from the research about customers' priorities for service and/or environmental improvements. They report that these are consistent with their own findings. Some CSCs, however, point out that customers' views vary and that the level of support for individual improvements does not always extend to a majority of customers.
In general, CSCs consider that the priorities for investment set out in companies' preferred strategies are consistent with their assessment of customers' priorities. CSCs have commented in their reports, however, where they consider that specific elements cannot, in their view, be sustained on the evidence so far of customers' views. This is particularly the case for a number of companies that propose investment to reduce the frequency of hosepipe bans.
CSCs are less confident that companies have interpreted properly the evidence of customers' views on the overall balance between service improvements and future bills. The CSCs have endorsed the conclusions of most companies that customers do not want bills to increase, but consider that companies did not consult customers fully on the issue of possible price reductions. Eastern and Wessex CSCs both note that the realistic option of a one-off reduction in prices followed by stable prices, together with continued improvements, was not an option offered to customers. The CSC for Wales considers that the evidence, in its region, pointed strongly to the majority of customers wanting lower bills as an overriding priority. CSCs were critical of the way options for lower prices or a one-off reduction in prices were associated with either negligible improvements to services (or even deteriorating services) and/or subsequent increases in bills.
The CSCs' own consultation work, which they acknowledge is not as robust as fully structured sample surveys, leads them to the conclusion that companies' strategies should include an initial reduction in price. Eastern CSC, for example, concludes that: "when customers understand that returning efficiency savings to them will not jeopardise levels of service, a significant majority want to see the benefits in lower bills".
5. COMPANIES' PREFERRED STRATEGIES
Companies were asked to provide the Director with their preferred strategies for services and prices for the period 2000-05 which best meet the needs of their customers. Companies were asked to identify any key choices or options as well as uncertainties that could affect their preferred strategies.
The purpose of these submissions was threefold: - To enable the Director to expose in this paper the strategic issues, at a national and regional level, on balancing needs and priorities for enhanced services and improvements to the environment with prices acceptable to customers.
- To help expose material issues for discussion between each company and the Director during the period prior to the companies finalising their Business Plans in April 1999.
- To allow customers to see the development of companies' thinking on future services and bills, and provide a basis for further consultation at a regional level, by both companies and CSCs, in the light of this paper.
Companies vary in their approaches to the future. In part, this reflects differences in their current position, and the issues facing them, including differences in customers' views. The main points in each company's strategy are summarised in Appendix A of this paper. This chapter sets out, at a national level, the key points arising from the companies' preferred strategies, including an assessment of the implications for price limits.
Status of the companies' preferred strategies
The companies have varied in their degree of commitment to the strategies set out in their submissions, and it is not clear whether these have always been endorsed by their Boards. Some have formed a clear view of the strategy for services and prices which they would like to deliver over the period 2000-05. These are based on a careful assessment of what they see as their customers' priorities, and of the costs of meeting those priorities.
Others have not been able to do so and have presented their submissions as more a basis for discussion both with the Director and the quality regulators, and for further customer consultation work. Typically, these make no reference to bills. Two companies (Anglian Water and North West Water) have each set out alternative strategies rather than a single strategy.
All companies identify two important areas of uncertainty where future decisions could cause them to alter their strategies. These are as follows. - At the time of preparing their submissions, Ministers had not provided guidance on future environmental and quality obligations. This uncertainty affected strategies for sewerage services in particular.
- A belief that the Government's proposals on water charging published in April 1998 could have a significant impact on costs and revenues; in particular, the proposal to give all customers the right to have a meter installed free of charge. Some companies have assumed that the proposals will become law and taken full account of them; others have not. A number of companies anticipate increases in bad debt if the proposal to ban disconnections for non-payment is implemented.
Several companies also mention the effect of proposals to alter the basis on which water and sewerage companies' business rates are assessed. Some companies have stated that these could significantly increase their operating costs.
Companies' approach to their strategies
Most companies report that customers want improvements in services and the environment, and that while they generally do not want prices to increase in real terms, the majority would be prepared for bills to remain stable, with past and future efficiency savings being used to finance improvements, rather than being used to reduce bills. A few companies suggest that a majority of customers would accept small real increases in bills to secure the improvements they want. The companies generally conclude, therefore, that there is no support for an initial reduction in bills, especially if this means that bills subsequently have to rise in order to finance the improvements to services and the environment that they believe should be delivered by 2005. Very few companies have specifically mentioned the possibility of a one-off reduction in prices.
Companies have, therefore, considered customers' priorities for service improvements within a framework of broadly stable prices. In general, although there are exceptions, they conclude the following: - Maintaining or enhancing security of supplies linked to controlling leakage is a high priority.
- Meeting future obligations on drinking water quality is important.
- The full environmental programme, which the companies were asked to cost in February 1998, either cannot be afforded within a regime of stable prices and/or is not supported by customers.
- Other priorities, which vary from region to region, are, in some cases, as important to customers as environmental improvements. These include improving the taste and appearance of tap water; reducing (or eliminating) house flooding from sewers; enhancing measures to reduce the risk from cryptosporidium; maintaining the policy of free supply pipe repairs; and reducing the frequency of hosepipe bans.
- Expenditure required to maintain their assets in a satisfactory condition should increase from the levels assumed in current price limits.
Companies' estimates of future expenditure requirements
The companies have supplied the Director with their estimates of the costs of implementing their strategies to meet customer priorities. In addition to the uncertainties referred to above, most companies emphasise that their estimates of future costs are subject to further review, prior to finalising their Business Plans. Some have developed preferred strategies on the basis of a careful review of costs and made explicit their current estimate of further efficiencies, while others have said that they have yet to review some aspects of their costs. Consequently, their current estimates of the future expenditure needed to implement elements of their plans could be subject to considerable change.
Very few companies have made explicit the financial assumptions, in particular the cost of capital, which they have used to assess the acceptability of their preferred strategies for customers. A number have, nevertheless, emphasised the importance of decisions on these matters when finalising their strategies.
Price implications of the companies' future expenditure and revenue estimates
On the basis of the cost estimates and revenue forecasts submitted by the companies, and without making any adjustments to these, Ofwat has examined the implication for future prices, assuming a post-tax cost of capital of 5.25% (and 6.0% for smaller companies).
At an industry level, the expenditure estimates imply that there could be a small reduction in 2000-01 of around 4%, but thereafter bills would have to increase so that by 2004-05 they would be 10% higher than bills in 1999-2000 (in real terms).
The main factors influencing the change in bills are that: - some companies have forecast significant increases in operating expenditure associated with business rates, increases in bad debts, leakage control and growth in demand;
- some companies have forecast significantly higher levels of capital maintenance expenditure, both for underground and surface assets.
Effect of Ministers' guidance on companies' strategies
As indicated earlier, companies drew up their preferred strategies before Ministers published Raising the quality. In drawing up their strategies, companies generally attempted to anticipate Ministers' decisions, although some companies made a judgement about how the potential scope for future quality was compatible with their customers' concerns about bills. Companies will now need to review their strategies in the light of the guidance received so far. The guidance is considered in Chapter 6.
6. QUALITY AND MINISTERS' GUIDANCE
The 1994 price limits were set for ten years and allowed for a substantial and continuing quality enhancement programme decided by the then Ministers until 2005. The main work in the period 2000-05 assumed a continuation of programmes to improve distribution mains for the water service and completion of the smaller schemes for the UWWTD, which required investment after the year 2000 in order to meet compliance dates. The 1994 price limits assumed that approximately 40% of the capital investment for the total water programme and approximately 25% of the sewerage programme would remain to be completed in 2000-05.
There have been subsequent adjustments to the confirmed programme of obligations which will need to be reflected in the new price limits for 2000-05. In one company, these changes were significant enough for it to seek an interim determination of price limits before the year 2000. However, the companies are, generally, becoming more efficient and this has enabled the programme of obligations to be implemented for less than was originally assumed. More significantly, the evolving estimates of the costs have fallen in the light of the solutions developed by companies to some of the quality problems.
Ministers' decisions on future quality obligations
In Raising the quality, Ministers have set out their expectations for the quality enhancement programme after the year 2000. They estimate that the proposed programme represents investment of £8.0-£8.5 billion over the five year period.
The guidance to the Director provides for the following principal improvements which would either be additional to those needed to comply with existing requirements, or involve an acceleration of agreed improvement programmes.
Water service - The acceleration of companies' mains rehabilitation programmes so that the current programme is completed by 2010, rather than by 2015 as was originally assumed.
- The commencement of the programme of lead communication pipe replacement on a broadly even profile from 2000 to achieve the new standard set in the revised Drinking Water Directive by the statutory deadline of 2013, as well as meeting the interim standard by 2003.
- Schemes to address deterioration in raw water quality. These would need to be supported technically by the DWI before they could be considered as a requirement that needs to be taken account of in price limits.
- Schemes to reduce the risk from cryptosporidium. Companies will need to demonstrate to the DWI's satisfaction that there is a specific additional risk, or an unacceptable risk of contamination of a water source, and that existing treatment is not effective in removing cryptosporidium before additional expenditure could be considered for inclusion in price limits. The group of experts established under Professor Ian Bouchier is expected to issue recommendations in the near future. If recommendations from the group suggest that additional safeguards should be required, then the DWI would issue advice to companies on the measures that may need to be taken.
- Schemes identified by the EA as being required to protect Sites of Special Scientific Interest (SSSIs) and other sites covered by the Habitats Directive where the proposed remedial action is based on agreed evidence demonstrating that abstraction or effluent discharge is the cause of specified damage.
Sewerage service- Raising bathing water quality where the performance levels expected to result from currently planned investment to 2005 are not acceptable. Ministers are looking to achieve at least 97% compliance with mandatory coliform bacteria standards and a significant improvement in compliance with the guideline standards of the Bathing Water Directive in order for beaches to gain blue flag status.
- An acceleration of the combined sewer overflow (CSO) improvement programme so that at least two-thirds of intermittent discharges which remain unsatisfactory in 2000 are remedied by 2005.
- The removal of high natural dispersion area (HNDA) status from all receiving waters so designated in 1994, thereby confirming the requirement for all significant coastal discharges to be provided with secondary treatment.
- The implementation of a significant programme to maintain and improve the quality of rivers and significantly raise compliance with river quality objectives (RQOs) above the current level of 82%.
- Phasing out the use of untreated sewage sludge on agricultural land by the end of 2001 and requiring advanced treatment prior to application to fields in certain circumstances.
For some aspects of the quality programme outlined by Ministers the standards are defined and the implications for each company are reasonably clear. For the purpose of this paper, these are referred to as "clearly defined quality requirements". For some companies, this will require a significant amount of capital expenditure before the new price limits come into effect which will be 'logged-up' by the Director. The clearly defined quality requirements, together with the confirmed programme from prior commitments, is estimated to cost about £5.3 billion.
For other aspects, accounting for the remainder of the estimated £8.5 billion total programme, there is still uncertainty about the implications for individual companies since, at this stage, the guidance is based on broad expenditure assumptions at an industry level. These aspects of the programme are referred to as the "other quality requirements" for the purposes of the paper.
For the water service, the main area of uncertainty concerns schemes to address deterioration in raw water quality, the risk from cryptosporidium and the extent of lead communication pipe replacement to meet the new standard. Companies have identified schemes, but each will need to be considered and supported as necessary by the DWI. At this stage, therefore, the scope of the work required by each company is not known.
For the sewerage service, the main areas of uncertainty are as follows. - The extent of the regional programme of work on continuous and intermittent discharges to raise bathing water quality and to secure improved compliance with guideline standards.
- The extent of the regional programme of work on intermittent discharges from the sewerage system to reduce the environmental problems which these can cause.
- The extent of the regional programme of work to achieve satisfactory progress on improved compliance with the RQOs set in 1989.
In each of these areas, Ministers have provided an indication of the overall progress they would like to see at a national level. They have, however, recognised that for some companies, too rapid progress may have undesirable consequences for customers' bills and they would want to consider the trade-off to ensure that a proper balance is struck. Final decisions on the scope of the work required in these areas for each company will be decided later by Ministers in the light of better information about costs/benefits and customers' bills.
Uncertainties about the costs of delivering the proposed quality enhancement programme
Ministers have estimated that the cost of the proposed quality enhancement programmes would be between £8.0 and £8.5 billion over the five year period from 2000-2005. They have stated that the range of costs was a material factor in making their decisions on the rate of progress for improvements. Their estimates were drawn mainly from the Director's open letter Setting the quality framework (April 1998) and, in particular, the challenged costs which the Director reported in that paper. This represents a continuation of the significant levels of capital investment (including capital maintenance, supply/demand balance expenditure and expenditure on service enhancement options) made by companies since privatisation, as shown in Figure 6.
There is still significant uncertainty about the likely costs of delivering the proposed programme of improvements. The key reasons for this uncertainty are as follows. - The challenged costs included in the open letter reflected broad aggregate judgements which took account of both the scope of work needed to meet potential obligations and assumptions about the improvements in efficiency which could be made. These judgements were based on the limited information available at that time and, on the basis of recent submissions on capital unit costs, may be optimistic.
- Since April, a number of companies have improved the models which they use to estimate the investment required to meet new quality standards. This process of refinement will continue through the update of the costs of quality costing enhancements submission (in December 1998) and the submission of companies' Business Plans.
Figure 6: Industry actual and projected capital expenditure from 1980 to 2005
(1997-98 prices)
The guidance from Ministers has confirmed that the scope of work necessary to meet individual obligations is likely to be more than the Director assumed as the minimum required to meet the obligations set out in the open letter.
Overall the £8.0-£8.5 billion represents a realistic lower band of what the total quality programme might cost. The final programme may be more expensive if the robust challenge to companies cannot be sustained, or, at an individual company level, the scope of the work required is increased.
There is now considerable work to do by all parties to identify those improvements that offer the best value for money within the constraints of the £8.0-£8.5 billion total programme for 2000–2005. The timetable for the Periodic Review requires the overall quality enhancement programmes to be confirmed by Ministers in late February or early March 1999. The Director, the EA and DWI, together with the companies and their Reporters, will all be working to prepare a robust basis for these decisions early in the New Year.
For a number of companies, these decisions could have a large influence on future bills. For some companies, there is a conflict between lower bills and meeting environmental aspirations - a conflict which is recognised by Ministers. This issue is considered further in Chapter 8.
The Director will allow for future investment within price limits where it is necessary to meet new obligations whose timing and means of attainment are clear. If it is not possible to define the outputs or delivery dates, such work will have to be considered at a later date when critical information is available. This could be at the next Periodic Review or, possibly, if the costs are material, at an interim determination.
7. PROSPECTS FOR PRICES IN 2000-05
In Setting price limits for water and sewerage services, the Director confirmed that he wished to ensure that some of the improvements in efficiencies achieved by companies are passed on to customers in 2000-01 through an initial reduction in prices (P0). This would reflect a competitive market. Ministers have also indicated that they would like to see prices fall. It is important for customers to see that, in a price cap regime of regulation, incentives work to their advantage, and not merely to the significant advantage of shareholders. Thereafter, all companies can be expected to become more efficient but the extent will depend on the relative efficiency of each company, compared with the best.
Without new quality obligations, customers could expect prices to fall in real terms throughout the period of the revised price limits. Existing commitments to higher quality standards, however, will create upward pressure on prices, and Ministers' recent decisions on further improvements in quality standards will add significantly to these pressures. In addition, maintaining the balance between supply and demand could require some additional investment, and the Government's proposals in respect of water charging will have implications for costs and revenues. Finally, the options put forward by companies for enhancing services would add further to bills.
At this stage, there is still considerable uncertainty associated with most of the above factors, as well as other issues which will impact on bills. Accordingly, the prospects for prices through to 2004-05 in this paper are set out in a range, reflecting the fact that the Director's determinations of price limits will need to be made in the light of: - his decisions on the scope for future efficiency;
- his judgement of the expenditure necessary to maintain the serviceability for customers of companies' assets, both surface assets and the infrastructure network;
- final decisions by Ministers on higher quality and environmental standards and the Director's judgement on the necessary costs of meeting them;
- his decisions on the costs of maintaining an appropriate balance between supply and demand;
- his decisions on the cost of enhancing services to customers and the priority of such enhancements;
- decisions by the Government on its charging proposals; and
- the Director's decisions on financial issues, particularly the cost of capital.
Each of these is considered in more detail in Chapter 8, which sets out the key issues on which views are invited.
So that these issues can be considered in context, this chapter sets out the possible range of | 
Consultation papers