Time to think outside the box on water charging? Try thinking outside the boundaries

Who remembers the Green Cross Code Man? Growing up I was a fan of the Code he tried to teach us: “Look right, look left then look right again”. It has served me well.

When it comes to how we think about charging for our water services instead of safely navigating our highways, I invariably find myself thinking about the Green Cross Code. In the context of water charging, looking right gets us to think about the future. And looking left, reminds us to think about where we are coming from.

In this essay I offer some reflections on what looking to the right might mean for how we charge for water services. These reflections are grounded in close to 30 years of experience – 30 years of looking left – in water charges and tariffs in the regulated water sector for England & Wales.

30 years of looking left has me feeling that now is the time to think outside the box that our system of water regulation has created and embedded. The box I have in mind is shaped by a number of boundaries that still define how we approach and regulate charging for water services.

We now have some clarity on what looking right means for the level of our water bills and charges, at least for the next 5-year period.

In December 2024, Ofwat published its Final Determinations of water prices for the period 2025 to 2030. Household bills for water and wastewater customers are going up in real terms by 36%. Add in the allowance for general inflation that our system of price regulation permits, and those water and wastewater bills could be over 50% higher than current levels by 2029-30.

This immediately creates pressure on the affordability of those water bills. In a macro climate of stagnant household incomes rooted in economic under-performance the challenge for affordability should be clear and obvious.

A challenge highlighted very strongly and recently by CCW

Through the prism of this looking glass, it is no surprise that CCW has – even prior to the PR24 Final Determinations – been a strong advocate for reforming and extending the approach in the water sector to social tariff protection. In the same recent evidence we heard:

This picture of a postcode lottery in water charging policies is, I want to suggest, not just limited to areas like social tariffs. There are other examples that stem from our current approaches to how water and wastewater services are paid for. Those current approaches are rooted in boundaries that hitherto had their own logic, but perhaps with a look to the right for water charges and affordability we now want to re-think some of that logic.

If the challenge that comes from looking right is to think outside the box, then perhaps we now need to think outside some of the current boundaries.

According to Office of Budget Responsibility, Vehicle Excise Duty is expected to raise about £8.3 billion in 2024-25. This is raised from about 29.3 million vehicles licenced to pay the duties and use our public highways. This figure is equivalent to about £290 per household or 0.3% of national income.

What these taxes pay for is subject to how the fiscal pot gets prioritised, but we mostly assume these duties pay towards the maintenance and improvement of our public highways. Not a penny of it goes towards keeping our public highways free of rainwater. The users of our public highways do not pay for the drainage of the highways they use every hour of every day.

The bill for draining the nation’s public highways falls to the wastewater customer. And we have the Water Industry Act to thank for that current reality and boundary.

Under section 115 and section 146(4) of the Water Industry Act 1991:

• highway authorities are allowed to use the public sewer system for drainage of roads repairable by them (public roads); and
• sewerage companies are prohibited (my emphasis) from charging highway authorities for that service.

Instead, the customers of our sewerage companies bear the costs of highway drainage.

The obvious question to ask is how much are wastewater customers subsidising our road users?

There are no precise figures, but my own ball-park estimate, based on information collected from the PR24 business plans and Ofwat’s PR24 final determination, is that the total cost per year could be at the lowest end around £550 million by 2029-30.

Every household wastewater bill (and there are about 24.5 million of them in England & Wales) is paying close to £17 per year for highway drainage. So in the region of 6-7% of our household wastewater bills are being used to keep our highways drained to benefit about 30 million road users.

This current legal boundary is rooted I suspect in the belief that we all need wastewater services and we all use the roads. So in the round wastewater customers are paying for something they do receive.

But that is a bit like saying we all need to eat and we all need to access the internet. We don’t use our mobile phone bills to pay for our groceries. And for good reason. Part of sensible pricing policies is to provide the right incentives for suppliers and users of those services.

And when it comes to water management, particularly sustainable water management, an accepted principle is polluter pays. If we want to be serious about encouraging better management in areas like water pollution – and highway drainage is a well-known polluter – a simple step forward would be to remove the artificial legal boundary of prohibiting the recovery of the costs of highway drainage from our highway authorities. This would create incentives for better management of highway drainage and it would also help to reduce the pressure on our wastewater bills.

What is the top destination for stay at home holiday-makers in the UK? The answer based on available visitor data is very clear.

Based on recent Visit Britain survey data, the South West region is our number one visitor hot-spot.

The South West region is home to about 10% of people in England, but accounts for 21% (60 million bed-nights) of domestic overnight stays and 27% (30 million bed-nights) of holiday stays. That’s a lot of extra mouths to feed and entertain, never mind the influx of showering and toilet flushing demands which peak during the summer months.

Another popular UK holiday destination – Scotland – has recently woken up to the challenges of these tourist-driven population movements. The introduction of the Visitor Levy (Scotland) Act in 2024 will allow local authorities to add a charge to overnight accommodation such as hotels, B&Bs and holiday lets.

The idea of the Visitor Levy in a nutshell is to more fairly share the burden of paying for local public services between permanent residents and temporary residents (tourists).

No surprise then that in a region so heavily dependent on tourism like the South West, the implication of that tourism has focused the minds of the local water and wastewater company – South West Water. And more than that, the question that has been asked is how to fairly charge for these services when such a material contribution to the demand for its services comes from its temporary residents and visitors.

This question featured heavily in the company’s PR24 business plan for 2025-30 and South West Water is one of a few water companies that are already testing alternative water charging methods – labelled as progressive charges.

These trials are currently with permanent residents in the South West, although the inclusion of seasonal charging trials with business customers (including tourist related businesses) is part of an attempt to think outside the box when it comes to how best to get visitors to the region to pay their fair share of the water services they use.

There may be extensions to these approaches in the future which might more directly address the tourist demand for water services. Another case where our approach to setting water charges may need to extend its boundaries.

Take for example, one of the attractions of the South West region  –  its unrivalled beaches. Of the UK’s 50 best beaches as recently revealed by The Times, 10 are to found in South West areas of Devon and Cornwall and the overall best beach was The Towans at Hayle in Cornwall:

To quote the Times:

These plaudits for the beach at the Towans include a reference to its car-parking. Find a good beach in a popular tourist destination and you will almost certainly find nearby a car park. And you will invariably also find that this car park is likely to benefit from a connection to the local sewerage network. Like the beach at Towans.

The question to then ask is – who is paying towards the cost of that connection to the sewerage network? Unfortunately – a bit like our first case above with highway drainage – the answer is likely to be that it is the wastewater bill payer, not the car park visitor, who is paying the lion’s share of the cost of providing the drainage connection that benefits the car park.

A more equitable approach could be to entertain the idea, for example, of a beach car park visitor drainage levy. Car parks tend to be operated by local authorities or private commercial companies who already pay charges to their local water companies. And we are all used to paying for our usage of car parks. Car park operators may well pass on the additional cost of any such drainage levy to the ultimate car park visitor, but that feels a fairer approach than persisting with the wastewater customers subsidising another form of road usage.

There is another tourist related boundary to consider. From April 2025, local councils in England will be able to use new powers to charge a premium of up to 100% additional council tax on second homes in their area, or parts of their area. Based on 2024 data, there are around 280,000 second homes in England that could become liable for these council tax premiums.

Of these 280,000 second homes, close to 55,000 (19%) are in the South West region and many of these second homes are in fact holiday homes or lets. Water charges will already be levied on these second homes where they are connected to water and wastewater networks. But as properties that are partially occupied in any given year, the question to ask is whether the charges they pay will be reflective of the costs of providing these services. Answering this delves into the nuances of charging structures and how those structures reflect the fixed costs of providing the necessary capacity.

Over many years, water companies have been encouraged by regulators to reduce standing charges and increase variable (volumetric charges). This creates a box for current charging approaches as this means they work well for all year round users (permanent residents) but are less suited to part year users like second home owners. Again, thinking outside this box leads us to consider the merits of something like a water charge levy for second homes.

In areas like the South West, where the desire for a second home is often related to the desire for a holiday get away, rethinking the boundary between how to charge permanent residents and temporary visitors becomes another potential route to creating more affordable and fairer water bills for those permanent residents.

The recent Ofwat PR24 final determinations for the water industry were notable in some of their finer details. Beneath the headlines of a record level of water industry expenditure over the next 5 years (£104 billion) and average real bill increases of 36%, there is also pump priming for 30 long-term and large-scale infrastructure projects that could end up costing in the region of £50 billion alone.

These 30 projects are primarily focused on enhancing water availability including the construction of new reservoirs. The map below gives a sense of the geography of these projects.

Aside from the scale involved, what is notable here is the extent to which these projects are regional and involve regional transfers of water resources. These major projects will transcend water company boundaries. This suggests a water resource future that is better co-ordinated and efficient with far more reliance on cross (water company) border transfers.

This poses however the question of how should we pay for strategic infrastructure investments that benefit us all? The track record in the water industry on this to date has not been great.

For example, the Thames Tideway sewer tunnel is about to open for business after a decade long construction period and a cost of about £4.5 billion. All of this has been paid for by Thames Water customers through their wastewater bills. But the economic case for the tunnel relied on recognising the benefits would be felt more widely in the nation – the cost benefit analysis even attempted to quantify the monetary value of these “non-use” benefits. The benefits are to the nation, but the cost has fallen to the Thames Water customer alone.

And from April 2025, the household residents of South West Water will no longer receive an annual £50 rebate on their water bills. In place since 2013, this rebate – known as the Government Contribution – was intended to be a retrospective recognition that the benefits of the Clean Sweep investment programme of the early 1990s were felt more widely than by the residents of the South West. The need for this retrospective rebate had been identified in the 2009 Walker Review.

A total of £453 million has been retrospectively repaid to South West households, about 70% of the original total £650 million recommended in the Walker Review.

The lessons of these examples is that a fairer more equitable approach to the funding of large scale projects with nationwide benefits needs us to think about how these national / regional projects are paid for – by whom and how. If the benefits of large-scale infrastructure projects are shared across our regions, the challenge is to think beyond current water charging boundaries as we seek fairer more equitable ways of sharing the cost of those projects.