MEMORANDUM
SUBMITTED BY
THAMES WATER
(DFWMB 20)
INTRODUCTION
We welcome the opportunity to submit evidence
to the Committee to assist with its scrutiny of the draft Flood
and Water Management Bill. This submission sets out Thames Water's
initial views on the provisions published for consultation by
Defra. As you will be aware, responses to Defra's public consultation
on the draft Bill are due by 24 July. We would welcome the opportunity
to submit our full consultation response to the Committee in due
course.
To help focus the Committee's scrutiny of the draft
Bill, this submission identifies:
— draft provisions supported by Thames
Water;
— draft provisions which concern Thames
Water, and;
— substantial omissions from the draft
provisions.
We hope this approach will help inform the Committee's
analysis and we would, of course, be happy to discuss our views
in more detail.
DRAFT PROVISIONS
SUPPORTED BY
THAMES WATER
Sustainable Drainage Systems (SUDS) and the right
to connect
1. The draft Bill proposes to bring to an
end the automatic right to connect new properties and redevelopments
to sewers for surface water drainage. In addition, it will require
developers to put SUDS in place in new developments wherever possible.
Developers will have to meet conditions set out in new National
Standards on SUDS and drainage in order to make connections, and
SUDS will be adopted and maintained by local authorities.
2. These proposals are welcome and have the potential
to help reduce the risks of overload to the sewer system. However,
it is important to note that any failure of SUDS would lead to
increased flows entering the sewer networks, which makes it key
that legislative changes are made in a way that minimises the
potential for such failures. The draft Bill provides no right
of veto for sewerage undertakers to stop new connections, so the
success of the proposals will depend on the effectiveness of the
new Standards and SUDS approving bodies. We welcome the Government's
commitment to involve the industry in developing the new Standards,
and would highlight the importance of providing the new body with
adequate resources and the proper level of expertise. In addition,
there must be a clearly defined funding route for SUDS approving
bodies, which is separate from the payment of water bills.
Misconnections
3. The problem of wrongly connected, or "misconnected"
household drains is widespread, affecting up to one in 10 properties
in parts of the Thames Water region, and an estimated 300,000
properties in England and Wales. Identifying and rectifying the
problem is costly and time-consuming. The draft Bill proposes
the introduction for sewerage undertakers of powers to rectify
misconnected drains comparable to those currently held by local
authorities. This change is essential and has our full support.
It provides us with the ability to tackle the issue directly instead
of going through local authorities, an approach that has historically
been met with an inconsistent response. The new provision should
make the process quicker and more efficient. It is essential that
where the new provisions lead to additional costs, sewerage undertakers
are funded to meet them, and that this is made clear on the face
of the Bill.
Water usage
4. We support in principle the intention to widen
the non-essential uses of water that can be controlled by water
companies, provided that the Bill provides clarity about the changes.
We believe the following principles need to be taken into account
when changing powers to ban non-essential uses of water:
— no changes should be made that significantly
complicate the system for our customers;
— the opportunity should be taken to remove
anomalies and streamline the system, without creating powers that
are excessively bureaucratic;
— categories of use must be clearly
defined to avoid any ambiguity that could make non-essential use
powers more difficult to enforce, and;
— any changes that would lead to a
requirement for extensive consultation before any powers could
be introduced during a drought could undermine the benefits of
amending the legislation.
KEY AREAS
OF CONCERN
5. We are concerned that the draft Bill
includes a number of what are termed minor provisions, which will
have a major effect on the sector. In combination, these provisions
will reduce companies' protection against ineffective regulatory
decision-making, whilst at the same time extending Ofwat's powers
of enforcement. This includes an extension of their scope to fine
companies from one year to five years.
6. These provisions will increase the scale of
regulatory risk faced by companies in the water sector. Investors
and rating agencies will expect this increase in company exposure
to regulatory risk to be met with an increase in the industry
cost of capital. As an increase in the cost of capital will drive
up our customers' bills, we call on the committee to make a full
assessment of the need for the following provisions:
Provision to allow Ofwat to amend standard licence
conditions
7. We are alarmed by the draft provision
that would provide Ofwat with the power to amend undertakers'
standard licence conditions, where a majority of companies agreed
with the proposed modification, without any recourse to appeal
the regulator's decision to the Competition Commission.
8. This provision would represent a fundamental
change to the regulatory regime, and by removing companies' right
of appeal to the Competition Commission, marks a fundamental re-drawing
of the regulatory contract that will reduce companies' protection
against ineffective regulatory decision making.
9. We can see no justification for this
proposed change, which was not discussed with the industry in
any shape or form prior to Defra's publication of the draft Bill.
Enhanced Enforcement Powers
10. At present, Ofwat is able to impose
a financial penalty on companies for contraventions that occurred
in the twelve months prior to their serving notice that a contravention
has occurred. The draft Bill proposes to extend the time period
for which Ofwat can impose a penalty from one year to five years.
This represents a significant change to the enforcement regime
and a marked increase in companies' exposure to financial risk
from regulatory enforcement. We call on the Committee to undertake
a full assessment of whether the increased regulatory risk, and
increased cost of capital that this will require, are outweighed
by the benefits of this provision.
Development of project based delivery approach
for large projects
11. The draft Bill proposes to allow for the
creation of regulated, project-based companies responsible for
the funding and delivery of suitable infrastructure projects in
the future. The draft provisions do not make clear if existing
undertakers would be eligible to take part in the competitive
process to determine contracts to design, fund, deliver and own
large infrastructure projects in the future, or whether they would
be excluded from delivering the large infrastructure projects
that would meet the criteria. It is essential that undertakers
are allowed to compete to deliver future large infrastructure
projects, and we would like the Government to clarify its position
as a matter of urgency.
OMISSIONS FROM
THE DRAFT
PROVISIONS
Removal of the special merger provision from the
Enterprise Act 2002
12. The Enterprise Act 2002 includes special
merger provisions that act as a major deterrent to mergers in
the sector. We share the conclusions of the Government commissioned
Cave Review, which states that the efficiency and environmental
benefits that could be reaped from capital market competition
are lost by the inclusion of the water industry in the provisions
of the special merger regime.
13. We agree with Professor Cave that provisions
governing mergers are brought in line with other sectors, and
such a provision should be made within the Bill. As we have set
out in our responses to Ofwat and Professor Cave's reviews of
competition, the development and implementation of competition
in the water sector will carry significant cost (as was seen in
the electricity and gas sectors). It has not yet been shown that
the benefits of competition could outweigh these costs. Therefore,
at this point in time, a realignment of the merger regime represents
the clearest route to delivering better value for customers.
14. We believe the special merger regime serves
to sustain an inefficient industry structure by supporting economy
of scale inefficiencies. This can be illustrated by reference
to Ofwat's small company premium. At the last two price reviews,
Ofwat has allowed water only companies (WOCs) to increase customers'
bills by a greater margin than water and sewerage companies (WaSCs).
The bill rises were allowed for the costs arising from scale inefficiencies,
including higher trading costs; a rate premium on the cost of
debt finance and the higher premiums and costs of raising capital.
At PR04, these costs were reflected in WOC allowances for higher
costs of capital of up to 0.9%, representing an 18% increase in
the 5.1% allowed cost of capital for WaSCs.[2]
15. The benefits from industry mergers arise
from reduced operating costs as greater economies of scale are
achieved by eliminating duplicated overheads; the leverage larger
companies achieve through increased purchasing power, and reduced
financing costs. Further environmental benefits can also be achieved
though more comprehensive water resource management, leading to
better-targeted investments and, potentially, improved regional
network interconnection.
16. We believe that the possible benefits
to customers from changes to the merger regime could generate
bill reductions of 6%[3]
or more as a consequence of efficiencies from merger activity.
17. It is not defensible for water sector
mergers to be singled out to enable Ofwat to make comparisons
between different water companies. 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 less comparators than the
water industry.[4]
18. The inclusion of water sector mergers
in the special merger regime appears to be an anomaly when viewed
in the context of the other special provisions in the Enterprise
Act 2002, namely to ensure plurality of media sources, and to
guard against threats to national security. Water sector mergers
are an odd bedfellow with the other exceptions designed as protections
to the diversity and security of the nation.
19. We have raised this issue on a number
of occasions with the Bill Team, Senior Defra officials and Ministers,
and are disappointed that provisions to amend legislation and
remove restrictions on water sector mergers were not included
in the draft Bill.
Tackling bad debt
20. The water industry suffers from a serious
and worsening problem of unpaid household charges, despite increasing
efforts to tackle non-payment. Customers who pay their bills regularly
(which includes many vulnerable customers) currently pay an average
of £11 to subsidise late/non-payers.[5]
21. We are therefore very disappointed that the
draft Bill does not include provisions to increase the powers
available to companies to enable more effective management of
bad debt. We have, along with industry colleagues, sought for
this issue to be addressed through the Cave and Walker Reviews,
and would expect the Government to look again at this issue once
the Walker Review reached its conclusion. We would like to see:
— a redefinition of payment responsibilities.
At present, responsibility for paying charges rests with the "occupier",
an undefined term. We have suggested that this term be replaced
with "liable person" and supported by joint and several
liability being imposed on tenants and owners of properties;[6]
and
— Government follows a recommendation
by the House of Lords[7]
to examine the evidence from Australia on the use of devices that
restrict flow. These are used to inconvenience the customer to
prioritise payment of their bill, while still allowing a level
of water to flow that meets public health needs.
Managing the risk of floods
22. We share the aspiration to achieve a
more coordinated and effective approach to managing flood risk.
The Bill makes provisions for a number of improvements that, if
successful, will improve the current situation. However, we are
concerned that the draft provisions do not address the issue of
floodplain compensation storage.
23. We are required to protect our critical assets
from fluvial and pluvial flooding. The Government's Planning Policy
Statement 25 requires:
— the protection of assets to a flood
event level of 1:100 + 20% for climate change; and
— that asset protection does not cause
any increased flood impact to third party assets in the flood
zone.[8]
24. In order to protect sites from flooding,
we install bunding around site perimeters. However, as a consequence,
the volume of water prevented from entering the site may lead
to localised flooding. Companies are required by planning policy
to provide a "like for like" level of flood volume alleviation
to protect local properties from this increased risk.
25. The protection of critical assets, such
as water treatment works, ensures that services to a great number
of customers can be maintained in the event of a flood. In some
instances, the requirement for flood compensation storage can
be either prohibitively expensive or impossible in practical terms.
We would like the Bill to address the issue of how decisions can
be made in these circumstances, where the loss of critical assets
could have a greater negative impact (such as the loss of water
supply to the many) than the increased flooding from the installation
of asset protection (affecting relatively few).
May 2009
2 Ofwat Future water and sewerage charges 2005-10 final
determinations. Chapter 15. Back
3
Thames Water estimate of the benefits to customers from a modelled
merger scenario. Back
4
For example there are 14 comparators in the Electricity Distribution
Industry, eight in the Gas Distribution Industry and 22 in the
Water Industry. Back
5
Customers pay on average £11 per annum to subsidise late/non-payers.
Source: Industry Information on Household Debt Ofwat RD 19/08. Back
6
This has precedent for the recovery of council tax from the owner
of the property in specifically defined circumstances. Back
7
House of Lords Science and Technology Committee Report of Water
Management Sessions 2005-06. Back
8
EA Flood Zone 3B: EA splits the flooding into three zones being
1, 2 and 3, where zone 1 is least likely to flood, and 3 the most
likely. 3B covers 1:20 to 1:100 year events, and is called the
functional flood plain. Back
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