Select Committee on Environment, Food and Rural Affairs Written Evidence


Memorandum submitted by the Department for Environment, Food and Rural Affairs

INTRODUCTION

  1.  The Government's objectives for the water industry are:

    —  to protect public health;

    —  to protect and improve the environment, ensuring that industry can continue efficiently to finance and deliver continuing water quality and environmental improvements with minimum impact on customers' bills;

    —  to meet the Government's social goals, including affordability of water supplies for households, protecting vulnerable groups, the interests of customers in rural areas, and for the disabled and for pensioners; and

    —  to safeguard services to customers, by sustaining an industry that can provide water efficiently with the highest levels of customer service; and with an effective emergency and drought regime to ensure that supplies are always available when needed.

  2.  A strong water industry with a secure future, coupled with a robust, clear, predictable and stable regulatory and policy framework is essential for delivering public policy objectives on water.

  3.  Every individual and private sector body operates within a framework of law that constrains decisions. The extent of that regulation is set so as to balance individual freedom of choice against the interests of others. Water is a more regulated industry in this respect than some others.

  4.  The water industry's prices are directly regulated, and there is a price limit on the changes companies can make in their overall charges. There is some room for companies to decide on the distribution of the charges among their customers, and they have the freedom to charge less than the limit specified by Ofwat if they want. Although heavily regulated, water has the advantage of being a low risk investment with the price review process providing stability for investors.

RESPECTIVE ROLES OF GOVERNMENT AND REGULATORS IN ENGLAND

Government's role

  5.  The Government's role is to determine policies that may affect price limits. It is for Government to inform Ofwat and companies of relevant policies that will apply in the review period, including those relating to drinking water and environmental programmes.

  6.  In taking decisions on policies affecting price limits, the Government has regard to advice from Ofwat, the Drinking Water Inspectorate, English Nature, and the Environment Agency and to the cost to consumers. Representations on issues such as sewer flooding, water quality and environmental improvements are also taken into account. The potential benefits and cost-effectiveness of proposals has to be weighed against the cost to customers and the ability of the industry to finance additional investment.

  7.  There are measures that must be implemented to meet EU directives and there are measures which are optional but desirable and which Ministers would like to support. A balance between these differing objectives must be struck in the final Ministerial guidance to Ofwat.

Ofwat's role

  8.  The independence of the economic regulator is essential both for the proper operation of the mechanism and for preserving the confidence of investors. The Director General of Water Services has sole responsibility for setting price limits as a condition of water companies' appointment. The Government, the Environment Agency and the Drinking Water Inspectorate assist and inform Ofwat in that task.

  9.  Ofwat designs and leads the periodic review process and in setting price limits, must meet its primary statutory duty of ensuring that companies carry out their statutory functions and that they are able to finance those functions. Ofwat also has the important statutory duty to protect the interests of customers.

  10.  The purpose of Ofwat's role in the Periodic Review process, in essence therefore, will be to establish with sufficient certainty what the functions of companies will be in the five years under review (2005-10), what the costs of carrying out those functions efficiently will be and what will be in the best interests of consumers in terms of price limits and service.

Environmental and Water Quality regulation

  11.  Both the Environment Agency and English Nature are responsible for advising Ministers' on policy issues. In the light of Ministers' policy decisions the Government then looks to provide the regulators, to the companies and to Ofwat, as full, early and as certain a picture as is feasible of what requirements water companies will have to meet and by when.

Environment Agency's role

  12.  One of the purposes of the Environment Agency is to protect from the risks of damage all rivers, streams, lakes, estuaries, underground waters and coastal waters. In doing this it aims to protect, now and for future generations, wildlife, fisheries, recreation, and water supplies and water resources. And it helps ensure compliance with national and international laws and agreements.

  13.  The Agency's role is to:

    —  advise Ministers on environmental obligations and priorities;

    —  assess companies' plans for water resources, and advise Ministers on the balance between supply and demand (the supply-demand balance); and

    —  prepare programmes of schemes to deliver these requirements.

  Once prices have been set, the Agency must set discharge consents and abstraction licences which will deliver the outcomes. It also monitors the delivery of the programme, jointly with Ofwat.

English Nature's role

  English Nature is the statutory body that champions the conservation and enhancement of the wildlife and natural features of England. Its role is to advise Ministers on nature conservation obligations and priorities and to work with the Environment Agency in preparing a programme of schemes to deliver these obligations.

Quality regulation

  14.  Drinking water quality in England and Wales is regulated by the Government through the Drinking Water Inspectorate (DWI), which was set up in 1990 after the water industry was privatised. DWI advises Ministers on policy decisions in relation to mandatory drinking water standards imposed by EC Directives. They also carry out a technical review of drinking water schemes in company submissions for the Periodic Review, and advise Ofwat as to whether the schemes are technically justified. Full details of the DWI process are available on their website.

THE VIEWS OF WATER CUSTOMERS

  15.  Customers' interests are at the forefront of our approach to regulation. Clarity, consistency and transparency are important in the case of all regulated industries and, none more so, than water because it is essential to health and to life. Customers need to understand what they are being required to pay for and why.

  16.  Defra, the regulators and the water companies take into account the views of customers in a number of ways.

  17.  For example, following the previous Periodic Review, on the recommendation of the Environmental Audit Committee's report[18], major stakeholders in the water and sewerage industry agreed to co-operate on a joint customer research project.

  18.  The research was commissioned jointly by:

    Defra Welsh Assembly Government

    Ofwat

    WaterVoice

    Water UK

    Environment Agency

    Drinking Water Inspectorate

    English Nature

    Wildlife and Countryside Link

  19.  The results of this research are intended to provide key stakeholders and the Government with a better understanding of customers' views of the water industry and their priorities for the scope and pace of improvements to the water environment, drinking water quality, sewerage services and customer services. It is being carried out in two stages. The first stage has been completed and paragraphs 32 and 33 below explain the principal findings.

  20.  The second stage of this research is underway. This is designed to explore customers' views on the need for particular improvements to the various aspects of water and sewerage supply. The report from this the second stage is due in December.

  21.  Customers can also make representations through WaterVoice, including on price increases, methods of charging and levels of service and performance. The WaterVoice committees inform Ofwat of important issues that affect customers. They work closely with Ofwat and hold their meetings in public.

  22.  The Water Bill currently before Parliament will introduce provisions aimed at putting the consumer at the heart of the regulatory process, and making the process more transparent and accountable.

THE MINISTERIAL GUIDANCE

Contribution to company business plans

  23.  The Secretary of State's guidance to Ofwat is also intended to inform companies as to the relative priorities the Government wishes to see companies address in their business plans. The guidance is not addressed to companies as such; it is for Ofwat to ensure that Ministers' views are taken into account. But in the sense that it informs the debate and draws attention to specific drivers, statutory or otherwise, it fulfils a role in focussing attention on, for example, new policy measures on which water companies may have to incur costs during the period covered by the review.

Timing of the Guidance

  24.  Defra will be issuing three sets of guidance to Ofwat over the course of the Periodic Review. The Interim Guidance was published on 21 January 2003, Principal Guidance will be published in early 2004 and the Final Guidance will be published in September 2004.

Basis of the Guidance

  25.  The Guidance in each case is based on information and advice Ministers receive from Ofwat, the Environment Agency, English Nature and the Drinking Water Inspectorate, as well as information drawn from the joint customers' surveys and the views of stakeholder interests such as WaterVoice, other consumer groups, environmental groups and the water companies. The Government is keen to ensure that there are opportunities for contributions of views from all stakeholders.

  26.  Defra work very closely with all the regulators to establish the required levels of investment in environmental and drinking water improvements, for the Periodic Review period. These priorities are articulated in scheme-specific investment programmes for individual companies.

  27.  These comprise statutory schemes, very often those required in order to ensure UK compliance with EC Directives, and prioritised lists of discretionary schemes.

  28.  EU and domestic obligations play a large part in determining the size, scope and pace of the overall quality programme. There are a number of key EU drivers, the most prominent of which are listed at Annex II. The Government is committed to full implementation of its European obligations. In addition, there are a number of domestic policies, for example PSA targets, which have an impact.

  29.  An important consideration is the Water Framework Directive. The Directive is an extensive piece of legislation which will bring substantial benefits. It will take to a new level the integration of the management of the water environment. Water bodies will have to reach good status by 2015. The Department has issued two consultation papers already and it is out to consultation on a third, which includes the draft transposition regulations. Annex I explains the future obligations of the Water Framework Directive, insofar as they will affect the water industry.

  30.  The timetable for transposition is a demanding one and the Directive will become increasingly significant in planning investment. It is clearly important that any investment decisions taken now look ahead to the likely future requirements of the Directive, in as far as they are known. However, the action that will be required by water companies to contribute to compliance with the Directive will generally not be clear in time to be included in the current Periodic Review. This is because work to assess the status of waters has yet to be completed, and because for some pollutants a combination of action will be needed to address the range of pollution sources. For example, nutrient pollution originates both from sewage treatment works and from agriculture, and river basin management plans will need to identify the combination of action required by farmers and by water companies. We are currently undertaking a review of diffuse pollution from agriculture, to identify the most cost-effective approaches to securing the reductions in diffuse pollution that will be needed, alongside action by water companies and others, to achieve compliance with the Water Framework Directive.

  31.  However, the Periodic Review process is designed to allow flexibility to accommodate changes that arise in between formal reviews, so as work on implementing the Water Framework Directive progresses, if this raises implications for investments schemes in the pipeline, there is sufficient flexibility in the system to cope with this.

  32.  The Government also aims to ensure that decision-making for the Periodic Review process embodies wider Government policy principles, such as sustainable development. It does this mainly through Ministerial guidance documents. It is for Ofwat to decide how to give effect to this guidance but clear, positive and achievable statements of the importance the Government attaches to its wider policy aims are a part of that process.

RESULTS OF CUSTOMER RESEARCH

  33.  As explained in paragraphs 16 to 19 above, the first stage of the Joint Customer Survey took place in 2002. The findings revealed a broad level of satisfaction with water and sewerage services but also showed that there is some demand for further improvements and a limited willingness to pay for this through higher water bills[19]. Customers' views on the "scope and pace of potential improvements" do include some desire for improvements.

  34.  However, respondents were divided on the degree of improvement needed, the amount they were prepared to pay (if anything) and on the urgency of any improvements.

COMPANIES' DRAFT BUSINESS PLANS

  35.  At the time of preparing this written evidence, the Department has yet to receive full details of the companies' draft business plans and Ofwat. However, now summaries have been published, it is apparent that there is wide variation between the companies both in terms of scale, make up and cost of their investment programmes. For example, some companies' estimates of the costs of the environment and drinking water programmes—and the impact on customers' bills—are relatively modest compared to other cost drivers. In the case of other companies, their proposed environmental and drinking water investment programmes are larger items. It will be important that there is proper understanding of the reasons for such variations and the advice from Ofwat and the other regulators will be vital in this respect. The Department looks to Ofwat and the other regulators to fully interrogate all aspects of those plans to challenge costings where appropriate and to provide advice based on that further analysis.

  36.  Ofwat requested companies to prepare reference plans as well as their preferred strategies. The reference plans are intended to ensure consistency of approach and offer comparison with the preferred strategies. Ofwat has stated that the reference plans will form the basis of their advice to Ministers.

CONCLUSIONS

    —  The Government's view is that the current regulatory processes are sound. The overall process is inclusive and allows all the principal parties to make their views known at key stages of the process.

    —  To address previous concerns about the opportunities for stakeholders to make their views known. there has been the joint statement which not only indicated when to whom comments could be sent, but also flagged up some of the key questions. This is illustrative of the level of co-operation between the different parties.

    —  The Government will issue its principal guidance in early 2004. It will be important that the draft business plans are thoroughly examined and that both costs and proposals for additional expenditure are subject to proper scrutiny. The draft business plans showed substantial variations between companies on cost drivers, including the environmental and water quality programmes, which will require proper explanation.

    —  In issuing its guidance, the Government will take into account the ability of the industry to deliver proposed programmes including the financeability of programmes.

    —  The Government is interested in the views of other main stakeholders and the views of the Committee on these very important issues, which will be taken into account in future planning and decision-making.

27 November 2003


18   Environmental Audit Committee "Water Prices and the Environment" November 2000 (597-I and 597-II). Back

19   Joint Statement "Results Of First Ever Joint Industry Research Into Customers' Views On Water And Sewerage Services". http://defraweb/environment/water/industry/research/pdf/cust statement.pdf 10 Back


 
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