SEVERN TRENT WATER RESPONSE TO ENVIRONMENT,
FOOD AND RURAL AFFAIRS COMMITTEE REQUEST FOR FURTHER INFORMATION
(DATED 9 JUNE 2009)
SUPPLEMENTARY MEMORANDUM
SUBMITTED BY
SEVERN TRENT
WATER (DFWMB 06A)
1 . A NOTE
ON THE
IMPACT THAT
COMPETITION, INCLUDING
THE SPECIFIC
PROPOSALS FROM
CAVE, MIGHT
HAVE ON
YOUR COMPANY.
YOU MIGHT
WANT TO
ADDRESS ASPECTS
SUCH AS
COST OF
CAPITAL, CHARGES
FOR YOUR
CUSTOMERS, BILLING
STRUCTURES, ANY
INCREASE OR
REDUCTION IN
THE TYPE
OF BUSINESS
UNDERTAKEN, CAPITAL
INVESTMENT PLANS
AND THE
SORTS OF
SERVICES THAT
WOULD BE
PROVIDED TO
CUSTOMERS, BUT
PLEASE DO
NOT BE
RESTRICTED TO
COVERING SUCH
ASPECTS.
Severn Trent supports the development of competition
where it brings benefits to customers, for example in lower prices,
improved service, or impact on the environment. Our analysis leads
us to believe the biggest benefit from, and the biggest driver
for, increased competition will be better allocation of water
resources, which will yield benefits for customer bills and the
environment. This note addresses the impact of competition our
company in the context of the Cave Review's recommendations and
where the aspects raised above do not fit within these headings,
they are addressed separately at the end of the note.
THE
CAVE REVIEW
The Cave Review has set out proposals for the
development of competition across four key areas which we discuss
in turn.
I. ABSTRACTION
LICENSING AND
DISCHARGE CONSENT
REGIME REFORM
Cave advocates that abstraction licences should
become fully tradable and proposes reverse auctions and negotiated
settlements as a means to facilitate this. In the longer term
he considers time limiting these licences.
We support abstraction trading in principle
as it will create incentives for companies to make maximum use
of the least environmentally damaging sources, prior to drawing
an abstraction in water stressed areas. However, we are concerned
at the proposals to introduce time-limiting of licences. Far from
facilitating trading, the time-limiting of licences has the potential
to:
— create uncertainty around long term investments;
and
— reduce the likelihood of trading taking
place.
Whilst Cave has implied protecting legacy abstraction
rights, his statement "the EA should…reallocate abstraction
licences to facilitate upstream competition "poses a
risk to existing arrangements. Any trading regime will need to
ensure that customers do not simply face increased bills through
inflated abstraction charges. Where existing infrastructure has
been established based upon single source, long term bulk supply
agreements, care needs to be taken for the security of supply
for customers.
Linking consents to river conditions as opposed
to end of pipe conditions is a welcome development and offers
the potential to reduce the level of treatment at certain times.
We believe this warrants further work given the impact that higher
environmental standards would have on costs (and hence customer's
bills) and carbon emissions. We will work with Defra and the EA
to develop these proposals.
II. UPSTREAM
COMPETITION REFORM
Cave sets out a number of reforms for increasing
upstream competition (eg an obligation for incumbents to procure
best value supplies, scrutiny by a procurement panel, access prices
by Water Resource Zone based on economic costs and long run avoidable
costs, and common binding operational codes and systems) which
Severn Trent is very supportive of, as it would improve water
resource allocation and incentivise supply of water to stressed
areas. Such reforms would also incentivise increased interconnections
with neighbouring companies which could in the longer term form
the basis for increased competition in the market. We have worked
with the Cave Review, Ofwat and the Environment Agency (EA) to
set out a framework to increase trading between regions. We have
attached our paper entitled "A framework to implement
a trading model "with this response which provides more
detail on how water trading would operate and what is required
to make it happen.
The Cave Review also considers vertical separation
as a more radical means to increase upstream competition in the
future. Cave is rightly cautious in his discussion of these reforms
and proposes a test and verify approach prior to introducing such
radical changes. We believe vertical separation could be detrimental
to the industry for the following reasons:
— The lack of a national grid, or interconnections
between incumbent's networks, and the high cost of moving water
around relative to other utilities, is likely to make the development
of such a model uneconomic.
— Vertical separation will remove the inherent
economies of scope which are currently exploited, for example,
in balancing supply between resources, treatment and networks.
— Financing costs may rise due to uncertainty
around future competition models, triggering debt covenants, lower
levels of capitalisation and the risk of stranding assets.
Maintaining investor confidence is critical
to an industry which is cash negative. The figure below illustrates
our typical spend relative to income per customer.
We believe that the benefits of competition
based on vertical separation of resources, treatment or networks
must be clearly quantified and articulated before being progressed.
There is a real risk that the benefits will be outweighed by the
cost of structural reforms. It is our view that most of these
benefits can be achieved through changes within the existing vertically
integrated regime, for example through changes to the incentive
mechanisms and through the adoption of a model for water trading.
In the UK water industry, the main driver of
customer bills is capital maintenance to maintain networks and
meet environmental and customer needs (see figure below). Therefore,
the areas most impacted by competition (in terms of optimising
supply/demand balance and in particular the development of new
resources) are a relatively small proportion of the bill.
III. RETAIL
SEPARATION AND
RETAIL COMPETITION
Cave proposes that the retail functions of Water
and Sewerage Companies (WaSCs) should be legally separated and
those of Water Only Companies (WOCS) should be functionally separated.
Cave also recommends that over time, all non-households should
become eligible to switch but the case for extending competition
to households is weak.
We believe that retail competition is only likely
to bring substantial benefits if it is coupled with other competitive
developments (such as the development and allocation of water
resources), and should therefore not be pursued as an end in itself.
Given that only £24 of an average customer's combined
bill of around £300 is attributed to retail, there is
limited scope for efficiencies to offset the setup and operating
costs. Independent consultants (who worked on the separation of
retail in Scotland) have forecast setup costs of £16.5 million
for STW and increased operational costs of around £8.5 million
per annum (approximately £2 per household customer and
£25 per non-household customer allocated on a 50:50 basis).
We believe that the costs attributed to introducing
retail separation and creating a competitive market in Scotland
have been understated. Efficiencies have been realised through
the rigor of process improvement, concurrent with separating retail.
However, the starting point for the industry in Scotland was different
to that in England and Wales where process improvements over many
years have already realised many of these efficiencies. We therefore
question whether sufficient savings can be made to meet the threshold
at which customers would consider switching.[11]
IV. INDUSTRY
STRUCTURE AND
CAPITAL MARKET
REFORM
Cave sets out proposals for capital market reforms
to increase the opportunity for mergers including;
— Increasing the threshold for the special
merger regime to £70 million applied to the smaller
of the merging companies; and
— for mergers above this threshold to be
referred to the Office of Fair Trading for a stage one assessment.
We are supportive of increased capital market
competition and this is an important competitive market pressure
that has largely been absent in the water industry in England
and Wales. We also believe that the arguments in relation to the
need for comparators for Ofwat to regulate the sector are overstated.
The ability for Ofwat to identify differences between efficient
companies has lessened significantly in recent times and more
focus could be placed on developing appropriate incentive mechanisms.
Impact on capital investment plans
The most likely reforms within the next five-year
period affect retail (both separation of the function and increased
eligibility for non-household customers to switch). Competition
reforms have had limited impact on this price review, as the timings
and details of any reform are not sufficiently clear to credibly
include associated costs in our business plan for 2010 to
2015. The costs would derive from creating the structures between
the separated retail function and the wholesale function and creating
the infrastructure needed to process those customers who switch
retailer. We are reliant on Ofwat recognising these costs if they
materialise during the 2010-15 investment period (AMP5),
and combining these costs with other Notified Items (such as the
adoption of Private Drains and Sewers) to exceed the triviality
thresholds necessary for an adjustment to prices to be made.
Ofwat have signalled their intent, through the
introduction of accounting separation, to introduce separate price
controls at the next price review (PR14) for up to nine areas
of our business. The details of these proposals are not yet clear,
with the only declared intent to have separate price controls
for retail and wholesale. A key consideration for retail separation
is how the retail margin would be determined, and the Cave report
is silent on this matter.
IMPACT
ON SERVICES
WE PROVIDE
TO CUSTOMERS
We have restructured the areas of our business
which address customer operational impacts (eg interruptions to
supply or property flooding) in order to streamline the process
from customer contact through to resolution of the problem. Retail
separation could require us to reorganise these processes and
would introduce a division of accountability into what is now
a seamless and more responsive customer service.
To ensure vulnerable customers are protected,
we believe that current cross subsidies should be maintained through
an appropriate wholesale pricing structure and tariffs such as
the WaterSure[12]
scheme should be maintained if retail is separated.
We are currently reviewing how we encourage
our customers to pay for the services we provide, whilst supporting
those who are genuinely struggling to do so. The options we are
considering include:
— a scheme that substantially reduces bills
for those in our region who are most vulnerable in order to encourage
them to pay something towards a lower bill rather than nothing
towards a higher bill;
— capping a customer's bill at a certain
percentage of their disposable income (the level would be likely
to be around 3% as this is commonly considered the threshold for
"water poverty ");
— a peak-seasonal tariff; and
— increasing the coverage of both WaterSure
and Water Direct.
POTENTIAL
FOR INCREASE
OR DECREASE
IN THE
TYPE OF
BUSINESS WE
UNDERTAKE
There are a number of opportunities for business
growth arising from the Cave Review. We are supportive of increased
capital market competition and increased market competition may
be a step towards helping achieve this. For example, we would
anticipate mergers and acquisitions of retail functions were they
to be legally separated.
If a viable framework for trading is created
then we would expect to exploit the opportunity to develop lower
cost resources than those currently identified by other companies
and trade water across existing boundaries.
The scope for Infrastructure Service Provision
(ISP) could be a means to grow our business outside of the regulated
business (eg through a PFI model) where interconnectors are provided
to deliver water primarily outside our area or which serve multiple
clients. We discuss ISP further in our response to Question 3 below.
2. Part 4 of the draft Flood and Water
Management Bill provides a revised special administration regime
for water and sewerage undertakers and licensed water suppliers,
in place of the ordinary administration regime in Schedule B1 to
the Insolvency Act 1986 that applies to companies in general.
Why are these new provisions necessary, and in what circumstances
would you expect them to applied?
We understand from Defra's Consultation on the
Rules of Court for the water and sewerage special administration
regime in early 2009 that the provisions are designed to
help ensure that "a water company transfer will run smoothly
should a company ever find itself in difficulties ". We support
this intention and believe it is important to ensure that customers
are not left without essential services if their supplier found
themselves in financial difficulties.
We do not believe that the proposed grounds
for an order under the water administration regime have altered
significantly from that contained in the Water Industry Act. However,
it is important that it does not become too simple to place a
water company into administration, as such a change could increase
perceived sectoral risk, and therefore the industry's cost of
capital. We do not believe this would be in the interest of customers
or the industry.
The Defra consultation on the draft Bill also
mentions at paragraph 541 that the special administration
regime could be used by Ofwat as an ultimate enforcement tool.
This is of concern, as one of the issues we have raised in response
to the proposal to extend Ofwat's enforcement powers is that there
is a lack of an effective appeals mechanism. We would therefore
be concerned if a special administration regime for water was
intended to be used as an enforcement tool without changes to
the appeals mechanism available to companies. We suggest that,
rather than the High Court, the Competition Appeals Tribunal are
the appropriate body that companies should appeal to, as they
have a greater understanding and experience of the utilities sector
and of assessing regulatory decisions.
3. Water UK and some individual water companies
have raised concerns about the provision of infrastructure (financing
large projects) in the draft Flood and Water Management Bill covers
(clauses 239-241). What concerns does your company have with Defra's
proposals and the possible practical implications should they
be enacted?
In line with our policy to deliver the lowest
prices to our customers, in principle, we support new approaches
that encourage more efficient provision of infrastructure and
more flexible forms of financing. As we note in our comments on
the development of competition above, Infrastructure Service Provision
(ISP) is one mechanism which could be used to exploit the opportunity
to develop lower cost resources to serve customers across companies'
boundaries. We therefore believe that the provisions for ISP are
potentially a positive development.
However, there is significant uncertainty and
lack of specificity about the provisions as currently included
in the draft Bill—both in terms of how they will work in
practice, and the circumstances in which they will be used.
The positive benefits of competitive opportunities
need to be set alongside the benefits of the present framework
for economic regulation and financing arrangements for the water
sector, which has helped ensure investor confidence in the sector.
In order to be able to raise finance from investors
on reasonable terms, there must be confidence in financial markets
that they will be able to earn adequate returns from investing.
For the water sector this confidence is underpinned by:
— The duty on Ofwat to ensure that water
undertakers can finance their activities (including earning a
reasonable return on capital.)
— The mechanism applied by Ofwat for allowing
companies to earn a return on the regulatory capital value (RCV).
Most investment automatically goes into the RCV (unless outputs
are not met or Ofwat's allowances are exceeded).
These factors allow Ofwat to set the level of
assumed returns (the weighted average cost of capital (WACC))
at reasonable levels.
The stable regulatory frameworks and financing
arrangements for the sector have allowed the industry to fund
c.£70 billion of investment since privatisation whilst
remaining "cash-negative " (ie having cost levels above
the level of revenue received from customers).
ISP could potentially rely on an alternative
form of financing, similar to that used for Private Finance Initiatives,
whereby companies pay the consortium who constructs, owns and
operates the assets a fee. Such a fee is usually regarded as an
operating cost and, if so, would not be added to companies "
RCVs. In assessing whether ISP would represent a more efficient
way of delivering large projects, it would need to be considered
whether such consortiums would be able to raise finance more cheaply
than water companies under the existing system.
We believe that if the potential for ISP is
to be fully realised, much further consultation is required. The
following issues (in addition to the question of financing) warrant
greater consideration:
THE CIRCUMSTANCES
IN WHICH
ISP WOULD BE
USED.
It is important that there is clarity over which
projects would qualify for ISP. We would wish to avoid the situation
whereby any new powers, without an appropriate degree of specificity,
could inadvertently be applied to large segments of water companies
" investment programmes and not their intended purpose.
We understand that the current provisions could
be used for large scale projects such as the "Thames Tideaway
". We do not believe we have any investment projects in our
appointment area that would qualify in this respect.
As we explain in our response to question 1,
the greatest benefits arising from competition could come from
better resource allocation. ISP could have a useful application
in this respect—for instance constructing a new reservoir
to supply several companies' areas. We believe the opportunity
to use ISP in such circumstances should be further explored.
TAKING INTO
ACCOUNT THE
LONG LIFESPANS
OF WATER
AND SEWERAGE
ASSETS.
The environmental and quality requirements that
water and wastewater assets are required to meet change over time,
and typically become more stringent. These changes may be a known
risk at the time of awarding contracts and could be taken account
of at the outset. However, other future quality requirements may
be unknown. There could also be uncertainty about the capacity
required to address future growth. It would need to be considered
how meeting these unknown requirements would be approached and
whether there would be implications for renegotiating contracts
and funding.
Consideration would also need to be given to
how to ensure that ISP projects continue to represent value for
money in the longer term. For instance, once the construction
risks associated with delivering projects have passed, there may
be the option for the licensee operating the asset to secure re-financing
at more preferential rates. It will be important to continuing
to ensure that customers get value for money that the undertaker
also benefits from any re-financing gains.
ENSURING CONTINUITY
OF SERVICE
TO CUSTOMERS.
Careful consideration will need to be given
to the process by which contracts are tendered and awarded, and
under which circumstances. Greater consideration is also needed
in respect of how the Secretary of State would exercise the wide
power to specify projects to give sufficient certainty for water
companies in their plans. Failing to do this could hold-up vital
investment and might mean that water companies are raising finance
for projects unnecessarily, thereby adding to cost. It is important
that these processes are as efficient as possible and carefully
managed—those which create undue delays in the provision
of vital infrastructure could impact on the security of supply
to customers.
FACILITATING EFFECTIVE
COMPETITION.
If the main benefits of ISP cited, a lower cost
of finance and protection from cost overruns, are to be maximised,
then there must be effective competition for the contract. As
ISP projects will be connected to companies' networks, and used
to fulfil licence obligations to customers, it is important that
water companies play a central role in the procurement process,
particularly in defining the criteria that the ISP project will
be required to meet. In order not to create distortions of competition,
water companies should be able to compete for the contract on
equal basis with other tenderers. However, this is currently prevented
by clause 36B(2).
To enable an open competition, consideration
needs to be given to mechanisms to ensure that a level playing
field exists—for instance, whether there is merit in Ofwat
(or an alternative third party) having a facilitatory or oversight
role to remove the perception of any bias. However, it will be
important that the role of this third party should be proportionate,
and not seen to unduly intervene where the market for contracts
can function effectively by itself.
PROVIDING CLARITY
ABOUT RISKS,
FAILURES AND
LIABILITIES
There could be circumstances in which assets
procured under ISP are not successfully constructed. Consideration
would need to be given as to which party (either the water company
or the provider) would be liable for such a failure. Under the
present system of financing, there is clear accountability for
such failures to deliver which are taken into account during price
reviews.
There are also circumstances under which assets
successfully constructed as part of ISP could fail. For instance,
during the 2007 flooding events in Gloucester, the flooding
of the Mythe water treatment works highlighted the risk, and impact
on customers, of the failure of key assets. It will be important
in relation to ISP projects to ensure that the responsibility
for taking effective remedial action, and the liability for such
failures, is clearly understood. This will be particularly important
where projects, as in the reservoir example cited in Defra's consultation,
span across companies' boundaries.
USING PRIMARY
LEGISLATION TO
PROVIDE GREATER
CERTAINTY
If projects are to be financed using project
finance, then a high degree of certainty will be required around
matters such as abstraction rights, liability and off-take arrangements
as is normal in project finance. The lower the risk the more likely
such finance will be available at a competitive rate but this
should not come at the expense of water companies by transferring
risk unduly.
The lessons learnt from the failure of the water
supply licensing regime are instructive here and a careful definition
of the primary legislation together with extensive industry consultation
is therefore a prerequisite. Leaving important principles, such
as principal constraints and considerations in the exercise of
such powers, to secondary legislation seems to afford too little
parliamentary scrutiny to very important issues and may well create
insufficient regulatory certainty for both water companies and
prospective ISPs leading to critical investment being delayed.
We also believe it is important that how these
new provisions will interact with existing European procurement
legislation, and any recommendations from the Cave Review that
are taken forward, is considered.
4. Clause 252 of the draft Bill covers
the introduction of a mandatory build standard for sewers. The
bill proposes mandatory build standards for sewers. What difficulties,
if any, do you have with the provisions?
We are fully supportive of the proposal to introduce
mandatory build standards (National Standards) for lateral drains,
sewers and pumping stations. We understand that these standards
are being implemented as part of the intention announced by Defra
to transfer existing privately-owned sewers and lateral drains
that connect to the public sewerage system into the ownership
of water and sewerage companies and to ensure that new sewers
and lateral drains are automatically adopted by water and sewerage
companies, as long as they meet the National Standards.
The National Standards are part of a larger
scheme relating to the transfer of private sewers and the automatic
adoption of all future sewers. These standards play a small (but
significant) role in relation to the entire scheme, which will
require new Sewer Regulations[13]
(amongst other things—implementing the Scheme for adoption
of private sewers), amendments to the Water Industry Act 1991 (which
we would consider would have to be included in the Flood and Water
Management Bill or other legislation), ensuring the interaction
with Building Regulations 2000 are coherent (and relevant
amendments are made to that legislation) and responsibilities
are clarified between the Planning Authority, the Local Authority
and Building Control Officers, and water and sewerage companies.
In itself, clause 252 of the draft Bill
will need to be reviewed in the light of all the other changes
required to primary legislation and interaction between relevant
stakeholders.
There is however, a significant shift from current
legislation as a result of the amendments proposed in clause 252,
in that a water and sewerage company is under a duty not to allow
permission for communication of drains and sewers to the public
system which do not comply with the National Standards. Clearly,
water and sewerage companies want to ensure that sewers and drains
do meet standards to ensure protection of their network, however,
water and sewerage companies will also now be liable for communications
where the sewers do not meet the National Standards.
Currently, we adopt approximately 135 km
of sewers each year and 30-40 sewage pumping stations. Introduction
of the proposed standards and the automatic adoption of sewers
and lateral drains will result in a significant increase in the
volume of assets being adopted by water and sewerage companies
(ie, those sewers and drains which would have remained private
will automatically become adopted and therefore assets of the
water and sewerage companies). Our analysis indicates that we
can expect to adopt approximately 340km of drains and sewers each
year and 200 sewage pumping stations as a result of these
intended changes. We believe that this represents a significant
increase in workload for water and sewerage companies, in regards
to both technical vetting of new drains and sewers and inspection
to ensure compliance with the National Standards. We consider
therefore, that there is likely to be a skill and capability shortfall
in the industry which will require addressing. Under the current
arrangements, developers pay a fee to the water and sewerage companies
for this service, an arrangement we would wish to see continued.
We are of the opinion that it is not appropriate for our general
customer base to fund this, and that the costs should be borne
by developers.
5. During the evidence session it was suggested
that water companies could adopt new SUDS. Could you provide us
for your analysis of the advantages and disadvantages of this
approach?
Local Authorities have little or no experience
of the approval of SUDS schemes, either in the inspection, adoption
or maintenance of such assets. We would question the current ability
of Local Authorities to carry out this function and whether they
will have access to sufficient funding to do so. As suggested
in our initial written evidence to this Committee's inquiry into
the draft Bill (dated 7 May 2009), we believe that further
consideration should be given as to whether Local Authorities
have the necessary expertise and funding required to approve and
adopt SUDS.
We are also unclear whether Local Authorities
would be required, under the current drafting of the Bill, to
maintain these assets. As sewerage companies have an existing
duty to provide effectual drainage as part of the wider sewerage
system, it is important to clarify if this duty would be affected
by the adoption of SUDS by Local Authorities. We wish to avoid
the situation whereby sewerage companies have no powers to correct
any issues with the SUDS but are liable for its effective operation,
or where non-maintenance of the SUDS causes issues with the public
sewerage system.
This is not to suggest that these problems are
insurmountable, but these issues need to be properly considered.
If the additional personnel, training and funding are made available
then Local Authorities may be the right body to adopt new SUDS.
Sewerage companies currently have a greater
understanding and expertise of drainage systems generally, particularly
with the inspection, adoption and maintenance of such assets.
We are also better placed to integrate SUDS with the public sewerage
system (although it would be more difficult for us to integrate
SUDS with water courses). Sewerage companies would be able, and
would have to, raise the necessary funds through the sewerage
bill (although there could be a negative political impact of further
bill rises). Such an approach would also appear to complement
Defra's intention to transfer existing privately-owned sewers
and lateral drains into sewerage company ownership.
The proposed approval scheme for drainage systems
is important, if not critical, to both Local Authorities (in their
role of coordinating flood risk management) and sewerage companies
(in relation to the overall management of their sewerage networks).
However, if Local Authorities have responsibility for SUDS, there
is a risk that our ability to manage our sewerage system could
be reduced. This could be mitigated if the interaction between
Local Authorities (the approving body) and sewerage companies
is coherent and responsive and Local Authorities are able and
willing to manage the process efficiently and effectively.
6. The Pitt Review discussed the need to protect
critical infrastructure from flooding. Can you tell us what you
are doing to protect your critical infrastructure and whether
the costs of those works will be passed on to customers?
Customers rightly place very high value on the
continuity of supply of both clean water and sewerage services,
and support long-term investment to secure this. Following the
2007 flooding events in Gloucestershire, we took action to
improve the resilience of our assets. Our final business plan
for 2010-15 proposes further improvements.
OUR RESPONSE
TO THE
2007 FLOODING EVENTS
Over the past 18 months, we have worked
closely with the Environment Agency and with Local Authorities
to find ways of ensuring that together, we are better able to
cope with major flooding events and protect our infrastructure.
We conducted a thorough review of flood defences at all our key
sites and have already implemented a number of improvements.
These improvements include:
— Installation of additional flood defences
at the Mythe Water Treatment Works. Currently, these are semi
permanent in nature, but work is under way to design a new permanent
barrier. We have completed the feasibility study and outline design
stage, and it will be around two years before any permanent defences
can be constructed.
— A £12 million programme of
works to alleviate sewage flooding problems in Gloucester.
— Additional measures and expansion work
(£3.3 million) at Big Normans sewage pumping station
in Longlevens in Gloucester.
We are also planning a £25 million
network reinforcement project in Gloucestershire which will help
secure supplies for our customers in the future by using back-up
supplies from our Strensham treatment works.
OUR FUTURE
PLANS
In our Strategic Direction Statement, we identified
the need to improve the resilience of our strategic network to
reduce the future risk of customers losing their mains water supply,
for all potential causes. Our benchmark is that no community larger
than 20,000 people should be without an alternative piped
source of water.
Given the historical development of our infrastructure
over more than 150 years, and the presence of many smaller
single points of failure in the UK's utility infrastructure, it
is impractical (and very expensive) to "defend everything"
or expect to achieve this goal in the near future. As the costs
of improvements are passed onto customers through their water
and sewerage bills, we consider it essential that the costs reflect
levels that customers are prepared to pay.
Accordingly, we have based the infrastructure
resilience component of our final business plan for 2010-15 on
consumer priorities and have taken into account the views of other
stakeholders: it must also be underpinned by a sustainable financing
plan. We have also looked at the balance between investment in
defence (such as flood barriers), resilience (such as network
reinforcement) and contingency planning, to ensure that we do
not spend more than is necessary.
Our final business plan, published in April,
sets out our proposals to protect four water treatment works at
risk of flooding from a 1 in 200 year flood event, as
well as a number of intake pumping stations and boreholes that
are vulnerable to flooding. In terms of the capital programme,
we plan to invest £149 million between 2010 and
2015 on the resilience of our water treatment works and associated
networks. Among other activities, this money will be invested
in flood defence at critical plants, resilience of power supplies
and availability of "spares" for large critical plant
items.
In terms of sewage treatment plants and pumping
stations, which are usually gravity-fed, low-lying and designed
to withstand inundation, we have worked to lift electrical components,
panels and inputs above a level which would put them at risk during
flooding—an example of our doing this being our pumping
station at Longlevens near Gloucester.
We have assessed our network capability and
our contingency plans to identify communities with populations
above the 20,000 threshold. A total of 1.4 million people
who are currently dependent on a single source (nearly 20%of our
customers) will benefit from an alternative source if their normal
source fails as a result of our proposed investment in the AMP5 (2014-15 to
2019-20 period). Moreover, 0.6 million people (8% of
our customers) who are currently dependent on a single pipe will
be provided with an alternative piped supply.
Given the significance of the investment and
its impact on affordability we intend to deliver against the 20,000 threshold
over 10 years (that is, through the AMP5 and AMP6 periods).
The AMP5 population threshold, in respect of those customers
dependent on a single pipeline, has been set at 30,000.
7. Climate change is a substantial risk to
the water sector. Can you give us an overview of your concerns
about the impacts of climate change on your business, what you
are doing to mitigate those impacts, and your assessment of whether
(a) the Price Review and (b) the draft Flood and Water Management
Bill take sufficient account of climate change?
The areas where the impacts of climate change
are likely to be most significant and immediate action is needed
are:
— Increased storm intensity leading to
flooding of assets and increased sewer flooding.
— Higher summer temperatures and lower
summer rainfall leading to an imbalance between water supply and
demand.
In making decisions on adaptation, because the
impacts are uncertain, incremental measures are generally preferable
to large one-off changes. Changes which contribute to climate
change mitigation are likely to be preferred to those which add
to our carbon impact, ie solutions have been chosen after taking
into account the cost of carbon.
We have reviewed the potential effects and need
for action by assessing severity of impact, the uncertainty of
impact, and urgency of action. Where there is no need for immediate
action we will continue to monitor trends and participate in research.
Our final business plan for 2010-15 contained the following
proposals:
Resilience of assets—Increased
storm frequency will increase the risk of assets such as treatment
works being flooded. We have assessed flood risk and are proposing
that our water treatment plants have a minimum flood risk frequency
of 1:200, plus an allowance for uncertainty including potential
climate change effects. We have also reviewed the criticality
of sewage treatment works with regard to various factors such
as the impact on the environment and the number of customers affected
and have put forward proposals for flood protection where necessary.
Water supply/demand—Lower summer
rainfall and higher temperatures will reduce potential water output
and increase demand. The overall impact on deployable output of
climate change under the mid-range scenario is estimated be a
reduction of 154 Ml/d by 2035—around 7% of our total
potential output.
Our plans for balancing supply and demand include
a package of leakage control, metering, water efficiency, and
small water resource developments. This is more flexible in response
to variations in climate change impacts than major resource developments
would be.
Sewer flooding—Sewer flooding is
a key customer priority, as borne out in our customer research.
Increased storm intensity will increase sewer flooding. We have
already increased the capacity provided in schemes to resolve
sewer flooding from protection against a 1 in 30-year storm
to 1 in 40 years. Our analysis indicates that our current
40 year internal design standards provide an equivalent performance
to a 30-year design storm uplifted by around 7%. The cost of providing
this protection against climate change is only 1.4%.
Surface water—Over the long term
we need to deal with surface water drainage in a more sustainable
way. Retaining surface water in the sewerage system and passing
it to sewage works for treatment is an inefficient use of the
network. It potentially leads to flooding and an increased carbon
footprint. Development needs to be constrained so that local flood
pathways are maintained and properties not built in vulnerable
areas. We welcome the intention to increase the coordination between
organisations responsible for inland flood risk management—EA,
water companies, Highways Authorities, Local Authorities and Internal
Drainage Boards. We are proposing to investigate the scope for
separating foul and surface systems through examining some pilot
areas—separating the whole network would be an extremely
costly task.
There is also great potential for SUDS to deal
with surface water, reduce the growth in sewer flooding problems,
and reduce costs of pumping sewage. SUDS deal with surface water
as close as possible to the point where the rain falls, by local
storage of the rain water or providing the ability for the water
to soak away. They reduce flooding from sewers and watercourses,
which could also create opportunities for improved habitats for
wildlife. We will encourage the installation of SUDS, and install
our own SUDS devices in response to problems on existing systems.
TAKING ACCOUNT
OF CLIMATE
CHANGE IN
THE PRICE
REVIEW.
Our proposals to increase the resilience of
our supply network and to reduce sewer flooding will both contribute
to reducing the impact of climate change. We do not yet know Ofwat's
assessment of our proposals. Our plans have the support of the
Consumer Council for Water and customers, as shown by our customer
research. We would be concerned if our plans were to be scaled
down by Ofwat as we believe we have a balanced plan, which minimises
bill increases while providing improvements which are supported
by customers.
In relation to balancing supply and demand,
a key issue for the price review is that the 2009 scenarios
produced by the UK Climate Impacts Programme (UKCIP09) have not
yet been published. Ofwat has stated that it will include "significant
climate change-driven investment in water resources only if it
is based on robust evidence using UKCIP09 scenario analysis".
While we recognise the need to avoid unnecessary investment, we
would be concerned if investment which is likely to be necessary
were to be long delayed as this would create a risk to reliability
of water supplies.
TAKING ACCOUNT
OF CLIMATE
CHANGE IN
THE FLOOD
AND WATER
MANAGEMENT BILL
Those elements of the draft Bill which seek
to implement the recommendations from the Pitt Review clearly
aim to deal with the effects of climate change in the immediate
future.
A further challenge to the water sector, however,
is the requirement to meet stretching carbon reduction targets
while implementing the requirements of EU legislation, such as
the Water Framework Directive (WFD).
The Climate Change Bill incorporates targets
to reduce carbon dioxide emissions for the UK by 26-32% by 2020,
and by 60% by 2050. As the fifth biggest energy user in the UK,
the water industry will be expected to make a significant contribution
to these targets and Severn Trent is seeking to make carbon reductions
in line with Government targets.
We are the biggest generator of renewable energy
in the UK water sector, largely due to our combined heat and power
operating on biogas from sludge digestion. Our current annual
electricity generation is 157 GWh per year (17% of annual
usage) and it is largely utilised to supply our own operational
sites. This self-supply of electricity reduces our carbon footprint
and lowers operating costs. To further this leadership position
we are seeking to pursue opportunities to expand our renewable
generation in 2010-15 (referred to as the AMP5 period).
Our final business plan for 2010-15 includes
plans to generate more renewable electricity and reduce our own
energy use. We are also investing, outside the regulated water
services business, in wind power and energy crops. Our target
is to generate 30% of electricity from renewable sources by 2013.
The work we will be doing to reduce our carbon emissions
over the next five years, however, will be offset by the huge
increase in energy use, and therefore emissions, from implementing
the statutory quality programmes such as the WFD. This is set
out in Figure 2 below:
Given the importance of reducing carbon emissions,
we believe there should be scope for reviewing these statutory
obligations and propose that there is a need to freeze the implementation
of the Water Framework Directive while Government in the UK and
EU consider the energy use required.
11 A recent joint study by Ofwat and the Consumer Council
for Water found that 53% of respondents would be willing to switch
for a £50 annual saving. Back
12
Formerly known as the vulnerable groups' tariffs Back
13
Defra has indicated that rather than the first draft being published
in June, it will be published in August. Back
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