Memorandum submitted by Ofwat
INTRODUCTION
1. The Office of Water Services (Ofwat)
is the economic regulator of the water and sewerage industry in
England and Wales. Our main task is to set price limits for the
companies and monitor their performance against them. Until 1
April 2006 its functions rest formally with the Director General
of Water Services, Philip Fletcher. From 1 April 2006 they transfer
to the Water Services Regulation Authority (WSRA). Our duties
are laid down in law and, where necessary, we make judgements
about how best to balance these duties.
2. Although our decisions are made independently
of Ministers, on water resource issues we work closely with Defra,
the Welsh Assembly Government and the Environment Agency.
3. Our evidence focuses on questions eight
and nine.
Are the water companies doing enough to secure
the supply of water resources to the four growth areas? And is
concern about security of water supply, in the South East of England
in particular, a valid one or simply a knee jerk reaction to a
few hot, dry summers?
4. The lack of rain last winter and the
dry spring that followed has resulted in the present water shortage
in the South East. Dry weather over the summer aggravated the
problem as it leads to increased demand. As a result a number
of companies introduced hose pipe and sprinkler bans which raised
the profile of resources in the South East. Each of the companies
has drought plans to ensure that they are able to manage their
resource position. Hosepipe bans are a precautionary measure to
limit discretionary water use, helping to maintain sufficient
stocks of treated water for essential use such as public health
and sanitation. This summer represented the first time since 1996-97
that several companies introduced hose pipe bans.
5. The water and sewerage companies in England
and Wales each have a duty to maintain and develop an efficient
and economical system of water supply in their operational areas.
Each company agrees with the Environment Agency (EA) a 25-year
water resources plan showing how it will maintain an adequate
balance between supply and demand. In formulating their plans,
companies make forecasts of future demand. Companies use these
forecasts to identify the need for future investment in water
supply resources.
6. At the 2004 price review, a number of
companies forecast the need to invest further in order to improve
the security of supply that their assets currently provide. This
is because companies believe that customers are currently exposed
to a higher than planned risk of supply interruptions in dry years.
We therefore assumed in price limits that around £3.1 billion
of investment (or £2.3 billion net of capital contributions
from developers) will be needed over the next five years to enable
companies to maintain the balance between supply and demand for
water and sewerage services.
7. Much of this investment is to meet changing
patterns of demand, rather than overall growth in demand. Water
resource pressures are greatest in the South East region. A number
of companies proposed investigations into either extending existing
reservoirs or developing new ones. The assumptions we included
in price limits will allow companies to take this work forward.
A high level of demand, population changes (particularly growth
in and around London) as well as the effects of climate change
will mean that resources in the South East are likely to be constrained
in the future. We therefore continue to support companies in pursuing
a twin track approach of managing demand but developing sustainable
resources where necessary.
8. The water companies have a duty to secure
water supplies for their customers and meet new/existing demand
for water as efficiently as possible. At the national level water
companies forecast that the demand for water will remain broadly
stable until 2020, and will then increase. There is a more variable
regional picture, with significant increases in demand projected
for some companies in the South East of England. In the medium
term, by 2009-10 we expect a 1.6% increase in demand for water
delivered to households and a 5.7% reduction for non-households.
In the long-term we expect these trends to continue as the number
of households increases and heavy industry demand continues to
decline. We consider the companies are taking the appropriate
actions to plan to meet consumers' demand going forward.
Is there sufficient effort being made by the Government,
the Environment Agency and the water companies to educate people
about water efficiency?
9. On 24 October this year Defra announced
that the Water Saving Group is preparing an action plan to encourage
households to reduce consumption and use water more efficiently.
The role of the group is to bring key players together to identify
and implement solutions. The plan will address the need to focus
on customer perceptions and awareness. People need to have clear
information on how to use water efficiently. It is essential that
cost effective measures to improve water efficiently are targeted
where they are most needed. Metering is vital in water-stressed
areas. Unless customers pay for the water they use they will not
save money when they save water. This group will meet every six
months to review progress on the initiatives it is taking forward
and the need to develop these.
10. The Water Act 2003 places a duty upon
water and sewerage companies to further water conservation. At
present the companies promote the efficient use of water by their
customers. Each year we report on their activities in "Security
of supply, leakage, and the efficient use of water." Chapter
five of the latest report (table 14) sets out the activities the
industry is undertaking to promote efficient use and reports on
the total water savings for the past five years. The water industry
has set up waterwise, a water efficiency group. Its role is to
push the economic case for large scale initiatives to help customers
and business to use water more carefully. waterwise aims to stabilise
rising demand over a five-year period.
November 2005
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