Infrastructure investment: the impact on consumer bills

• Report: Infrastructure investment: the impact on consumer bills
• Report: Infrastructure investment: the impact on consumer bills (PDF 2.62MB)
• Public Accounts Committee

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.

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