APPENDIX 2
Memorandum from Water UK
WATER PRICES
AND THE
ENVIRONMENT: WATER
UK COMMENTS ON
REPORT FROM
EAC
Water UK welcomes the Committee's well researched
and authoritative report. It broadly supports the Committee's
conclusions and it hopes that the Government and the regulators
will review institutional arrangements and their working practices
carefully to ensure that the Committee's conclusions are fully
implemented.
Water UK has taken account of the Committee's
recommendations in formulating its submission to the Environment
Sub-committee on the recently published draft Water Bill. Our
press release and a background brief on our submission to the
Environment Sub-committee are to be found on Water UK's website
http://www.water.org.uk.
A key theme of the Bill is better regulation,
ensuring that the customer is at the heart of economic regulation
and that the regulatory process is more open and transparent,
accountable, predictable, consistent and effective. The Committee's
report on water prices and the environment has been very helpful
in identifying areas where improvements should be made.
DETAILED POINTS
Timetable (para 39)
We accept the Committee's conclusions. Our concern
is that, although initially the timetable for the 1999 periodic
review seemed reasonable, in practice there were difficulties.
We note that Ofwat will be considering whether to reduce the duration
of the review to two years which implies greater pressure on the
DETR, other regulators and companies to deliver on time.
Assessing customer needs (paras 50, 52)
We agree that customer research should be undertaken
on a co-ordinated basis and that there should be common ownership
of the results. We look forward to discussions with the DETR on
how customer research might be best managed in future in the light
of the committee's recommendation. We think companies continue
to have an important role to play in developing research within
a co-ordinated framework agreed with DETR, Ofwat and the CSCs.
Early predictions (paras 68, 69)
We support these important conclusions.
Costing the environment programme (para 90)
We agree with the Committee's conclusion.
The role of the DETR (para 94), long term planning
(paras 179, 180)
We regard these conclusions as extremely important
and far reaching, and we strongly support them. We welcome this
clear statement of the role of the DETR and we continue to believe
that a longer term vision is required extending well beyond the
five year period forming the basis for a periodic review.
We have suggested to the Environment Sub-committee
reviewing the draft Water Bill that the Secretary of State might
be required to set up a national forum to consider the longer
term issues affecting the water industry.
Transparency, involving wider stakeholders, date
provision, monitoring (paras 100—122)
We support all these recommendations and hope
that early implementation will take place. We think that the draft
Water Bill should be amended to ensure that these recommendations
are implemented, for example, to make the full financial model
publicly available.
The price profile (para 128)
We agree with the Committee's view on roller
coaster prices. Already two companies have interim price determinations
effective from April 2001, and it is likely that more companies
will need to request interim determinations before 2005. It is
clear that the media are confused about why this is happening
and no doubt customers are even more confused.
The lack of forward planning on the prospects
for prices and investment beyond 2005 remains a matter for concern.
Paragraph 126 of the report summarises the only evidence in the
public domain on Ofwat's view on this matter.
Size and nature of the environment programme (paras
139, 142)
We agree that there is no room for complacency
given the likelihood that new quality obligations are likely to
be introduced, and there will be constraints on water resources.
This reinforces the need for longer term planning. We believe
that a prudent approach by Ofwat would have been to make proper
allowance within price limits for the cost of expected future
environmental spending likely to crystallise before 2005.
Accommodating new obligations (para 151)
We share the Committee's concern. The current
arrangements for dealing with the timely introduction of any new
obligations set by government between periodic reviews are not
well specified and remain contentious. This applies to all new
obligations, not just those that need to be reappraised. We think
DETR needs to take the lead in agreeing a sensible process with
the regulators and the industry, covering the ground presently
dealt with in Appendix E of Ofwat's final determinations report.
This work needs to be undertaken as a matter of urgency as a number
of important issues already need to be resolved.
Tackling diffuse sources of pollution (paras 159,160)
We agree with the Committee that there the Environment
Agency should focus more regulatory effort on diffuse sources
of pollution and demonstrate an overarching enforcement strategy.
Future environmental benefits arising from improvements in sewage
treatment will not be fully realised until diffuse pollution beings
to receive the same level of attention as point source pollution.
Water quality programme (para 163)
A review of the DWI's procedures and adequacy
of its resources will be timely at the beginning of AMP4 and will
help to ensure that the regulator is well placed to fulfil its
role over the next five years.
Interface with planning process (paras 171-173)
We agree with the Committee's conclusions.
Maintaining the infrastructure (paras 198, 208-212)
The Committee's conclusions on the maintenance
of sewers and water mains are shared by Water UK. We continue
to develop our views on the appropriate methodology for assessing
capital maintenance through our focus group of experts on this
subject. We look forward to further discussions with DETR and
the regulators on this important matter.
Setting the right framework (para 220)
We think that a co-ordinated approach to sustainability
is best achieved by debate and discussion between government,
regulators, the industry and other stakeholders. We think this
co-ordinated approach should be given statutory backing by means
of the draft Water Bill, with economic and environmental regulators
required to work towards sustainability and to collaborate to
achieve this end. We have also suggested a national forum should
be set up to consider longer term issues affecting water customers
and the environment.
Ultimately it is for Government to balance the
costs and benefits of extra investment in environmental improvement
and take decisions in the light of the best available information
and advice from regulators and the industry. Government should
have a clearly defined role in the sustainability debate.
We are not convinced, therefore, that the Committee's
proposal that the DG should have a specific duty to have regard
to sustainable development is appropriate or sufficient. The new
draft Water Bill power for the Secretary of State to provide guidance
to the DG on environmental matters is also unlikely to achieve
an effective result.
Water efficiency (para 225)
We are pleased that the Committee recognises
the number of initiatives being undertaken by the industry on
water efficiency. The Committee also rightly points out that in
many cases there is no financial incentive for water companies
to reduce their water consumption. This is also true for unmetered
customers.
There is a need to promote joined-up regulatory
thinking on water efficiency. Ofwat requires that water efficiency
activity should be cost effective. This is not always recognised
by the EA and DETR who look at the broader environmental and sustainability
principles.
We believe that it is essential to get a strategic
framework for water efficiency agreed with EA, Ofwat and DETR
before any targets are set. This would formalise how the water
efficiency targets are to be funded as well as how they will be
undertaken and the benefits measured.
Leakage (paras 230-232)
We agree with the Committee's conclusions, and
we would wish to strengthen them. The water industry should be
more closely involved in the work of the tripartite group.
If government wishes to reduce leakage below
economic levels this is effectively a new obligation on companies
that should be funded through price limits. The draft Water Bill
gives the Secretary of State powers to set standards of service
in environmental areas and we understand that the DETR would use
this to reduce leakage below economic levels. As the Committee
suggest DETR should explain its reasons for doing this, and provide
a regulatory appraisal setting out the benefits and costs of imposing
the new obligation.
January 2001
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