Select Committee on Environment, Transport and Regional Affairs Memoranda

Memorandum by Thames Water (DWB 22)


1.  Abstraction and Impounding: Clauses 1-21

  1.1  Balance and sustainability (Part I in general): Generally, changes should only be made where it is clear that benefits will occur, and wherever possible those benefits should relate to customers or the integrity of the water supply and sewerage system, bringing, for example:

    —  increased choice of supplier for customers;

    —  improved or extended services for customers, including quality improvements;

    —  improvements to the environment or sustainability in general;

    —  increased security of service through better investment in essential infrastructure;

    —  protection of vulnerable customers;

    —  increased stability in regulation, leading to long term rather than short term investment decisions.

  1.2  Before changes to the water industry regulatory or licence regime are made there should be a transparent cost-benefit analysis, with a requirement for all regulators, economic as well as environmental and water quality, to work together in a co-ordinated way aiming at a balanced and sustainable outcome. This could perhaps involve a process similar to the "fiche d'importance" undertaken when the European Community proposes new legislation. Such a process would help to avoid changes which are either impractical or simply not good value for money (for example setting leakage targets below the economic value of the water saved where the environmental case has not been established.

  1.3  The Environment Agency should be constrained in removing licensed resources unless there is a readily available open market in alternative sources which could provide alternative headroom. In the proposed reform of abstraction licences there is no explicit recognition of the interdependency of water resources, treatment and supply. For example the supply to London is largely dependent on outputs from the large treatment works in the Thames Valley and Lee Valley (eg Thames Water's Hampton and Coppermills treatment works). These in turn are dependent on abstractions licensed from the R. Thames and R.Lee. Huge customer-funded investment has been and continues to be made in these and other treatment works. In making judgements on future licences and their duration the Agency must be required to take fully into account security of supply, in this case for London, and the impact on investment decisions if security of licensed abstractions is reduced. Whilst London provides an obvious example of the need for the Agency to act carefully in reviewing licences with the interests of all stakeholders in mind, it will be equally true in other locations on a smaller scale.

  1.4  Variation of abstraction licences without compensation (c.15). Must accommodate the long-term nature of investment in developing new resources. An effective time limit of 15 years on essential resources may result in reduced security of supply and increased costs, as water undertakers' assets may need to be depreciated over a much shorter time-scale than at present. Exceptions to the principle of variation or revocation without compensation should be made in the legislation to require the EA to recognise the need for preservation of designated sources which, by virtue of their stand-by purpose in case of drought, may not be in active operation for periods of over four years.

  1.5  Bulk supplies (c.21). From a competition perspective it is unhelpful to see the Environment Agency given powers to, in effect, "compel" undertakers to seek bulk transfers through the reference to their "failure" to do so in c.21 (2). This should only be as a last resort, with all alternative market mechanisms, such as Common Carriage,being exhausted first. In addition it should be possible (or even automatic) for the donor company, which is ordered by OFWAT to provide a bulk supply, to have its resource base re-established. If this does not happen then the donor will have lost commercial opportunity to export water, as well as having headroom removed, with the recipient, in some cases, being given a corresponding advantage. Legislation must recognise that water resource management cannot be divorced from considerations of fair competition.


  1.6  Water Advisory Panel (c.22). We support the appointment of an Advisory Panel to the Director General. However, we consider that regulated companies, as well as the Secretary of State and the Director should have the ability to ask the Director to refer major decisions to the Panel. This would include proposals for Periodic Review methodologies, such as broad equivalence to prevent the implementation of prejudicial action by the Directive General, as occurred in the 1999 Periodic Review (PR99).

  We also consider the advice of the Panel should be published (with exceptions to preserve commercial confidentiality).

  1.7  Consumer Council for Water (c.23). We support the formation of an independent Consumer Council for Water. It will be important that this body does not attempt to replicate some of the functions of OFWAT and thus increases the regulatory burden and costs to companies. There should be a requirement for the Council and OFWAT to issue for comment a joint memorandum of agreement on working procedures.

  1.8  Objectives of Regulation: putting the customer first (c.27). We welcome proposals to improve the quality and transparency of economic regulation and to put the consumer first. We are particularly pleased that the interests of future customers are mentioned (c.27 (4)). This should reduce the risk that an economic regulator should prefer short-lived price cuts over long-term planning and investment eg in asset maintenance.

  Regarding the duties of the regulator we consider that:

    (i)  The new primary duty of the regulator to protect customers' interests should be broadened to require the regulator to specifically take account of customers' views based on customer research. Insufficient regard to this in OFWAT's 1999 Periodic Review (PR99) led to an inappropriate balance between price and service which did not reflect Thames Water's customers' clearly stated views on service improvements they were prepared to pay for.

    (ii)  The existing primary duty to finance companies' functions should not be revised to remove the reference to securing a reasonable return on capital. Removal of this phrase changes the meaning and would be perceived by the financial markets as adding to regulatory risk. This would increase the cost of capital for water companies unnecessarily.

  We support the proposals for the regulator to publish a forward work plan and to publish reasons for his decisions. In the draft Utilities Bill there was also a proposal that the regulator should publish a Code of Practice. Following the widespread criticism of aspects of the 1999 Periodic Review we consider this requirement should be reinstated in the Water Bill.

  Appeal Process: We consider that the current appeal processes against decisions of the Director General (involving an "all or nothing" package approach) are onerous, unduly lengthy, expensive and therefore limited in their application. An additional restricted appeal process is required to review specific individual decisions of the regulator and to consider proposed actions by the regulator before they are implemented. We believe that Clauses should be added to the Bill to implement this proposal, either through the Competition Commission or the Water Advisory Panel.

  1.9  Guidance from the Secretary of State on Social or Environmental Policies (c.28). If guidance results in new regulatory requirements (whether formal or informal) being established there should be an automatic right for the costs of such policy implementation to be subject to an Interim Determination of prices, if of sufficient impact, or if not a right to log up the expenditure for the next Periodic Review. The Director General should not have discretion as to whether or not such new expenditure should be included in the determination of Interim or Periodic Reviews, particularly in the absence of a satisfactory regulatory appeal mechanism, as noted in the preceding paragraph.

  Linked with the above, we have some concerns on the enforcement policies and the exercise of discretion in prosecuting. Currently we face an Environment Agency and sometimes a DWI apparent policy to prosecute without always according full weight to the circumstances of an event or the significance of any harm done. As a consequence the industry finds itself on occasion being prosecuted for events where the cause is demonstrably a malicious act of a third party or where the impact on the environment or the customer is at worst marginal and transient, (for example technical breach of a discharge consent or very slightly coloured but safe water). Whilst this approach is clearly within the remit of the Agency and DWI it does result in a popular misconception that water companies are gross polluters, damages public confidence, incurs unnecessary costs and impedes the ability of UK water companies to compete in the large international water market.

  We believe it would be in the interests of all for the Agency and DWI to be given guidance on the implementation of prosecution policies to ensure consistency across the UK, fairness in application and any consequential action commensurate with the seriousness of the crime committed.

  1.10  Performance Standards (cc.29 and 30). These proposals are acceptable provided the standards have customer support and are in the public interest. A transparent consultation process before implementation would be required. We would be concerned if this Clause was used, for example, to set leakage targets unless these were fully funded.

  1.11  Financial Penalties (c.36). Regulatory fines should be proportional to the seriousness of the breach and its effects on customers and/or the environment. They should not detract from the ability of the company to invest in service and environmental improvements for the benefit of customers. There is a risk of double jeopardy in those instances where a failure to comply with a statutory requirement constitutes a criminal offence, for which the courts are the designated forum to determine penalties in accordance with established precedent and balance of public interest.

  Although we appreciate that these provisions are based on arrangements recently introduced in the Utilities Act, we do question whether the Court will always be the most appropriate forum for appeal in relation to the amount of the penalty. Appeals against the Director General's determinations on Periodic Review, and his decisions on Competition Act matters are referred to specialist panels of the Competition Commission. It should therefore be considered seriously whether a more consistent and rounded outcome would be achieved in regulatory as opposed to environmental or quality matters if those appeals were heard by the Competition Commission.

  1.12  Drought Plans (c.46).  Care must be taken regarding the level of detail to be placed in the public domain. There are some important issues of security involved in drought plans which must remain confidential in the context of public (as opposed to regulator) availability. In addition, some of the information may be commercially sensitive. It is important that appropriate safeguards be built into the legislation.

  1.13  Reservoirs (cc.49-52).  We generally welcome the proposals to transfer powers from Local Authorities to the Environment Agency. However, we are concerned on the proposal to make the detail (as opposed to confirmation of the existence and robustness) of flood contingency plans available to the public (c.52). Existing controls on construction and ongoing inspection of reservoirs are sufficiently rigorous that the need for preparation and publication of additional compulsory contingency plans must be questioned in the light of some of the security issues this raises, not least in relation to the possibility of terrorist threats, and the avoidance of needless and unjustified public alarm.

  This will be a situation that the Government is itself familiar with, in relation to its own installations, and one where overall the most appropriate response in the public interest is to maintain confidentiality.


  2.1  There are many aspects of the proposals on reforming the water abstraction regime which can be welcomed as facilitating competition, for example the relaxation of qualification criteria relating to those who may apply for a licence.

  2.2  The proposal in the consultation paper (paragraph 59) to extend the DWI powers of prosecution to contractors and others supplying water via undertakers' pipes, will facilitate the protection of the public which is essential under Common Carriage. However, we believe that this does not go far enough, as explained in the following paragraph.

  2.3  The provision of the Water Industry Act 1991 and the Water Resources Act 1991 should be amended to enable new forms of licence to be granted by Government or the Regulator. These new forms of licence should be constructed so as to:

    —  enable new entry or extended entry by existing undertakers to all or part of the water and wastewater service chains but with;

    —  appropriate legislative and regulatory safeguards to ensure public health and the integrity of the infrastructure involved is not compromised.

  These licences should bring with them less than full Appointed Water Supply Undertaker status, rights and obligations where appropriate, and could be available (without enforced restructuring for all) for the effective regulation of those wishing to engage in part only of the supply chain. Effective safeguards on drinking water quality and customer service can best be provided and enforced within such a regulated framework.

  2.4  Economic Instruments. More work is needed on the ways in which economic instruments, such as trading in abstraction licences, can credibly and effectively facilitate competition. The Government's current proposals on reform of the abstraction licensing system currently focus largely on changes to ensure environmental sustainability, avoiding over abstraction, low flow rivers and depleted wetlands. This is of course essential, and to a large extent can be supported. However, the proposals do not address the way in which trading in licences or trading in water which, by the very nature of supply and demand variation becomes surplus from time to time, could be used to facilitate competition and increased choice/security of supply for customers.

  For example increased trading in surplus winter water could be a means of reducing groundwater abstraction in adjacent areas where summer demand peaks are known to strain security of supply or the environment—effectively leaving water "in the bank" for summer use. Such an approach could be a better economic solution than development of new local resources or the limitation of economic growth in the area. Such trading will only be possible if the new licensing regime explicitly acknowledges the role and value of market led commercial trading. This would require new licences to be framed with sufficient flexibility to allow, subject to sustainability, significant variability in abstraction rates—beyond the current daily and annual maximum limits set in current conventional abstraction licences.

  One way of achieving a balance between security of supply and environmental sustainability might be to encourage the introduction of water trading as described in the previous paragraph. In conjunction with a requirement on the Agency to take all stakeholder interests into account this could provide a new abstraction licensing process which both safeguards essential public supply and benefits the environment.

  2.5  Enforced major structural change to the industry is not necessary for competition to be taken forward, and competition in the market can co-exist with competition for the market. In cases where companies do take the decision to formally restructure by transferring the ownership and operation of assets into different legal entities, the licensing regimes should accommodate this, and there should be an early and transparent process for the competitive tendering of services.

  2.6  We would urge the Government to establish a firm position on the maintenance of regional average pricing, primarily in the interests of disadvantaged and rural customers, and on the establishment of a competitive market place which properly balances the needs of existing domestic customers with the more powerful industrial and commercial companies.

  2.7  In view of the potential difficulties of introducing full competition into the small domestic market, it is worth considering whether the legislation should recognise that there are two distinct potential markets—domestic and commercial—and whether their needs would be better served by treating each separately, for example in a staged approach to competition.

  2.8  The power to limit resale sale prices (paragraphs 76-81) should be restricted to where customers have, in effect, no choice. It would be inappropriate for the same constraints to be applied in a competitive market place, where choice can be exercised and margins ought to be reflective of the market conditions.

January 2001

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