House of Commons - The Draft Flood and Water Management Bill - Environment, Food and Rural Affairs Committee

The Draft Flood and Water Management Bill - Environment, Food and Rural Affairs Committee Contents

9 Water issues consulted on but not included in the draft Clauses

Time limiting abstraction licences and water efficiency

108. Paragraphs 653 to 654 of the consultation document discuss the desirability of time limiting abstraction licences. Professor Cave came to the conclusion that trading abstraction licences was a sensible approach to help manage water resources sustainably. He considered that in the longer term the Environment Agency should be able to "flex the prices for abstraction and also to deal rather more rigorously with cases where there is over-abstraction". He envisaged that in water scarce areas the price of abstraction would rise, but in water abundant areas people would be encouraged to abstract. He noted that "the degree to which they do it would obviously depend upon the cost of transport" and people could become innovative in looking at "smart investment that we could do, using perhaps natural mechanisms for transporting water around".[172] The use of prices would not be immediate since it would "take a bit of time to set up a properly competitive market in abstraction" but it would "give signals to get people to behave in particular ways which benefit the environment".[173]

109. Natural England highlighted in their evidence to our Ofwat Price Review 2009 inquiry that reforming the abstraction licensing system could "signal" the regional economic cost and scarcity of water.[174] Severn Trent Water also supported trading of the licences, but not time limiting them since this potentially impeded trading by diminishing licence value and creating uncertainty around long term investments.[175]

110. Paragraphs 657 to 659 of the consultation document discuss the desirability of provisions that would place a water efficiency obligation on the water companies. Currently, domestic demand is around 148 litres per person per day. Water companies have a duty to promote the efficient use of water and Ofwat has introduced water efficiency targets on a trial basis.[176] However, the targets are not stretching in comparison to achievements elsewhere in Europe. In Germany, for example, per capita consumption was already down to 129 litres per day in 1998—the target the UK is aiming to achieve by 2030.[177]

111. Regina Finn, Chief Executive of Ofwat, emphasised that water efficiency was a key area since "the challenging thing for us all in the longer term is how do we ensure that both the industry and customers properly value this really essential life resource" and establish incentives for the "right behaviours".[178] Anna Walker recommended in her interim report, published in June 2009, that companies be required to develop their own water efficiency programmes which would contribute to their enforceable water efficiency target, with priority given to low income customers in debt or in receipt of Council Tax Benefit.[179]

112. Some witnesses thought that the draft Bill's water efficiency measures were insufficient. The National Trust said that it was disappointed that there was no water efficiency commitment in the Bill and urged the introduction of a "water service rather than a water supply culture". Waterwise was disappointed that, apart from proposals on updating hosepipe ban legislation, water efficiency measures were absent from the Bill and recommended a "step change in water efficiency programmes…linked to energy efficiency retrofit programmes".[180] Waterwise did note that Ministers intended to reflect some of the Cave and Walker recommendations in the Bill in due course.[181]

113. Ofwat's price review mechanism does not provide sufficient incentives for water efficiency savings. We recommend that Defra include provisions in the Bill providing for time limiting of abstraction licences and water efficiency obligations on water supply companies. Such provisions are essential to achieve the vision set out in Future Water. In drafting these provisions Defra should consider their potential impact on the cost of water companies raising finance which would be borne by their customers. Defra together with the regulator, companies and financial institutions should consider how the legislation can be drafted to ensure the least detrimental affect on the water companies' ability to raise finance.

Cave and Walker Reviews

114. The Cave Review brought forward the Government's commitment to review the eligibility threshold for non-household customers to choose suppliers introduced as part of the Water Act 2003. The final report makes recommendations in relation to abstraction and discharge; competition in retail and upstream services; the water industry's structure and innovative capacity.

115. We considered the arguments for competition in our report on the Ofwat Price Review 2009.[182] If the Government decides to press ahead with retail competition, Professor Cave was confident that the necessary legislative provisions could be drafted and included into a Bill "fairly simply".[183]

116. The Walker review considered the charging of household water and sewerage services. The review is focussing on issues of affordability and the arguments for metering. The interim report refines some of the questions that need to be answered in the final report, which is due to be published in October 2009. Given the timing of the Walker final report it is questionable whether any legislative provisions necessary to implement recommendations accepted by the Government will be drafted in time to be included in the final Bill if it is introduced as a result of the 2009 Queen's Speech.

117. Central to both the Cave and Walker reviews is the need for new ways of valuing water (both potable and waste). Water scarcity will become a more frequent and widespread problem. If we are to meet the challenges posed by climate change the Government needs to reach conclusions on how to value water and implement the necessary changes as soon as possible.

SPECIAL MERGERS REGIME

118. The consultation document does not include proposals to alter the current merger regime, but does refer to including recommendations from the Cave Review where appropriate. The current merger provisions for water companies are strict as they are intended to preserve enough entities to enable a price control system based on cost comparisons between companies to be effective. Professor Cave has proposed that the merger regime could be improved, and told us that allowing mergers between companies would spur innovation and help spread best practice. He suggested that merger of smaller companies should not trigger automatic referral to the Competition Commission and that for larger companies "the regulator should indicate more clearly than has been the case in the past what the kind of threshold payment would have to be [made] to consumers in order to allow the merger to go ahead".[184]

119. Thames Water told us that it supported Professor Cave's proposals as efficiency and environmental benefits from competition were "lost by inclusion of the water industry in the provisions of the special merger regime". The company suggest that mergers would enable economies of scale resulting in water bill reductions of around 6%.[185]

120. Thames Water pointed out that "no special provisions exist to protect mergers in the gas, electricity, telecoms, aviation or postal service sectors—all industries currently subject to price control regulation and with [fewer] comparators than the water industry".[186] Thames Water suggested that the special merger provisions put the water industry on a par with the needs for plurality of media sources and national security, "which makes no sense".[187] They said it was not defensible for the water sector to be treated differently simply to enable Ofwat to undertake its work by comparing water companies.[188]

121. We raised the issue of the continuation of the special merger regime with Ofwat. Regina Finn explained how if 'market forces' could be used to help protect consumers' interests, then there was scope to relax the special mergers provision.[189]In a market without competition, Ofwat is right to be cautious about the impact of mergers on customers' interests. It appears that the Government and Ofwat are committed to competition in some form. However, it would be inappropriate for the regulator to prevent mergers purely to maintain their ability to compare companies' performance. Defra should review the water industry's merger regime with the intention of relaxing its conditions when greater competition is introduced. Defra should ensure that any changes to the merger regime do not reduce the protection for consumers.

Surface water drainage charges

122. During our inquiry into the Ofwat Price Review 2009 we received evidence from several not-for-profit organisations about the increases in water bills associated with changes to the method of charging for surface water drainage. Ofwat argued that the difficulties experienced by these groups was due to the way that water companies had implemented the change in charging method. We concluded that Ofwat should have taken an active role in managing the issue, rather than laying the blame at the industry's door. United Utilities has been the company most found to be at fault. The company acknowledges the errors that it has made in implementing surface water drainage charging on the basis of area rather than rateable value. The consultation document does not consider this issue. However, we consider that this Bill is an opportunity to provide a legislative solution.

123. We do not accept Ofwat's argument that there is sufficient transitional flexibility in the regulatory regime to accommodate changes in charging schemes. We recommend that Defra explore including provisions in the Bill that create a subset of customers that could be excluded from the new charging method and which recognise the real world financial situation of not-for-profit organisations such as the Scouts, Churches and village halls.

172 Q 163 Back

173 Ibid Q 163 Back

174 Environment, Food and Rural Affairs Committee, Fifth Report of Session 2008-09, Ofwat Price Review 2009, HC 544-II Back

175 Ev 57 Back

176 Ofwat, Water supply and demand policy, November 2008. Within current operating budgets companies are required to undertake activity to save 1 litre per property per day, for household and non-household customers. Above this baseline an allowance will be made in price limits for companies pursuing additional water efficiency measures. Back

177 http://www.ifpri.org/media/water2025.htm Back

178 Q 202 Back

179 Anna Walker, The Independent Review of Charging for Household Water and Sewerage Services: Interim Report, June 2009, p 15. Back

180 Ibid Back