Written evidence submitted by Thames Water
EXECUTIVE SUMMARY
— Future legislation should provide companies
with powers equivalent to those of local authorities to tackle
flooding and pollution from misconnected drains.
— We support Walker's recommendation that
Government reviews companies' powers to pursue debt from customers
able but unwilling to pay their bills.
— We agree that Government should share
information on customers in receipt of benefits—an essential
precursor for a social tariff to reach those genuinely in need—and
occupancy data.
— Market reform should be explored with
careful consideration of the potential impact on financing arrangements,
which underpin the successful performance of the sector since
privatization.
— Existing provisions governing mergers
should be brought in line with other sectors as a legislative
priority. Mergers could reduce customers' bills, deliver innovation,
and improve Ofwat's ability to undertake comparative regulation.
— Both the overall burden of regulation
and the inter-relationship between policy, legislation and regulation
could usefully be reviewed.
— Funding arrangements for and regulatory
treatment of the transfer of private sewers need to be finalised
as a priority.
Key issues covered by the consultation into the
draft Flood and Water Management Bill and by the Cave and Walker
reviews to be taken forward as legislative priorities
Draft Flood and Water Management Bill—misconnected
drains
1. The problem of wrongly-connected household
drains affects up to one in ten properties in parts of our region.
"Misconnections" pollute watercourses and increase the
risk of floods from the public sewer network.
2. The draft Flood and Water Management
Bill proposed the introduction for sewerage undertakers of powers
to rectify misconnected drains in addition to those currently
held by local authorities. Although local authorities have powers
to tackle the issue at source, they are not responsible for addressing
the problems misconnections cause downstream. This has led to
an inconsistent and at times ineffective response.
3. We view the provisions outlined in the
draft Bill as essential. They would make the process quicker and
more efficient; are straightforward and non-contentious, and would
bring in line companies' powers to enforce waste water quality
issues with those they already exercise on drinking water quality.
Walker Review—bad debt
4. We welcome the provisions in the Flood
and Water Management Act that introduce liability for landlords,
reflecting Anna Walker's recommendations. They are an important
step in the right direction, but do not on their own do enough
to deal with this growing problem, which adds £12 to the
average annual water bill.
5. Domestic disconnection is rightly not
an option for water companies, but in its absence we need carefully
to examine other ways to create a disincentive for repeated and
willful non-payment. We agree with Anna Walker's recommendation
that Government review whether companies should be legally able
to pursue debt through the magistrates' courts, a mechanism already
successfully used for non-payment of council tax.
6. As the Walker Report highlights, this
process would provide the important additional benefit of identifying
customers struggling to pay their bills who may qualify for other
assistance, while allowing companies to recover outstanding revenue.
Walker Review—social tariffs
7. We championed the introduction of a social
tariff1 for water customers, and were therefore delighted that
the Flood and Water Management Bill was amended to include provisions
in this area.
8. Our customers have made clear, in independently-facilitated
research, that, while they are prepared to support our planned
social tariff, it must be carefully targeted to benefit those
genuinely in need. The success of a social tariff relies on the
ability to differentiate between customers who cannot and those
who will not pay. This is at present an obstacle.
9. For this reason we support Anna Walker's
recommendation that central and local government should pass on
to companies information on vulnerable customers in receipt of
benefits, in line with the approach in the energy sector. Information
on household occupancy rates is also required for the successful
introduction of new tariffs.
Cave Review—approach to reform
10. The water industry faces significant
challenges in the form of climate change and population growth,
particularly in London and the South East. We should explore the
potential for market reform to help ensure companies are best-placed
to meet them.
11. In determining how to introduce reform
we should look carefully at the impact of change. The current
regulatory regime works well and delivers value for customers.
This is possible largely because the clarity, stability and certainty
of the regulatory regime attract capital investment on the best
possible terms, which over time is in customers' interests.
12. There is a risk that some reforms could
jeopardise investors' abilities to make a reasonable return, undermining
the incentives for future investment. Whichever reforms are adopted,
the biggest of all the challenges we face is the ongoing need
to attract capital to sustain the high levels of service customers
receive. We advocate an approach that reflects that need.
Cave Review—Special Merger Regime
13. We share Professor Cave's conclusion
that the potential benefits from capital market competition are
lost by the inclusion of the water industry in the special merger
regime2, and agree that provisions governing mergers are brought
in line with other sectors.
14. The benefits from mergers arise from
reduced operating costs through greater economies of scale; the
leverage larger companies achieve through increased purchasing
power and reduced financing costs. They would also include improved
environmental performance and the potential for improved customer
service.
15. Our analysis indicates the potential
benefits to customers from mergers could generate bill reductions
of up to 6%.3,4
16. For these reasons, we believe this reform
should be a legislative priority.
The further policies which are required to ensure
flood and water management which delivers optimum social, economic
and environmental outcomes
Inter-relationships between policy, regulation and
legislation
17. An independent, clearly-focussed economic
regulator is a key element of the stable environment needed for
the efficient financing of the sector. Ofwat was set up as the
industry's economic regulator but has, over time, seen its remit
broaden to the point where it is charged with decisions about
trade-offs between economic and environmental and social issues.
Given their significance for the future direction of the sector,
we believe that responsibility for environmental and social policy
decisions should rest with Government.
18. There is a case for reviewing the implementation
of the provisions of the Water Act 2003 that form the statutory
requirement for Water Resource Management Plans. While Ofwat allowed
funding for a programme of compulsory metering through the Price
Review, this was done in the absence of decision by the Secretary
of State to grant the necessary powers for us to progress such
a programme. This should be addressed by using the ministerial
guidance for the price review to set out how the issues should
relate.
Regulatory burden
19. We believe the regulatory regime works
well in broad terms, with an appropriate balance between customers'
needs and companies' requirements. There is, inevitably, scope
for improvement, and the regulatory burden could usefully be reviewed
in this respect.
20. Our last annual performance report to
Ofwat (known as the "June Return") reported 650 pieces
of data, each underpinned by explanation and detailed analysis,
in a 1,200 page report. Our Business Plan for 2010-15 was 6,500
pages in length. It would, we believe, be worth assessing the
additional value this very high level of detail provides, and
whether it might be possible to move to a lighter touch approach
without jeopardising the high standards the regime delivers.
Any issues related to the Flood and Water Management
Act 2010 (including sustainable drainage systems (SUDS) and the
transfer of private sewers and lateral drains).
Transfer of private sewers
21. We welcome the transfer, which will
remove uncertainty about responsibility for drainage at homes
and businesses, and the risk of homeowners being landed with unexpected
and sometimes large costs.
22. The transfer will increase the length
of our sewer network by 60% from 40,000km to 67,000km and the
incidence of blockages from 55,000 to 250,000 per year.5 Our operating
costs will as a result increase by up to £60 million annually.
23. Given this significant cost increase,
the current lack of certainty on how costs are to be recovered
puts us in a difficult position. We are therefore looking to Ofwat
to ensure that adequate funding for the transfer is allowed, probably
through an Interim Determination of K. We are also looking to
Ofwat to agree how the performance of these assets will be measured,
and the information they will require.
7 October 2010
REFERENCES1 Our
planned social tariff would provide the four per cent of customers
least able to pay their bills with a 25% discount, while the one
per cent least able to pay would receive a reduction of 50%.
2 The inclusion of water sector mergers in the
special merger regime appears to be an anomaly when viewed in
the context of the other special provisions in the Enterprise
Act 2002, namely to ensure plurality of media sources, and to
guard against threats to national security.
3 Thames Water estimate of the benefits to customers
from a modelled merger scenario.
4 Regulatory practice in other sectors indicates
that a reduction in the number of companies should not adversely
affect Ofwat's ability to regulate on a comparative basis. The
gas, electricity, telecoms, aviation and postal service sectors
are all currently subject to price control regulation with fewer
comparators than the water industry. For example there are 14
comparators in the electricity distribution industry, eight in
the gas distribution industry and 22 in the water industry. The
Committee acknowledged this point in its report on the Draft Flood
and Water Management Bill.
We have found that, far from reducing Ofwat's ability
to undertake comparative efficiency analysis, a reduction from
21 to 10, or fewer comparators, may actually have a beneficial
impact on Ofwat's ability to undertake comparative regulation
and set efficient prices.
On reviewing our evidence of the impact of mergers
on comparative efficiency analysis, Professor Stephen Littlechild
commented, "These are really important results…an apparently
small change in the model specification can give better results
with fewer comparators. This is part of the argument that the
continued existence of the smaller companies is actually handicapping
Ofwat's ability to do effective comparisons, rather than improving
it."
5 We will also take on around 5,000 sewage pumping
stations, in addition to the 2,500 we already have.
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