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
BillConsultation 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
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
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
5. Clauses 23 to 25: The Consumer Council
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
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
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 companieseven 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
CLAUSES 31 TO
35: FUNCTIONS OF
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
(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
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
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
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 4345
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
24. Trade effluentappeals process and
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
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
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