Further memorandum submitted by Ofwat (ACC 39)

 

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