Government response
Transparency of the review process
Recommendation 1
We are disappointed that Ofwat felt
it could not be clearer about which maintenance and improvement
programmes were allowed for in its draft determination of price
limits. We hope that this is resolved in its final determination
of price limits, in order that customers and other stakeholders
may have the clearest possible understanding of what they can
expect water companies to deliver. If Ofwat chooses not to present
this information, it should write to us explaining its decision.
(Paragraph 11)
Alongside its final determination of price limits
Ofwat published a list of improvement schemes that it expects
the companies to undertake in the period 2005-10. These can be
found on Ofwat's website.[1]
This will allow customers and other stakeholders to understand
what improvements they can expect the companies to deliver. It
is also important, by a clear specification of what is expected,
to focus the companies' attention on the outcomes expected from
the price limits, not the inputs.
Ofwat will publish reports on companies' progress
in delivering these outputs. At the draft determination stage
Ofwat judged that it would have been impracticable and misleading
to publish a list of individual improvement schemes at what was
a provisional stage before many schemes had been fully scrutinised.
However, lists of schemes were shared with quality regulators
who were able to scrutinise them further as part of the draft
determinations process. The Guidance (RIA was not published until
after the draft determinations) published by the Secretary of
State in advance of final business plans and draft determinations
in conjunction with the advice to the Secretary of State published
by the Environment Agency and the Drinking Water Inspectorate,
made clear the improvement policies Ministers were expecting companies
to deliver and, in broad terms, the environmental and drinking
water benefits that would be achieved.
Recommendation 2
We recommend that Ofwat considers WaterVoice's
suggestions for clearer ways to explain to customers the impact
of changes in price limits during its evaluation of this price
review. (Paragraph 13)
In its final determinations Ofwat set out the implications
for domestic customers' bills of price limits by including average
figures. This is consistent with the approach taken to explain
the implications of companies' proposals in final business plans
and Ofwat's proposals at the draft determination stage. It facilitates
comparisons. However, Ofwat recognises that the average varies
for each company and for individual customers of those companies.
The table below from 'Future water and sewerage charges 2005-10:
Final determinations' (Table 4) sets out the average expected
household bill for each company by 2009-10.
Table 1:
Average expected household bills[2]
| Average annual household bills (£)[3]
| | |
|
| 2004-05
| 2009-10
| Change |
| |
| Company
| Water
| Sewerage | Water
| Sewerage | Water
| Sewerage | Total
| %
change
|
| Water and sewerage companies
|
| Anglian
| 122
| 172
| 140
| 173
| 18
| 1
| 20
| 7
|
| Hartlepool
| 94
| -
| 108
| -
| 14
| -
| 14
| 15
|
| Dwr Cymru
| 123
| 163
| 153
| 199
| 30
| 36
| 65
| 23
|
| Northumbrian
| 100
| 132
| 114
| 146
| 14
| 14
| 28
| 12
|
| Essex & Suffolk
| 132
| -
| 153
| -
| 21
| -
| 21
| 16
|
| Severn Trent
| 116
| 105
| 133
| 132
| 16
| 27
| 43
| 20
|
| South West
| 126
| 231
| 179
| 265
| 53
| 34
| 87
| 25
|
| Southern
| 91
| 168
| 110
| 214
| 19
| 46
| 65
| 25
|
| Thames
| 113
| 98
| 156
| 104
| 44
| 7
| 50
| 24
|
| United Utilities
| 133
| 136
| 147
| 175
| 14
| 39
| 53
| 20
|
| Wessex
| 126
| 151
| 170
| 177
| 44
| 26
| 70
| 25
|
| Yorkshire
| 117
| 126
| 133
| 155
| 17
| 28
| 45
| 18
|
| WaSC average (weighted)
| 118
| 132
| 142
| 155
| 24
| 23
| 47
| 19
|
WATER ONLY COMPANIES
| |
Average annual household bills (£)
|
|
| |
2004-05 |
|
2009-10 |
|
Change |
|
|
|
| Company |
Water |
Sewerage |
Water |
Sewerage |
Water |
Sewerage |
Total |
%
change |
| Bournemouth & W Hampshire |
107 |
|
122 |
|
15 |
|
15 |
14 |
| Bristol |
108 |
|
122 |
|
14 |
|
14 |
13 |
| Cambridge |
91 |
|
101 |
|
10 |
|
10 |
11 |
| Cholderton |
136 |
|
166 |
|
30 |
|
30 |
22 |
| Dee Valley |
107 |
|
106 |
|
-1 |
|
-1 |
-1 |
| Folkestone & Dover |
143 |
|
176 |
|
33 |
|
33 |
23 |
| Mid Kent |
131 |
|
151 |
|
19 |
|
19 |
15 |
| Portsmouth |
77 |
|
80 |
|
4 |
|
4 |
5 |
| South East |
129 |
|
151 |
|
21 |
|
21 |
16 |
| South Staffordshire |
91 |
|
106 |
|
15 |
|
15 |
17 |
| Sutton & East Surrey |
127 |
|
143 |
|
16 |
|
16 |
13 |
| Tendring Hundred |
162 |
|
158 |
|
-4 |
|
-4 |
-2 |
| Three Valleys |
118 |
|
138 |
|
20 |
|
20 |
17 |
| WoC average (weighted) |
113 |
|
129 |
|
16 |
|
16 |
14 |
| Industry average (weighted) |
117 |
132 |
140 |
155 |
23 |
23 |
46 |
18 |
Ofwat has also published estimated 'typical' bills to illustrate
the likely effect on both unmeasured and measured customers for
those customers that do not opt for a meter, and do not vary their
consumption over the period 2005-10. The table below (Table 16
from 'Final Determinations') sets out the change in typical unmeasured
and measured bills over the period, but does not take account
of the savings that some customers will make as a result of switching
to a measured supply. The individual company pages included in
'Final determinations' set out for each company these figures
for each year for which price limits are set. These figures are
provided for illustrative purposes and cannot reflect the actual
impact on individual customers' bills of the price limits. This
will become apparent once companies have submitted their charges
schemes and Ofwat has approved them. Ofwat has published its average
bills leaflet on its website which sets out increases to the average
household bill for 2005-06.
Table 2:
Change in typical measured and unmeasured bills
| Household bills (£)
| | |
| 2004-05
| 2009-10
| % change
| |
| Company
| Measured
| Unmeasured
| Measured
| Unmeasured
| Measured
| Unmeasured
|
| Water and sewerage companies
|
| Anglian | 244 | 354
| 272 | 401 | 11
| 13 |
| Dwr Cymru | 177 | 314
| 228 | 411 | 29
| 31 |
| Northumbrian | 211 | 251
| 245 | 289 | 16
| 15 |
| Severn Trent | 200 | 230
| 255 | 282 | 27
| 22 |
| South West | 273 | 442
| 375 | 636 | 37
| 44 |
| Southern | 239 | 271
| 311 | 356 | 30
| 31 |
| Thames | 196 | 215
| 239 | 270 | 22
| 26 |
| United Utilities | 246 | 279
| 305 | 349 | 24
| 25 |
| Wessex | 227 | 302
| 292 | 407 | 29
| 35 |
| Yorkshire | 205 | 259
| 247 | 319 | 21
| 24 |
| WaSC average (weighted) | 222
| 263 | 271 |
323 | 22 |
23 |
|
| Water only companies
|
| Bournemouth &
W Hampshire | 90
| 117 | 101 | 143
| 12 | 23 |
| Bristol | 92 | 113
| 112 | 129 | 21
| 15 |
| Cambridge | 82 | 101
| 91 | 114 | 11
| 14 |
| Dee Valley | 78 | 121
| 87 | 119 | 11
| -2 |
| Folkestone & Dover | 119
| 162 | 147 | 210
| 23 | 29 |
| Mid Kent | 112 | 141
| 128 | 168 | 14
| 19 |
| Portsmouth | 87 | 77
| 88 | 81 | 2
| 6 |
| South East | 114 | 137
| 137 | 165 | 20
| 20 |
| South Staffordshire | 90 |
92 | 105 | 110 |
17 | 19 |
| Sutton & East Surrey | 111
| 130 | 125 | 150
| 13 | 15 |
| Tendring Hundred | 135 | 199
| 130 | 197 | -4
| -1 |
| Three Valleys | 98 | 124
| 115 | 147 | 17
| 19 |
| WoC average (weighted) | 101
| 117 | 117 |
136 | 16 |
16 |
|
| Industry average (weighted) | 222
| 261 | 269 |
319 | 21 |
22 |
Ofwat also included additional information in appendix
2 of 'Final Determinations'. This was to respond to WaterVoice's
concerns by showing illustrative figures for different rateable
values and different levels of consumption for each company. It
is for the companies to consider tariff proposals which conform
with their price limits and to submit their charges schemes for
Ofwat's approval. This may include changes in the balance between
standing charges and volume or rateable value related charges,
which would have an impact on these typical bills. Ofwat will
consult each relevant WaterVoice Committee as part of its approval
process. The actual impact of the price limits Ofwat sets on individual
customers will become clear when the companies send out their
bills for 2005-06 ahead of the charging year beginning 1 April
2005. Ofwat remains concerned that customers should not be misled
by generalised figures which may not reflect their own bills.
Recommendation 3
The controversy over the cost of the environment
programme risks giving the impression to customers that water
bills are a source of investment for environmental work, albeit
vital work, that it would otherwise be difficult to fund. There
is no perfect way of presenting information about these costs,
but Ofwat should consider how information can be presented to
give customers the most accurate possible picture of the costs
of and reasons for the environment programme and how they contribute
to the overall bill. The Government should also consider making
a statement at the start of the process stating in clear terms
details of the environmental legislation which the water companies
will have to comply with over the five-year period of the pricing
review. (Paragraph 15)
The Government welcomes the Committee's recognition that there
is no perfect way of presenting information about costs and shares
the Committee's concern that the cost of the environment programme
should be presented in proportion. Ofwat has presented costs in
three alternative ways in the published Final Determinations:
the assumed capital costs; the contribution to changes in customers'
bills; and the contribution to the overall bill.
Ofwat assumed the capital costs of the environment programme,
shown in Table 8 of the final determinations, to be £3,500
million out of the £16,800 million assumed for water companies'
total capital expenditure between 2005 and 2010.
The contribution of the environment programme to changes in customers'
bills is estimated at £21 out of the net increase of £46
over the five year review period, as shown in Table 6 of the final
determinations. In the interests of consistency Ofwat used this
'drivers' table, as developed at previous price reviews, to set
out the marginal impact different drivers have on customers' bills.
This provides continuity and makes comparisons easier.
The Committee mentioned one reservation about the drivers table,
its treatment of efficiency savings. The Committee drew attention
to the way in which Ofwat presents the 'drivers' for price increases,
in which it separates out the increases due to improvement programmes
and the decreases due to improvements in efficiency. Ofwat has
made it clear, in its published material and in explaining its
decisions, that whilst the benefits of greater efficiency have
been expressed in one line for the sake of simplicity, that efficiency
is gained through all the operations of the company, including
its capital expenditure on environmental and other schemes. If
the assumed improvements in efficiencies are allocated to the
individual drivers and netted off against their costs, each would
show a lower cost. After such an adjustment the cost of the environment
programme as an addition to customers' bills would be £19
rather than £21.
The third alternative way of presenting the cost of the environment
programme, preferred by the Environment Agency, is its share of
the total average household bill . Tables 14 and 15 of 'Final
determinations' give the components of average household bills
in 2004-05 and 2009-10. The 2005-10 environment programme accounts
for £19 of the 2009-10 average bill of £295.
The Government agrees that it should give the clearest possible
statement at the beginning of the process of the environmental
legislation that companies will need to meet. This was the purpose
of the Initial Guidance from the Secretary of State in January
2003. It was possible to state many policies definitely at that
early stage. However, it is important that the Government does
not close off the remaining available choices about the implementation
of environmental programmes before all the information on those
decisions, including the costs and benefits, is to hand. The three
instalments of the Guidance, together with the published advice
from the regulators, also served the important purpose of explaining
the reasons for the measures to be adopted. The Government will
consider the content and timing of information that will be most
helpful to the next review.
Recommendation 4
We are particularly disappointed that the Government
has been slow to address the problems of diffuse water pollution
and flooding caused by urban run off and that as a result the
costs of these problems fall on water customers. The Government
should consider whether charging via water bills is the most equitable
way of funding the effects of these environmental challenges as
well as the impact of climate change. The Government should make
clear, at the earliest opportunity, its plans for solving these
problems. (Paragraph 16)
The Government does not agree that it has been slow to address
the problems. On the contrary, it has a strong commitment to tackling
these problems, but they are not conducive to quick fixes.
One of Defra's areas of focus is to identify further measures
needed to address diffuse water pollution. The success of measures
to reduce pollution from point sources means that tackling diffuse
pollution, particularly in relation to water quality objectives
of the Water Framework Directive, is the single biggest opportunity
to further improve water quality in the country. Defra and the
Treasury recently consulted on measures to reduce diffuse water
pollution from agriculture through the catchment-sensitive farming
programme. In contrast with agriculture, where there is strong
evidence of the significant contribution made by that sector to
diffuse water pollution, the task of quantifying the significance
of urban diffuse pollution in relation to Water Framework Directive
objectives is more complex, reflecting the wide variety of different
sources and the lack to date of a sound and comprehensive knowledge
base.
To gain a better understanding of these issues, Defra
has already undertaken an extensive review of relevant published
material and during 2004 has co-hosted, with the Environment Agency,
a series of sector-based workshops. Feedback from those workshops
is on Defra's website at:
http://www.defra.gov.uk/environment/water/quality/diffuse/non-agri/index.htm.
In November, Defra invited a wide-ranging group of
stakeholders to discuss the work done to date and to consider
possible options for a way forward. The main conclusion was that
although considerable progress has been made, further work is
needed on the priorities for action, and that in developing priorities
for action it is important to make strong links with the Water
Framework Directive, and with its daughter directives, still to
be agreed.
Defra is therefore actively improving its knowledge base which
is essential to any consideration of possible measures. It is
looking to the Environment Agency's refinement of its initial
river basin catchment characterisation work, required under Article
5 of the Water Framework Directive, to provide an indication of
any targeted approaches that may need to be considered at catchment
level. These approaches will also take into account the Community
agreed priority list of 33 dangerous substances as listed in Annex
10 to the Water Framework Directive, which are required to be
progressively reduced or phased-out, at the latest, after 20 years
upon adoption of a daughter directive.
The Committee is also right to recognise that run-off can be a
source of diffuse water pollution in many urban catchments and
this was discussed in most of the sector workshops held last year.
Defra will be considering the scope, extent, sources and impact
of urban run-off as part of the further work described above.
The Government has also been setting a new agenda on the problems
of urban run-off in relation to flooding. In Making space for
water the Government proposed that a joined-up approach to
drainage management should be pursued in high-risk urban areas.
This would involve a joined-up approach across fluvial flooding,
pluvial flooding, sewer flooding and groundwater flooding. The
Government is also committed to ensuring that take-up of Sustainable
Drainage Systems (SUDS) techniques is facilitated where appropriate.
The Government hopes to respond later this spring to the points
made in the Making space for water consultation exercise,
including those made about how to take forward the concept of
integrated drainage management.
The impact of climate change was explored in the Committee's report
on Climate Change, Water Security and Flooding: (Sixteenth
Report of Session 2003 - 2004). The Government's approach was
set out in the Defra memorandum to the Committee of April 2004
and the Government response to the report's recommendations. These
set out a clear view of the problems and a programme of work to
address them.
In developing policy on all these issues the Government takes
full account of the 'polluter pays' principle identified in Article
9 of in the Water Framework Directive. Identification is fundamental
to the principle being applied successfully and while this is
relatively straightforward when dealing with point source pollution,
the situation with diffuse pollution is more complex. Where costs
are attributable to water company activities and responsibilities,
it is right that water customers should meet those costs, but
the Government acknowledges the Committee's concern about the
apparent inequity in present charging arrangements where water
customers could be paying for the pollution caused by others.
The Government recognises that those responsible for pollution
should be accountable and this is also consistent with the approach
of the Water Framework Directive. This will be developed further
as part of the implementation of the directive.
The respective roles of Ofwat, the quality regulators
and Defra
Recommendation 5
As the price review system stands, it is not for
Ofwat to determine the content of the environmental and quality
improvement programmes. We are concerned that, if the final determination
does not fund statutory requirements, those companies will apply
for further increases in their price limits before the next review.
This would undermine the value of the price review process. We
recommend that the Government examine closely how the regulator
has responded to its guidance and to what extent statutory schemes
have been allowed for in the price limits. (Paragraph 19)
The Secretary of State for Environment, Food and Rural Affairs
for England and the Welsh Assembly Government for Wales set out
the legal requirements that water and sewerage companies will
be obliged to meet and the policies that they wish the water and
sewerage companies to follow. Each of the regulators takes account
of this guidance within the framework of their statutory obligations.
Ofwat has a role, on behalf of customers, to ensure
that as far as possible value for money is safeguarded. In its
methodology paper (consulted on in draft in autumn 2002 and finalised
in April 2003) Ofwat said that it would only include within price
limits schemes with clearly defined outputs, timings and costs.
This is similar to the approach taken at previous price reviews.
Where these are not clear, investigative work can be undertaken
to enable the projects to be developed to the point where they
are capable of inclusion. Ofwat concludes that to include resources
for schemes that are not yet properly defined would be a waste
of customers' money.
All the schemes specified by the DWI and almost all
the schemes specified by the environmental regulators to deliver
the legal requirements and policies in Ministerial guidance and
included in companies' business plans have been included in final
price limits.
While it is desirable for both companies and customers
that price limits should be set for five years without frequent
adjustment through interim price determinations, this depends
on the availability of information and the completion of scrutiny
before price limits are set. The Ministerial guidance, the regulators'
detailed requirements for companies' outputs, companies' proposals
for schemes to deliver those outputs and Ofwat's decisions on
price limits can only take account of the information available
at the date that they are set. Policies, programmes, schemes and
costs become more defined and alter the picture during the review
and will continue to evolve after price limits are set. Throughout
the process the Environment Agency and DWI kept schemes under
review. For some schemes this resulted in recommending further
work before a suitable scheme could be identified. In these cases
Ofwat included funding in final determinations for such further
investigative work rather than the proposed solutions. In a number
of other cases Ofwat re-instated schemes in full in final determinations
that had been set aside from draft determinations.
The process of defining requirements and schemes
more clearly and adding new requirements will necessarily continue
between reviews. There are systems in place for schemes to be
added in time as they are defined. Ofwat's 'change protocol',
published with Final Determinations, sets out how schemes which
are not yet properly defined, can be taken forward where necessary
before the next price review.
Table 3:
The quality improvement programme for 2005-10
| Companies'
business plans
| Draft
determinations
| Final
determinations
|
| No. of projects
| Capital expenditure £ million
| No. of projects
| Capital expenditure £ million
| No. of projects
| Capital expenditure £ million
|
| Water service
|
| Drinking water and other obligations
| 357 | 2,200
| 327 | 1,877
| 348[4]
| 2,014 |
| Environmental investigations and solutions with ministerial support
| 218 | 136
| 181 | 60
| 183 | 47
|
| Water service total
| 575 | 2,336
| 508 | 1,937
| 531 | 2,061
|
| Sewerage service
|
| Environment Agency environment programme for 2005-10 with ministerial support and other new obligations
| 2,967 | 3,974
| 2,660 | 2,435
| 2,731 | 2,631
|
| Completion of 2000-05 programme
| 668 | 542
| 689 | 708
| 658 | 819
|
| Sewerage service total
| 3,635[5]
| 4,516 | 3,3495
| 3,143 | 3,389
| 3,450 |
| Total | 4,2105
| 6,852 |
3,8575
| 5,080 |
3,920 | 5,512
|
'Horse trading'
Recommendation 6
We accept that an economic regulator for an inherently
monopolistic industry like the water industry can never be a perfect
surrogate for market competition. However we are concerned that
the bidding process seems to result in such stark differences
of opinion over costs, value for money and the scope for efficiency
savings that the regulator, in his draft determinations at least,
halved the bid set out by the companies. We recommend that the
Government re-examine the methodology of the bidding process to
identify the reasons for the striking differences between the
companies' and the regulator's positions. (Paragraph 21)
The Committee was concerned that the differences of view between
Ofwat as regulator and the regulated companies could be seen as
a process of 'horse trading'. As the Committee recognises, there
is an iterative process to arrive at the final policies, programme
and price limits, which should converge as the review proceeds.
In Ofwat's view it was inevitable that
at the time when the Committee took evidence, between draft and
final determinations, there would be strong differences of view.
Draft determinations were based neither on the full programmes
eventually set nor on fully challenged costs. Companies drew up
draft business plans in advance of Ministers' final policy decisions
on quality policies, and Ministers had to reach their main quality
policy decisions on the basis of advice from all the regulators
and draft business plan costs that differed from the costs attributed
to policies in the final determinations.
Ofwat's conclusion, in its final price
limits, is that the companies can deliver all that needs to be
done, if they are efficient, for two-thirds of the bill increase
which the companies sought. However, in some cases Ofwat has very
largely accepted the inputs and outcomes proposed in some companies'
business plans - for example those of Yorkshire, Welsh Water and
South Staffordshire - whilst not agreeing on every detail. The
degree of difference of view between the regulator and the regulated
can therefore be exaggerated.
What is important is that the final determinations
reflect the information available at the time. In Ofwat's view
the fact that no company has asked for its price limits to be
redetermined by the Competition Commission is an indicator of
the real extent of agreement or disagreement.
Sewer flooding
Recommendation 7
We accept that it may not be possible to address
every property at risk of sewer flooding, but we are concerned
that the problem appears to linger on from price review to price
review, leaving a backlog of properties waiting to be addressed.
This is of particular concern given the likelihood of increased
risk of sewer flooding identified in the Office of Science and
Technology's Foresight report on flood risk and climate change.
We recommend that companies prioritise action in those areas at
highest risk and that, in examining the cost-benefit ratio of
plans presented by the companies, Ofwat consider the distress
and inconvenience of those affected as well as economic damage.
(Paragraph 24)
Reducing the distress of sewer flooding remains a
priority for Government as set out in the guidance on the periodic
review. The Government welcomes the attention paid by water companies
and Ofwat to sewer flooding in this review. It is the Government's
view that as many properties as possible should be protected while
also ensuring that the costs to customers more widely are proportionate
to the benefits.
In its final price limits, Ofwat has assumed that the ten sewerage
companies will now spend approaching £1 billion over the
five-year period to deal with the scourge of sewer flooding. Although
a value for money challenge remains, Ofwat expects the price limits
to allow the companies to resolve or mitigate every known high-risk
problem of internal flooding caused by overloaded sewers where
the companies' plans said action was needed by 2010. Some homes
will come on to the register of homes at risk of flooding once
in 10 years for the first time during the five-year period. However
Ofwat expects that register to have been reduced to 0.01% of all
homes (around 3,100) by 2010, compared with around 8,800 currently.
There will also be significant progress in tackling sewer flooding
in gardens and public spaces.
The Government recognises that measures to reduce
sewer flooding problems may not necessarily be best addressed
in isolation. Defra's recent Making Space for Water consultation
proposed that a joined-up approach to drainage management should
be pursued in high-risk urban areas.
Ofwat are continuing their discussion with sewerage
undertakers and Government on sewer flooding compensation, insurance
and mitigation measures and hosted a second seminar on the subject
in February 2005.
Affordability
Recommendation 8
We await with interest the review of the Water
Industry Charges (Vulnerable Groups) Regulations and the cross-Government
review of the ways in which low-income groups are helped with
their water bills. However, we wish to make clear that we believe
that many people on low incomes will have spent too great a proportion
of their income on water. Adjusting the mechanisms for making
payments would benefit some customers and would be welcome as
an interim measure. But the Government should also consult on
ways to reduce the charges paid by the poorest and on ways that
the assistance offered to those on low incomes can reflect the
great regional differences in water bills. (Paragraph 31)
The cross-Government report into the review of water affordability
was published on 2 December 2004 and the Government's response
to the vulnerable groups consultation paper was published on 19
January 2005. The Water Industry (Charges) (Vulnerable Groups)
(Amendment) Regulations 2005 were laid before Parliament on 19
January 2005 and came into force on 10 February.
The affordability report concluded that there are already a range
of measures in place to assist lower income households with their
water and sewerage charges but that there is scope for improving
them in the near term. Ways forward for Government, Ofwat and
the water industry to tackle these issues are set out in this
report, and include improving existing arrangements in the near
term and undertaking studies into the effects of the charging
system in the longer term. The report notes that the Government
is not minded to introduce an explicit linkage between the tax
and benefit system and water charges. However, the Government
will press on with its policy of promoting fairness and using
changes to the tax and benefit system to tackle poverty, for example
child and pensioner poverty, more generally.
Following the review an affordability assistance pilot study,
involving Government, South West Water and other stakeholders,
will be run in the south west to assess the combined impacts of
benefits checks, water efficiency measures and metering on low-income
consumers.
Long-term issues
Recommendation 9
We are still concerned that the five-year cycle
will tend to delay expenditure until the problems become urgent.
We recommend that Ofwat, the water companies and the Government
use the opportunity of Ofwat's evaluation of the price review
process to assess the long-term risks and challenges that the
water industry faces and report back to us on how coping with
these risks will be funded. (Paragraph 33)
The Government recognises that there is a place for a long-term
policy framework for the water industry, given its long-term responsibilities
and the lead time on major new policies and investments. At the
highest level, this policy framework is set out in Directing the
Flow, a strategic long-term view of water policy that the Government
will treat as a living document to be updated and improved as
required. Within that overall framework, the Government will tackle
the need for a long-term view on individual policy areas. The
time horizon for meaningful forward planning is longer for some
policy elements than for others, depending on the availability
of information.
On the environment programme, it is not practicable, ahead of
the necessary preparatory work on the Water Framework Directive,
to establish at this stage a clearly defined environmental quality
programme to be undertaken by water companies for the period beyond
2010. However, it is possible, knowing the general direction of
improvements, if not their scale and pace, to say that the environmental
quality programme in PR04 will help deliver the longer-term WFD
requirements. Defra, the Agency and Ofwat will consider further
how the timescales of the Water Framework Directive and periodic
reviews will fit together in future.
In other areas a longer horizon is practicable and useful. 25
year water resource plans are now an established part of the review
process. In respect of capital maintenance, Ofwat's final determinations
set indicative levels of investment to 2020, which should help
guard against any tendency to delay necessary expenditure on company
assets. At the same time Ofwat considers that it has applied appropriate
efficiency challenges.
There are other challenges that face the water industry and need
to be taken into account in future reviews. For example, the need
for infrastructure to accommodate the impact of increased household
growth and climate change.
All stakeholders now have an opportunity to contribute to Ofwat's
review of the price review process. The review will look at the
fitness of the process for longer-term challenges and the issue
of the interval between reviews. The membership of the steering
group undertaking this review has been published. John Baker,
one of Ofwat's non-executive advisory directors, will chair this
group. The steering group members are independent experts. The
group has published its terms of reference and has indicated that
it expects to publish its findings by the end of July 2005.
Ofwat will, in 2005, be consulting separately on the length of
future price review periods, from 2010. It has also previously
agreed to undertake a study on financeability issues following
related work by Treasury and DTI. The results will be published
and the Committee will be informed about the outcome.
Department for Environment, Food and Rural Affairs
March 2005
1 http://www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/content/pr04fd_projectschedules
Back
2
This table is quoted in 2004-05 basket year prices. All other
figures quoted in this document are in 2002-03 financial year
average prices unless otherwise stated. Back
3
The actual impact on customers' household bills will also be governed
by companies' approved charges schemes. Back
4
Includes further projects submitted by companies since our draft
determinations. Back
5
196 projects included in our draft determination have been excluded
as they do not have any costs or outputs in 2005-10. Back
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