Select Committee on Environment, Transport and Regional Affairs Memoranda

Memorandum by the Office of Water Services (OFWAT) (DWB 26)


  This paper sets out the Office of Water Services' (OFWAT) response to the Government's consultation paper Water Bill—Consultation on Draft Legislation. OFWAT welcomes the aims of the proposals in the consultation paper, which are to improve the management of water resources and to benefit customers in respect of the quality and price of water and sewerage services. In particular OFWAT shares the objective of placing customers at the heart of regulation. The comments on the Government's proposals set out in this paper have the same aims in mind.

  Competition, however, also has the potential for benefits for customers and the proposals in the consultation paper are incomplete without the Government's proposals to promote further competition. It will be important to ensure that, when those proposals are published, they are considered carefully alongside the proposals in the consultation paper and that they represent a coherent package. It may, for example, be necessary to look again at the proposals on water conservation to ensure that they are consistent with promoting the development of competition.

  OFWAT welcomes the proposal to establish an independent Consumer Council for Water. In many respects OFWAT is already moving in the direction proposed by the Bill. It is working to ensure that the ONCC (OFWAT National Customer Council) and the CSCs (Customer Service Committees) are recognised as speaking in the customers' interest independently of the Director. New appointments of the Chairmen of CSCs are being made in accordance with the Nolan public appointment rules and the working relationship between OFWAT and the ONCC and the CSCs will be set out in a published Memorandum of Understanding (MoU) later this year. Also, OFWAT already meets the requirements of the Bill in respect of its Forward Programme, its Annual Report, and in giving reasons for its decisions. It is important that the new arrangements are cost effective and that customers are not saddled with significantly increased costs of regulation.

  The draft Water Bill provides an opportunity to strengthen customer protection and this paper suggests further improvements that could be made. Any new powers even if taken on a precautionary basis increase regulatory risk and impact on the cost of capital and ultimately on customers' bills. OFWAT is concerned that the benefits from some of the proposals, for example on setting standards of performance, may not be commensurate with the extra costs they would impose.

  This paper follows the order of the Clauses set out in the consultation paper.


1.  Clauses 1 to 13

  OFWAT welcomes the proposals to introduce greater flexibility to abstraction licensing by offering a number of types of licence. It also welcomes the relaxation of the tie between land ownership and abstraction, and recognises that this will extend the scope for trading of abstraction licences. Measures to reform abstraction licensing that allow greater competition within the water industry are valuable.

  OFWAT is concerned, however, that the regulation of abstractions should not be undertaken in too rigid a manner. An exclusive focus on regulating (and reducing) the volume of water abstracted may neglect consideration of which resources represent "best value" for both the environment and the economy, or the implications for competition in the water industry. OFWAT's view is that the Government should keep the operation of the reformed abstraction regime, and its effects on competition and costs in water supply, under close review. OFWAT is concerned that the interpretation of the "reasonable need" requirement should not unduly stifle competition.

2.  Clauses 14 to 17

  OFWAT is concerned that the requirement to pay damages under clause 14 may affect companies' willingness to perform their water supply functions. Fear of claims may lead a company to refrain from using its full entitlement in dry years (thus risking non-compliance with its water supply obligations). This may also cause a company to seek additional resources in its drought plan, imposing an additional cost on customers.

  Clause 16 provides for the possibility that compensation may be recovered from a water company where another company's licence has been revoked in order to permit the issue of a licence in favour of the first company. These circumstances are equivalent to a compulsory licence sale, and as such are directly relevant to companies' investment requirements for balancing supply and demand. OFWAT therefore considers that it would be appropriate for a statutory obligation to be placed on the Environment Agency (EA) to consult OFWAT before determining the appropriate level of compensation for the transfer of a licensed entitlement between two existing or potential public water suppliers.

  In response to the consultation on Competition in the Water Industry (April 2000) OFWAT supported the tentative proposal that the Director should have power to compel transfers of abstraction licences on competition grounds. This is not dealt with in this consultation paper. This issue requires further consideration.

3.  Clause 21

  The Draft Bill allows the EA to propose to a company that it applies to take a bulk supply from another water company "where that is necessary for the proper use of water resources". If the company declines, the EA can take that into account in considering other licence applications by that company. This gives the EA a further lever to require companies to accept bulk supplies, where it judges this most appropriate. The Water Industry Act 1991 (s40) allows OFWAT to compel a company to give a bulk supply on specified terms, but only following an application from an actual or prospective water company and after OFWAT is satisfied that the two parties cannot agree terms. However, there may also be economic grounds for compelling companies to seek a bulk supply.

  Thus, OFWAT considers that it would be appropriate for OFWAT to have a similar ability to compel a company to seek a bulk supply on ground of economic efficiency. Such a power would increase the incentive on companies to seek the most cost-effective means of balancing supply and demand, in particular through bulk supplies. This is preferable to higher price limits to allow more costly capital investment in resource development. If companies did not seek such cost-effective solutions they could find that OFWAT imposes a solution through its powers of determination over bulk supplies. OFWAT should be able to compel companies to accept bulk supplies from new entrants, where this is clearly in customers' collective interests. This would enable a new entrant to enter the supply function rather than becoming a retailer (as would be required for entry via a common carriage arrangement).

  OFWAT understands that its powers of determination under section 40 of the Water Industry Act 1991, would remain unaffected.


4.  Clause 22: Water Advisory Panel

  OFWAT believes that the current structure of economic regulation for the water industry has produced significant benefits for its customers. There is room for improvement, but this must not be at the expense of clear accountability, with the capacity for flexible well informed and where necessary quick responses as regulatory issues arise.

  OFWAT welcomes the intention behind Clause 22 of ensuring that the regulator has available a wide variety of relevant expert advice. However, OFWAT questions whether the proposals as set out in the Bill would achieve the objective. OFWAT has already established a non-statutory Regulatory Policy Committee (RPC) to build upon the long-standing practice of its Director in taking advice from senior industrialists on economic and regulatory issues. The RPC consists of the Director, independent members and the executive members of OFWAT's Management Board. It will meet six times a year. Independent members contribute from a wide variety of knowledge and experience in business, engineering and economic issues. The Director also meets regularly with customer representatives through the ONCC and the individual CSCs. All water companies and other key stakeholders have access to him and to OFWAT, which consults fully on all major issues of policy. But accountability for the decisions taken rests by statute firmly with the Director.

  The proposed Water Advisory Panel (the Panel) could confuse accountability and introduce regulatory uncertainty. The consultation paper offers no guidance on how the Panel will operate, which issues it will deal with, what accountability it has, if any, for its advice, or the transparency with which it should operate. Would it, for example, be chaired by the Director as with the present Regulatory Policy Committee? Would it include the executive members of the OFWAT Management Board? Is there any risk of it being seen as itself a separate focus of economic regulation?

5.  Clauses 23 to 25: The Consumer Council for Water

  OFWAT recognises the benefits to customers of strengthening the role of customer representation and welcomes the proposal to establish an independent Consumer Council for Water. The present arrangements bring together the 10 Chairmen of the regional CSCs, whose primary role is to serve the interests of customers in the region they represent. This has meant that a national view on customer issues has not always been readily available. We consider that setting up a national body to take forward customer issues will allow the Council to speak with a single national voice.

  The new Council should not only have a separate voice from OFWAT; its statutory functions should be distinct from those of OFWAT to minimise the risk of increased costs and of confusion for customers. In a few areas the proposed functions of the Council arguably duplicate or overlap with those of OFWAT and these are commented upon below. (See Clauses 33 and 34).

  OFWAT welcomes the proposals to require the Director and the Council to make arrangements, in the form of an MoU, for co-operation on the exchange of information between them and the consistent treatment of matters, which affect both parties. OFWAT sees this as crucial to ensuring that any increase in the cost of regulation is kept to a minimum. Such an MoU is already in preparation under the current statutory framework.

  At present OFWAT and the CSCs together cost each connected household approximately 50p a year. The direct costs of the CSCs are £2.2 million (out of OFWAT's total running costs of £10.9 million), but this does not include the costs of support on personnel issues, finance, IT, legal services, public relations, library services, and advice and support on policy issues that OFWAT currently provides. Some of these services could continue to be provided by OFWAT. This would be facilitated by locating the headquarters of the new Council in Birmingham, which would also allow for continued close working arrangements.

  OFWAT agrees with the proposal that there should in principle be a regional structure for customer representation but that beyond the requirement for an office in Wales the details should not be decided in legislation.

6.  Clause 26: Forward Work Programme and Annual Reports

  Legislation is unnecessary to secure what is essentially good practice. OFWAT already publishes and consults on its Forward Programme and reports on progress in its Annual Report. The Secretary of State and First Minister of the National Assembly for Wales are asked if there is anything specifically on which they wish OFWAT to report. On 16 January 2001 OFWAT will meet stakeholders to consult further on OFWAT's Forward Work Programme, for 2001-02 and beyond.

7.  Clause 27: Objectives of regulation of water industry

  OFWAT welcomes the decision to restate the Director's primary duties such that the consumer objective is set alongside the duties to seek to ensure that companies can carry out their functions and can finance the carrying out of these functions. In responding to each of the consultations on the role of the regulators, OFWAT has supported proposals to make clear that the protection of customers should be at the heart of the way in which the Director exercises his powers.

  In respect of competition the change in duty from "facilitation" to "promotion" is important and will allow OFWAT to take a more active approach in developing competition with consequent benefit for customers. Experience elsewhere suggests this may have implications for OFWAT's costs.

  However, the new clause deals with protection of consumers. This term needs to be defined.

8.  Clause 28: Social and Environmental guidance

  OFWAT agrees with the concept underlying the proposed provision for guidance to the Director (by the Secretary of State and the National Assembly for Wales) on the attainment of social and environmental policies. There is already experience of the Secretary of State's guidance on charges to customers issued in February 2000, following the Water Industry Act 1999. OFWAT recognises that important social issues are properly dealt with by Ministers rather than unelected regulators. In July 1998 the Government stated in "A Fair Deal for Customers: the response to consultation" that where its social or environmental policies would have significant financial implication for customers or companies these should be backed by new, specific legal provision. This remains an important principle.

  The Environmental Audit Committee's Report on Water Prices and the Environment suggests that OFWAT should be "directly accountable" for making "a positive contribution to the Government's sustainability agenda". OFWAT believes that the current legislation already provides for this. Section three and section four of the Water Industry Act 1991 set out OFWAT's duties in respect of the environment. OFWAT will also have regard to Ministerial social and environmental guidance that contributes to sustainability.

9.  Clauses 29 and 30: New service standards

  Uncertainty about the future actions of all regulatory bodies, including the Government, adds to the cost of capital and thereby imposes additional costs on customers. The draft Water Bill is rightly aimed at reducing uncertainty about OFWAT's actions through improving transparency. The proposal, however, to give the Secretary of State and the National Assembly for Wales powers to set standards of service inevitably increases uncertainty for companies—even if these are intended as precautionary powers which may never be used. OFWAT suggests that the existing Government powers are sufficient for that purpose without adding to regulatory risk and costs.

  OFWAT does not agree with the suggestion by the ONCC that the Council should have the same powers as OFWAT to propose new standards. This would also create uncertainty. The Council would still be able to influence decisions as a statutory consultee.


10.  Clause 31

  OFWAT agrees the proposed functions of the new Council, which represent sensible extensions of the current functions of the CSCs.

  On a small point, if it is necessary, which OFWAT would question, to require OFWAT to provide the Council with copies of documents it is statutorily required to produce there should be a reciprocal requirement on the Council.

11.  Clause 32

  OFWAT welcomes the provisions which allow the Secretary of State to make regulations setting out the categories of information which OFWAT, the Council or a company may refuse to provide. The Utilities Act 2000 (Supply of Information) Regulations 2000 set out a useful model of what information might fall within this category. OFWAT recognises the value of setting out such guidance at an early stage.

  Another consideration is the cost of providing information to the Council. The MoU between OFWAT and the Council should set out the principles for dealing with information requests, to limit duplication of activity and to make best use of the information that companies provide to either the Director or the Council.

12.  Clause 33

  The draft bill proposes that the new Council should have a specific duty to publish two sets of statistics on:

    (i)  companies' performance against standards of performance prescribed in regulation under sections 38 or 95 (ie standards of service set in Guaranteed Standards Scheme; and overall standards of performance); and

    (ii)  complaints made by consumers and the handling of such complaints.

  It also proposes that the existing duty on OFWAT to publish information on (i) above would cease to have effect. There is no requirement on OFWAT to publish information on (ii) but at present both OFWAT and CSCs publish information on complaints.

  As now OFWAT, not the Council, will have the responsibility for setting standards under sections 38 to 95; for taking action where overall standards of performance are not met; and for resolving disputes under the Guaranteed Standards Scheme. In OFWAT's view formally separating the function of publishing information on performance creates an unhelpful overlap.

  The position in respect of information on complaints is less clear cut, as is reflected in current practice. OFWAT sees no objection to the new Council having a duty to publish this information.

13.  Clause 34

  OFWAT supports the proposals for the Council to take responsibility for most complaints. The Director, however, has statutory duties and powers to resolve certain categories of complaint (eg Guaranteed Standard Schemes, pipe laying and connection disputes) and it is in the interests of customers that the Council should refer all these, without delay, to him.

  The statutory requirement on the Council at proposed section 29(6), to consult complainants prior to referring disputes to the Director, is bureaucratic and unhelpful. It runs the risk that the Council may be required to investigate a dispute, on which it has no powers of determination, introducing either unnecessary delay or a lesser remedy for the complainant. The position in respect of such disputes should be the same as for complaints about pipelaying (proposed section 29(3)).

  OFWAT is aware that the ONCC has proposed that the new Council should have powers to require a company to pay compensation of up to £5,000 where this is justified; but subject to the company having a right of appeal to the Director. This reflects in principle arrangements that a number of companies have voluntarily agreed to with their CSCs. These arrangements have worked well and have given the customers concerned confidence in the existing complaint system. OFWAT recommends that the ONCC proposal should be given serious consideration.

14.  Clause 35: Investigation by the Consumer Council

  OFWAT agrees that the Council should be able to undertake investigations on its own account. As at present this should be subject to prior discussion with OFWAT to avoid duplicating activities. This is something that should be covered in the MoU between the Council and OFWAT.

15.  Clause 36: Financial Penalties

  OFWAT supports the proposed power to fine companies, if they contravene their conditions of appointment or fail to meet any prescribed standards of performance.

  The Regulatory, environment and equal treatment appraisals document suggests that the new power to impose financial penalties should not entail a significant new cost burden on the industry. This is based on the premise that most companies will avoid having to pay penalties by complying with their obligations. This does not however take account of the impact on the cost of capital for companies as a result of additional uncertainty being introduced into the regulatory regime. The threat of financial penalties, of up to 10 per cent of companies' turnover, will increase regulatory risk and could impact on the cost of capital.

  The Director already has powers under the Competition Act 1998 to impose financial penalties on companies which infringe that Act. Before doing so, he must take into account the guidance produced by the Director General of Fair Trading (DGFT) on the appropriate amount of a penalty under the Act. Therefore, in order to minimise the level of regulatory risk on companies from fines under this proposal, it will be important for OFWAT to set out, after consultation, a policy for setting and imposing fines for failing performance or contravention of conditions of Appointment at an early stage. This policy may include reference to the DGFT's guidance, where appropriate.

16.  Clause 37: Enforcement of conditions of appointment

  OFWAT supports this clause, which will bring regulation of the water industry into line with other utilities.

17.  Clause 39: Reasons for decisions

  OFWAT publicises its decisions and has a continuing commitment to improve its transparency.

18.  Clauses 43—45

  OFWAT values the close working relationship it has with the Drinking Water Inspectorate and welcomes legislation that will assist with its work.

19.  Clause 46: Drought

  OFWAT recognises the value of these proposals that seek to protect customers from water shortages.

20.  Clause 57: Sewerage

  OFWAT is concerned at the proposed removal of the qualifying date in S101A of the Water Industry Act 1991 for the provision of public sewers otherwise than by requisition. The Regulatory environmental and equal treatment appraisals suggest that a best estimate of the total costs is around £1 million to £2 million. In practice the costs could be greater than estimated particularly where the sewerage infrastructure has to be substantially improved to serve, for example, new housing estates that were not previously connected to the public sewer.

  OFWAT's view is that the costs of connections made after the qualifying date should continue to be met by developers and not transferred to customers generally. To amend the qualifying date from 20 June 1995 to 1 April 1999, when Planning Circular 3/99 was implemented, would at least limit the impact on sewerage charges generally. But, if the qualifying date was removed altogether, this could undermine the effective implementation of the policies recommended in Circular 3/99. In this case the impact on sewerage charges would be much greater.


21.  Water resale

  The consultation paper sets out a number of areas where the DETR is considering additional legislation and seeks views on those areas. On water resale OFWAT welcomes the proposals in the consultation paper to give purchasers of resold water and sewerage services, such as park/mobile homeowners, a right of access to information about the basis of their bills to enable them better to make use of the protection for them under a resale order.


  OFWAT has already drawn to the DETR officials' attention the following proposals for further legislation.

22.  Cesspits and septic tanks

  OFWAT has received complaints from cesspool and septic tank owners about the high charges paid to tanker operators for the removal and disposal of their waste. Complainants have always been told that we have no jurisdiction to investigate these complaints, as the service does not form part of the appointed business. OFWAT's investigations to date indicate that it would be difficult to obtain satisfactory redress for customers under the Competition Act 1998, as the definition of "excessive pricing" is unclear.

  OFWAT considers that the Water Bill should contain provisions that would bring the reception, treatment and disposal of tankered waste within the scope of the regulated business. Cesspool and septic tank customers would then enjoy the same level of protection as those customers receiving mains sewerage services. Legislation should oblige service providers to receive, treat and dispose of waste from cesspools and septic tanks. Charges for these activities could then be brought within the scope of companies' charges schemes and subject to approval by OFWAT.

Resolution of disputes

23.  Compensation for streetworks

  This is a regular source of argument between traders and companies. At the moment, OFWAT's sole function is the appointment of an arbitrator, if one is required.

  The judgements required are about—

    (a)  how well the Appointee discharged its duty to ensure that its streetwork schemes caused as little loss or damage as possible and;

    (b)  what compensation should be paid if it failed to do (a)

  OFWAT proposes that it should determine these disputes. If they were made relevant disputes (for the purposes of s30A of the Water Industry Act 1991) OFWAT could also recover its costs.

24.  Trade effluent—appeals process and costs

  These are already within OFWAT's jurisdiction and, fortunately, very few have gone all the way to a hearing. When they do, they are expensive and costs are not recoverable from the parties. These could also be made relevant disputes.

25.  Complaints about pipelaying in private land

  Cases that have to be resolved by formal decision are expensive to conduct. Designation as a relevant dispute would give OFWAT a wider discretion over cost recovery.

26.  Competition Commission —Inquiry costs

  The recent decision by the Competition Commission allowed two water companies to recoup all the costs of a reference to the Commission from their customers. OFWAT is concerned that customers have been required to meet such costs and would like to consider with Government possible changes to legislation to secure a fairer way of allocating costs.

27.  Standard licence modifications

  The Utilities Act 2000 has useful provisions at s33 and s81 that allow the Gas and Electricity Markets Authority (GEMA) to make standard modifications to energy companies' licences. Consideration should be given to similar provisions for the water industry.

January 2001

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