Memorandum submitted by Ofwat (FW 06)





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.


2. Ofwat has been in existence since 1989. It became a corporate body with a Board structure from 1 April 2006.


3. Our main duties are to:


protect the interests of consumers, wherever appropriate by promoting effective competition; and

enable efficient water and sewerage companies to carry out and finance

their functions.


4. 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.





5. 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 and contributed to the EFRA Committee's pre-legislative scrutiny of the Bill.


6. We welcome the introduction of the Flood and Water Management Bill into Parliament. 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 scrutiny process.



7. We are entering an important time for the water and sewerage sectors with a number of significant developments, including:


our recent announcement of limits on the prices that the water and sewerage companies can charge their customers for the next five years;

the Government's consultation on the proposals made in Professor Cave's review of competition in the water and sewerage sectors; and

Anna Walker's report on charges and metering.


8. As well as these developments, the companies face many challenges. These include:


the ongoing effects of the economic downturn;

adapting to and mitigating against climate change;

a rising population and changing demographics; and

evermore stringent environmental standards.


9. All the parties involved have developed long-term strategies to meet these challenges. These include:


Defra's 'Future Water' strategy;

our own strategy; and

the companies' 25-year strategic direction statements.


10. The Bill provides an important first step to create the legislative framework to deliver all of our strategic priorities.


11. 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.


12. The recent floods in Cumbria and those in summer 2007 demonstrate the need for the Bill to promote an integrated approach to drainage and surface water management. We recognise that the water and sewerage sectors will need to contribute to that.


Our views on the Bill


Part 1: Flood and coastal erosion risk management


13. 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.


14. We agree that legislation should address the issue of responsibility for managing surface water management plans (SWMP) and sustainable urban drainage systems (SUDS). This includes having greater clarity about the roles and responsibilities 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.


15. 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:


improved arrangements for managing flooding from surface water;

the aim of achieving more use of SUDS; and

limiting the volume of surface water carried by sewers.


16. However, the law on flood defence and surface water drainage is presently contained in a number of pieces of legislation. And responsibility for administering these laws is spread between various bodies, with different but overlapping responsibilities. Because of this confusion, the Pitt Review recommended that "The forthcoming flooding legislation should be a single unifying Act that addresses all sources of flooding, clarifies responsibilities and facilitates flood risk management".


17. Unfortunately, the Bill fails in this regard. Although it endeavours to rationalise responsibilities, it simply amends and adds to the existing extensive legislation. It also creates two new types of bodies:


the Lead Local Flood Authorities (LLFAs); and

the Sustainable Urban Drainage Approving Bodies (SABs).


18. We are working with Defra, the Environment Agency and other stakeholders to make sure that we all have a clear understanding of the way in which the bill proposals will operate in practice.


19. Our specific comments on the parts of the Bill most relevant to Ofwat are summarised below.


Clause 11 and 12: Effect of national and local strategies

20. We agree that the companies have a significant role to play in local flood risk management. Unlike the other public bodies responsible for flood risk management, they have specific defined duties to serve water customers and are subject to economic regulation. The role they play in local flood risk management needs to reflect this distinction.


21. The companies have a duty under section 94 of the Water Industry Act 1991 to "effectually drain" their area. Ofwat and/or the Secretary of State enforce compliance with this duty using the enforcement provisions provided by sections 18, 19 and 22A of the Water Industry Act 1991; the ultimate sanction for failure is a special administration order. We interpret the duty to "effectually drain" in the context of customers.


22. As part of this approach, we monitor the performance of each company's sewerage system to ensure that the service, in terms of the risk of flooding from sewers, does not worsen and that targeted improvements that customers have paid for are achieved. We also require the companies to demonstrate that any proposed improvements are cost-beneficial, supported by customer 'willingness to pay' research and appropriately prioritised.


23. The Bill requires the companies to "act consistently with" the national flood and coastal erosion risk management strategies and "have regard to" the local flood risk management strategies.


24. Should the national and local strategies be interpreted as imposing mandatory obligations on the companies, requiring them to carry out specific works, then the safeguards for the wider interests of water customers that the economic regulation regime provides would be circumvented. Potentially, Ofwat would have a duty (under section 2 of the Water Industry Act 1991) to finance the costs of the works that have not been through cost-benefit analysis and could result in increases in customers' bills.


25. We would expect the companies (amongst others) to be key partners in developing the strategies at both a local and national level. Potentially, there may be a need to allow for safeguards in the event of substantial disagreement on the part of consultees about the proposed strategies.


26. We support strongly the aims of the draft Bill in promoting a collaborative, multi-agency approach to flood risk management. The companies clearly have a role to play, and we would expect them to be involved at a local level in drawing up the appropriate strategies, and contributing to their delivery through the exercise of their functions.


27. However, to protect customers' wider interests and ensure value for money, we believe those "flood risk management strategies" should not impose mandatory requirements on the companies. Instead, they should impose advisory requirements that are subject to cost-benefit analysis and challenged as appropriate by the economic regulator. Therefore, we agree that it is appropriate for the companies to "have regard" to the local strategies.


28. We believe that the Bill should be clear 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 the companies to carry out particular works or asset improvements that override the safeguards for customers through the proper operation of economic regulation.


Clause 14: Power to request information

29. The proposals grant the Environment Agency and local authorities extensive powers to request information from the companies. This is framed as an open-ended obligation to provide whatever information is needed to allow delivery of the Environment Agency and local authority flood risk management objectives.


30. There is a risk that these powers could result in significant costs to both the companies and their customers.


31. 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.


Clause 30: Designation of features

32. This gives certain authorities, including local authorities, the power to designate assets which affect flood or coastal erosion risk.


33. 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.


34. 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 the companies if they need to pursue consents. Given that the costs of this will be passed on to customers, we believe the burden should be considered carefully.


Part 2: Miscellaneous


Clause 32 and Schedule 3: Sustainable drainage

35. We support the greater use of SUDS as a way of reducing or more effectively managing the flow of surface water into the sewer network. Increasing the use of such drainage systems will:


help reduce pressures on the underground network;

prevent future emergence of sewer flooding risks;

improve the way surface water is managed; and

have the potential to contribute to improved water quality.


36. Draining highway and public spaces currently contributes significantly to surface water run-off. Therefore, demand management of surface water run-off at source is critical to the future management of drainage and flooding issues.


37. While we welcome the inclusion of these proposals in the Bill, we have some concerns.


38. Under the proposals, the SUDS approving body (SAB) is required to "consult" the sewerage company; it is not required to take that company's views into account.


39. In addition, the company must allow the connection of approved SUDS to its public sewers, whether or not those sewers have the capacity to receive flows from the SUDS feature. Therefore, the companies will still not have full control over the quantity or quality of flows discharged to the public sewers they are responsible for. Much will depend on the quality and effectiveness of the national standards. If the national standards are not robust, or ineffectively policed, new development may continue to increase the risk of downstream property flooding or pollution incidents that are effectively beyond the control of the water company.


40. In addition, the water company may not refuse a connection to the public sewer "on grounds that the drainage system absorbs water from more than one set of premises or sewer, or from land that is neither premises nor a sewer". The latter wording implies that the company must accept flows from both highway run-off and land drainage. That effectively continues the uncontrolled right of local or highway authorities to discharge highway run-off, at no cost to them, to the public sewer, while adding unknown flows from land drainage and other surface run-off. Sewerage companies currently have no responsibility to provide facilities or capacity for land drainage. Therefore, this clause seems to be applying an additional unfunded obligation on water companies.


41. We believe that alternative approaches should be considered which give the companies greater leverage over new surface water connections to sewers. This could be through consents, or through alternatives such as enhancing the powers of the companies to recover the costs of increasing downstream capacity arising from new connections from those seeking the connection. As a minimum, local authorities must be required to have regard to the advice of sewerage companies. National standards should specify effective handling of highway and land drainage. This could avoid duplicating resources that otherwise local authorities would have to build up in order to be able to make informed decisions of allowing surface water to enter the sewerage system.


42. The creation of charging regimes is something we believe needs further examination. This type of approach could potentially incentivise a reduction in surface water run-off by managing rainwater at source. We would encourage further exploration of this incentive mechanism in order to understand the benefits to consumers.


43. 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 the body adopting SUDS properly maintains the feature over time. This could leave the companies responsible for handling the downstream impacts on sewerage capacity of inadequate SUDS maintenance. We think that a power for the 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.



Clause 34: Special administration

44. We support the provisions that amend the special administration regime in the Water Industry Act 1991. These new provisions align the regime with the general insolvency regime, as amended by the Enterprise Act 2002, and with other sectoral administration regimes, particularly that for energy.


45. We support the inclusion of these provisions in the Bill. The new sections provide for a regulatory framework to govern the competitive and cost-effective financing and delivery of large water infrastructure projects.


46. Population growth and climate change will potentially require the water and sewerage sectors to carry out larger, more complex infrastructure projects, with greater cost uncertainty.


47. The clause responds to this requirement by specifying a regulatory framework in which new entities will compete to design, build, own and operate large infrastructure projects that meet certain criteria. The framework envisages that the new regulatory regime will be assessed on a case-by-case basis, and will be applied to only those projects that can produce a more efficient and cost-effective results for customers than if the same projects were financed and delivered by the existing companies.


Clause 42: Drainage - concessionary charges for community groups

48. Surface water, in the context of the Bill, is the rainwater that runs from a property into the companies' sewers. In our view, the fairest way of charging for this service is in relation to the size of the site being drained. Customers broadly pay for the service they receive. This gives a financial incentive to reduce the amount of surface water they drain to public sewers as customers only pay for the area that is drained. For example, customers could reduce their bills by replacing a paved area with grass or gravel, reducing the site area being drained. This helps to reduce the risk of flooding from sewers and encourages customers to find more sustainable drainage solutions.


49. This approach is in line with the Government's policy objectives set out in its guidance on charges and its strategy on surface water drainage.


50. The Government's charging guidance sets out matters to be taken into account when agreeing companies' charges schemes. This includes charging non-household users that are not businesses (including places of worship, community facilities, charities and voluntary bodies). The guidance stated that those making similar demands on a service should be charged on the same basis.


51. The Government's 'Future water' strategy outlines:


how SWD should be managed in the context of the 'polluter pays' principle;

that the system of SWD charges should be more transparent; and

that by 2030 there needs to be a better management of SWD by rewarding those organisations that place a smaller load on the sewerage system.


52. The clause leaves each company free to determine which community groups in their area should benefit from a concessionary scheme. The proposals also allow the Minister to issue guidance, to the companies, which they must follow in determining which community groups should benefit from a lower charge.


53. We have a significant concern that the Bill as drafted puts the onus on the companies to decide which of their customers should benefit from concessionary surface water drainage charges. In our view, the decision to preferentially reduce the charges for certain groups of customers is a matter for Government to decide and Parliament to pass into law. It is not for the companies or the regulator to determine social policy by deciding which groups of customers should subsidise another.


54. In our view, it should be made clear either on the face of the Bill or in regulations which community groups should benefit from concessionary charges for surface water drainage and who should bear the costs of providing this concession.




55. While we welcome the introduction of the Bill as an important step in addressing the devastating effects of flooding, we think this should only be seen as the first step in a wider review of legislation in the water and sewerage sectors.


56. The challenges of climate change and population growth will put pressure on our water supplies and will increase concerns about affordability and environmental protection. While many of the challenges will have a slow and gradual impact, taken together the impact is likely to be more substantial and immediate. Changes need to be made now in order to ensure a strong industry and a sustainable supply of water in the future.


57. Ministers have committed to bringing forward legislation to implement key measures from the Cave review of competition and innovation in the water and sewerage sectors and legislation to implement measures from the Walker review of charging and metering.


58. While we welcome the Government's consultation on the Cave recommendations, 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.


59. We also think that legislation should be introduced at the earliest opportunity to address the recommendations in the Walker report. As a first step to addressing the affordability issues we would support the inclusion of proposals in the Bill to get a named person on water bills and for landlords to provide information on their tenants.


60. It is paramount that we begin to put the tools in place to meet these challenges now. That is why we believe that reform in the water and sewerage sectors and water policy is needed. Such reforms do not form part of this Bill, but we would welcome legislation at the earliest opportunity to allow for the wide ranging changes that we believe are needed to allow all the players in the sectors to meet the challenges ahead.



January 2010