The
Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today
said:
"A staggering £375 billion of investment is
needed to replace the country’s ageing infrastructure, help meet policy
commitments such as climate change targets, and meet the long-term needs of a
growing population.
It
is the consumer – through their various bills – that is expected to
fund at least two thirds of this investment where the infrastructure is
financed, built, owned and operated by private companies.
Currently, consumers rely solely on Government and
regulators to protect their interests. But it doesn’t take much nous to
work out that this is going to have a tough impact on the
consumer.
While median incomes did not rise significantly in the
decade to 2011, energy bills rose by 44% and water bills by 21%, in real terms.
High levels of new investment in infrastructure mean that bills and charges are
likely to continue to rise significantly in the future. The Government is
projecting that average household energy bills in 2030, for example, will be
18% higher in real terms compared to 2013.
No
one in Government is taking responsibility for assessing the overall impact of
this investment on consumer bills and whether consumers will be able to afford
to pay.
No
one seems to be sticking up for the consumer in all this. This is of particular
concern given that the poorest households are hit hardest by increases in
bills. Poorer households spend more of their incomes on household bills
relative to richer households, meaning that funding infrastructure through
bills is more regressive than doing so through taxation.
We
are calling for the Treasury to produce and publish an assessment of the
long-term affordability of bills across the sectors. They need to establish
with departments and regulators who is responsible for what in each sector when
it comes to assessing the long-term affordability of bills, and pull all the
information together.
Crucially, they need to assess the combined impact of
increased bills on different household types, including those households most
vulnerable to price rises.
Regulators must play their part by having a coordinated
approach to assessing the impact on bills and affordability of infrastructure
investment, in collaboration with Government.
We
also need to be reassured by regulators that infrastructure has been built to
the standards expected, to improve their protection of consumers’
interests."
Margaret Hodge was speaking as the Committee published
its 5th Report of this Session which examined Infrastructure Investment: the
impact on consumer bills. Those who provided evidence included: Andrew Wright,
Interim Chief Executive, Ofgem; Cathryn Ross, Chief Executive, Ofwat; Keith
Mason, Senior Director of Finance and Networks, Ofwat; Dr John McElroy,
Director of Policy and Public Affairs, RWE/npower; Nick Fincham, Director of
Strategy and Regulation, Thames Water; Bronywn Hill, Permanent Secretary,
Department for Environment, Food and Rural Affairs; John Kingman, Second
Permanent Secretary, HM Treasury; Geoffrey Spence, Chief Executive,
Infrastructure UK, HM Treasury and Simon Virley, Director General, Markets and
Infrastructure Group, Department for Energy and Climate
Change.
The
UK requires substantial investment in economic infrastructure and the
Government expects that much of this investment will be funded by consumers.
Private companies will deliver much of the infrastructure within frameworks set
by regulators. Currently, consumers rely solely on Government and regulators to
protect their interests. However no one in Government is taking responsibility
for assessing the overall impact of this investment on consumer bills and
whether consumers will be able to afford to pay. This is a particular concern
given that the poorest households are hit hardest by increases in
bills.
Conclusions and recommendations
HM
Treasury has identified more than £375 billion of planned investment in
economic infrastructure that the UK needs to replace ageing assets, replace
assets which don’t comply with EU regulation, help meet policy
commitments such as climate change targets, support economic growth, and meet
the long-term needs of a growing population. Around two-thirds of this
investment is expected to be financed and delivered by private companies but
paid for by consumers through utility bills and user charges, such as rail
fares. Energy and water bills have risen considerably faster than incomes in
recent years, and high levels of new investment in infrastructure mean that
bills and charges are likely to continue to rise significantly. Furthermore,
poorer households spend more of their incomes on household bills relative to
richer households, meaning that funding infrastructure through bills is more
regressive than doing so through taxation. Separate Government departments set
the overall objectives and policies for each sector. Economic regulators set
the frameworks within which private companies deliver this infrastructure and
they have legal duties to protect consumers by, for example, promoting
competition, acting to prevent and address market abuses, and in some cases
setting the prices consumers can be charged.
The
complexity and changing nature of Government policies, particularly in the
energy sector, risk delaying much needed investment. We are concerned that the
complexity and changing nature of the policy landscape affecting infrastructure
investment, particularly in the energy sector, may be causing investors to hold
back from making investment decisions. For example, we heard that
although there is planning consent for infrastructure that would provide 15
gigawatts of gas-powered electricity generation, investors are not going ahead
due to a combination of unfavourable market prices for gas and electricity, and
lack of certainty with regard to the Government’s electricity market
reforms. The shift to renewables is one of the reasons for increasing bills for
consumers. There is a challenge to the adequacy of supply which is made more
difficult by current market interventions. There appears to be a lack of
urgency in DECC when so much of our coal fired plants are being decommissioned
before the end of 2015.
Recommendation: Departments should
explicitly factor in the potential impact of complexity and uncertainty on
investors when making or changing policies affecting infrastructure. DECC needs
to act quickly to give certainty and unlock much needed energy investment or
the consequences for consumer bills will be worsened.
While HM Treasury accepts responsibility for considering
the impact of infrastructure investment on consumer bills “across the
piece”, it has not produced any work on the long-term affordability of
consumer bills. Within individual sectors, there is no clear guidance
about who – regulators or Government – is responsible for assessing
affordability. For example, in the water sector there is no definition of
affordability, and neither Defra nor Ofwat was able to tell us which of them
were responsible for monitoring and assessing affordability. The failure of
departments and regulators to assess the overall long-term affordability of
planned infrastructure means they are taking policy and regulatory decisions
which influence what infrastructure is built and how, without a proper
appreciation of consumers’ ability to pay. We are not persuaded by HM
Treasury’s argument that it is not sensible to aggregate the costs to
consumers across sectors as the affordability of costs can only be determined
by taking into account all household bills, household incomes and the wider
costs of living. We welcome the recent commitment by regulators to consider the
affordability of bills across sectors, but we strongly feel that both HM
Treasury and Government departments, which set policies that influence
investment decisions, should assess and consider affordability as an integral
part of their decision-making processes.
Recommendation: HM Treasury should
ensure that an assessment of the long-term affordability of bills across the
sectors is produced and published.
This should involve:
- establishing with departments and regulators clear
responsibilities in each sector for assessing the long-term affordability of
bills;
- bringing together sector-level assessments, starting
with energy and water, so that long-term affordability for consumers can be
considered in aggregate; and
- assessing the combined impact of increased bills on
different household types, including those households most vulnerable to price
rises.
Regulators are not getting sufficient assurance on the
long-term sustainability of companies’ operations. Regulators rely
heavily on the information companies provide to them rather than seeking
independent assurance so, for example, regulators do not check whether
infrastructure has been provided to the agreed specification and will be fit
for purpose for its whole expected life. We found this surprising given that
misreporting has in the past prompted the Serious Fraud Office to impose fines
on water companies. Given the nature of the energy market, it is vital that
regulators protect consumers’ interests by properly understanding the
companies’ finances. While we welcome Ofwat’s commitment to look
more closely at companies’ financial structures, Ofwat recognised that it
has struggled recently to recruit the skilled people it needs, and it is not
clear that Ofwat has all the necessary skills to support effective
scrutiny.
Recommendation: Regulators need to
improve their protection of consumers’ interests by paying closer
attention to the financial structures of regulated companies and by verifying
in, a proportionate way, whether infrastructure has been built to the standards
expected. They must have robust plans to address any gaps in their capacity and
skills to do this.
Regulators have been unacceptably slow to respond to
earlier calls for more joined-up working. We are disappointed that despite the
House of Lords Economic Affairs Select Committee calling for much stronger
joint working arrangements in 2007, regulators have only very recently acted
upon this. At our hearing, regulators rightly recognised the limitations of
their previous cross-sector working arrangements. We welcome the news that
regulators’ Chief Executives are now having regular formal meetings and
are in the process of establishing a permanent secretariat and a joint work
programme which includes a focus on affordability issues.
Recommendation: Regulators must
ensure their reformed joint-working arrangements deliver a coordinated approach
to assessing the impact on bills and affordability of infrastructure
investment, and that this is carried out in collaboration with
Government.
Further information