Memorandum by United Utilities PLC (DWB
25)
I am submitting this memorandum to the committee's
inquiry as Chief Executive of United Utilities, parent company
of North West Water, of which I am also Chief Executive. As the
only remaining UK water company in the FTSE 100 and the company
with the largest programme of environmental improvement over the
next five years, we believe we have an important perspective on
the issues raised by the Draft Bill.
We therefore welcome the opportunity to submit
our views to the committee. In this letter I would like to set
out the key issues for North West Water that arise from the Government's
consultation. These are:
— Changes to the abstraction regime
and drought planning.
— The social and environmental agenda.
COMPETITION
There is little doubt that competition in water
supply is coming. Indeed, for the larger customers it is already
here.
We believe that the lesson from the extension
of choice in other markets is that, sooner or later, a clear steer
is needed from government to make competition happen. This does
not mean mandating a specific outcome but rather creating a clear
framework within which regulators, companies and customers can
work together
We are aware that a government statement on
water competition is due soon. We hope that, following that statement,
the Bill can be amended to set out the necessary framework for
competition to be introduced on an effective basis; protecting
the interests of all customers; safeguarding water quality, security
of supply and the environment; and recognising the need to ensure
that the capital markets will continue to fund necessary investment.
At a minimum, legislation is needed.
(1) To provide for the separate licensing
of the activities currently undertaken by the water and sewerage
companies (including the operation of treatment facilities owned
by others);
(2) To set out the responsibilities of the
different categories of licensee;
(3) To ensure that water quality requirements
and environmental safeguards are maintained and can be applied
to all licensees;
(4) To provide for security of supply;
(5) To make supplier of last resort provisions;
(6) To provide for supplier default; and
(7) To ensure that competition works for
the benefit of all customers, not just those deemed commercially
attractive by new entrants.
CHANGES TO
THE ABSTRACTION
REGIME AND
DROUGHT PLANNING
We welcome many of the changes to the abstraction
regime proposed in the consultation. Our concerns relate to the
potential impact of new revocation provision and the introduction
of a wide-ranging right to sue for damages.
The water industry has a uniquely long planning
horizon and asset lives amongst the network industries. Prudent
planning of water resources, to enable supplies to be maintained
in emergencies or drought conditions requires us to keep available
some water sources that may be used only once in ten years or
more. We are, therefore, concerned that the proposed provisions
of the Bill could make it more difficult for us to manage the
balance between supply and demand.
We also have to invest to keep resources available
and our charges reflect the long-life expected from our assets.
Again, we would be concerned if the revocation of abstraction
licences led to the "stranding"of pipelines and treatment
facilities. Where such stranding takes place, the Regulator should
be under an obligation to ensure companies can continue to recover
legitimately incurred costs through the price-setting process.
Of equal concern is the proposal to remove the
present defence from civil action resulting from abstraction activities.
We believe that this could create a charter for vexatious litigation.
The DETR's earlier consultation (The Review of the Water Abstraction
Licensing System in England and Wales) highlighted the considerable
technical difficulties associated with this proposal. We are not
aware that these technical problems have yet been satisfactorily
addressed. We therefore urge reconsideration of this proposal.
The Bill's proposals on drought planning cause
us some concern. We already produce a drought contingency plan,
as would any well-managed company, and that plan has been accepted
by the Environment Agency. Whilst we acknowledge government's
concern to ensure the proper management of a vital resource during
situations or extreme shortage, we believe that, unless a company
has acted negligently, we should be able to recover additional
costs we incur as a result of complying with Government directions.
BETTER REGULATION
We support many of the proposals in the draft
Bill designed to improve regulation. We agree with the proposal
to create a more independent consumer body, to require the regulator
to consult on and publish his forward work programme, and to require
reasons to be given for key decisions.
In considering changes to the statutory framework
for regulation, we have had regard to the principles, set out
by the Better Regulation Task Force, that regulation should be
transparent, accountable, targeted, consistent, and proportionate.
We believe that in significant respects the present regulatory
system fails to meet these principles.
The Bill contains provisions for the regulator
to have the benefit of a statutory advisory panel. This contrasts
with the situation in the energy, post and communications markets
where collegiate regulation has been introduced or is proposed.
The position of the water industry is no different from these
other industries in this regard and we, therefore, advocate the
creation of a collegiate regulatory system for water. We believe
this will improve the quality of decision-making and provide for
greater continuity through time.
The Bill proposes a penalty system under which
companies could be fined up to 10 per cent of their turnover with
no right of appeal, other than on narrow procedural grounds. Whatever
the merits of the proposed penalty regime, we recommend a clear
appeal process, perhaps to the Competition Commission, on the
substance of any proposed penalty decision.
As we have already said, we endorse the creation
of the Consumer Council for Water. However, we have concerns about
the potential costs, both direct and indirect, of this change,
and more generally, of the mounting costs of regulatory compliance.
In some cases we are unclear of the purposes for which information
is needed. We think it would be helpful if the regulator could
be put under an obligation to carry out a Regulatory Impact Assessment
(RIA) for major changes to the regulatory regime, new licence
conditions and standards of performance, for example. As RIAs
are already required for government legislation, including the
Water Bill itself, for example, this would extend regulatory best
practice to utility regulation.
THE SOCIAL
AND ENVIRONMENTAL
AGENDA
The water industry has become uniquely experienced
in delivering water quality and environmental objectives set by
government in an economic framework determined by the regulator.
Whilst there is scope to improve the process further, for the
most part it has worked well. In A Fair Deal for Consumers
the government acknowledged the precedent for guidance operating
hand in hand with the Periodic Review process. We are therefore
supportive of the extension of the guidance procedure to the social
field, provided that the costs to companies of guidance can be
reflected in the price setting process, and that obligations with
significant financial implications are the subject of specific
legislation.
We hope that the Committee will find our comments
constructive and helpful to its inquiry, and I would be pleased
to answer any questions the Committee has arising from this memorandum.
January 2001
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