House of Commons - Public Accounts

Select Committee on Public Accounts Thirty-Sixth Report

THE WATER INDUSTRY IN ENGLAND AND WALES: REGULATING THE QUALITY OF SERVICES TO CUSTOMERS

THE ADEQUACY OF WATER SUPPLIES

Restrictions on the use of water

5. Water companies are not legally required to provide an unrestricted supply of water.[3] Their main duty is to provide water for domestic purposes (e.g. drinking and sanitation). Their obligation to provide water for other purposes is more limited and OFWAT consider it reasonable for companies to use occasional restrictions on the non-domestic use of water, such as hose-pipe bans, to help balance supply and demand in very dry weather. Such restrictions have been widespread in recent years (Figure 1).[4] They affected 40 per cent of the population in England and Wales in 1995-96, and 31 per cent in 1996-97. Problems in maintaining water supplies were particularly serious in parts of West Yorkshire in 1995, where for a time the threat of cuts in domestic supplies was averted only with the help of a large operation to bring water into the area in road tankers.[5]

6. In view of the restrictions in recent years, the Committee asked OFWAT whether the water companies had sufficient supplies for 1998. In evidence, OFWAT told us that, so far as essential supplies were concerned, they were currently confident about the situation and they believed that the companies did have sufficient water if they acted properly and efficiently.[6] OFWAT were looking at the assessments by the companies of their water supply position in the 1999 price review for the years ahead.[7] They believed the one case since 1976 when essential supplies were put at risk, in Yorkshire in 1995, was because of the incompetence of the company.[8] They said that, since 1995, they had agreed with all the companies that if companies did risk a shortage of domestic water supplies then there would be automatic compensation for customers, even if a drought order was in operation.

7. The Committee asked why OFWAT thought it was reasonable for companies to restrict the non-domestic use of water.[9] They replied that they would regard it as unacceptable to invest so heavily that water is supplied for people to use sprinklers overnight, or at peak hours, and to expect the rest of the population to pay for that. They thought it was a question of balance. They therefore distinguished between water used for domestic purposes inside the house and water used outside the house. They would regard a hose-pipe ban, for example, as the lesser of evils, although not, of course, very desirable. They also said that it was not very easy to predict the climate exactly, and that to invest on a scale that would mean that there would never be a hosepipe ban of any kind would require investment for which they very much doubted the public would pay for.

MONITORING THE ADEQUACY OF WATER SUPPLIES

8. Companies report annually their performance to OFWAT against a series of measures of service quality.[10] Two of the measures address aspects of the adequacy of water supplies, but one of those - that which monitors the number of people at risk of water shortage - has a number of weaknesses and is unsatisfactory.[11] OFWAT have ceased to rely on it and are developing new ways of monitoring companies' ability to maintain essential supplies of water.[12]

9. We asked OFWAT what they were doing to put this matter right.[13] They said that the measure they had inherited in 1989 had not been reliable, and that they believed that the problem was too complicated for a single measure.[14] They were taking a number of steps to put things right, having regard to the previous Government's "Agenda for Action" paper published after the 1995 drought. They now had a much wider approach, including the examination of leakage, the efficient use of water and charging. They were carrying out this work in conjunction with the Environment Agency, who had responsibilities for water supplies, and who were very well advanced in looking with the companies at the reliable yields from existing water sources for the various parts of the country. The Agency were also advising companies on the possible implications of change in the climate.[15]

10. Further steps were planned in the context of the review of the companies' prices due in 1999. These included the preparation by companies of plans for maintaining supplies over the next 15 years, and agreement of those plans by the Environment Agency and OFWAT. OFWAT will report the outcome of this action to this Committee. The companies' resource plans would be included in the submissions the companies were preparing as the basis for the 1999 review of prices, and OFWAT would be monitoring implementation of the components of these plans.

Leakage

11. After the 1995 drought, OFWAT found that many water and sewerage companies had not reduced leakage in line with forecasts they had made in 1990, and leakage was estimated to be about 30 per cent of the water put into distribution systems.[16] Because companies had had problems in measuring leakage accurately OFWAT had not acted against those that had not achieved forecast leakage reductions in the past, but in May 1997 the Secretary of State for the Environment, Transport and the Regions announced that they would set mandatory leakage reduction targets for companies from 1998-99.

12. We asked OFWAT when they had become aware that the level of leakage had been this high and what action they had taken with regard to the companies to reduce it.[17] They told us that there were no measures of leakage before they came into operation and that leakage was not an easy thing to measure. There were all kinds of measures over the world, some of which were pretty unreliable, and so OFWAT had gone for a comprehensive measure of leakage that caught up the whole of leakage. This had taken a little time to get going.

13. OFWAT told us that up to 1992-93 their evidence showed that leakage had been reducing but that after the 1994-95 review of prices it had increased again. Prompted by OFWAT, companies had then set themselves targets for 1997-1998[18] which often involved a big reduction in leakage. OFWAT said there were some companies, such as Severn Trent, that had clearly not given leakage enough attention, but which had then acted and their leakage had come down quite satisfactorily.[19] In other cases OFWAT had had to push companies and when they set targets for the following financial year, 1998-99,[20] they had found that some companies were doing quite a good job, whereas others needed to be pushed quite hard. Where there had been uncertainty about what was really happening in some cases, for example Thames Water, they had required quarterly progress reports from the companies.

14. The Committee asked OFWAT what in-roads into leakage they had seen from the best performing companies. They told us that they preferred not to use percentage numbers for leakage, and that a better measure was the amount of water lost per day, either per property or per kilometre of main.[21] All the companies now had targets for reducing the amount of water lost through leakage and that it was falling significantly.[22] Between 1995-96 and 1996-97 the average reduction achieved across the whole industry was ten per cent, and the targets set by companies for 1997-98 and by OFWAT for 1998-99 (Figure 2) required further reductions to be made in both years.[23] The targets for 1998-99 were for leakage to be reduced to 3.6 billion litres a day, a reduction of some 30 per cent on the 1994-95 level.

15. OFWAT added that it was very important, as leakage fell, to be sure that the level of leakage was getting down to the economic level so that customers were not paying excessive amounts.[24] Reducing leaks cost money but also saved money in terms of additional water resources not being needed. The companies were now under pressure to come forward with assessments of what is a reasonable balance between the two costs. In many cases the companies were probably above the economic level of leakage but were charged with having by mid-1998 proper studies of the economic level of leakage so that the leakage standards could be set in a fully rational way.[25]

16. When asked whether leakage reduction would be a more effective mechanism of saving water resources than encouraging metering,[26] OFWAT told us that companies should address both and that which gave better value depended very much on the circumstances. They thought that metering garden sprinkler users in leafy areas on summer evenings had very considerable benefits, but in different situations the reduction of leakage could be very beneficial indeed.

17. We also asked whether metering would compromise the health and hygiene of poor people.[27] OFWAT said they had advocated selective metering, concentrated, for example, on new houses and areas of water shortage. They had also investigated the social impact of water metering, and had tried to identify the hardship groups, which represented a relatively small proportion of consumers, but which were very important. And they said that it was very important to make sure that in certain places, for example new estates, sympathetic and sensible policies were pursued.

Encouraging efficiency in water use

18. OFWAT have promoted increased use of water metering as one way of promoting the efficient use of water by customers.[28] The Committee therefore asked OFWAT what they were doing to encourage efficiency in the use of water.[29] They told us that every water company was required to submit to them a water efficiency plan indicating the approaches that they were using to encourage efficiency. OFWAT had examined the plans, sent them back for improvement, and would be monitoring them.

19. In addition, each company will be required in 1998 to submit a plan showing how they intend to balance the supply and demand for water.[30] The plans will have to be agreed by the Environment Agency and will have to state the contribution the company thinks it would make by its proposals for managing the demand for water. OFWAT told us that discussions were also under way on the possibility of setting up a water savings trust.

20. The Committee asked whether there was evidence that meters reduced the demand for water. OFWAT told us that there was a great deal of research by the Water Research Association on the effect of water metering, and quite a lot of international evidence.[31] They believed that the conclusions showed that having meters led to something of the order of a 15 per cent reduction in the amount of water used, and at peak hours something like 30 per cent.

Conclusions

21. The ability of the water companies to maintain water supplies is of course an essential part of their service to customers. In recent years, however, there have been widespread restrictions on the use of water and in one case essential supplies to customers were at risk. We note that OFWAT are confident that the companies have sufficient resources to maintain essential water supplies for 1998 and that, in the 1999 price review, OFWAT will be looking at the companies' assessments of their water supply position for the years ahead. We expect OFWAT in so doing, to ensure that the companies have satisfactory plans to maintain the reliable supplies of water that customers expect.

22. The arrangements for monitoring the number of people at risk of water shortage which OFWAT inherited in 1989 were unsatisfactory. We are concerned that OFWAT did not start to try to improve these arrangements until 1995 and that their review is not yet complete. We look to them to conclude it without further delay and to introduce more reliable measures for monitoring who is at risk and what is being done to reduce that risk.

23. By 1995, many water and sewerage companies had not reduced leakage in line with the forecasts they had made in 1990. The amount of water lost as a result of leakage was, on average, some 30 per cent of the water put into distribution systems. We recognise that leakage reduced slightly in 1996-97 and that targets now set by OFWAT require it to be reduced in 1998-99 by nearly a third compared to its level in 1994-95.

24. We are nevertheless concerned that leakage reduction targets were not set earlier, and that OFWAT did not act against the companies that failed to achieve the leakage reductions they had forecast in 1990. We expect them to monitor closely companies' progress in achieving their targets for reducing leakage and to act promptly if any companies fail to achieve them.

3 C&AG's Report paragraphs 3.4-3.8 and 3.28, Figure 4 Back

4 C&AG's Report, Figure 10 Back

5 C&AG's Report paragraph 3.5 Back

6 Q38 Back

7 C&AG's Report paragraph 2.2, Q10 Back

8 Q38 Back

9 Q39 Back

10 C&AG's Report paragraphs 4 and 3.2, and Figure 2 Back

11 C&AG's Report paragraphs 8 and 3.25 Back

12 C&AG's Report paragraph 3.28 Back

13 Q9 Back

14 Q10 Back