Further memorandum submitted by Ofwat
This submission provides further information
on our approach and what we have allowed the water and sewerage
sector to help them adapt to the challenges of climate change
in the 2009 price review. We also take this opportunity to respond
to the points made by Water UK during their oral evidence session.
On 26 November 2009 we published our final determinations
on the prices that water and sewerage companies can charge their
customers, in England and Wales. Our determination means that
customers' bills will remain broadly stable between 2010-15 but
will still mean that over £22 billion will be able to be
invested to improve services and safeguard supplies. These final
determinations have been set in the longer context of the companies'
25-year strategic direction statements and will be a step towards
meeting the challenges of the future, including those of climate
change.
First of all I think it is important to state
that our final determinations are a good settlement for the environment
and will not create problems for the future. Throughout the process
we worked with the Environment Agency and have accepted 99% of
the National Environment Programme. This includes investments
in over 100 catchment-sensitive management proposals, where previously
there had only been two such schemes.
At the beginning of the 2009 price review process
we asked every water company to produce a 25-year strategic direction
statement. In each statement we requested the companies to take
account of the risk of climate change—both mitigation and
adaptation.
Adaptation in the form of increased resilience
featured strongly in the companies' strategic direction statements
and was reflected in their final business plans, submitted to
us in April 2009. The proposals for increased resilience took
the form of:
— network resilience projects, which protect
from a number of hazards; and
— asset-specific flood resilience measures.
In total our final determinations included resilience
schemes that will benefit almost 10 million consumers.
Climate change and allowing companies to meet
the challenges of it, was central to our price review. While we
allowed funding for a large number of adaptation projects we took
an equally strong stance with mitigation schemes; allowing every
stand-alone renewable scheme put forward by companies, but as
you would expect we challenged the costs.
The table below sets out what we allowed in
terms of adaptation and mitigation measures.
Adaptation
| Mitigation |
| By 2016, 9.6 million people will benefit from increased service resilience to external hazards such as flooding.
| We included all of the 33 stand-alone renewable energy schemes proposed within price limits.
|
We included £414 million for network and asset resilience schemes.
| We included £57 million for renewable energy projects, delivering £8.8 million of operational expenditure savings to customers every year when complete.
|
Companies will protect more than 150 critical, at-risk assets and carry out 13 major network resilience schemes.
| By 2015, companies will be generating more than 1TWh a year from renewable energy sources.
|
More than 100 catchment management and investigation schemes are included in price limits—at the last price review there were only two such schemes.
| This saves the equivalent of more than half a million tonnes of C02e each year.
|
| |
By taking both adaptation and mitigation into account in
the 2009 price review we have taken a holistic view of climate
change. We have never been short sighted on the challenges faced
by climate change to the sectors and we will continue to drive
companies towards best practise through taking into account the
most up to date data and information.
We are currently in the process of preparing a document which
highlights climate change good practice from the price review.
Although this is work in progress, we will give you a draft copy
of the main body of the document when we meet with you on Monday
18 January. We hope this helps to demonstrate how our approach
to climate change encourages evidence-based responses to climate
change adaptation. Our aim is for this document to further promote
climate change adaptation (and mitigation) in the companies we
regulate.
RESPONSE TO
WATER UK ORAL
EVIDENCE
We were quite surprised by Pamela Taylor's oral evidence
to the Committee on 1 December 2009, and do not feel that this
is representative of the whole industry. However, we understood
that it was only a few weeks since we had announced our final
determinations and some organisations may not have had the time
to thoroughly read our national report.
The examples in our good practice document show that we have
taken account of companies' proposals where they show that they
have understood the risks and have plans in place to meet the
challenges.
Adaptation is about making the right choices by using the
most up-to-date information; this is particularly relevant in
the water sector where it has such important long-term repercussions
for customers in terms of the critical services they receive and
the level of bills. Unfortunately the timing of the latest climate
change projections (UKCP09) did not allow them to be utilised
in the price review. However, we adopted a flexible solution to
this problem.
In our original evidence to the Committee we outlined that
we had defined a notified item on climate change and water resources.
This would allow companies time to assess the UKCP09 projections
and then come back to us between 2010-15 with proposals and costs
for schemes to help them adapt to the impact of climate change
on meeting the supply-demand balance.
Although initially received with some surprise by companies,
our approach is now considered as robust and forward thinking.
It is a flexible approach to regulation which does not tie companies
into a five-year period. We are not closing the door in this crucial
area. Indeed we have already had discussions with a number of
companies to help them prepare for any proposals that they may
bring to us.
FURTHER QUESTIONS
Leakage
We understand the perception of leakage. Seeing water leak
out of pipes and then go down the drain is not a good image. However,
eliminating leakage altogether would be a wasteful use of resources.
The cost of eliminating leakage altogether, including the substantial
environmental impacts, would far exceed the cost of balancing
water supply and demand by other means, and that would mean higher,
unsustainable bills for customers. Instead, we expect companies
to keep leakage down to sustainable, economic levels. Below this
level, the costs of additional leakage control would exceed the
benefits. We expect each company to measure costs and benefits
comprehensively—taking account of the environmental impact
of leakage control and other options, and customers' views.
We expect companies to maintain leakage at current levels
or to reduce it slightly over 2010-15. We understand some stakeholders
wanting further reductions in leakage. In most cases, however,
the evidence suggests that more significant reductions over this
timescale would represent poor value for customers and the environment.
Moreover, with the expanding pipe network, maintaining leakage
at current levels still requires companies to increase leakage
control activity because even new pipes leak.
Our final determinations will see companies, by 2015, saving
100 billion litres of water a year through, leakage targets, metering
assumptions and water efficiency targets.
For the first time we have included water efficiency targets
as part of the price review process. Like leakage targets they
are individual to the company. They will play a major part in
driving water efficiency by companies and their customers.
Each company has a duty to promote the efficient use of water
by customers. We monitor the companies' performance against this
duty. Our targets are made up of two elements.
— A base service water efficiency target, which is equivalent
to one litre per property per day for all companies. This target
reflects the level of activity that we judge companies should
undertake to meet their duty.
— A sustainable, economic level of water efficiency,
which forms part of a best value strategy to balance the supply
and demand for water, bringing benefits to consumers and the environment.
CONCLUSION
Climate change was a key issue for us in the recent price
review. We set out our approach in our 2008 climate change policy
statement. We encouraged companies to propose schemes which tackle
the challenges in a phased, responsible and appropriate manner.
However, we will not risk companies wasting their customers' money
on adaptation measures or schemes that may not be needed or do
not go far enough to meet the challenges. While the majority of
the water and sewerage sectors understood our stance, and welcomed
the approach, Water UK obviously felt that companies would rather
have the customers' money up front before justifying the expenditure.
This would not have maintained a fair balance of risk and would
not have promoted an understanding of the UKCP09 scenarios and
their implications for future water resources.
15 January 2010
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