Memorandum submitted by Thames Water Utilities
Ltd
BACKGROUND
1. At Privatisation a 10-year period of
increased investment was envisaged that would deliver service,
drinking water quality and environmental improvements. Customers'
bills would rise as a result, although partially offset by increasing
efficiency. Investment has been made, improvements in service
and environmental performance and efficiency have been delivered
but further substantial increases in investment were required
in AMP3 and are being signalled again from 2005 onwards.
2. These are being driven by a need for
increased asset maintenance, a continued and (in the case of some
companies) a very substantial further quality programme and a
need to address financial and accounting issues arising at the
last price review or since. Thames Water has a particular need
to invest to meet the challenge of London's ageing infrastructure
and growth in demand for services. These require increased investment
in the next 2-3 AMP periods. As yet unconfirmed environmental
obligations may add further to prices.
3. Current uncertainties may eventually
contribute to further price rises, as well as to instability of
prices between periodic reviews. There are also financing issues
for companies as a result.
4. European environmental and drinking water
quality legislation continues to develop. The Habitats Directive
is a current example where there is uncertainty and conflict
with Thames Water's other priorities. The Water Framework Directive
is another example that is insufficiently well understood
for there to be explicit provision in our draft plan. It is hard
to envisage this situation changing, yet it is not sustainable.
KEY ISSUES—FOR
THIS PRICE
REVIEW AND
BEYOND
Adequate funding of asset maintenance and service
enhancements
5. Necessary asset maintenance must be fully
addressed if service is to be maintained, as should service enhancements
supported by customers. Environmental improvements should be demonstrably
necessary.
Determining the scope and pace of further environmental
improvements
6. This review does not explicitly address
the requirements of the Water Framework Directive (WFD)
and raises the broader issue of the "escalator" of rising
standards and the challenge of sustainability. Extracting further
increments of environmental improvement from water companies requires
increasing and possibly disproportionate cost, as well as imposing
environmental cost, from increased energy consumption for example.
A consistent, long-term (10 years+) policy setting framework which
can examine the costs and benefits of improvements across all
sectors and diffuse impacts is a much needed pre-cursor to water
price reviews, which are not the appropriate process to address
these wider issues.
Reducing uncertainty
7. There are many uncertainties at this
review. Ministers are required to give guidance on the extent
and timing of many environmental obligations to be delivered.
This is due towards the end of the process, later than is ideal.
The guidance must be on time, specific and unambiguous, recognising
that increased obligations means higher bills for customers. Other
uncertain obligations will not be clarified in time for final
business plans. These will fall into the ambit of price-correction
mechanisms.
Price correction mechanisms
8. There are a number of concerns with the
mechanisms in place to deal with costs arising from changes to
our obligations between Periodic Reviews. Legitimate expenditure
above regulatory assumptions to maintain service may be disallowed,
and companies may bear financing and other costs forever. We have
set out our proposals for improved mechanisms in our draft business
plan.
Preserving incentives to reduce bills in the future
9. A major success of the current regime
has been the delivery of efficiency resulting in lower bills than
would otherwise be the case. Incentive mechanisms and efficiency
assumptions must encourage this to continue, if the twin objectives
of attracting investment and further savings for customers are
to be achieved.
10. Our draft strategic business plan sets
out our priorities and is available on our web site at http://www.thameswateruk.co.uk.
We would be pleased to make further information and detail available
to the Committee if required.
17 October 2003
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