Memorandum from Water UK
INTRODUCTION
Water UK is the representative body for the
statutory water and sewerage undertakers of the United Kingdom.
1. Water UK welcomes the inquiry. The Environmental
Audit Committee's previous report on water prices and the environment
was an important milestone for regulation of the water industry
and we hope that some important lessons will also emerge from
this inquiry.
2. In framing our evidence to the Committee
we have addressed a number of key issues in addition to those
raised by the committee:
— What happens if the investment programme
is reduced below £20 billion?
— Who should make the hard choices?
— How do we cope with the current delays
in the issue of guidance?
— What improvements to the process
of price setting do we need for the future?
BACKGROUND
3. The water industry has an excellent track
record since privatisation, delivering a huge investment programme
to time and to budget, £50 billion will have taken place
from 1989 to 2005. It is widely regarded as one of the successes
of the privatisation programme.
4. Companies are looking for the periodic
review process to deliver a price settlement that will enable
companies to invest in what they believe will be a sustainable
programme to maintain a good service to customers, avoid deterioration
to existing assets, and meet statutory obligations. At the last
review significant price cuts were achieved in part by squeezing
and deferring essential maintenance. We would not want to see
this happen again.
5. We believe that the periodic review process
up to January of this year had gone well, with all parties seeking
to make it work. The Efra Select Committee in their recent report
on Water Pricing said:
"Although this Periodic Review of water
prices is at an early stage, we are encouraged by signs that it
is being conducted in a transparent and mature way. It seems likely
that price limits will be raised in this Review. While it is absolutely
imperative that Ofwat should rigorously examine the claims companies
make about their costs, we have seen no evidence to make us doubt
that it will do so."
6. Companies submitted draft business plans
in August 2003 that recommended a total capital programme of the
order of £20 billion for 2005-10. These plans represented
their best view of what was required to deliver a sustainable
business. The Efra Select Commitee supported this approach:
"11 We welcome the introduction of draft
business plans produced by the water and sewerage companies themselves
and the greater scope for scrutiny and debate that this allows
at an early stage in the price review process."
7. Philip Fletcher in his letter of 19 December
2003 to the Secretary of State expressed his continued confidence
in the process and what companies have delivered so far in their
draft business plans, which proposed, on average, a price increase
of 30% over five years in real terms, or £15 per year.
8. We are concerned that the Committee may
have been slightly misled by the recent press reports, which implied
that the Director General of Ofwat was considering a £5 billion
cut in the water industry's environment programme for the period
2005-09. In his letter to the Secretary of State of 19 December
2003, Philip Fletcher said that if the total capital programme
could, for example, be limited to £15 billion then it was
likely to reduce price limits by around 5% over the period 2005-09
from that proposed by companies. He was putting a question to
the Secretary of State, suggesting that it might not be practicable
to carry out all possible improvements in the next five years,
and that priorities would need to be established.
9. In his letter the Director General raised
the possibility that capex might be constrained in some way, and
gave the example of £15 billion. A cut of 25% would not just
affect the environmental programme, it would hit all elements
of the capital programme including maintenance, network expansion
to cope with growth and development, and asset renewal. Removing
elements of one part of the programme will have a knock-on effect
on other parts of the programme. We suggest that the committee
should seek to clarify with the Director General whether he is
setting £15 billion as the investment target for the 2004
price review.
10. In fact what the Director General appeared
to have in mind in the letter was a level of spending "similar
to that assumed for 2000-05". Given that this was £15.7
billion in May 1999 prices the equivalent figure in projected
May 2004 prices might be of the order of £17.5-18 billion.
11. What companies put forward in their
draft plans was an integrated programme, which also seeks to meet
all the criteria which have been set down by the Director General
for quality schemes in the final business plan:
— Schemes must be required by the quality
regulators and confirmed by Ministers, or be a new obligation
under current legislation.
— Schemes must deliver a measurable
defined output which is enforceable.
— Schemes must have a clearly defined
timetable and due date for delivery in line with regulations or
other legislation.
— Schemes must have defined asset improvements
or changes to operational procedures to deliver the output.
— The costs of schemes must be identified
and the solution challenged and validated by the company's reporter.
12. The exact nature of the draft plans
submitted by companies and the final business plans currently
in preparation varies from company to company, and is related
to history, geography and geology. For example, a company such
as South West Water with its very long coastline has through the
previous and current AMP period concentrated on the environmental
programme to improve bathing water. This time around their proposed
programme focuses on maintenance and the replacement of an ageing
infrastructure. In contrast companies in the South East are emphasising
new resource development and water efficiency measures to maintain
security of supply in the face of population growth and water
scarcity.
13. We are concerned that an arbitrary cut
in the proposed investment programme is not a sustainable approach
and will not deliver the optimal solution for customers. Short-term
fixes can lead to additional costs. For example, if there is a
decision to delay the adoption of known higher standards at sewage
treatment works until post-2009, over the next five years new
kit and works will inevitably be commissioned. But the plant will
have to be upgraded within a matter of years to meet these standards.
Deferring work has the potential to build up an even larger programme
in 2009 and to result in infraction proceedings for the UK. We
already know that work to meet the requirements of the Water Framework
Directive will need to be funded in AMP5.
14. Philip Fletcher has indicated prices
will need to rise and that hard choices are inevitable. There
are many factors forcing prices upwards including capital maintenance,
infrastructure renewal, network expansion, the environment and
quality programme, and operating costs. For some companies rising
operating costs are the main issue. In his letter to Margaret
Beckett of 19 December the Director General said:
"Companies' day-to-day running costs are
also increasing, partly as a result of Government policy . . So
even before we consider enhancing the service already received
by customers, bills can be expected to rise over the period 2005-10."
Many of these cost drivers are completely outside
of the control of companies or Ofwat such as tax and business
rates changes, charges for streetworks or new security measures.
For example, the Ofwat document "setting water and sewerage
price limits for 2005-10: Overview of companies' draft business
plans" shows that whilst the scope for future efficiencies
is estimated at £10 this is nearly wiped out by the impact
of new taxation, estimated to be £9.
15. Customers have been consulted and research
has shown that about 60% of customers in England & Wales have
indicated they would be willing to accept price increases while
not welcoming them. We recognise that there are issues of affordability
if prices are to rise by levels indicated so far and this will
need to be discussed further with Government. The Efra committee
supported the joint research:
"We welcome the introduction of joint customer
research, as it has limited the degree to which stakeholders have
made competing and conflicting claims about what customers really
want".
The initiative to undertake joint research was
a direct result of the specific recommendation from the EAC inquiry
that took place after the last periodic review.
16. It is not just customers that are being
asked to fund the capex programme. The capital markets will have
to fund the bulk of any agreed programme by providing new debt
and new equity. Another new joint initiative since the last periodic
review has been for water companies to work collectively, and
in co-operation with Ofwat, to understand the perceptions of investors
about the industry. Water UK's investor survey shows that regulatory
risk has lessened since 1999, but that investors believe that
there is more political risk. It is important to note that investors
no longer view water shares as a "must have" in a balanced
portfolio, and there is a risk that they could walk away from
the industry if the "right" programme is not agreed
at the "right" allowed rate of return.
17. The water industry is very different
from many other businesses in that it has a number of roles and
functions. The prime function is of course to manage the distribution
of water and sewerage services. These are essential services for
all customers. To a greater or lesser degree the companies pick
up the Government's social agenda; no domestic customers may be
disconnected and vulnerable customers must be supported. In practice
the water industry also operates as an environmental contractor,
implementing many EU water directives on behalf of the nation.
18. It is the totality of the customer base
that picks up the bill for things that arguably should be paid
for by specific groups of customers or polluters, or Government.
For example diffuse pollution is mainly caused by poor agricultural
practices. There are rising levels of customer debt which might
be better addressed by Government through the benefits system.
Developers and their customers do not pick up the true cost of
new infrastructure, as companies have a duty to provide public
water supply and to accept sewer connections from new developments.
THE ISSUES
What happens if the investment programme is reduced
below £20 billion?
19. We believe that arbitrary cuts in the
programme will store up problems for the future. Companies have
submitted business plans, which take a clear view of what is needed
for securing a sustainable industry. Delivery of essential services
could be at risk if these plans are compromised. Ministers have
made it clear that it would not be acceptable to see leakage rates
rising after the successes that have been achieved in tackling
this problem since 1997. Companies are however funded to carry
out work at the economic level of leakage, not the political level
of leakage. They are now finding it increasingly difficult to
maintain these leakage levels. We believe that in order to make
further progress on leakage companies will have to undertake mains
renewal programmes rather than a "patch and mend" approach.
20. In the "sustainable development"
section of Defra's "Directing the Flow" (Nov 2002),
under "the water industry", (page 11) it states,
"The water industry must be strong and viable
in the long term. This is essential for delivering public water
policy objectives. A key element of this is an effective, independent,
stable and predictable system of regulation".
Stability and predictability are essential if
we are to maintain long-term sustainability of the industry.
21. Although built to a high standard the
infrastructure needs repair and renewal to maintain what are essential
services. Since the last periodic review the industry in cooperation
with the regulators has developed a new "common framework"
for assessing the capital maintenance programme. Again this is
a direct result of a recommendation in the previous EAC report
which criticized Ofwat for "intellectual neglect" of
this important issue.
22. We would not wish to see capital maintenance
spending squeezed in this price review. It is central to a sustainable
future to ensure that the nation's assets remain fit for purpose.
23. The network was built for a much smaller
population. In some areas the systems of water or sewerage do
not have the capacity to meet the current or expected future needs
of the local economy and its population. Customers and Water Voice
want to see problems such as sewer flooding eliminated through
network improvements. In southern and eastern England a huge expansion
of population and housing is expected. In Wales and the north
and west of England economic development is hampered by inadequate
networks. There is also a concern that the design of networks
assumed continuity of rainfall patterns and in many cases will
not be able to accommodate the impacts of a changing climate.
Who should make the hard choices?
24. We strongly support the concept that
the independent regulator should be able to set price limits without
political interference, which was another EAC recommendation,
nevertheless this needs to be done sensitively, taking into account
the views of stakeholders.
25. There is a real need for shared understanding
and shared views. We have previously suggested that there should
be a national water forum which can discuss and agree long-term
objectives for what is a long-term industry. A comprehensive framework
was a recommendation from the previous EAC inquiry:
"However, the Committee recommends that
the DETR, companies and the regulators ensure that the five year
investment programmes of the Periodic Review are set in a clear,
comprehensive framework of longer-term policies and goals including
those relating to water resources and environmental quality and
serviceability goals."
26. The delays with Ministerial guidance
that have occurred indicate that there is a problem for government
in delivering timely decisions. There may be a case to decouple
decisions on the environment programme from the rest of the Periodic
Review process. The down side might be a series of interim determinations
as new environmental programmes came on stream. This would not
deliver certainty to customers going forward about their likely
bills.
27. Elsewhere in Europe water operators
receive grants from central government to implement the provisions
of European directives. This has the advantage of making it clear
how much such directives are costing. Although in England and
Wales water operators are private sector companies there are precedents
for private companies to receive state aid, for example in the
railways sector. Another approach might be to have an explicit
tax for environmental clean-ups.
28. Water UK is not recommending any of
these options but recognizes that they may have to be considered.
29. We are concerned that other political
factors could override the need for a sustainable price determination
for the water industry. There has been a lot of publicity about
increases in Council tax with a media perception that this is
something the Government is powerless to control. Ministers may
feel that other high profile price rises cannot be tolerated.
How do we cope with the current delays in the
issue of guidance?
30. Delays on an agreed timetable cause
great difficulty for companies. They cannot finalise their business
plans without knowing the priorities that ministers will want
to see met over the next five years. The current delays put the
process under great strain, and indeed may wreck it. A squeezed
timetable also puts heavy pressure on the decision making process
which may lead to decisions that are viewed as less than satisfactory
for all parties. It should also be noted that appropriate additional
consideration by the Welsh Assembly Government and interpretation
by the Environment Agency Wales, will mean that guidance in Wales
could be delayed by an additional four weeks, exacerbating the
problems for Welsh Water and complicating the situation for cross-border
companies who rely on liaison between the English and Welsh Environment
Agency staff.
31. We advised the Secretary of State of
the need for timely decisions 19 November 2003 (see annex). The
Director General has to set price limits that are effective from
April 2005, just over a year away. The timetable was set out clearly
at an early stage of the price review process in agreement with
the Departments concerned. We believe that any delay in the price
determination will have a negative impact on investor confidence
and ability to manage customer and stakeholder expectations. It
could also hamper companies' ability to agree charges for 2005-06
with the regulator and to issue bills with a consequent impact
on cash flow.
What improvements to the process of price setting
do we need for the future?
32. It is clear that we cannot go on indefinitely
with the current approach. It was set up to deal with a particular
set of circumstances, to get a large amount of investment into
the business over a short period of time. It was assumed that
high levels of environmental investment would only be needed over
a relatively short period, the first ten years, and that after
that maintenance and a programme of asset replacement was all
that would be required. This has not turned out to be the case
and it could be argued that the current Periodic Review process
is no longer fit for purpose.
33. The process needs a radical rethink.
Extending the period between reviews is not likely to be the solution.
However, we would like to see the review become more of a check
on progress on delivering an agreed long-term programme.
THE COMMITTEE'S
QUESTIONS
34. What should be the key components
of the environmental programme? This is essentially for government
and regulators to decide. It is for Ministers to challenge the
Environment Agency on the cost-benefit analysis of the environmental
programme. The Government must assess whether the Agency's interpretation
of Directives is in line with other member states. Non-compliance
with obligations agreed by Ministers in Brussels, whilst the responsibility
of the Government, may be seen by our stakeholders as a failing
of the industry. What we need is as much clarity and certainty
as possible over long term goals and outcomes. Otherwise there
is a risk of wasted investment, with companies putting in place
solutions that will become redundant in a few years time.
35. The industry's environmental duties
are not an optional extra, they are statutory requirements and
the actions the companies take have a significant effect on both
the state of the natural environment and the quality of life in
England and Wales.
36. The Companies have a statutory duty
to promote the Government's Habitat Action Plan and Biodiversity
Action Plan agenda and meet the agreed levels of service in this
area. The absence of water company spend would have a significant
impact in this area.
37. The investment in capital maintenance
is closely linked to the environment programme. Long-term investment
in underground assets is essential for long-term environmental
protection.
38. A key component of the environment programme
should be an integrated catchment approach to environmental protection
and water quality. This is in keeping with the multi-barrier approach
to drinking water protection and the aims of the Water Framework
Directive.
39. Longer-term we need regulatory impact
assessments to be strengthened in Europe. We also believe that
the UK Government must be more consultative at an earlier stage
to understand the likely impacts on the water industry of proposed
new European legislation. This will put the Government in a better
position as they develop and agree policy in Europe.
Adequacy of EA and Defra guidance so far?
40. This has generally worked reasonably
well, although there have been some problems with delays. At present
a lot of issues remain uncertain (habitats, infractions, WFD)
and will remain so until well after the price review is complete.
The process for handling uncertainties is frequently discussed
with Ofwat. We believe that there is a need to have more robust
financial variation mechanisms to deal with both environmental
and other uncertainties. There is an additional problem of a timetable
mismatch between the Periodic Review process and EU Directives.
41. The main problem is not the adequacy
of the guidance received so far, but the adequacy of the process.
There was a general acceptance amongst stakeholders that hard
choices would have to be made, however the options were not discussed
early enough and there has been a lack of debate on the general
issue of water services and the environment with all the key players.
We believe that decisions on what is included in the guidance
are made by Government collectively and not by Defra alone, so
that the effectiveness of the debate between what are normally
seen as the key players (Defra, industry, customer groups and
regulators) is in reality constrained.
Extent of environmental achievements in PR99?
42. The report attached to Ofwat's letter
to regulatory directors RD03/04 confirms companies are on track
to deliver agreed programmes.
February 2004
Annex
Letter to Rt Hon Margaret Beckett MP,
Secretary of State for Environment, Food & Rural Affairs from
Pamela Taylor, Chief Executive, Water UK
WATER PRICE
REVIEW 2004. PRINCIPAL
GUIDANCE FROM
DEFRA
Early in the new year you will issue principal
guidance to Ofwat on quality and social programmes required for
implementation in the period 2005-10. The purpose of this letter
is to advise you of the issues the water companies would like
you to address.
In the guidance you have an opportunity to secure
the progress the industry has made in recent years and help it
contribute fully in the future to the national strategy for sustainable
development.
Our advice is divided into eight sections:
1. Context: industry role and requirements
of PR04.
2. Benefits of the draft business plan approach.
3. Views of stakeholders.
4. Clarity and timeliness.
5. Scale, value and timing of quality enhancement.
7. Water framework directive.
1. CONTEXT: INDUSTRY
ROLE AND
REQUIREMENTS OF
PR04
1.1 New demands
The industry has a unique set of responsibilities.
It has achieved much recently in its core roles of protecting
and enhancing economic, environmental and community health. More
will be expected of it in these areas. But the industry is also
now a required and willing partner in delivering public policy
for a more demanding and fast-changing society. For example it
is active in the location and design of new urban settlements;
in the regeneration of rural communities; in delivering industry
and transport policy sensitive to fragile natural environments;
and in waste management and resource productivity.
In the same vein, beyond the UK, our water companies
are working with others to strengthen our national response to
the biggest threat to global sustainability, the poverty and deprivation
of the developing world.
The prospect of companies meeting these challenges
will depend to a large degree on two conditions: their ability
to build closer and more informed relationships with customers,
and ensuring the reliability of their assets.
1.2 Customer relationships
Among the most important industry achievements
of recent years has been the improvement of customer services.
This tends to receive less attention than notable environmental
and quality improvements. However customer confidence will arguably
be more important in enabling the industry to contribute fully
from now on.
Modern customers increasingly expect service
providers to meet their particular needs. Linked to this is a
strong current in society and government towards local delivery
and away from centralised decision-making. Water companies are
conscious of these trends. While working hard to ensure that their
PR04 draft business plans would meet the requirements of Ofwat
and the other regulators, they were also keen to ensure that their
proposals met the needs and expectations of local people and environments.
We hope that your guidance will emphasise the
importance of recognising local conditions and priorities in company
business plans.
1.3 National infrastructure
The reliability of essential utility infrastructure
is among the most important long-term issues facing the country.
It is widely accepted that for many years we have not invested
enough in maintaining and renewing critical assets. The results
are: a level of insecurity most people feel is inappropriate for
an advanced nation in 2003; and a drag on the national economy
and quality of life.
Both these characteristics are visible in the
water sector. Many companies provide evidence of threats to existing
levels of service let alone the newer challenges, unless capital
maintenance increases in the PR04 period. While your guidance
will not apply directly to maintenance proposals, we are conscious
that plans could be reduced if the overall bill is judged too
high.
We hope that you will recognise the need for
adequate capital maintenance in 2005-10.
1.4 Summary
We hope you will give timely and unambiguous
guidance that reflects local customers' preferences and priorities,
accepts the need to secure vital national infrastructure, and
allows companies to maximise their contribution to national sustainability.
2. BENEFITS OF
THE DRAFT
BUSINESS PLAN
APPROACH
2.1 Early information allows informed debate
We believe the new element of the periodic review
process—the publication of draft business plans—has
been a success. It enables the cost of quality debate to be set
within its wider context. It has put the issues in front of a
wider range of stakeholders than in the past, and enabled them
to participate.
Companies have developed careful proposals setting
out their views on how to secure and develop services for their
customers. We think the diversity of "company preferred"
proposals across companies is a strength; it indicates that solutions
have been tailored to local circumstances and reflect regional
differences in customer priorities, quality of the environment,
the endowment of assets, geography and geology.
Ofwat has acknowledged that prices will have
to rise and in essence now the issue is by how much. There will
have to be hard choices, given that the prospect for off-setting
efficiency gains is less than in the past. It is important to
secure existing levels of service and ensure that a huge ageing
asset base is adequately maintained.
2.2 Involvement of investors
The greater involvement of industry investors
is an additional improvement to the price review process.
The prospective size of the investment programme
implies that companies need to maintain access to capital markets—debt
and equity investors are therefore a key stakeholder group. Evidence
from Water UK's investor survey is that the size of the capital
programme itself raises concerns with investors, and Ofwat has
accepted that this raises the cost of capital and therefore customer
bills.
In summary we hope you will continue to emphasise
the need for coordinated policy, and collaboration as appropriate,
between the different participants in the price review.
3. VIEWS OF
STAKEHOLDERS
3.1 Customers
The results of the joint stakeholder customer
research will shortly be available. This work will provide valuable
first hand information on how customers have reacted to the draft
plans. The evidence so far suggests limited customer appetite
for big increases in bills. We would urge you to listen carefully
to what customers themselves have said in the light of the new
information presented to them.
3.2 Investors
Water UK is repeating its investor survey during
November and December. The survey will provide updated information
on how investors are responding to draft business plans and recent
Ofwat statements. We will keep your officials informed of the
results.
3.3 Consumer and environmental champions and
the public
We look forward to seeing the views of other
stakeholders—especially environmental and consumer representative
groups and members of the public—on the joint statement
issued by Defra and the regulators on 12 August. We understand
that non-confidential responses will be published on the regulators'
websites. We hope that you will take into account the views of
those interest groups that are champions of the environment in
the context of sustainable development.
We also hope that you will have due regard to
the views of the Efra Committee when they report on their current
inquiry into water pricing.
4. CLARITY AND
TIMELINESS
4.1 Clarity
We believe that the Principal Guidance should
identify as clearly as possible those schemes that should proceed
and those that should not.
We hope that the material provided in the two
reference plans A and B will prove useful in framing your decisions.
Companies remain concerned that the Ofwat reference assumptions
are not realistic; in particular the efficiency assumptions are
too ambitious looking forward.
4.2 Timeliness
There are some process issues relating to the
timely provision of information and the Ofwat financial model
that we will need to discuss with the regulators and your officials
in due course.
Final business plans have to be submitted to
Ofwat on 7 April and should be based on a firm view of the obligations
companies are expected to deliver. It is also important that the
regulators should not use this valuable time re-interpreting your
guidance.
We hope that the date of issue of your Principal
Guidance will not slip as the timetable is very tight. There will
be only nine weeks between end January and 7 April for companies
to analyse several thousand capital schemes, prepare final business
plans, have them reviewed by company reporters, and clear company
plans with boards.
We hope that all the key decisions will be taken
by end January 2004. We understand that there will be "final"
guidance in September 2004. Companies will only be able to deal
with minor adjustments to their business plans at this stage.
5. SCALE, VALUE
AND TIMING
OF QUALITY
ENHANCEMENT
5.1 Hard choices
It is clear that hard choices will have to be
made given the possible implications for water prices. Your preliminary
guidance indicated that costs and benefits would be fully taken
into account and Ofwat has said that it will adopt a rigorous
approach to proposals for extra obligations. We hope that the
outcome will reflect this. Several companies have identified areas
where they think the evidence of value for money is weak.
Many customers will be resistant to price increases
if they do not think the proposed schemes are good value for money.
It is important to be transparent about the expected benefits
and costs.
5.2 Options
One option would be to delay the timing of schemes.
In a number of instances this may be the sensible outcome. However
the number of items to be dealt with in future price reviews is
already high and decisions to delay should be set within a longer-term
context.
A particular flaw in the 1999 price review was
that it did not look beyond 2005 in any systematic way and produced
a non-sustainable outcome. Taking the long-term view is essential
for planning efficient investment in long-lived water sector assets.
We hope that you will ensure that an environmental
agenda seen as too ambitious does not lead to a squeeze on investment
capital maintenance, returns that are too low in the eyes of investors,
increased risk of service failure, or excessive reductions in
abstractions (especially in the dry South East).
We are concerned to see that, in its guidance
to you, the Environment Agency has suggested that some companies
have over-stated the costs of environmental schemes. There is
an effective system in place for challenging and auditing these
costs, and we have no doubt that this will be used. Some companies
have been hampered by delays in the delivery of scheme details
to them by the Environment Agency.
6. FUTURE UNCERTAINTIES
It is clear that in some areas decisions will
not have been taken in time to influence the current price review.
These include: obligations under the Water Framework Directive;
revision of the Bathing Waters Directive; the impact of the Habitats
Directive and other nature conservation measures; and the outcome
of infraction proceedings under the Urban Waste Water Treatment
Directive.
We have discussed these issues in general terms
with Ofwat with a view to greater clarity on how they will be
dealt with outside price reviews, through interim price determinations
and logging up and down. This has been helpful, but we remain
convinced that the mechanisms could be improved and that greater
flexibility is required.
We therefore urge you not to assume that decisions
can be delayed because the mechanisms work well and customers
always pay. There is a danger that obligations imposed between
price reviews are not subjected to the same rigorous cost/benefit
tests as decisions at price reviews leading to excessive price
increases.
7. WATER FRAMEWORK
DIRECTIVE
7.1 Preliminary work
Your initial guidance in January 2003 said that
some preliminary work and some schemes may need a start date within
2005-10. We hope your guidance will address what should be planned
now. We are concerned that little seems to be expected by your
officials or the regulators before 2009. This is too late if measures
are to be operational by 2012.
7.2 Pressures on raw water
Some companies are experiencing deteriorating
raw water quality. The problem is accentuated this year by the
dry summer and autumn in that reservoirs collecting water from
agricultural land are affected by excess nutrients, sediments
and algal blooms. Climate change will increase the difficulties.
Programmes to improve raw water quality should be developed for
the next pricing period and better co-ordination of actions by
the regulators is required to facilitate this.
7.3 Efra select committee
It is plain that members of the Efra committee
are concerned about how this directive is handled and we ask that
you ensure the matter is properly addressed.
8. OTHER ISSUES
8.1 General points
There are a number of other issues under discussion
now between your Department, the regulators and the industry.
These include (by way of example) the lead replacement programme,
odour at sewage treatment works, unsatisfactory intermittent discharges,
the implications of recent legal cases, IPPC, and first time sewerage.
In all these cases we are seeking greater clarity
in time for final business plans, and a better understanding of
how they should be handled between price reviews if not resolved
shortly.
Longer term there is the impact of proposed
`sustainability reductions' to secure nature conservation, CAMS
and the Water Bill in reducing the availability and reliability
of raw water supplies. These may compromise the ability of companies
to supply and increase the cost of new investment. Proposed future
population growth in the South East will put severe pressure on
water resources at a time when supply is becoming more uncertain
and more costly.
You will be well aware that initiatives outside
the remit of Defra such as proposed tax changes and the Traffic
Management Bill have a substantial impact on customers' bills.
8.2 Specific concerns at present
Specific concerns we have at present include
the following:
Freshwater fish directive. The options considered
in your Department's recent consultation and what has been costed
in business plans do not appear to match up. This has been picked
up by WaterVoice in their evidence to the Efra committee. This
may be a matter where the timing of action can help to ease the
problem.
Unsatisfactory intermittent discharges. The
Environment Agency and Ofwat are assuming that previously unidentified
discharges that are now unsatisfactory are already allowed for
in companies' capital maintenance. This clearly cannot be the
case if they were not known to exist.
Debt. Debt has been increasing steadily
since domestic disconnections were banned by the 1999 Act (long
term debt may have increased by 50%). Water companies are working
with others to find solutions and in particular to help those
in difficulty pay their bills. However, primary legislation is
needed to remove loopholes that allow various households—not
necessarily vulnerable ones—to avoid paying water charges.
Your department was unwilling to include the required legislation
in the Water Bill, but recent interim determinations of prices
demonstrate that debt has a significant cost. It raises customers'
bills by an average of up to £10 per year and diverts resources
away from other more valuable activities that could be undertaken
if debt were better controlled.
19 November 2003
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