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
Drinking Water Inspectorate
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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