Where is our water, now that we need it?

Another classic British mess, another unholy row about whose fault it all is. Ian Mackinnon untangles the arguments

Why is one third of the country's population - 18 million people - suffering water rationing?

The water companies argue that you only have to look out of your window to see the answer. The long spell of hot, dry weather has forced meteorologists to delve into the record books, and it seems as though with each passing day another record falls. To date it is the driest period for 200 years and the hottest since the memorable summer of 1976. In short, they say, despite the wet winter, there will not be enough water to meet essential day-to-day demand for washing, cleaning and the like unless some of them conserve stocks. Hose-pipe bans are intended to prevent non-essential use by things such as lawn sprinklers, which eat up 220 gallons an hour, the same amount of water as a family of four would use in a day.

So we simply have not had enough rainfall?

Not quite, particularly if you listen to Frank Dobson, Labour's environment spokesman. He accuses the privatised water companies, and by extension the Government, of squandering precious resources in allowing almost one third of the supply, 826 million gallons every day, to escape from leaky mains. It all comes down to lack of investment as the companies have creamed off excessive profits, he says. Ofwat, the industry watchdog, goes along with this to an extent, saying that some companies have not done enough to tackle the problem of leaks and are thus failing in their statutory duty to ensure that customers have a continuous water supply. This is why Ofwat has called on the culprits to compensate customers.

Why do the water companies not just plug the leaks?

The main reason is cost. Bill Dale, a water analyst with SG Warburg, estimates it could land water companies with bills of as much pounds 20 billion in total to produce a leak-proof system. Anyway, the companies say that in the six years since privatisation, they have between them invested pounds 4bn in reducing leakage from our antiquated system, cutting wastage on average from 35 per cent to less than 30 per cent. A reduction of a further one per cent would cost pounds 400m. Our Victorian water infrastructure has given us unique difficulties: in the more modern systems of Germany and the Low Countries, for example, water leakage is less than 10 per cent. Moreover, to do the necessary work would bring cities grinding to a halt as the roads were torn up.

Surely what that means is: the leaks could be plugged, but the companies are not prepared to pay?

Over and above the large sums the industry has already put into mending leaks, Ofwat has ensured they will spend another pounds 24 billion in investment over the next 10 years. That sum includes repairs, but also improvements to drinking water quality and sewerage. But the companies say that in reality no one wants a perfectly leak-proof system, because the cost would inevitably fall on the customer - a point neglected by Mr Dobson - who would be faced with an enormous increase in bills. As soon as it starts raining again, the public will become very reluctant to pay.

Who has been paying for all the investment up until now?

Mainly the customer. Since privatisation, households, according to the National Consumer Council, have already paid the cost of decades of under- investment by successive governments. Bills rose on average by five per cent above inflation in each of the years from 1990 to 1994, though Ofwat has now pegged them for the future to one per cent ahead of the retail price index. Similarly two-thirds of investment has been paid for by the customer, rather than the shareholder in the form of new share issues or extra borrowing. Robin Simpson, the council's policy director, argues that in such privatised monopoly, with virtually no risk attached to the shares, investors should accept lower returns to allow greater capital investment.

How much profit have the water companies made?

In the years since the English and Welsh water companies - 10 water and sewerage, and 21 water suppliers - were privatised, they have made on average pounds 1.5 billion profit each year. In the period from February 1990 to February 1994 the value of the 10 water and sewerage companies leapt by 99 per cent as against an average of 39 per cent for all firms in the 100 FT shares index.

Does this mean that Ofwat is another toothless watchdog?

No. Ofwat's duty is to see that the companies continue to improve their service through efficient use of investment, which it assumes the present arrangement is achieving. Crucially, however, it favours "demand management", a quaint term for cutting the amount of water we use, in tandem with the cut in the amount leaking out of the system.

And how would they do that?

Water meters are the big thing for them, and for the Government. Seven per cent of the population have the devices in their houses, measuring every drop they use. The number of meter connections is increasing by about one per cent each year. Ofwat argues that it is fair for everybody to pay for the water they use, because this gives people the all-important choice to consume as much or as little as they like, while at the same time discouraging wastage or inefficient usage. Industrial users of water are already metered.

Does metering really reduce the amount households use?

Trials on the Isle of Wight, an area of habitual water shortage, showed that demand fell by 20 per cent at normal times, and 30 per cent at peak times. The island now no longer suffers from hosepipe bans. A note of caution though: some industry sources say that the savings are as little as 10 per cent, and much of that came when the engineers installing meters repaired leaks that they discovered in householders' own pipes (which anyway account for one-third of all leaked water).

While their use is not universally supported by the water companies, those in areas of low rainfall, such as Anglian and Southern, certainly favour meters. There is the added appeal, according to Ofwat, that when households are paying for the amount they use, it is very much in the interests of the water companies to make sure that supply is continuous, otherwise they will not get the money.

Are there any other drawbacks to metering?

Quite a few, according to some, who argue that after an initial period of being extremely careful, demand shoots back up as soon as people get used to having to pay for their water. Equally, the cost of installing each meter is around pounds 200 plus about pounds 18 annually for the water company to come and read the device. Ofwat thinks the companies should aim for a pounds 150 installation cost. Again, it is the consumer who will have to foot the bill.

Is it not simply fair that everybody should pay for what they use?

The problem, according to groups such as the National Consumer Council, is that if everybody pays for what they use, those who can least afford it will be hardest hit.

This is because at present the charging system of water rates is still linked to the old rateable value of homes (pre-poll tax), which in effect subsidises the cost of water to the less well-off. Those who live in bigger houses in nicer areas are paying more for their water, no matter how much or how little they use. Those with large families in, say, a small council house pay relatively little. If everyone was forced to pay the same rate through a metered charge, the large family in a small house would end up paying more.

Ofwat recognises the social significance of this drawback, and has been holding talks with the Benefits Agency and the Department of Social Security in an effort to get them to take into account water costs when uprating benefits in future.

A move to metering, while no doubt painful for consumers who have cherished their right to this unlimited and free resource, would bring us into line with our European partners. They long ago realised that there's no such thing as a free bath.