Helm: use Thames crisis to change water’s pricing model

“The current water charging regime is not sustainable, either environmentally or politically,” Professor Sir Dieter Helm has argued in a new publication, The price of water – higher bills and fairer returns (see https://dieterhelm.co.uk/natural-capital-environment/water/the-price-of-water/).

According to the paper, continuing with the status quo will mean “everyone eventually loses:” companies and environment, both of whom will come under even greater pressure; and customers, who will pay more for increasingly stretched services.

Helm urged that the focus on Thames Water’s fortunes and forward price proposals be harnessed to introduce a sustainable pricing model for the whole industry. He described this in detail in the paper, summarising: “Price should comprise two parts: variable costs + infrastructure charges. Variable costs are related to demand and usage, including the costs of water from the point of abstraction + the cost of storage + operating costs + capital maintenance (as an operating cost). Infrastructure costs are the return on the existing Regulatory Asset Base (RAB) + returns on the new RAB as and when assets are completed.”

Relative to current pricing: “The variable costs are much higher than the existing price of water. The fixed costs are lower, because capital maintenance has been erroneously treated as investment in asset enhancement, which it is not, and then added to the RAB, which it should not be.”

Helm continued: “The key point to make is that if prices have to go up so that water resources are better utilised, then the fact that the companies are not able to make excess returns or engage in financial engineering matters a lot. Put differently, it is hard to see how price increases with excess returns could ever be acceptable.”

He concluded: “Prices matter. The wrong prices may be politically convenient in the short run, but they are poisonous in the medium term. Now is the time to put the water industry on a sustainable basis.”