SUPPLEMENTARY
MEMORANDUM SUBMITTED
BY THAMES
WATER (DFWMB 20A)
1. Part four 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?
Our understanding is that the new provisions
have been included to bring the regime in the water industry in
line with modern practice, rather than as a result of any specific
faults with the current arrangements. We are comfortable with
these proposals, and have no objection to the provisions that
provide more flexibility to rescue viable companies that experience
financial difficulties.
In respect of procedures for transferring failing
companies to new owners, we disagree that the existing right held
by other undertakers to veto a transfer should be removed. The
veto could be used by another undertaker when, for example, it
is receiving a bulk supply transfer from the company in administration.
This would compromise the existing position accepted by shareholders,
weakening their position from both a financial and legal perspective.
However, given the potential requirement to
reduce the scope of the draft Bill to meet the pressures of the
legislative timetable, we would see provisions in this area as
of lesser importance than others, and would see no difficulty
in them being dropped.
2. 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?
We are disappointed that there has been no consultation
on these provisions prior to their inclusion in the draft Bill.
They do not make clear what the threshold for the change would
be, so it is unclear how many projects would be captured, and
the extent to which the industry would be affected. This needs
to be clarified urgently.
Without this clarity, the industry will be unable
to tell the impact of the provision, and whether it will impact
only a single company, a small group of companies, or the entire
industry. To our knowledge, Ofwat has not given any indication
that projects other than the Upper Thames Reservoir and Thames
Tideway Tunnel—both Thames Water projects—would be
captured by these provisions.
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.
The potential for a third party to either operate
an asset forming part of our networks, or transfer one to us after
building it, raise further concerns. In the first case, this could
hamper our ability to manage our network in an integrated way,
and in the second, we would need to ensure that any asset transferred
to become part of our system was built in accordance with our
requirements.
3. 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?
There is already a firm foundation in this area,
set out in the existing standards, and the new draft proposals
are designed to build on this. We have played a leading role in
the Water UK group that drafted a proposal for the new standards—this
was submitted to Defra in April 2009. We hope that this will ensure
that assets transferred from developers to water companies will
be of a standard comparable to those that we already work to.
We believe this is a positive step as it will
help avoid future problems caused by developers seeking to transfer
assets such as sewers and pumping stations that don't meet the
requirements, prove difficult and-or expensive to maintain and,
ultimately, cause future problems and expense for customers and
companies.
There are a few additional issues we would wish
to see resolved in the final provisions. These are technical points
which we are working to address through a Water UK group that
is actively engaged with Defra. We believe these are unintended
consequences that have arisen through the drafting of new provisions
in this area, and are confident they can be addressed through
this dialogue.
They include the need to provide a mechanism
that ensures sewers laid to serve new developments are of a capacity
sufficient to serve all properties in that development. The provisions
as currently drafted could see companies accepting an initial
application to connect without taking into account the full extent
of the development. We are developing an amendment, through Water
UK, that would allow companies to continue to enter agreements
under Section 104 of the Water Industry Act that will ensure
drainage systems are properly co-ordinated and completed.
4. 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?
We strongly believe that systems which mimic
natural drainage patterns, by attenuating overland flows and encouraging
infiltration and evaporation of surface water, offer more sustainable
solutions to surface water management, than reliance on piped
systems alone. We support the positive steps the draft provisions
take to enforce the use of SUDS in new developments.
One of the primary aims of the draft provisions
in relation to flooding is to provide greater clarity of responsibility.
Given the proposal for local authorities to take on a local leadership
role to deal with surface water, we believe it is more appropriate
that control of SUDS rests with local authorities, who are responsible
for Surface Water Management Plans, and have the power to enforce
the use of SUDS in new developments through the planning process.
Local authorities also have the most appropriate
resources, capability and experience to manage SUDS. Much of the
maintenance of balancing ponds, detention basins and swales, consists
of grass cutting and silt and litter removal. Local Authorities
already carry out these tasks extensively and, because many SUDS
assets would also function as public open spaces and recreational
facilities, they will often be maintaining them anyway. Regarding
liability for health and safety issues, again the Local Authorities
have the most expertise in the management of ponds, boating lakes
and wetlands.
A further issue in the case of above-ground
SUDS is the potential for third party activities to reduce their
effectiveness—through, for example, land use changes and
developments. Local authorities are better placed to ensure SUDS
are not adversely affected as they have the authority to prevent
or influence these changes.
Furthermore, drainage structures that are not
classified as sewers cannot at present be adopted by sewerage
undertakers, so no mechanism exists for companies to take them
on and secure a revenue stream in order to ensure proper ongoing
maintenance.
5. 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?
We have completed an assessment of our sites
to better understand the impact of flooding on our ability to
maintain services to customers. We have used this assessment to
inform a programme of investment for 2010—2015 to protect
critical infrastructure. These proposals, which are summarised
below, have been submitted to Ofwat as part of our final Business
Plan.
CLEAN WATER
SITES
The projects proposed in our final Business
Plan will, if approved, reduce the risk of flooding at 11 water
treatment works and six pumping stations in London and the Thames
Valley from a 1:100 year storm; reinforce dam and reservoir
safety at seven reservoirs and fund emergency water supply measures.
They will cost £16.9million in capital investment, plus £637,000 in
operational expenditure each year.
Our proposals are based on the strategic view
that operational water sites—especially the key water treatment
works in London—must not be flooded. Customer preference
surveys undertaken in January 2008 indicate that customers
are very keen to avoid interruptions to supply.
Our proposals will greatly reduce the risk of
flooding at critical sites but will not eliminate it altogether,
so we have included costs for an emergency response capability
(including extra tankers, static tanks and other equipment). This
would enable us to supply 20 litres per person per day to
vulnerable customers including babies, the elderly and dialysis
patients.
WASTEWATER
Our objectives are to:
— Avoid pollution incidents and consent
failures during a flood
— Prevent critical storm pumping stations
from being flooded, which could exacerbate flooding elsewhere
— Avoid damage and losses to our equipment
The projects proposed in our final Business
Plan would, if approved, reduce the risk of flooding at 13 of
our most vulnerable sewage treatment works and 37 key sewage
and surface water pumping stations from a 1:100 year flood.
They would also help protect approximately 500km of various rivers
from pollution caused by flooding at these 50 sites. The
total cost of this work is £19.9million.
In 2010-15 we have focused on the highest
priorities for investment. We expect that additional sites will
be identified for investment in 2015-20.
The cost of these works would be passed on to
customers in the same way as the other projects in our business
plan. The money paid to us through customers' bills is not on
its own enough to finance our investment programme, and is supplemented
by borrowing which during the period 2010-2015 will amount
to around £3billion.
We have calculated that all the flooding resilience
schemes in our final Business Plan are cost-beneficial. ("Benefits"
were calculated based on the costs that we would incur if a site
were made inoperable.)
6. 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?
OVERVIEW
Climate change will fundamentally alter the
water cycle. It is predicted to reduce the water available for
use; increase demand in hotter drier summers and lead to more
frequent extreme rainfall events. We are taking action to adapt
our activities to the impacts of, and to reduce our own contribution
to, climate change. We were the first UK utility to gain the Carbon
Trust's carbon award for consistent, real year on year reduction
of carbon emissions, leading the Water Industry in this respect.
ADAPTING TO
CLIMATE CHANGE
When planning to balance future supply and demand
for water, we make an allowance for the impact of climate change
on both the volume of water available for supply and levels of
demand. The magnitude of impact is assessed using the methodology
prescribed by the Environment Agency and is based on the latest
available climate change scenarios.
Where climate change will result in a shortage
of water, we have identified the investment required to maintain
the levels of service agreed with Ofwat and, in particular, to
ensure customers never experience severe water use restrictions.
This investment includes increased demand management measures
such as leakage (leak repair and mains pipe replacement) and metering
as well as the development of new resources where appropriate.
However, without prior warning, Ofwat issued guidance on the treatment
of climate change-driven investment in November 2008 that
required companies to remove such proposals from their final business
plans in recognition of the uncertainty around the forthcoming
climate change modelling scenarios. As a result, we have excluded
investment related to climate change from the final three years
of our business plan pending the scenarios' release. The mechanism
by which funding will be allowed to reinstate this investment,
should modelling of the UKCP09 scenarios demonstrate it to
be required, remains unclear. It is critical that this mechanism
allows for the full costs incurred in delivering this investment,
including financing costs.
Now that the UKCP09 scenarios have been
published we have commissioned further work to evaluate the impact
of the projected changes on our investment proposals and determine
any changes that are needed.
In the future we plan to invest in supply solutions
that are robust to the impact of climate change. In particular,
the development of a major new reservoir continues to feature
in our long-term plan. However we await clarification around some
key planning uncertainties before we can confirm the timescales
for developing this resource.
When developing our plans we have considered
the carbon contribution from alternative options and where possible
have included low-carbon solutions within our planning solution.
We have also assessed and taken into account
the increased level of flood risk created by climate change and
the subsequent impact on our ability to maintain services during
floods. We have carried out flood risk modelling on all of our
water and wastewater assets to identify flood risk during a severe
storm. Using this information we developed plans to protect the
most vulnerable and critical of our assets. This is explained
in more detail in our response to the previous question.
For our sewer flooding programme, we will move
to a higher design standard with flooding solutions, aligned to
industry standards. This will be a first step in ensuring drainage
capacity adjusts to climate change predictions. However, we will
need to review our programme once new climate change scenarios
are available.
We agree with the Pitt Review that ever-larger
sewers are not the only answer to climate change and that other
options need to be considered in the long term. These include
Sustainable Urban Drainage Systems and the development of surface
water management plans, which are both moved forward in the Draft
Flood and Water Management Bill.
CLIMATE CHANGE
IN THE
DRAFT FLOOD
AND WATER
MANAGEMENT BILL
AND PRICE
REVIEW
The Draft Bill does not include any explicit
provisions to adapt to climate change; rather it "…set[s]
out an approach that provides scope to manage all risks, of which
climate change is a key one". The Climate Change Act is the
legislative driver for our activities in this area.
The Act set the Government the target of reducing
the UK's greenhouse gas emission by at least 80% by 2050. We have
set out in our five-year plan our intention to reduce our emissions
by 20% compared to 1990 levels by 2015, to help contribute
towards this objective. Consultation on both our 25-year Strategic
Direction Statement and our five-year plan has revealed consistently
strong customer support for this objective. This is subject to
funding by Ofwat for energy efficiency and renewable energy projects
and the continuing allowance to use of low carbon electricity
to reduce our emissions. Ofwat's decisions on funding these investments
must be made in the light of the regulatory imperative and consistent
customer support.
In addition, the Act also introduces powers
for Government to require public bodies and statutory undertakers
to carry out their own risk assessment and make plans to address
those risks. We have already started to assess the impact of climate
change on our business, as set out above.
We are concerned that Ofwat's current approach
to climate change will not enable companies to fulfil their potential
to reduce their contribution to greenhouse gas emissions as far
as they are able to.
Ofwat promotes the use of the renewable energy
market to enable companies to work towards their carbon reduction
targets. However, the purchase of renewable energy is not an acceptable
mitigation option under the Carbon Reduction Commitment scheme.
Companies therefore need flexibility in renewable energy investment
to deliver carbon mitigation.
However, Ofwat will only fund renewable energy
investment where it is consistent with a company's core activities.
This prevents investment in options such as wind power and solar
power, even where these may be identified as the most cost-beneficial
solutions. Ofwat's current approach prevents companies from delivering
the most cost-effective emission reductions and meeting renewable
energy obligations under planning requirements, and as such appears
to be at odds with its sustainability duty. It is not currently
clear to us how Ofwat are accounting for sustainability in their
regulatory decision-making, in particular with respect to reducing
carbon emissions.
Ofwat should support investment in carbon mitigation
where it is proven to be cost beneficial. While this currently
applies to renewable energy, in future funding periods, once easier
mitigation options have been delivered, it may be necessary for
Ofwat to allow companies to buy carbon offsets if they are the
most economic way of delivering emissions reductions.
Thames Water
June 2009
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