Water UK offers an explanation on water charges for customers in England and Wales in 2007-08…

Water customers and the wider public these days take a greater interest in the service provided by the water industry.

Water UK welcomes this development. The more people are aware of the costs and benefits of a first rate water service and its dependence on the environment, the more they will understand why prices are rising and how they can help themselves and others by using water wisely.

Continuing investment

In England and Wales we have some of the best water services in the world. This is because we have invested a lot over a relatively short time and been successful. Some people might say enough is enough and it would be better now to ease off on the investment (and the rises in bills). Admittedly this would be attractive. But it would also be complacent because the task of securing the service improvements is by no means complete.

For the sake of customers, the economy and the environment we must keep investing in replacing and maintaining old dysfunctional pipes, raising the quality of the effluent we return to the environment and working towards a better balance between supply and demand. The priority must be maintaining the assets we all depend on and protecting the higher quality we have achieved.

There will be major benefits for customers and the environment, including: greater security of supply; better control of leakage; better taste and appearance for drinking water; many households freed from risk of sewer flooding; fewer problems with smells at sewage treatment works; even higher river quality; a reduction in sewers overflowing in storms; and more protection for wildlife habitats.

Companies are different

Much attention is drawn to the difference between the water bills customers have to pay in different parts of the country. But this should not be surprising. Water services are dependent on the water environment - the climate and rainfall, the flow and quality of rivers and streams, the existence of groundwater stocks.

All these factors are different from company to company, but so are the age and condition of pipes and plant, the history of the organisations and the requirements of customers. So naturally individual companies have to invest in different projects, take on different costs, and consequently, in partnership with Ofwat, set customer charges at different levels.

Finance and profits

In England and Wales water customers ultimately pay for water investment programmes, but because companies can make use of the financial markets the full price can be paid slowly over the life of the assets. Today's customers benefit as soon as projects are complete, but it is fair for future customers to share the cost because they will benefit too.

To get the work done in this accelerated timeframe means attracting funds from investors in shares and bonds. Obviously this has to be paid for, so a part of the higher bill, and the industry’s profits, goes to lenders and shareholders.

Because investment in water companies is unusually high in comparison with most other companies their profits may look large in relation to turnover. But the level of profits directly reflects the level of investment and accumulated assets.

Profits are an effective (in fact the only) way of financing the essential investment and delivering the benefits everyone wants. Like everyone else, shareholders and lenders - most of them pension and savings funds invested on behalf of millions of people - expect a fair return in exchange for the use of their money.

In the year to March 2006 the pre-tax return on capital employed in the industry was 6.6%.

Company debt

The impact of a huge investment programme can be seen in the industry’s overall debt. At privatisation in 1989 the companies had virtually no debt. Now the total amount owed to the markets is more than £23 billion, well over £1000 for each and every customer.

Companies are getting further into debt and this is likely to continue as long as the investment continues, even if more share capital is attracted into the industry. Of course the debt is carefully managed and subject to scrutiny by Ofwat. The effect is similar to taking on amortgage on behalf of customers. It is an efficient way of delivering value to the country in a vital public service, but it has to be supported.

Low income customers

Affordability is a real issue for a group of low-income customers who genuinely find it hard to make ends meet.

The government’s involvement is important, because supporting people on low incomes must always be a national public policy matter. Beyond a certain level the majority of paying customers should not be expected to subsidise a social security cost of this kind.

At the same time most people agree that it would be wrong to carry out essential work at a pace everyone, even those on the lowest incomes, can afford. This would mean delaying improvements to a service that underpins the standard of living of everyone in society.

Value for money and efficiency savings

Water UK believes that water charges are good value for money. We could show this by making comparisons with other household expenses or consumer products like fizzy drinks. But the changes in bills over the years speak for themselves when you set them beside what has been delivered.

In 1999 water charges were cut by more than 12%. Bills for 2004-05 were still lower in real terms than in 1999. Or take a longer perspective. From 1989 to 2007 the average water and sewerage bill increased by 39% in real terms (before inflation).

During this time there were major improvements to the service and the environment that would have meant much bigger increases without company efficiencies. Ofwat has calculated that 70% of the cost was absorbed by companies in this way.

Value and price

Water bills are good value because the actual cost in pence per day, or pounds per week is low relative to other expenses. In the big scheme of things, water bills are a fairly small part of most family budgets.

But, as noted above, this is not true for everyone. We are dealing with bills that everyone has to pay, so it is the industry's responsibility with its regulators and the government to show why it is worth paying a little more for higher quality. In other words, to put the focus on the value of a secure water supply and a clean environment, not just the price.

National pride and quality of life

Between 2005 and 2010 the water companies will invest nearly £17 billion in a wide range of projects throughout England and Wales. Around one third are required by the government and set out in formal guidance to Ofwat and the industry during the 2004 water price review. The rest result from detailed assessments of what is needed by the companies working closely with regulators.

These days more people know about improvements in drinking water, security of supply, the water environment and biodiversity that have come from earlier water industry investment.

But not everyone realises that this is an important reason why the UK’s environmental reputation in Europe has improved beyond recognition. We used to be called "the dirty man of Europe". Happily this shameful epithet no longer applies.