MEMORANDUM
SUBMITTED BY
OFWAT (DFWMB 25)
OFWAT'S EVIDENCE TO THE 2009 ENVIRONMENT,
FOOD AND RURAL AFFAIRS COMMITTEE SCRUTINY OF THE DRAFT FLOOD AND
WATER MANAGEMENT BILL
BACKGROUND
1. Ofwat (the Water Services Regulation
Authority) is the economic regulator of the water and sewerage
sectors in England and Wales. The sectors comprise 21 regional
and local monopoly companies, four newly-appointed water or sewerage
companies and six water supply licensees. Ofwat has been in existence
since 1989. It became a corporate body with a Board structure
from 1 April 2006.
2. Our main duties are to:
3. The price limits we set every five years
allow well-managed and efficient companies to finance the services
they deliver. They allow the companies to meet the needs of their
customers and of the environment while continuing to deliver a
safe and reliable service.
4. We congratulate Defra on producing a
substantial body of work in a relatively short space of time.
We have worked closely with Defra to develop its proposals on
flood risk management, sustainable urban drainage systems (SUDS)
and special administration.
5. We have developed proposals in consultation
with stakeholders that have been included in the Bill:
— in the light of our experience of using
our enforcement powers we have developed proposals to enhance
our existing enforcement powers to better protect consumer's interests.
We have worked with stakeholders and reviewed the approach and
powers of other regulators to develop our proposals;
— we have developed a new regulatory approach
for delivering large projects. This to facilitate the Government's
decision on the Thames Tideway to avoid the risk of infraction
and reduce potential costs to customers; and
— we propose changes to Ofwat's complaint
handling powers to introduce new provisions for the most appropriate
organisation to deal with complaints against water and sewerage
companies.
6. We have also worked closely with the
Cave review team and the Walker review team on their reports on
competition and innovation and household charges and metering,
respectively.
INTRODUCTION
7. We welcome the publication of the draft
Flood and Water Management Bill for consultation. We believe this
is a significant opportunity for the water and sewerage sectors
and we are grateful for the opportunity to contribute to the Parliamentary
pre-legislative scrutiny process.
8. The water and sewerage sectors face many challenges,
including:
Meeting rising consumer expectations
We live in a modern, fast-moving, 21st century
globalised society. All sectors, including water and sewerage,
need to respond to these changing needs.
Increasing demand from a growing population
The UK population is projected to increase to
71 million by 2030 with the largest increases projected in south
and south-east England. An increasing number of single-person
households, which use more water per person, are also creating
pressures.
World wide water scarcity
We currently export 60%-70% of our water demand
by importing water intensive goods from elsewhere. This has a
significant environmental impact in water-scarce environments.
Adapting to climate change
Climate predictions for the UK suggest that our
weather will be more volatile in the future. This could lead to
water scarcity, particularly in south-east England, or devastating
floods such as we saw in the summer of 2007. The latest projections
for England and Wales suggest that overall river flows could fall
by up to 15% by 2050.
Mitigating the effects of climate change
We will need new technologies, processes and
approaches to help the UK economy become low-carbon.
Complying with stringent environmental standards
On the basis of current technology, meeting the
standards of the Water Framework Directive could result in a four-fold
increase in greenhouse gas emissions by 2030.
9. All the parties involved have developed
long-term strategies to meet these challenges. These include Defra's
strategy—"Future Water", our own strategy and
the companies' 25-year strategic direction statements. The Bill
provides an ideal opportunity to create the legislative framework
to deliver all of our strategic priorities.
10. This paper responds to the Committee's
inquiry into the draft Flood and Water Management Bill. We aim
to address the areas of particular concern to the Committee through
a strategic overview of the parts of the Bill relevant to us.
These relate to:
— how the Bill can help to address the
future challenges;
— omissions from the Bill; and
— our views on the flood risk management
and drainage proposals.
12. We also provide a summary of our proposals
that we believe will enhance the aims of the legislation and address
the specific concerns we have over the provisions in the draft
Bill. We will feed these through to Defra in our response to its
consultation. We would be happy to follow this evidence up with
a more detailed paper on the Bill if that would be helpful.
HOW THE
BILL CAN
HELP ADDRESS
THE FUTURE
CHALLENGES THE
SECTORS FACE
13. We believe that the Bill is an important
opportunity to address many of the future challenges that the
sectors face:
— The Bill is an important part of the
Government's response to Sir Michael Pitt's report on the summer
2007 floods. The Government accepted the recommendations and committed
to taking action. The Bill addresses a number of the key recommendations.
— A strategic priority for the sector is taking
a long-term view of sustainability. The summer 2007 floods demonstrates
the need for the Bill to take an integrated approach to drainage
and surface water management, consistent with the Government's
water strategy on surface water drainage. We recognise that the
water sector will need to contribute to that.
— Introducing effective competition to
benefit consumers is an important theme of the Government's water
strategy and it is a key element of our strategy. The Bill is
an opportunity to introduce enabling provisions to allow this
to be realised.
— Effective competition has the potential
to generate benefits in a range of water and sewerage services.
It can drive innovation, efficiency and responsiveness, enabling
the water and sewerage sectors to meet the challenges of the future.
This will help the Government deliver its water strategy, including
sustainable and secure water supplies and an improved and protected
water environment. Competition has delivered substantial benefits
in other utility sectors, leading to lower costs, improved service,
and more choice for customers. Regulation can be withdrawn when
markets are sufficiently competitive to protect consumers, meeting
the better regulation principles.
— It is becoming increasingly important
for companies to address the risks and uncertainties such as evolving
customer choice, increasing levels of metering, making sure bills
represent value for money and protecting vulnerable customers.
We believe that companies' future charges and charging mechanisms
will become increasingly important in addressing these challenges.
— A new legislative framework should enable
the development of innovative tariffs, promote metering and enhance
the companies' ability to manage customer debt to the benefit
of the overall customer base. This will help the development and
implementation of key policies including adapting to climate change
by encouraging water efficiency and controlling leakage. Ultimately
the Bill may provide an opportunity for the Government to address
any social policy in relation to vulnerable customers. We will
work with the Walker review team on metering and charging to develop
any subsequent legislation.
OMISSIONS FROM
THE BILL
Professor Martin Cave's, Independent Review of
Competition and Innovation in Water Markets
14. We believe that there is a strong case
for adding to the Bill clauses relating to the Cave review at
the earliest opportunity, given the challenges that the water
and sewerage sectors face.
15. While we acknowledge that the final Cave
report was not available when the Bill was published for consultation,
the absence of clauses relating to the recommendations outlined
in both the Cave review's interim report, and accepted by the
Government in the Pre-Budget Report, is disappointing.
— "In February 2008, the Government
commissioned the Independent Review of Competition and Innovation
in Water Markets to assess the potential to increase efficiencies
in water and wastewater markets that would lower prices, improve
customer service and deliver environmental benefits. The Review
published its Interim Report on 18 November 2008, advocating a
phased approach to furthering competition that could deliver significant
benefits to the economy over the coming decades. The Government
accepts this approach and will take it forward ... As a first
step, and in response to the Review's recommendations, the Government
announces a package of measures to extend and enhance retail competition
in the water markets for large non-domestic customers in England.
The Government will ...
— lower the usage threshold above which businesses
and other non-domestic customers are eligible to switch supplier
from 50Ml to 5Ml;
— extend the competition regime to retail
wastewater services;
— remove the current access pricing arrangement
for water from legislation (replacing it with simplified criteria
to be introduced by Ofwat); and
— introduce nationally agreed codes to
be co-ordinated by Ofwat in conjunction with stakeholders."
2008 Pre-Budget Report (November 2008)
16. The Government has now accepted many
of the recommendations in the final report. Its intention is to
consult on a range of reforms relating to the additional recommendations
outlined in the final report. The Government also indicated its
intention, if the outcome from this consultation was to implement
the necessary reforms, to include them in the draft Flood and
Water Management Bill.
"The Department for Environment, Food and Rural
Affairs will, before the summer recess, issue a consultation on
the retail competition package in its entirety so that its outcome
can be included in the final Flood and Water Management Bill,
and will also set out in detail how the Government intends to
take forward the rest of the Review's recommendations."
2009 Budget (April 2009)
Why Professor Cave's recommendations should be
included in the Bill
17. While we welcome the Government's agreement
to consult on the recommendations, we believe the report's recommendations
should be included in the Bill. This would allow Parliament to
scrutinise the proposals at the earliest opportunity.
18. The challenges the sectors face, such as
climate change will put pressure on the companies to meet customers'
water supply needs in a sustainable way which minimises any environmental
impacts. While many of the challenges will have a slow and gradual
impact, taken together the impact is likely to be more substantial
and immediate.
19. We (and the Cave review) believe that
successfully and efficiently addressing these challenges demands
a more flexible approach to regulation than we have had in the
past. The existing regulatory tools may not be enough. Greater
use of market mechanisms in combination with better regulation
will enable us to meet these challenges effectively.
"While the water industry has delivered much
over the last 20 years—improving service levels and quality
standards—the task of meeting ever higher customer expectations
and tackling the new challenges facing the industry, particularly
climate change and population growth, will require alternative
approaches and new ways of working. In this report I recommend
changes to both the regulatory and legislative frameworks of the
water sector to encourage the industry to become more innovative,
whether through competition or co-operation, so that it is better
able to anticipate, manage and respond to these challenges."
Professor Martin Cave, Foreword, Independent
Review of Competition and
Innovation in Water Markets: Final Report (April
2009)
20. It is paramount that we begin to put
the tools in place to meet these challenges now and seize the
legislative opportunity that the Bill represents. Primary legislation
for the water and sewerage sectors was last introduced four years
ago. It would curtail significantly our ability to meet these
challenges with the appropriate tools if we have to wait another
four years for the next legislative opportunity and even longer
to implement the legislation and resulting changes.
The Walker review of household charges and metering
21. The interim report of the Government's
independent review of water charges and metering, led by Anna
Walker will be published shortly. It will address issues such
as the structure and fairness of the current charging framework,
and the future of metering for household customers. It is also
expected to look at the issues of affordability and debt. We look
forward to receiving the Walker report. We will consider its recommendations
carefully and respond to the review in due course. We will share
our response with the Committee.
OUR VIEWS
ON THE
FLOOD RISK
MANAGEMENT AND
DRAINAGE PROPOSALS
Overview
22. One of our strategic priorities for
the water and sewerage sectors is to take a long-term view of
sustainability. One way of achieving this is to make sure that
the companies have a business approach that is robust to the challenges
of adapting to and mitigating the effects of climate change. Experience
of the floods in summer 2007 demonstrates the need for services
that are robust to the effects of climate change and an integrated
approach to drainage. This approach is consistent with the Government's
water strategy on surface water drainage.
23. We agree that legislation should address
the issue of responsibility for managing surface water management
plans (SWMP) and SUDS. This includes having greater clarity on
the roles and responsibility of the parties involved in surface
water management. We also see keeping surface water out of the
sewers and more sustainable ways of managing surface water as
a key priority.
24. We understand and support the Bill's overarching
aim to consolidate the mechanisms necessary to address flooding
and develop clear accountability for flood risk management. The
Bill contains much that we agree with, in particular:
— the aim of achieving more use of SUDS;
— limiting the volume of surface water
carried by sewers; and
— more holistic arrangements for managing
flooding from surface water.
25. We believe, however, that the current
clauses potentially expose water customers to unquantified costs
for uncertain benefits. We also consider that the new powers for
local authorities may circumvent and conflict with the framework
for economic regulation of sewerage services, which safeguards
the wider interests of all customers.
26. We are concerned about the Bill's impact
on the:
— the duties and powers of the water and
sewerage companies;
— our role as the economic regulator for
sewerage services; and
— our aspirations to improve the water
and sewerage companies' accountability in delivering cost-beneficial
and efficient sewerage services to customers.
27. We are working with Defra, Environment
Agency and other stakeholders to resolve our concerns and to make
sure that we all have a clear understanding of the way in which
the bill proposals will operate in practice. Our specific concerns
are summarised below.
SPECIFIC CONCERNS
28. In each of the following areas we have
set out the issue, what our concerns are and our view of how the
Bill should be changed.
EXERCISE OF
FLOOD AND
COASTAL EROSION
RISK MANAGEMENT
FUNCTIONS (CLAUSE
22)
The issue:
29. The provisions in section 22 of the
Bill place an absolute duty on water and sewerage companies (among
others) to exercise their "flood management functions"
"in a manner which is consistent with" the Environment
Agency and local authority strategies and the guidance issued
in relation to those strategies.
30. The Bill as drafted also includes a catch-all
provision in section 13(1)(b) to include "anything else that
is or may be done ... for a purpose connected with flood risk
management in England" in the definition of "flood risk
management functions". Potentially, the WIA91 section 94
requirement on the water and sewerage companies to effectually
drain their area falls within this provision.
Our concern:
31. Our concern is that the combined effect
of these provisions could compromise economic regulation of the
water and sewerage companies.
32. We consider that the Bill, as currently drafted,
could empower the Environment Agency and local authorities to
impose binding legal obligations on the water and sewerage companies
(for example, in terms of requiring specific works), with a consequential
impact on customers' bills. There is no clear mechanism for testing
and ensuring that the costs of any obligations these provisions
create would be justified by the benefits, or for accountability
on the part of local authorities in this context. This also appears
to contradict the principles established in the Marcic case. This
was an important test case which recognised the legitimate role
of the economic regulator in interpreting the section 94 duty
in the context of the interests of all customers.
33. We are also concerned about the proposal
that the national and local flood risk management strategies will
not be in the public domain (because the Environment Agency and
local authorities only have a duty to publish summaries of the
strategies). The Environment Agency and local authorities also
appear to have no duty to consult those who might be affected
when devising strategies.
Our view:
34. We believe that the Bill should be amended
to clarify that the national and local flood risk management strategies
provide a framework for co-ordination. They should not be a means
for authorities to require water and sewerage companies to carry
out particular works or asset improvements, overriding the safeguards
for the wider interests of water customers through the proper
operation of economic regulation.
35. As an illustration of the application of
the Bill, consider the situation in many heavily urbanised areas
(such as Hull and large parts of metropolitan London).
36. In these areas, the role of the public
sewerage system is paramount in providing adequate and appropriate
drainage for surface water. The capacities of the sewerage system
are also largely defined by the amount of surface water carried
away. In addition, the incremental costs of increasing the surface
water carrying capacities of such sewers are very high. In these
circumstances it is crucial to manage the demand being placed
on public sewers by reducing the amount of surface water flowing
to them.
37. Introducing the proposed provisions
is, in our view, likely to create significant difficulties for
the water and sewerage companies and water regulation generally,
as the respective local authorities seek to discharge their new
duties. There is a clear risk of introducing an unbalanced "predict
and provide" approach to sewerage capacity, without proper
account of cost and benefit considerations.
38. We are working with Defra to resolve
our concerns in this area.
Powers over surface water connections to sewers—SUDS
(clauses 217-233)
The issue:
39. Under the SUDS proposals, water and
sewerage companies will gain no influence over the discharge of
surface water to sewers. Instead local authorities are to be given
the power to "consent" surface water discharges into
public sewers, albeit subject to compliance with national standards.
Our concern:
40. We have a number of concerns with this
area.
41. The proposed change seems perverse given
that local authorities are not accountable for the economic consequences
associated with such decisions. Nor do local authorities possess
the technical competence to assess this within the context of
specific local hydraulic conditions. Water and sewerage companies
are to be given little or no influence over surface water connections.
42. We are sceptical that national standards
can alone deliver the safeguards needed for the developing sound
drainage infrastructure. These standards have not been issued.
The standards will have to contain various options for attaining
SUDS objectives since, in practice, development sites embody various
constraints. For example, in a green field scenario, the planning
authority can make sure ample space is provided for SUDS, but
in many urban locations this will not be possible. It will be
tempting for the local authority to seek an enhanced public sewer
solution to meet its local area flood risk objectives.
43. The approach is also inconsistent with
our regulatory policy. This aims to reinforce the long-term accountability
of the water and sewerage companies in managing sewerage capacity
and the associated risks of flooding. Our regulatory approach
is based on putting the right incentives in place for water and
sewerage companies to take the right decisions to manage their
networks over the long term. We set clear regulatory outputs around
the improvements in sewer flooding risks that water and sewerage
companies are expected to deliver. It is vitally important for
there to be a long-term framework to manage the demand for sewerage
capacity given the challenges of climate change and the massive
expense and unsustainability of attempting a `predict and provide'
approach in this area.
44. The impact assessment for local flood
risk management appears to omit completely any consideration of
the option of giving water and sewerage companies powers to determine
surface water connections to sewers. We have developed a series
of proposals that would give the water and sewerage companies
power to consent new surface water connections, mirroring current
arrangements for consenting of trade effluent discharges.
45. Our understanding is that impact assessments
should consider alternative policy proposals, and not simply those
which the proposing department's policy process has selected.
The handling of this area appears unclear and incomplete. For
example, there does not appear to have been a serious attempt
to estimate the extra costs required for local authorities to
scrutinise and reach reasoned decisions about surface water connections
to sewers. This is a function for which they are not currently
resourced, and which would be likely to duplicate the existing
interface between the companies and developers over new connections.
Our view:
46. We believe that alternative approaches
should be considered which give the water and sewerage companies
a greater leverage over new surface water connections to sewers.
This could be through consents, or through alternatives such as
enhancing the powers of the water and sewerage companies to recover
the costs of increasing downstream capacity arising from new connections
from those seeking the connection.
47. It is also vital that there is a robust framework
in place to make sure SUDS are maintained adequately over the
long term. This is so that they continue to function and deliver
the surface water attenuation intended. The draft Bill does not
contain any proposals to ensure that any body adopting SUDS properly
maintains the feature over time. This could leave the water and
sewerage companies responsible for handling the downstream impacts
on sewerage capacity of inadequate SUDS maintenance. We think
that a power for the water and sewerage companies to require SUDS
features to be maintained would be an important safeguard. This
could be incorporated within a consenting approach for surface
water connections.
48. We will continue to work with Defra
to resolve our concerns in this area.
Information sharing provisions—SWMPs (clauses
24-30)
The issue:
49. The proposals grant the Environment
Agency and local authorities extensive powers to request information
from (among others) us and the water and sewerage companies. This
is framed as an open-ended obligation to provide whatever information
needed to allow delivery of the Environment Agency and local authority
flood risk management objectives.
Our concern:
50. There is a risk that these powers could
result in significant costs to water and sewerage companies, and
their customers.
Our view:
51. Sharing information pertinent to surface
water flood risk should be subject to an information protocol.
This should take appropriate account of the nature, provenance,
accuracy and cost of "information" (for example, knowledge
embodied in hydraulic models). The proposals also offer no safeguards
against the misuse of such information, or the data protection
issues that could arise.
52. We will work with Defra to address our concerns
in this area.
Part 2: Designation of features
The issue:
53. This gives certain authorities, including
local authorities, the power to designate assets which affect
flood or coastal erosion risk.
Our concern:
54. We are concerned that the provisions
for "designation" are rather wide-ranging. For example,
a local authority could choose to "designate" all or
part of the public sewer network that a water and sewerage company
operates. The company could not then "alter, remove or replace"
its network without consent.
Our view:
55. Clearly, if designating authorities
behave sensibly, this is unlikely to be a serious problem. However,
this system does have the potential to introduce an administrative
burden on companies where they need to pursue consents. Given
that the costs of this will be passed on to customers, we believe
the burdens should be considered carefully.
56. We are working with Defra to resolve our
concerns in this area.
SUMMARY OF
OUR PROPOSALS
TO ENHANCE
THE BILL
57. We believe the proposals listed below
will enhance the achievement of the overall aims of the legislation.
These aim to address the omission of competition clauses and create
a more effective engagement for water and sewerage companies in
surface water drainage.
58. Our changes would be to:
— include the recommendations for competition
set out in the final report by Professor Cave;
— ensure that the Bill preserves the framework
for economic regulation of sewerage services. In particular, the
Bill should preserve economic regulatory oversight of sewerage
investments and service delivery to safeguard the interests of
all water customers;
— include a statutory protocol for water
and sewerage companies to provide sewerage information to local
authorities for the purposes of local flood risk management and
surface water management plans;
— include within that protocol provisions
to provide information that is technically sufficient for the
purposes of surface water management planning, but excludes commercially
or privately sensitive information or restrict its use or disclosure;
— include, in the SUDS approval process,
an approval or consenting duty for the water and sewerage company
covering the discharge to sewer capacity and the future maintenance
of the facility to ensure this is not exceeded; and
— strengthen the abilities of water and
sewerage companies to recover the costs resulting from new surface
water connections.
59. We would be happy to discuss our proposed
amendments with the Committee in more detail.
Ofwat
May 2009
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