Supplementary memorandum from Water UK
Response to specific questions from the Environmental
Audit Committee following Water UK's oral evidence session, 3
March 2004
INTRODUCTION
The Committee asked Water UK to provide additional
information on a number of matters, both at the oral hearing and
in a subsequent letter.
English Nature raised the issue of the timing
of investigations carried out by water companies included in the
AMP3 programme. They were concerned that some of the work was
carried out too late for results to be fed into the current review,
despite commitments being made that this would not be the case.
The Committee would like further clarification on this from Water
UK. In particular whether there was a specific timetable within
AMP3 for completions of actions some or all the actions that the
companies were committed to.
Work on sites covered by the Habitats and
Birds Directives and SSSIs affected by over abstraction or effluent
discharge
We understand that in its oral evidence to the
EAC English Nature said that companies had been laggardly in carrying
out investigations under AMP3 on sensitive sites covered by various
nature designations and taking the appropriate action. At the
last price review DETR in its guidance document "Raising
the Quality" (issued to Ofwat September 1998) advised that
companies should be funded to carry out investigations on such
sites adversely affected by water company activities. It also
said that if an investigation shows that a scheme needs to be
completed or commences within the period 2000-05 there should
be effective arrangements to ensure that this can happen.
The problem is that these "effective arrangements"
were not put in place. Under existing arrangements capital costs
(but not the operating costs) of schemes added to the programme
between price reviews may be "logged-up" and allowed
for Ofwat at the next price review. As that mechanism does not
allow for the full costs of such schemes "logging-up"
is an arrangement that companies are not very happy with.
Repeated discussions between Ofwat, Water UK
and companies did result in Ofwat issuing a consultation document
but little changed as a result of the consultation. Therefore
companies continue to believe that it is best to deal with such
schemes within business plans put forward at price reviews, to
establish sensible priorities for these schemes within a wider
plan, and to ensure that the costs of the schemes are properly
funded.
Looking Ahead Beyond PR04
We believe that the PR process does need reviewing
and we have already said to Government and regulators that we
would like to look at the process. We do not have a firm view
about the environment programme coming out of the periodic review
but believe that there are some fundamental issues that it would
be useful for the Committee to discuss.
The process worked well in the past but the
goalposts have moved. When the industry was privatised in 1989
and the huge capital investment programme was started there was
a huge problem with point source pollution to be tackled by the
industry. That problem has largely been solved with huge improvements
in river quality and bathing water quality. Many issues to be
addressed on the environmental side now fall outside the periodic
review.
Diffuse Pollution
What we now have to tackle now is diffuse sources
of pollution and catchment based approaches to water management.
Dealing with diffuse pollution from a plethora of sources already
costs water industry customers £7 per year. This figure is
rising. For example the drinking water directive has tighter standards
on nitrates. Nitrate problems arise from farming practices. To
comply with these standards companies have been blending waters
so that the standard is not breached. However, the problem of
nitrates is growing and we are now running out of these low nitrate
waters and so having to put in additional treatment at additional
costs.
The same type of issue arises with implementation
of the bathing waters directive. Point source pollution has been
addressed. In order to improve the standards of beaches further
we need to work with farmers, for which there is no funding, or
ratchet up standards at waste water treatment works. Improving
the last 10% using end of pipe solutions is very expensive.
The policy levers for working with those causing
the diffuse pollution are in Government's gift not water companies.
There will be new requirements from the water framework directive
to achieve "good ecological status". Diffuse pollution
is likely to be the main cause of not complying with the directive.
So far there is no positive action coming from Defra in terms
of measures, finding mechanisms or regulations. This is in contrast
with the situation in Scotland where Scottish Water has seconded
a member of staff to the Executive to develop and draft regulations
on diffuse pollution.
Water companies are undertaking work with other
stakeholders, including farmers and the chemicals industry on
the voluntary initiative on pesticides. Such work is not funded
by Ofwat and does not form part of the periodic review negotiations.
We believe that what is needed going forward
is a clear and agreed framework for water. In Directing the Flow
a start was made by Defra in creating a framework for the delivery
of water services and protecting the water environment. However,
we have not seen this followed through by any actions. We think
that an agreed framework would mean that investment is made at
the right time to produce the most cost effective solutions.
An example of how the lack of framework adds
to costs comes from implementation of two directives. Investment
made as part of compliance with the Freshwater Fish Directive
over AMP4 may well become redundant if tighter standards are introduced
as part of the Water Framework Directive post 2009. Early clarity
on requirements would help avoid this.
There is no doubt that the water industry could
continue to take the responsibility for cleaning up the environment
indefinitely. But we believe that using an end-of-pipe approach
to tackle wider catchment problems is inefficient. It means higher
costs for customers without providing the best environmental solutions.
Already customer groups are questioning the
cost of water services and on behalf of our customers we have
to ask why they should be forced to pay for problems caused by
others, when these problems could be addressed by a range of other
policy tools.
We think that a wider groups of stakeholders
needs to be involved in discussing and developing solutions to
these problems. In previous evidence to the EAC we have raised
the idea of a water forum, to be convened by Defra, to provide
a place for these discussions to take place. We still believe
that this would be a positive development.
Publicising Environmental Activity
The EAC asked what steps companies took to inform
customers about the scope of their activities. All water companies
produce environmental reports which are available to customers.
These detail environmental improvements. These are also promoted
through customer newsletters, websites and at visitor centres.
Companies are pro-active in letting the media know about the work
that is carried out. However, the industry faces the same difficulties
as other organisations, including Government in that good news
is not considered newsworthy. As you heard companies also work
in partnership with environmental groups such as RSPB and the
Wildlife Trusts either on campaigns or research to reach customers
more effectively. The industry's work on otters is well known
and currently we support the Wildlife Trust's Wild Rivers project.
INFORMATION
ON THE
LEVELS OF
CUSTOMER DEBT
AND IMPACTS
ON CUSTOMER
BILLS
How has the figure of an average of up to £10
per year per customer been arrived at?
Ofwat collects information on an annual basis
from the water companies on the level of household debt. This
includes revenue outstanding, revenue written off and the operational
costs associated with revenue collection.
Ofwat published household debt figures for the
industry in their letter RD32/03[2]
issued on 28 August 2003. This indicated that the average debt
collection cost per household billed had risen to £2.38 in
2002-03. Added to this are the write-off costs and the financing
costs of the ongoing debt. These numbers are not in the public
domain but we understand from private correspondence with Ofwat
that the total charge per household billed for write-off and financing
costs is £5.95. The total average cost of debt is therefore
£8.33.per household billed. Since the amount of household
revenue outstanding (up to 48 months) is equivalent to 16% of
household revenue billed, the companies will under-recover from
the paying customer base the costs of managing debt. If we assume
the figure of 16% under-recovery a further £1.33 has to be
added to paying customers bills. This gives a total value of £9.66,
i.e. approaching £10 per year per customer.
Are there significant variation within different
water regions?
Ofwat states that the annual cost of collecting
outstanding household revenue varies significantly between companies.
Five companies reported reductions in operating expenditure whilst
eight companies reported increases. Costs will vary with the policies
adopted by the particular company. However, as discussed above
these operating costs account for only about 30% of the total
debt management cost.
What systems do companies have in place to monitor
customer debt?
In 2003 the industry commissioned an independent
report by CreditScorer Ltd on Water Industry Debt—Current
Trends and Good Practice Approaches[3].
The report concluded that the water companies have developed and
adopted good practices in debt management, collection and recovery.
CreditScorer pointed out that adopting all aspects of "best
practice" as used e.g. in the large volume financial services
industry, is not feasible for the water sector due to regulatory
and legal constraints and the technological investments that are
only feasible for large scale operations.
The report gives case study examples of practices
within large and small organisations with outsourced or in-house
collection operations, reflecting both urban and rural situations
and north and south locations.
The report includes a matrix of good practice
in debt management against which the performance of the case study
examples were judged. The good practice principles covered.
— Customer type and knowledge.
— Billing—clarity and timely.
— Payment methods and arrangements.
— Customer contact and account management.
— Collections and recovery.
— External debt collection.
— People, training, technology.
Are some companies more successful than others
in dealing with the problem?
It is inevitable that some companies will be
more successful. Smaller companies for example will not have scale
economies or the financial resources to invest in the more powerful
call centre technologies and information systems available to
the very large companies.
On overall industry performance the CreditScorer
report demonstrated that the water sector is comparable with the
competitive gas and electricity sectors across a number of key
indicators
|
| Factor | Water
| Gas/Electricity |
|
| % Customer base on direct debit | 41%
| 41% |
| % Customer base with known phone nr | 56%
| 60% |
| Customer contact rate per FTE/hour | 11
| 10 |
|
Details of cases where water companies' have not included actions in their draft plans because they think they will have minimal impact compared to other sources of pollution
| | |
Most companies have included only statutory schemes requested
by the EA in their plans. Some companies question the value of
some of these statutory schemes, for example schemes to deliver
tighter dangerous substances limits. They have however, included
such schemes in the business plans.
Some general information of the cost to companies of dealing
with polluted drinking water sources and how much of this can
be attributed to diffuse pollution
Ofwat has published figures for the average capex cost per
customer per year of dealing with nitrates and pesticides during
AMP3. This has been assessed at £7 per customer. This does
not include the cost of dealing with cryptosporidium. One medium
sized company has estimated that the costs of dealing with nitrates
and pesticides during AMP4 will be £16.50 per customer per
year.
The problem with nitrates has increased significantly over
the past ten years. Since 1997 capex expenditure on nitrates removal
has been £36 million for the industry as a whole. Contrast
this with one large company which is putting in for nitrate removal
schemes in excess of £100 million during AMP4.
It is becoming more expensive to supply water that meets
all the standards of the Drinking Water Directive, because the
levels of pesticides and nitrates in raw water sources continue
to increase. In the past it was possible for companies to blend
water with high levels of nitrates with those sources with no
nitrates or to switch sources. However, in the UK we are now reaching
the point where all groundwater sources are polluted to some degree,
meaning that there is currently no option but to go for expensive
end of pipe solutions.
We need much more widespread catchment protection to prevent
the problem occurring. For example in Lower Saxony, in Germany,
water operators have been buying forest land to protect catchments.
Taking pro-active land management of the catchment has had the
effect of reducing nitrate levels from 120mg/litre to 46mg/litre.
The cost of doing this has been no more than for end of pipe solutions
and much more sustainable. This type of approach is becoming more
popular in northern European countries.
Further details of costs can be found in the June Returns
supplied to and available from Ofwat.
The Committee would like clarification on your evidence
regarding diffuse pollution. Is Water UK, together with water
companies, arguing that some of the actions included in the environment
programme are not necessary because there are other sources of
pollution to the water bodies in question, which are more significant,
and therefore no action should be taken by water companies to
deal with the pollution they cause? If this is the case could
you please give us examples of where this is an issue, including
the levels of pollution caused by the water companies compared
to the input from diffuse pollution.
Companies treat wastewater to the standards required by European
and UK law. Water company discharges are therefore agreed with
the EA. It would be wrong to suggest that these discharges could
be described as pollution.
Companies do however have views about the effectiveness of
actions that the may be required to take. For example, companies
have included costs for nutrient removal schemes where directed
to do so. However, they consider that these schemes will only
be of limited value unless there is a commensurate reduction in
agricultural sources of nutrients.
March 2004
2
RD32/03 is available on the Ofwat website under Regulation Director
letters. Back
3
This report can be supplied to the Committee if required. Back
| 
