Supplementary memorandum from Water UK
JOINED-UP
REGULATION
Water UK expressed in its evidence[1]
that no policy documents should be issued without full sign up
from all regulators and DETR.
Appendix E of Ofwat's final determination report
was issued without this agreement. We attach correspondence between
Ed Gallagher (Chief Executive of the EA) and Water UK relating
to Appendix E[2]
. On page 16 of its evidence, Ofwat says they have not seen Ed
Gallagher's response to us.
Ofwat say in their evidence[3]
that "the DETR has indicated that it will offer a view on
these issues shortly". There is no reference to a revision
of Appendix E in the DETR evidence at all. We would welcome clarification
of the DETR's plans.
AGREED ROLES
AND REMITS
It is clear form the evidence submitted and
heard by the Committee that the purpose of the quadripartite process
is ill defined—DETR's evidence[4]
says it is to "facilitate proper processes and the transfer
of information". DETR appears to have regarded it as primarily
a safety valve in the event that companies had concerns about
process—the evidence[5]
also says "the setting up of quadripartite group was intended
to help ensure the inevitable tensions involved were creative
and constructive".
Companies are concerned that they have not been
consulted on the "tripartite" work on leakage [DETR
evidence[6]]—the
label "tripartite" is both accurate and significant!
AGREED TIMETABLE
In response to questions 280 and 281[7]
on timetable the DG said that he had consulted on timetable, and
that he would have had to think again if people had said it was
"ridiculous".
His consultation took place in February 1997
(MD124). The main comment on timetable put forward by companies
was in the Water Services Association submission (representing
the larger water and sewerage companies). This suggested that
the final date for the review should be moved from the proposed
end date of December 1999 to July 1999, following the 1994 precedent.
In the event the DG moved the final date forward one month only,
to end November 1999.
The DETR did not put forward proposals on how
the quadripartite process should be handled until July 1997, after
Ofwat had completed its consultation on timetable.
REDUCED INFORMATION
REQUIREMENTS
The first costing exercise on quality improvements
is described in the Ofwat evidence[8]
and in retrospect it was clearly a complete waste of time and
effort. MD124 of February 1997 announced the exercise and says
that "it will be used to assess the current best estimate
of the scope of the quality issue". The range of figures
obtained of £2.2 billion to £7 billion gives little
guidance on a best estimate.
In Ofwat's evidence the benefits claimed were
that the exercise "highlighted major cost drivers" and
"identified key areas in which guidance from DETR and the
Environment Agency was needed". In reality, the objectives
subsequently changed.
The exercise was undertaken in advance of the
May 1997 general election and in advance of DETR setting out proposals
on how the quadripartite was to be handled, which was clearly
premature.
CUSTOMER RESEARCH
The DG claims in responding to question 212[9]
that the ONCC research "was a very specific piece of research
designed to fill a gap in the evidence and it particularly concentrated
on low income customers". In fact the problem with this survey
was the small sample size and all the national surveys of customers
undertaken by Water UK and others had larger samples of low income
customers. We have reanalysed the Water UK sample to look at the
views of low income customers and can provide results if required—our
view is that the small sample size in the ONCC study led to unreliable
conclusions.
SHARING OF
OFWAT FINANCIAL
MODEL
In responding to question 289[10]
the DG said that "there is a consultants model around which
gives almost exactly the same answers" as the Ofwat model.
This Ofwat view was not known to companies at
an earlier stage of the process.
Copies of the full exchange of letters between
Water UK and Ofwat regarding the sharing of the model are attached[11]
.
It is not clear why Ofwat developed a separate
model that was then expensively audited by a firm of accountants,
independently of the companies' own work. More sharing of costs
and methodology would seem to be sensible.
MAINTENANCE
In responding to question 223[12]
the DG claimed that in the 1994 price review water companies wanted
a further doubling of maintenance expenditure over and above the
level of spending in the previous five years. This is not correct,
as Figure 19 on page 102[13]
clearly indicates, even in 1994. It is certainly not true for
the 1999 review, where the proposed increase is 15 per cent as
noted on page 102[14].
There is a gap of nearly £2 billion between
the £8.3 billion in the SBPs and the Ofwat allowed expenditure
of £6.4 billion set out in Table 19. In part this arises
because Ofwat have chosen to cut the previous level of expenditure
of £7.1 billion by 10 per cent or more, because of alleged
efficiency improvements.
Water UK held a think-tank on capital maintenance
on Wednesday 26 July, and a copy of the report from the day is
attached[15].
Our aim for the day was to debate the way forward and to engage
the regulator, so that there is some measure of agreement between
the two sides about next steps.
INFLUENCE OF
GOVERNMENT ON
REGULATOR
The DG first indicated that he was planning
price reductions in October 1996, when announcing his intention
to undertake a price review, but any figure put on the size of
possible reductions subsequently in the press was speculation
by journalists, often based on City analysts' views. The DG provided
no figures himself before Prospects for Prices in October
1998.
Mr Meacher's evidence in response to question
351[16]
claimed that he was not "boxing in" the regulator, when
announcing an £8 billion investment programme and a 10 per
cent cut in prices in March 1999. Nevertheless, it is clear from
Prospects for Prices (pages 6 and 7) that the regulator felt that
a substantial environment programme would make it difficult to
achieve substantial price cuts in the medium term—bills
would fall but then rise considerably, so that in 2004-05 bills
would be 2 per cent to 12 per cent below the expected level in
1999-2000.
It is clear that 10 per cent is at the upper
end of this range and represented a relatively challenging target
for the regulator to achieve.
THE ROLE
OF THE
DWI
We were surprised that Michael Rouse found Water
UK's comments "strange"[17].
Certainly DWI has been aware and acknowledged the industry's concerns
for some time and even employed a consultant during the periodic
review to help process submissions.
In 1999 DWI commissioned a survey to obtain
feedback from companies on the DWI's performance. The report of
the survey was published and summarised in DWI information letter
11/99. This report highlighted concerns that companies believed
DWI did not have the resources to carry out the task. Particular
problems were:
— lack of clarity of information requirements
(particularly on lead) and difficulty contacting DWI to clarify;
— many preliminary opinion letters
were late in arriving.
DWI stated that it intended "to carry out
a full review of its procedures for AMP3 and its relationships
with other organisations with a view to learning lessons for the
handling of a future Periodic Review". It would seem that
DWI has forgotten this undertaking.
We refer the committee to Paragraph 46 of the
survey report which highlights specific issues. A particular problem
is that one company had still received no preliminary opinion
from DWI even though the final meeting with Ofwat prior to the
determination had taken place.
WATER EFFICIENCY
TARGETS
Water UK does not believe that the setting of
water efficiency targets would be a helpful step at this stage
in improving overall water efficiency. All water companies are
engaged in ensuring the sustainability of their resources in order
to meet consumer demands both today and in the long term.
Water companies have recently submitted their
strategies for promoting water efficiency to their customers over
the next five years to Ofwat. There should therefore not be any
doubt over the plans and commitments that the industry is making
in this area. However, the economic justification for further
promotion of water efficiency will vary from company to company
depending on resource availability, the supply/demand balance
and the costs of delivering water.
There is still considerable work to be completed
before we can accurately measure the costs and benefits of water
efficiency. We believe that an agreed understanding of the economics
of water efficiency is necessary before the setting of targets
can be contemplated.
A three-year UKWIR research project has just
begun which will define best practice in water efficiency measurement.
The data collection stage will be completed by the end of the
year and will lead to the establishment of best practice and transferability
criteria and a draft framework methodology. This will be tested
through demonstration projects to produce a final methodology
and to understand the implications for charging. The EA, Ofwat
and DETR all attended the initial workshop and have indicated
that they wish to be involved in the project.
Water efficiency is not just a matter for water
companies. All companies have a duty to minimise their own consumption
of water but the industry cannot take responsibility for customers'
or for society's actions. As Mr Meacher said in his oral evidence
to the Environmental Audit Committee in response to question 330[18]
"You do need a change of behaviour and so much of environmental
action by the authorities, government downwards, is to try and
promote a change of behaviour. It is difficult to achieve that
and get people to use water less". Only 20 per cent of UK
households are metered at present, which means that changes of
behaviour will not be achieved by changing the price of water.
We support establishing partnerships with other
stakeholders to promote the case for water efficiency. The industry
is already engaged in a number of initiatives both to improve
understanding about water efficiency and to increase the take-up
of water efficient practices by consumers.
In May, Water UK held a think-tank which brought
together the industry with white goods manufacturers, researchers,
regulators and the retail industry. A dialogue is continuing with
these groups to make progress on issues such as product labelling
and product design.
The industry supports the National Water Conservation
Group and its aim of providing information and advice to consumers
and designers on the efficiency of water-using appliances and
products. In doing so we recognise the need to work closely with
other programmes such as the Market Transformation Programme and
the Advisory Committee on Consumer Products and the Environment.
Water UK has worked with the NFU on their water
audit survey, which has been distributed to farmers recently.
A report on the results will be launched in November.
Water UK and the EA jointly sponsor annual awards
for water efficiency. The winning entries will be announced on
Tuesday 19 September and a conference is being held in November
to share the best case studies with a wider audience. The winning
entries will be promoted through the press and media.
Other plans for this year involve working with
DETR and developers to encourage the use of water efficiency measures
in new developments.
In conclusion the industry supports the principles
of water efficiency and has made great progress in reducing leakage
and encouraging household metering in resource constrained areas.
It was disappointing that Ofwat did not support companies' metering
programmes. We are keen to continue working with other organisations
in the water supply chain to promote water efficiency and to develop
a coherent package of water efficiency initiatives and activities.
However, this cannot be achieved by the industry in isolation.
PLANNING PERMISSIONS
Water UK supports a fast-track approach for
planning permissions which would allow companies to ensure that
meeting standards is not dependent on Local Planning Authorities.
Currently water issues are not adequately addressed
in the planning system. We have raised this issue with DETR and
Ministers both independently and in partnership with RSPB and
CPRE. We would welcome a dialogue about preparing guidance for
Local Planning Authorities on water issues, and more specifically
we believe that water companies should become statutory consultees
in the planning process.
Water UK wrote to the Minister following the
oral evidence session on Thursday 13 July.
September 2000
1 See memorandum from Water UK p 2. Back
2
See supplementary memorandum from Water UK p 60. Back
3
See memorandum from the Office of Water Services (Ofwat) p 103. Back
4
See memorandum from DETR, p 147. Back
5
Ibid, p 146. Back
6
Ibid, p 149. Back
7
See p 121-122. Back
8
See memorandum from Ofwat, p 95. Back
9
See p 113. Back
10
See p 122. Back
11
See p 30-32. Back
12
See p 115. Back
13
Final Determinations: Future Water and Sewarage Charges 2000-05,
Ofwat, November 1999. Back
14
Ibid. Back
15
See p 32. Back
16
See p 157. Back
17
See p 90. Back
18
See p 154. Back
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