Conclusions and recommendations
1. Key
challenges for PR 09
1. The
challenge for Ofwat is to balance the requirement for sustainable
water supplies, delivered by water companies able to pay for necessary
environmental improvements, with bills that are affordable for
consumers. This must be delivered against the background of the
current economic recession and the predicted impacts of climate
change. (Paragraph 13)
2. The Government's
decisions on implementing the Cave and Walker reviews' recommendations
and the content of the Flood and Water Management Bill will still
be unresolved when Ofwat comes to make its final determinations
for this price review. The uncertainty generated may affect the
companies' ability to raise money on the capital markets. Despite
the 'change protocol' mechanism, we conclude that Defra should
set out the probable timing of its full responses to the Cave
and Walker reviews; and to what extent and how the regulation
of the water industry will be altered by the Flood and Water Management
Bill. (Paragraph 15)
2. Transparency
and burden of process
3. We
recognise that economic regulation of a monopoly utility will
be complicated and welcome the improvements in transparency in
this price review. We commend Ofwat and the companies' determination
to place more information in the public domain and recognise that
Ofwat will need to publish a series of guidance and information
as the process develops through consultation and discussion. Nevertheless,
the current regime's complexity risks hampering the regulator's
wish to increase transparency. We recommend that Ofwat and Defra
seek ways to rationalise, and make more comprehensible, the process
to companies. We further recommend that Ofwat and Defra consider
what further information relating to the price review can be placed
in the public domain, and ensure that such information is comprehensible
and comprehensive. The volume of a submission is no substitute
for the quality of its content. (Paragraph 20)
3. Consumer
engagement
4. We
recommend that Ofwat require companies to demonstrate how consultation
with their consumers has informed their business plans. We further
recommend that it be a condition for Ofwat's approval of a company's
business plan that the company demonstrate that its plan is understood
by the majority of its consumers. (Paragraph 22)
4. A
sustainable water policy
5. We
recommend that Defra sets out how it envisages delivery of Future
Water's objectives will impact on the industry and the regulator.
Water customers will be part of the delivery mechanism of Future
Water, particularly in relation to reducing water demand. Defra
should include in its analysis the role played by water customers
and the likely impact upon them. (Paragraph 25)
5. Environmental
improvements
6. We
recommend that Defra explore the potential for derogations to
implementation of the EU Water Framework Directive's requirements
to enable the phasing of environmental improvements and their
related costs, where the near-term burden of these on customers
would be severe. (Paragraph 33)
7. We further recommend
that Defra provide clear guidance to Ofwat as to the application
of cost benefit analysis and Ofwat's guidance to the companies
needs to be clear and unambiguous. (Paragraph 34)
8. Ofwat and Defra
have so far failed to make the argument that regional variations
in the costs customers must bear for environmental investment
are fair and appropriate. We have found it hard to see how alternative
charging mechanisms for infrastructure investment could be made
to work effectively without significant changes to the current
underlying regional charging regime. Defra must therefore examine
how changes might be made to the way water industry investment
is paid for when it is directly and expressly for the purpose
of improving environmental standards for national benefit. (Paragraph
40)
6. Climate
change mitigation
9. Defra
should assess the impact of new requirements for water companies
to improve water quality and conservation to ensure that only
policies with net positive environmental outcomes are adopted.
Ofwat should require the water companies to set out the carbon
impact of their business plans and the measures they will put
in place to mitigate any increases. (Paragraph 42)
7. Climate
change adaptation
10. Climate
change is predicted to have a significant impact on water availability
throughout the country. The management of water resources will
have to take climate change into consideration. We welcome Defra's
proposal that Ofwat and water companies be considered as priorities
for early reporting on how they will adapt to climate change.
However, Defra should consider if changes are needed to the regulatory
regime to ensure that water companies have incentives to take
early action to adapt to climate change. We further recommend
that the Flood and Water Management Bill should place an explicit
requirement on water companies and Ofwat to exercise their functions
with regard to the adaptation objectives of the Climate Change
Act 2008. (Paragraph 46)
8. Water
efficiency
11. We
recommended in our report on Energy efficiency and fuel poverty
published earlier this year that energy efficiency targets be
set for existing homes, delivered through an area-based approach,
focusing first on the areas of most need. Funding for this would
come from Government schemes such as Warm Front as well as the
Carbon Emissions Reduction Target (CERT) activity funded by energy
supply companies. This is a model whose merits could usefully
be considered for the water industry. (Paragraph 55)
12. We are not convinced
that the mechanisms in the price review are sufficient to promote
the increases in water efficiency necessary to ensure that water
demand can continue to be met in periods of water scarcity. We
consider that there are models from the energy sector that could
usefully be adapted for water supply and Ofwat should assess how
best practice in achieving improvements in energy efficiency can
be applied to the water sector. We recommend that Ofwat and Defra
explore more extensive water efficiency obligations, either by
placing limits on volumes sold or a (CERT style) measures based
approach. Ofwat should benchmark the performance of the UK industry
in delivering sustainable water management on an international
basis. (Paragraph 56)
9. Public
funding for supporting water customers
13. We
welcome the contribution that the Walker interim report has made
to the debate on how to improve affordability of water bills for
all customers and look forward to the Government's response. Central
to this response must be adoption of a firm definition of water
affordability to be used by all relevant agencies together with
strategy for improving the monitoring and reporting of water affordability.
(Paragraph 64)
10. Addressing
affordability through tariff structures
14. Ofwat
argues that it has gone as far as it is prepared to go without
Parliament sanctioning the further use of cross-subsidies to support
customers struggling to pay water bills. Ofwat's remit should
be strengthened to enable it to require water companies to adopt
more progressive methods of tackling water affordability for all
customers. Defra needs to set out how Ofwat can be equipped with
the necessary tools to implement this. (Paragraph 68)
15. There is a need
for innovative solutions and the water sector can learn from the
energy sector on how to support vulnerable customers. In particular
water companies need to be far more pro-active in disseminating
information on the availability of support schemes for vulnerable
customers and in providing advice on water efficiency. (Paragraph
69)
16. We endorse policies
which encourage the greater use of sustainable drainage since
this can have both environmental and economic benefits. Customers
who install such drainage systems should share the benefits, through
lower tariffs, of reduced costs from lower volumes of surface
water run-off generated. We recommend that Defra explores how
individual households can be informed about sustainable drainage
systems and encouraged to install them. The costs for highway
drainage, that water customers currently bear, should be shared
with local taxpayers who benefit from the service. (Paragraph
71)
11. Metering
17. Given
the stage we are currently at in the price review timetable, it
is frustrating that, despite clear support in Anna Walker's interim
report for charging based on volume, the Government's initial
response on metering may not appear until the autumn. (Paragraph
79)
18. We consider that
metering can have an impact on water demand, but it should not
be adopted as a substitute for a robust water efficiency policy.
Before investment is diverted to metering there must be a robust
empirical case to demonstrate that the costs do not outweigh the
benefits and that demand especially in water-stressed areas cannot
be reduced more cost effectively through sustainable water use
management. We recommend that the Government set out at the earliest
opportunity (ie before Walker produces her final report in the
autumn) the evidence that metering reduces consumption in the
long term; and reduces consumption by a sufficient amount to offset
the additional costs associated with having a meter. (Paragraph
80)
12. Bad
debt
19. A
more accurate picture is needed of which customers are in debt
to enable differentiation between those who can't pay and those
who won't pay. (Paragraph 86)
20. We recommend that
Ofwat require water companies to disclose more information on
bad debts levels, such as where debt is attached to vacant properties.
We recommend a mechanism whereby property owners have to inform
water companies on vacating a property so that the standing charge
is no longer applied. (Paragraph 87)
21. We support a named
person being identified as responsible for a property's water
charges, so that legal redress can more easily be sought for outstanding
debt. (Paragraph 88)
22. Companies should
look at billing schemes which suit low income customers, for example
to enable payments to be spread evenly over a year. (Paragraph
89)
13. Surface
water drainage charging
23. The
level of anger surrounding this issue illustrates the importance
of companies having sufficient information about their customers
and taking account of their needs when implementing changes in
charging policy. This will be something companies need to take
more account of in future as changes to implement recommendations
made by the Cave and Walker reviews will need to be clearly explained
to consumers and their implementation undertaken carefully. (Paragraph
95)
24. We consider that
Ofwat should have intervened earlier and harder on this issue.
It is not sufficient for the regulator to lay the blame with a
company for poor communication while not attempting to help clarify
action that water companies needed to take. (Paragraph 96)
25. Ofwat must now
develop a clear protocol to guide all water companies to ensure
that a fair and affordable charging regime can be introduced throughout
England which properly reflects community based organisations'
ability to pay for water services. (Paragraph 97)
14. Financing
26. The
regulatory regime, and prospective changes in the regime, contributes
to the cost of capital for water companies because it influences
lenders' assessment of regulatory risk, which in turn might affect
lenders' assessment of the financial risk implicit in the companies'
gearing. For the period covered by PR 09, the regulatory risk
may be rising due to uncertainties due to the outcome of the Cave
and Walker reviews, and the content of the draft Flood and Water
Management Bill. (Paragraph 107)
15. Protection
of critical infrastructure
27. The
protection of critical infrastructure has different beneficiaries
and the costs should be distributed according to those who stand
to benefit. Some protection clearly provides an improved service
to water customers, who should bear the cost. Other measures,
though, are intended to allow water companies to continue to meet
their service delivery obligations, and thereby benefit the companies.
In practice the distinction might be a difficult one to make.
Nevertheless, Ofwat should critically assess what measures it
allows companies to pass on to their customers, to ensure that
the companies bear the costs of those investments which are essentially
part of 'doing business'. (Paragraph 110)
16. Competition
28. The
Government response to the Cave Review, published in the Budget
2009 provided little information about the Government's views.
The Government needs to provide a full response to the Cave report
which explains: (Paragraph 128)
- What forms of competition are
being considered, for which sectors and to what timetable;
- The potential risks of introducing each form
of competition and how those risks will be managed;
- How Professor Cave's 'trust and verify' approach
will work and what the Government's measure of success will be
(before moving to the next stage of competition);
- What procedures will be used to reverse competition
should the approach fail to achieve the required benefits;
- How competition will affect regional differences
in water pricing and investment;
- The Government's view on how different forms
of competition will influence the cost of capital for companies,
and
- How the approach to competition promotes sustainable
water management..
29. The
first stage of competition will apply to business customers, as
in Scotland. As the domestic consumer will not gain from retail
competition, they should not be expected to contribute towards
the higher cost of capital that will result from non-domestic
retail competition. (Paragraph 129)
30. We recommend that
Defra and Ofwat fully involve consumers (through CC Water and
others) in the discussion around the introduction of competition.
Before such a major change is introduced consumers should be fully
aware of the possible risks and the hoped for benefits. (Paragraph
130)
31. Defra should consider
how competition can be introduced in different regions, including
taking into account Welsh consumers apparent contentment with
the Welsh Water model. Ofwat should not impose competition on
Welsh Water if this goes against the wishes of consumers. (Paragraph
131)
17. Innovation
32. We
welcome Professor Cave's suggestions for promoting innovation,
although it is not clear to us that competition will be the route
to greater innovation in areas such as sustainable water management.
(Paragraph 137)
18. Conclusion
33. We
recommend that Defra undertake a fundamental review of Ofwat's
role and remit to enable it to effectively regulate a future water
industry where the value of water and waste water will have a
crucial role in determining water companies' charging regimes.
If competition is going to be introduced and water efficiency
and water demand management are going to become more important,
the regulatory regime should be amended. We recommend that Defra
set out a timetable for review of the current regulatory approach
in relation to those parts of the industry that are likely to
be affected first by the introduction of competition. The timetable
should allow any recommended changes to be introduced before the
next price review. (Paragraph 144)
34. Providing households
with water and waste water services is likely to remain a monopoly
activity for the foreseeable future and it is essential that the
current mechanism works robustly for millions of customers. The
review should therefore consider how the regulatory regime accommodates
both competitive and non-competitive parts of the industry operating
in tandem. (Paragraph 145)
35. We recommend that
the regulatory review examines how lessons from energy sector
regulation can be applied to the water sector, so that a framework
that incentivises companies to encourage their customers to be
more water efficient can be adopted. (Paragraph 146)
| 
