Environment, Food and Rural Affairs Committee - Minutes of EvidenceHC 374

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Tuesday 6 March 2012

Members present:

Miss Anne McIntosh (Chair)

Richard Drax

George Eustice

Mrs Mary Glindon

Iain McKenzie

Neil Parish

Amber Rudd


Examination of Witnesses

Witnesses: Lord Chris Smith, Chairman, Environment Agency, Dr Paul Leinster, Chief Executive, Environment Agency, and Ian Barker, Head of Land and Water, Environment Agency gave evidence.

Q88 Chair: Good morning and welcome Lord Smith. Thank you very much indeed for being with us and for participating in our inquiry on the Water White Paper. Before we turn to questions, would you like to introduce yourself and your team for the record?

Lord Smith: Thank you very much, Chair. I am ably assisted this morning by Paul Leinster, my chief executive, and Ian Barker, who has the very grand title of head of land and water at the Environment Agency.

Q89 Chair: Almost biblical in proportions. You are most welcome.

Are you confident that the White Paper’s package of measures to address water scarcity will secure England’s water supply in what may be a severe and persistent drought, not just this year but in the years ahead?

Lord Smith: Before saying yes to the question, it is worth observing that we do, of course, face a rather serious potential drought position over the course of the coming year, and our analysis of the impact that climate change is likely to have over the next 20 or 30 years shows that we are going to face such problems increasingly frequently over the years to come, so making sure that we can address those issues is really important. I think the Water White Paper does put in place quite a lot of the key building blocks for that. Especially, it talks, very seriously and rightly, about the need to value water as a precious resource rather than as something that is an infinitely available commodity as we have assumed for decades. It does have proposals for abstraction reform, for interconnectivity between water companies and for measures to protect the environment for water, which, I think, will very much help us to tackle these problems strenuously.

Q90 Chair: In terms of the recent drought summit and the immediate steps that you are proposing to take to manage the current drought situation, would you like to share those measures with us?

Lord Smith: The key to managing the current problems is working together, and it has to be ourselves working, obviously, with Defra but also with the agricultural community, the business community, the water companies and Ofwat to make sure that the competing demands for water, which include public water supply, water for industry, water for agriculture and protecting the ecology of the river system, can be properly planned and balanced. Getting everyone working regularly round the same table, agreeing what is going to be done, is absolutely the key to making sure we can tackle this. Paul is chairing the working group that is taking this forward. Paul, do you want to say something on that?

Dr Leinster: We have just established a working group of the prime interested sectors, including the ones that the Chair has just outlined, and we will be meeting on a fortnightly basis to make sure that we have got those right approaches in place going forward. The thing is that, unless there is more rain, we will be in for a difficult time and there are difficult decisions to be made within this. There are limited amounts of work that we can do, but what we need to do in the whole process is make sure that we make the best use of water, that we minimise wastage, and people need to start the reduction in water use as of now, so that our water resources go to best effect over the coming summer. The whole programme of work is: how, together, do we do that?

Q91 Chair: I would like to ask just one question in two parts. In the longer term, my understanding is that, in both the Natural Environment White Paper and the Water White Paper, we are encouraging farms to look at building reservoirs to store water as and when it does fall, and yet that is not going to happen because we still have not had the revisions to the Reservoirs Act. Where are we in the long term on farms and others who wish to store water not falling foul of the reservoir safety provisions?

Dr Leinster: Whether or not the water storage applies to a given on-farm store will depend on the size of that storage.

Q92 Chair: Under the current rules-

Dr Leinster: The limitation in the Reservoirs Act is on the amount of that water that is above ground. There is work that is going on just now. We have just had a consultation on the size of reservoirs, which, just now, is 25,000 cubic metres. There are a number of on-farm water storage systems already in place. One of the issues has been that certain farmers have not been able to replenish those reservoirs, because of the low flows currently within rivers. We have just come out with a package of measures to make it easier for farmers to be able to refill that storage. Colloquially they were known as winter storage, because that is typically when they would be refilled. We have said that, irrespective of the time of year when high flow happens within a particular river, farmers will, with our agreement, be able to take the water to fill those reservoirs. In certain places, one of the things that we are doing is working with Defra to enable grants to be made available for farmers to construct new reservoirs.

Q93 Chair: Excellent. In the shorter term, you have said about the competing claims for use. Obviously, livestock farmers rely heavily on taking water to their animals. Can you give us an assurance that they will have access to the water they need for their animals in the short-term drought situation?

Dr Leinster: One of the things that certain farmers are doing just now is looking at what their stocking levels are and taking account of what the future water situation is. Some people are reducing stock levels because of that. Other farmers are also deciding what sort of crops to plant, depending on what they believe the water situation will be. This is something that we are in active discussion with the farming unions and the farming bodies about to make sure that people can make those business decisions that they need to make.

Q94 Neil Parish: Could Defra be more ambitious in setting a timescale for a long-term reform of the abstraction regime? Is it clear enough where we are going?

Lord Smith: I think it is very clear from the White Paper where we are going. The timescale is necessarily medium-term rather than immediate-term, because, where you are talking about abstraction rights that people have, in order to remove such rights overnight, you would both create problems with patterns of agricultural or business use but you would also incur very substantial compensation liabilities. What I think the White Paper sensibly does is to say, "Let us look over the course of the next eight to 10 years at how, when we get to the end of that period, we can have a much more sensible, much more sustainable abstraction pattern than we have at the moment." Ian, do you want to add any of the detail to that?

Ian Barker: It is important to understand that, although the reforms proposed in the White Paper will not commence until the mid-2020s, that does not mean that nothing will happen between now and then. There are very clear signals from the Government that the Environment Agency needs to work hard to tackle the legacy of damaging abstraction which is drying up rivers and wetlands, so that, by the time a reformed abstraction system comes into play, we have a sustainable base line in terms of the balance between the amount of water pumped from rivers and ground waters, how much the environment needs and how much is actually there.

The second critical thing is whether the timing is appropriate. The current system has worked pretty well for 50 years, but our analysis in support of the White Paper has shown very clearly that it will not be fit for purpose when the impact of climate change starts to occur and we feel the effects of population growth and increases in demand. By the time the change to the regime takes place from the mid-2020s, that should be in good time in order to be prepared for those future changes and, by then, we will have a more flexible and dynamic regime, which will be able to respond to changing water availability and changing patterns of water demand.

Q95 Neil Parish: If you are going to create a market for water, then in the end the ones who need it the most and pay the most for it will get it. If you are not careful, you will cut back growing crops in this country to import vegetable crops from other parts of the world that are equally drought-ridden, if not more drought-ridden than we are. How are you going to protect the fact that we do need to grow crops in this country, even though sometimes people think they can import whatever they want to eat? This worries me because it is not only about abstraction. Are you going to look at recycling of water so that that can be used for crops into the future, including nutrients from recycled sewage water and what have you? Where is the strategy? What I rather fear is the idea that, because we’ve got a lot of people, we’ve got a drought situation, crops and animals are dispensable, therefore we won’t bother with them; we will concentrate on people and import all our food from countries that can little afford the water to grow those crops in the first place.

Lord Smith: There is a growing realisation generally, and certainly here and now on our part, that relying on imported food over the course of the next 20 to 30 years is not a sustainable option. We have to look to as much self-sufficiency as we possibly can within the UK. That means trying to make sure that we plan the use of water so that agriculture can use water in the ways that it needs to. Part of that will be finding new ways of using water for the growing of appropriate crops, and that is something which the farming community is already doing quite a lot of work on and thinking about. Our responsibility is to make sure that, in balancing the competing demands, agriculture does not lose out, and we are determined to make sure we do that.

Q96 Neil Parish: Are you looking at ways of recycling that water so that water that has been used by people can then go back to growing crops? You will still grow your crops and then extract your water for people, and then grow your crops with the water that is discarded. Surely that, while quite an expensive way forward, could be quite competitive if you were then using the nutrients from recycled sewage water and the like. The trouble is that it is no good sitting here in 2012 and getting to 2020 and wringing our hands, because these long-term solutions will not happen overnight.

Lord Smith: They certainly will not happen overnight, but I think we will increasingly see recycling of water for a lot of different purposes. Do you want to comment on that Paul?

Dr Leinster: At present in certain areas a lot of the base flow of a river is, in fact, sewage effluent. When we do water balances and when we do water studies, we look at the water that is abstracted but also the water that comes back into the system after people have used it. That is already part of the water cycle that we look at. There is a really good example, going forward to the Olympics, where they are using, for the watering of the landscape areas, so-called black water. There is a water-treatment plant on site which then makes sure that that is taking raw water and treating it to a sufficient standard to enable landscape plants to grow. I think one of the things that we have to do within this study going forward and looking at all of the options is looking at what level of treatment is required for what type of water. Just now we have one level of treatment, which is to drinking-water standards, and then we tend to use that water for purposes that it is not required for. Those are areas that we are actively looking at.

Neil Parish: You are looking at them but what incentives are you doing? Lots of dry countries recycle a lot of water and yet we do not do it.

Q97 Chair: Could we just move the argument along, because we have done recycling. Farmers are concerned about a free-for-all. Could you share with us what principles you are going to use in abstracting so that it is not just the ability to pay and it is not just going to be a complete free-for-all?

Lord Smith: We certainly would not want to have what you might call a complete free-for-all. We need the right combination of market forces that are going to encourage water companies to share resources between each other, for example, at the same time as sensible regulation that looks at how you need to plan for the overall use of water. Ian, you have effectively been in charge of doing this.

Ian Barker: Thank you, yes. At present we are working with Defra to develop some understanding of what the new regime might look like, but we and Defra are very keen that we do not sit in a darkened room and then pop up with a consultation in 18 months’ time or so. The intention very clearly is to engage with all sectors of water users so that they can input to the development of a reformed abstraction regime and, as my Chairman says, work towards the right balance of market forces and regulatory safeguards.

We are certainly very mindful of the concerns that we have heard from the folk in the agricultural community. They are a relatively small player but absolutely essential. Agricultural use is currently only about 1% or so of the total water used in England and Wales, but very much more in some parts of the country at some times of the year. It will be necessary to safeguard that use and potentially to increase it as, perhaps, we become more food-sufficient. To ensure that the future regime gives those proper safeguards, also in terms of water planning, it is likely that, in the future, we may need new water-resource developments. The lesson from other countries has been that, rather than just a development for public water supply, a development should also consider other uses as well, and there are precedents for that in resources that we manage, for example, on the River Severn, which are for the benefit of all water users on the whole of the River Severn catchment, not just for public water supply.

Q98 Neil Parish: One of the problems of this country is a lot of your vegetable crops are going to be grown in the Fens, where there is particularly a problem with water and with drought, so I think that is where you are going to have to target. You are going to have to not only generally target but also target particular areas. Have you got plans for that?

Lord Smith: You are right about the importance of the Fens and East Anglia more generally, which, in many ways, is the richest agricultural land in the country. At the moment it is suffering most from drought. I caution a little against assuming that, in all years, we are going to have a superfluity of water in the north and west of the country and a shortage of water in the east of the country. That tends to be the pattern but it is not always the case, so we need to look across the country’s water needs as a whole rather than just saying it is a problem in the east and the south-east.

Q99 Iain McKenzie: With reference to section 27 of the Water Act 2003, once implemented, how widely do you expect the powers to revoke licences to be used?

Lord Smith: I am going to look to Ian to answer that one, if I may.

Ian Barker: Defra consulted on the principles which would apply to the use of that particular power, and we need to await the outcome of that consultation to understand the way in which that would apply and what the definition of serious damage might be in practice.

Q100 Iain McKenzie: Have you any indication of what may be termed serious damage at this present time?

Ian Barker: The consultation illustrates a number of different examples. For example, a borehole abstraction which is drying up a wetland of special scientific interest or a Habitats Directive site, might be considered serious damage. It will be a combination of the magnitude and extent of that damage, but that will be very much a question of judgment. The consultation is designed to try and elicit views in terms of where that bar should be drawn. It would be wrong of me to try and pre-empt the outcome of that consultation.

Q101 Iain McKenzie: How do you deal with limited licences? At what sort of duration do you see them?

Ian Barker: Since 2003, all abstraction licences have been required to be time-limited, although, in many cases, earlier licences have been so restricted. As we see greater variability in water availability, it will be important that abstraction licences, like all other types of permit, should be eligible for a form of review and a stock-take. As I said earlier, the important thing is that we move to a sustainable base line and, once we have that, future changes are likely to be incremental rather than significant.

Q102 Richard Drax: In the short term, do you have any plans to encourage the increased trading of licences to tackle the current unsustainable abstraction?

Lord Smith: We are already encouraging farmers, for example, to make available spare abstraction capacity to other farmers in order to help to address some of the existing issues of drought.

Dr Leinster: Yes, we are encouraging people to do it. It is possible to do it. There is not necessarily much of a drive to do it. In the Middle Levels within East Anglia, for example, we have got together a group of farmers, all of whom are abstractors, and they are sharing their licences and sharing the water between them. We are also working down in Hampshire just now to see if we can get a similar sort of approach down there. Some licences have got headroom within them which is not currently used. Making sure that we can find ways of encouraging that water use from a place which is relatively well supplied in a particular year to an area which is less well supplied is something that we are trying to do. That will most probably require greater interconnection between catchments and, again, we are working with water companies and others to see how we can facilitate that.

Q103 Richard Drax: What information on licences is available to allow potential buyers and sellers of water rights to identify each other?

Ian Barker: There is a public register of all abstraction licences, which is freely available. There are some security restrictions about the location of public water supply licences, for understandable reasons, but in general terms it is open access in terms of who is abstracting where and what the authorisation is for.

Q104 Richard Drax: Do you have a proactive role to push that? Can people go on it and are people aware of it?

Ian Barker: The outline details, we do make public, and we have published guidance which sets out how one might go about a water trade and the sorts of rules that we might apply.

Dr Leinster: We will certainly call those farmer abstractor groups that I was talking about together and facilitate that discussion. When you get to the larger water users, they are quite sophisticated and they know how to access that information. When you get to smaller users, us facilitating it is one of our key roles.

Q105 Mrs Glindon: Will the Environment Agency have published an overview of interconnection options before planning begins for the next round of water resource management plans in 2014?

Lord Smith: We are very keen to see the next price review round for the water companies include provision for much better interconnectivity between different water company areas and different catchments. It seems to us that it is one of the ways in which we can try to address the problems of imbalances of water availability across the country, and potentially a much more cost-effective way of doing it than creating a national grid for water, which some have occasionally demanded, and which would involve huge expense and cost in order to pump water from one end of the country to the other. Making sure that they are able to move water around relatively easily, both within water company areas, within their own patch, but also between different water company areas, has to be a crucial part of the next price round.

Q106 Mrs Glindon: You have already referred to a national grid, Lord Smith. Will the overview include a cost-benefit analysis of the different approaches to interconnection, for example by contrasting local interconnections with a national grid?

Lord Smith: We will certainly want to continue to develop that analysis. There will, I imagine, be some imaginative proposals coming from the water companies themselves in all of this. The recent bit of kite-flying by United Utilities, for example, saying that perhaps it could run a pipe alongside the high-speed rail link was an ingenious way of tackling a planning problem but might not necessarily be the best way of moving water very long distances.

Q107 Mrs Glindon: Will a cost-benefit analysis be an important part of the overview?

Lord Smith: Absolutely, yes.

Q108 Mrs Glindon: Finally, how will you assess the comparative environmental impacts of bulk transfers and abstraction?

Lord Smith: We will want to make very sure that, where an interconnection is happening in order to solve water availability issues, it does not inadvertently cause ecological problems in the process. Sometimes the content of water in one catchment is actually different from the content of the water in another, and shifting water in bulk from one to the other may have some really serious detrimental effects; it could, for example, carry invasive species across country. We will need to make absolutely sure that we are protecting the ecological and environmental issues at the same time as we are addressing water availability issues.

Q109 Mrs Glindon: Will they have equal weight?

Lord Smith: We will be very much making sure that we protect those environmental considerations.

Q110 Chair: Have you done any work on the costings? Have you any idea what the cost of these interconnections will be? I think, in the drought summit, the Secretary of State made quite a big play on interconnections and it would just be good to know an idea of the costs.

Lord Smith: The answer is it will depend on where, how many and which companies are really keen to undertake it and so on. I do not know if we have got any further information than that.

Dr Leinster: No, but already companies do share resources, and also there are bulk transfers. For example, from the Bedford-Ely-Ouse system down to Abberton, there is a bulk water transfer that happens that we manage. There are other places. After the 1976 drought, Yorkshire Water made sure that there were interconnections between its different supply systems. I think, as the Chairman says, this will depend on the individual circumstances and I think this will be key work for the individual companies to carry out, doing that cost-benefit. How you balance new resource as opposed to sharing resource is one of the things that we will have to investigate.

Lord Smith: It should be work that they carry out over the course of the next two years leading up to the price review, because any capital expenditure that they will need to have in place over the next five-year period will need to be included within that price review.

Q111 Chair: That is my point: it is additional capital expenditure on top of plugging the leaks and everything else that they have been asked to do.

Ian Barker: We have convened all the water companies in the south-east of England and those on the periphery, such as Anglian Water and Severn Trent, to look at the available resources, the current demands and future demands, and the different options for meeting demand well into the future. Part of that work is modelling the different options for meeting demand and the costs of those different options, so that, collectively, the water companies come up with the most integrated, sustainable and cost-effective option for meeting demand over the next 25 years or so.

Q112 Iain McKenzie: How do the bulk transfers that you referred to take place currently and are they the most environmentally friendly methods?

Ian Barker: Bulk supplies can be either a transfer of raw water in a pipe, which is what is usually the case, or a transfer of treated water. They would perhaps go from a water treatment works in one water company directly into the supply of another company, or a raw-water supply from one water company into the treatment works of another one. Generally, they would be within pipelines and not getting near rivers.

Q113 Iain McKenzie: So that is restricted on distance at this moment in time?

Ian Barker: Yes.

Q114 Iain McKenzie: It can be either treated or untreated water?

Ian Barker: Yes.

Lord Smith: If you are transporting water in a pipeline from one area to an end user in another-classically, for example, the water that comes from north Wales down to Birmingham-there are very few environmental considerations that you need to have regard to. If, however, you are using river courses to transfer water, or canals to transfer water, or any other means where you are taking water from one water body and you are putting it into another water body, then you absolutely have to make sure you are safeguarding the environmental impact.

Q115 Chair: I would just say that transporting water by pipe is hardly carbon-neutral.

Lord Smith: If it is downhill all the way, it is not too bad. However, unfortunately, our country is not downhill all the way from one end of the country to the other, and pumping water uphill is both hugely expensive in terms of energy use and also carbon-generating.

Q116 Amber Rudd: You referred earlier to the proposal for the north-south pipeline alongside HS2. Do you think it has any merit?

Lord Smith: It is an ambitious idea. As and when you are building a major piece of new infrastructure of this kind, it is certainly wise to think about what other bits of infrastructure this could be used for. It might be that bits of it could be useful for some of the interconnection that we need. Whether it makes sense to aim to take water from the north-west of the country down to the south-east of the country, I am less certain.

Dr Leinster: We have to remember as well that, I suppose, probably two or three years ago, the north-west had a drought. Under those circumstances, the water would not have been available. I understand that they are also talking about potentially using water from Kielder, but you then have to go from Kielder reservoir all the way down to wherever the high-speed link is going to, so Leeds maybe or Birmingham. It is still a huge distance that you are having to transport water. I think that the proposition itself was quite silent in terms of where the water input was coming from.

Q117 Amber Rudd: It is quite a detail, isn’t it?

Dr Leinster: Yes.

Q118 Chair: Was this not visited round about the time that Cow Green Reservoir was built and David Bellamy made his name on the back of saying it was uneconomic and unenvironmentally friendly to transport water long distances? That was just from Teesdale to Teesside, so how has the debate moved on in that time?

Dr Leinster: We did a study in 2006 looking at whether or not a national grid was a potential solution, and we raised all these issues then. It is one of the things that we will revisit, but I think we would come to the same conclusion, which is that it is highly carbon- and energy-intensive, and there are most probably other alternatives that are more appropriate.

Ian Barker: Kielder Water is a good illustration in terms of water planning not recognising future uncertainties. Currently, we face many uncertainties in terms of the impact of climate change on water availability and also how demand patterns may change across England and Wales in the future. Kielder was predicated on the basis that industrial demand would increase in the north-east of England, and the reservoir was designed specifically for that purpose. The industrial demand that it was designed to meet did materialise, but in China and India and not, unfortunately, in the north-east of England, which is why it still has such huge spare capacity within it.

Q119 Chair: With respect, you are talking about Kielder. I mentioned Cow Green, which flooded the blue gentians, so it is alpine flowers that will never grow in that area again.

Ian Barker: Indeed. It is a special area.

Chair: I hope we can learn from that.

Q120 Amber Rudd: Could I ask you about water metering? Do you think that the White Paper is ambitious enough or should we be trying to look further at Walker’s recommendations for 80% of water meters by 2020?

Lord Smith: Of course, any decisions on universal metering would be for Parliament and Government to decide, not for us. Our view is that metering can be a very useful way of encouraging consumers to think about the amount of water that they are consuming. One of the interesting things is that, in the south-east of the country, water metering already has a very high penetration rate. Ian, you have got the figures at your fingertips, I know.

Ian Barker: Southern Water is embarking on a programme of compulsory metering, which will see Southern Water’s area up to about 97% by 2015. South East Water is also just embarking, and that will take it up to about 88% by 2020. Across the whole of the south-east of England, with the current proposals working through, by 2020 there will be 73% meter penetration. Already in Anglian Water and Cambridge Water, meter penetration is about 70%, and similarly down in the south-west. By the early 2020s, in the swathe down from the Humber pretty much to south-west England, meter penetration will be well in excess of 70%, even if nothing else were done.

Q121 Chair: Should there be incentives to metering? I think the south-west has pretty much metered voluntarily. In other parts of the country, do you believe that there is an argument to incentivise the use of metering?

Lord Smith: In a way, for many households there is an incentive already in that installing a meter reduces the household bills. Where there are very large households with very large quantities of water use, that will not necessarily be the case. One of the concomitant issues that has to sit alongside greater penetration of metering, of course, is the need to take account of those households on very low incomes with very high water needs, and the tariff system does need to take account of that.

Q122 Chair: I was slightly surprised that the Water White Paper did not include more on water efficiency and more of the Walker conclusions, some of the obvious things like households and businesses using water butts to retain rainwater and also only heating hot water to a certain level. Do you think there is a feeling that the Government will rely on legislation or do we need legislation to do this if we are going to proceed to encourage more water efficiency through existing legislation?

Lord Smith: I certainly think that there are ways in which greater water efficiency can be encouraged. Quite a lot of things like planning requirements for new construction, for example, could take account of these sorts of issues. The Government have a longstanding objective, as far as I understand it. At the moment, average water consumption per head per day is 150 litres. Their longstanding objective is to get that down over time to 130 litres per head per day. That is not a huge ask for households to think about the way in which they are using water. It may be that, instead of going for all-out legislation to achieve it, just by doing some relatively small things with the planning system, with new construction and with making guidance available to everyone, you could actually get quite a lot of change.

Q123 George Eustice: Some of the evidence that we had from the Water White Paper pointed to a tension between some aims in the White Paper, which try to develop a holistic approach and encourage co-operation between the water companies, and then, later on, the notion of competition. What do you think of the competitive market? Is that likely to reduce the possibility of companies working together?

Lord Smith: I do not see them as an either/or. I think there is room for bringing in some market incentives, especially in terms of trading water, but I think there is also room for a balanced regulatory approach that encourages collaboration between water companies. I do not think necessarily that you cannot have both. We need both if we are going to get to the desired outcome.

Q124 George Eustice: Particularly with the drought in 2006, if you had things fragmented at the retail side, that could make it difficult to encourage the public to reduce their water use, whereas, at the moment, when you have got one single water company, they are able to run quite high-profile campaigns that urge the public to cut their water use.

Lord Smith: The pattern varies around the country, of course. Very large parts of the country are covered by very large regional water companies. Parts of the south and south-east have much smaller entities, some of which are just responsible for water rather than for waste water and sewage as well, so the pattern is more variegated in the south and south-east, which makes consistent messaging perhaps a bit more difficult there, which is why bringing all of them together and making sure that they are all speaking with one voice is very important.

Ian Barker: It is important to remember also that the proposed competition items in the White Paper are for non-household customers only, and experience from Scotland has shown that, where a customer has changed their supplier, the benefits they derive come from closer engagement and promotion of water efficiency within that business. Experience suggests that that closer engagement will help to drive down consumption in any case and will create a closer relationship which should serve better during a drought. The whole ethos of the proposals in the White Paper is around moving cautiously with competition and increasing the use of markets, and that is very much in line with the recommendation from Professor Cave, whose independent review sparked the proposals in the White Paper.

Q125 George Eustice: Just finally, are there any other concerns that you have about the possible downsides of increased competition, specifically in terms of the impact on the environment?

Lord Smith: If, as your Chair said earlier, this led to a free-for-all, we would be seriously concerned because environmental considerations might go out of the window. But what is in the White Paper is not a proposal for a free-for-all; it is for a modest and timely introduction of market forces into parts of the picture. That, we think, can be beneficial. What we will be concerned to do is make sure that our regulatory responsibilities are being proportionately maintained.

Q126 Chair: You have had a fairly fundamental reorganisation at the Agency. How many people are now, in proportion to the total number, dealing with water, flooding and drought issues at head office and in the regional offices as well?

Lord Smith: Overall, we have reduced in terms of staff numbers from 13,500 two years ago to about 11,500 now. We have taken a huge amount of cost out of the Agency. We have undertaken, as you have indicated, a lot of rather major restructuring. In terms of within that 11,500, probably we would need to separate out flood from the rest of water.

Dr Leinster: The flood side is proportionate to the funding, and just over half of our money that we get in-and we have a budget of £1.1 billion-is on flood risk management. Therefore, around half of our staff work on flood risk management. Water resources is funded via the charge payers, and so the number of people who work in water resources has reduced by a modest number, because we have held our charges largely. In terms of the funding, we get income of about £130 million a year, so just under a tenth would be on water resource work.1 During a drought, the nature of the work that those people does shifts, because they are diverted on to drought work rather than some of the longer-term planning work that they might otherwise be doing.

Chair: That is very helpful. Thank you for all you do, and I am delighted your people are more visible when they go around at the times of flooding. I think that is extremely important. Thank you very much, all of you, for contributing, Lord Smith, Dr Leinster and Mr Barker, this morning. We are very grateful.

Examination of Witness

Witness: Tony Smith, Chief Executive, Consumer Council for Water gave evidence.

Q127 Chair: Thank you very much for joining us this morning and for participating in our inquiry on the Water White Paper. Just for the record, could you introduce yourself and give your position?

Tony Smith: Yes. My name is Tony Smith. I am the chief executive of the Consumer Council for Water, and that is the body that represents water customers, business and domestic.

Q128 Chair: How do you perceive the role of water companies in representing the consumer generally and then, in particular, in their relationship with you as it currently stands before we introduce any competition into the sector?

Tony Smith: The water companies, obviously, should have the primary responsibility for being accountable to their customers for what they provide and the price that they provide it at, but because they are monopolies it is quite important that the system is regulated by the economic regulator and by other regulators, but also there needs to be balance in that debate about what is required by the companies as far as the environment and future requirements are concerned and how far customers’ priorities are reflected in the companies’ plans.

That is where our job comes in. It is quite important that we make sure that water companies listen to their customers about their willingness to pay for things and what their priorities are, and that those plans that the companies put forward to the regulators actually reflect those requirements. That is a fundamental part of our job. As I said in terms of the introduction, this is both for domestic customers and business customers, because, at the moment, obviously, there is very little competition, even for business customers. Even when there is, there will be issues that come through as a result of introducing competition-things like mis-selling and so on-where business customers will need help.

Q129 Chair: In terms of legislation, we obviously have the Water Industry (Financial Assistance) Bill before the House, whose Second Reading is today. In terms of finalising the Pitt recommendations and looking at the Gray, Walker and Cave reviews, how much emphasis do we need on legislation and how much can we be getting on with without legislation? Where we do require legislation and what, in your mind’s eye, would the legislative timetable be?

Tony Smith: I think much of what the water companies and what the water industry needs to do for customers is already enshrined in existing legislation. The gaps are probably around the market reform issues-things like the removal of the costs principle and the reduction in the threshold to zero for business customers, because business customers want competition. More broadly than that, I think the other gap is potentially the issue of water affordability, where the proposals in the White Paper go some way towards addressing the south-west unfairness issue, and the social tariff proposals in the Flood and Water Management Act go some way towards addressing the affordability problem but not as far as they need to go. There will still be an issue around affordability, even with social tariffs. Those are the two gaps, really, that need to be addressed.

Q130 Amber Rudd: I wanted to ask about social tariffs. There has been much debate on how to implement them and what the best outcome might be. What principles should Ofwat use to decide whether a company’s proposal for a social tariff has the broad support of its customers? How are we going to verify that?

Tony Smith: It is very important for monopoly water companies to have a degree of legitimacy for social tariffs that they are proposing, and that can come from two possible sources. One is from Government clearly saying who should get social tariffs and who should not get social tariffs, or-and I think this is reflected in the current guidance-that companies’ customers need to give broad support for those social tariffs in order to give that monopoly water company legitimacy for cross-subsidising between customer groups. Ofwat then have the challenge, with our help, about what that actually means.

We think that it is more than 51% that would not give, in our view, broad customer support, because there would be still a large percentage of customers who would be opposed to social tariffs. I would not necessarily want to put a number on what broad customer support is, because it depends on those who are opposing social tariffs, and how strongly and for what reasons they oppose. Reflective of this, I think, is, in price reviews, we tend to look at companies’ business plans in terms of the level of customer support they have, and I think our view is that if companies are getting 70% to 80% customer support, that is pretty strong customer support.

Q131 Amber Rudd: What do you mean by "customer support"? Do they "tick here" to volunteer to contribute to the social tariff?

Tony Smith: No. We have done customer research, as have a number of water companies, and customers are receptive to the idea of social tariffs but they are only receptive within fairly narrow bands of what they are prepared to add to their bill-maybe £1 or £2. If companies propose social tariffs of that sort of size, then actually I think they will get reasonably strong support, but they will need to help those customers who disagree with those social tariffs.

Q132 Amber Rudd: Will it be on the bill separately or will it just be folded into it and you have to read the fine print to realise that you are participating in it?

Tony Smith: Our view would be it would be better for it to be transparent. Certainly, customers are receptive to playing their part but they do want transparency. They do want to know if they are paying £2 towards addressing a social tariff-

Q133 Amber Rudd: They want to be told.

Tony Smith: Then they want to be told.

Q134 Amber Rudd: Is there any alternative support available for customers who do not qualify for the WaterSure scheme if their company chooses not to introduce a social tariff?

Tony Smith: Already some companies have charitable trusts that can help certain customers and some of them have what they call Restart schemes, which help customers who are in debt to get back on the payment habit. Apart from that, no; it is down to WaterSure or social tariff proposals that the companies might come forward with in the future.

Q135 Amber Rudd: Do you think some people might fall through the safety nets there?

Tony Smith: Potentially, yes. We think that social tariffs can play a part. We think that there will be limits on what customers are prepared to pay. The problem, I think, with the social tariff proposals is that our analysis suggests that customers might pay, say, £2. That is around England and Wales. That is about £40 million. Anna Walker, in her analysis of what the affordability problem is in the water sector, I think identified that the problem is nearer a £400 million problem, so it is a big shortfall. Separately, the Government are proposing a solution to the unfairness issue in the south-west, and we support that, though, in that case as well, there is a question about whether business customers, particularly smaller business customers, might need help in that regard, because the unfairness issue affects them as well as it does domestic customers.

Q136 George Eustice: I know you mentioned just now that £2 is about as much as people say that they will pay, but I just wondered where that came up. Was that based on some kind of economic modelling you did or was it just a focus group? It seems to me, for instance, in the south-west, we are going to have a rise in bills of £50 in one year, so it is a huge rise, and £2 is quite small in the scheme of things to fund a proper tariff.

Tony Smith: We have done a lot of customer research, and so have some water companies, and it is a combination of focus groups and quantitative research. You find that customers generally are not very receptive to social tariffs until they understand what the issues are, and then they are more receptive but within this limit. It is very difficult, I think, to get customers beyond the £2 or £3 range, because then they say, "Who else is contributing to this? The water companies should be contributing to this and so should Government." They are prepared to pay to some extent, but it is limited. That is why I said there is a potential gap in the affordability provision here: it does not quite address the issue. It has got a big part to play but it does not fully address the problem.

Q137 George Eustice: Before the Government found this money to do the assistance it is giving now to the south-west, there was discussion of having a nationally funded social tariff, which could be targeted at those areas which, for instance, have much higher water bills than the national average. Do you think that would have been a better system than a social tariff based at a company level?

Tony Smith: We think a Government-funded social tariff across the country would be the preferred solution. I think customers would prefer that too. That is a separate issue than the south-west fairness issue. We think that those two issues should be separated. There is a fairness issue in the south-west, and then, separately, there is a national problem around affordability. A Government-funded solution for that is the best proposition because to use social tariffs, as I say, limits the help available.

We would not be in favour of trying to use the WaterSure tariff as a route into that solution, because WaterSure was put in for a specific purpose, and that specific purpose was to cap the bills of customers who were going to be disadvantaged because of having a water meter. The idea was that it would bring the cost to them back to the local regional average cost. There are three issues going on: there is protection for customers who have to use a lot of water, which is WaterSure; there is the affordability issue, which is social tariff; and then the third issue is the fairness issue in the south-west. We think those three things are separate issues, and if you try and merge those in terms of a single solution, you start distorting the effect in different parts of the country.

Q138 Richard Drax: Would you support the suggestion that Government data on customers who are likely to be in need of support-like benefits, for example-should be made available to water companies or not?

Tony Smith: Yes, we do. We think that anything that would help the water companies target their help-social tariffs or any other form of help-to the customers who most need it would be beneficial. The take-up of things like WaterSure at the moment is relatively low compared with the number of customers who could benefit from it. That suggests that, despite the fact that we and the water companies do a lot of promotion of that programme, if it could be more targeted by using that data then, we would get a higher uptake of things like WaterSure or social tariffs, and that would be beneficial to customers who need it but also to customers in general. If customers are getting into debt, it causes everybody to have to pay more, so we would be in favour of data sharing.

Q139 Richard Drax: Bearing in mind this information is very sensitive, probably, to many, what do you think customers would make of that?

Tony Smith: I think it is how it is used. I think, if it meant that customers were getting telephone calls from their water company saying, "I believe you are on a particular benefit", then that would be inappropriate, but if being able to target information would help companies to say to customers, "This is available. You may wish to take it up", we think that would be a beneficial thing. It would still be in the customer’s gift to say, "This is helpful to me and, therefore, I want to apply for WaterSure", for example. That would be a helpful development.

Q140 Chair: Could I just ask a more general question on data? We are told that two issues that could delay the introduction and the path to consumer choice and competition are the lack of availability of data-not just about those on benefits but data more generally about water customers, both retail and domestic-and IT issues. Do you agree with that? How do we tackle it?

Tony Smith: I am not sure you are referring to this, but as I understand it many of the companies’ systems are actually looking after business customers and domestic customers, so this separation of the two is practically quite difficult, which is why these questions about the degree of separation between the distribution businesses and the retail businesses is quite an important issue. Our view is that there still needs to be a degree of integration of the companies so that you have customers not being given dissimilar information by different bits of the business or that they get passed around when they have, say, a water quality problem or they have gone off supply for some reason. If there is separation between the retail and distribution businesses, the incentives on those businesses need to be consistent and complementary, so that customers are not disadvantaged.

Q141 Mrs Glindon: With regard to dealing with bad debt, should the Flood and Water Management Act’s provisions on landlord liability be enacted, or do you support trialling a voluntary approach?

Tony Smith: The voluntary approach is an interesting one but we do not think it will be comprehensive enough to address the problem. We would be in favour of making it a statutory requirement rather than the voluntary approach. We do not think that there would be enough take-up to help the companies actually address the problem.

Q142 Neil Parish: On South West Water, we welcome the £50 off the bills, which all of us representing the south-west naturally do. How is that generally perceived by the rest of the country? Do they actually recognise that we did have the highest bills and that that is justified?

Tony Smith: I think the start point is customers would not necessarily recognise the problem in the south-west until somebody tells them. Obviously, customers in the south-west are very, very acutely aware of it but elsewhere they are not. When they become aware of it, they are actually quite receptive to that issue being addressed. The issue around fairness is a very important principle and, therefore, we certainly support the Government’s proposals in the south-west, although, as I mentioned earlier, there is the issue that business customers are equally affected.

Q143 Neil Parish: Yes, I am coming to that.

Tony Smith: Certainly, customers elsewhere, when they realise there is a problem, are actually saying, "Yes, that sounds a difficulty for those customers, so that should be resolved."

Q144 Neil Parish: I know you want it extended to business customers, and part of me says yes also, but would you not perhaps think that that extra money that would need to be spent is not better actually helping others in other parts of the country who are having difficulty paying their bills?

Tony Smith: It is difficult to trade those two things off. That is what I mentioned earlier. Absolutely, I think there are these issues. There is unfairness in the south-west; there is the affordability problem. The affordability problem, from a customer’s perspective, is actually a higher priority, not surprisingly. They see that issue around helping customers pay for this fundamental product-water-so that everybody can afford it as actually quite a high priority. The issue around resolving that for all customers, wherever they live, is I think probably one of the outstanding gaps in the Water White Paper.

Q145 Neil Parish: This is slightly off the question but you talked earlier on about the £2 or £3 people would be prepared to pay, but I think in the south-west I am right in saying that bad payers or not being able to pay is something like £15 on each bill-

Tony Smith: That is right.

Q146 Neil Parish: So it is a significant gap?

Tony Smith: Absolutely. I think the advantage of trying to address the affordability problem, either with social tariffs or a Government-funded scheme, is, if you can help those customers who genuinely have got a problem paying, then arguably the water companies can be a little tougher with those customers who are not paying and, therefore, imposing some of that £15 on other customers. I think that is the other argument in favour of trying to address the affordability problem. It means that the people who could pay but are not paying could be helped more strongly by the water companies to do that, and that is in every customer’s interests.

Q147 George Eustice: I know you said it should be extended to businesses, but given that the Water White Paper itself and the Bill that has come from it are intended to increase competition within the business sector, is that not the way to deliver the result for businesses rather than diluting the fund that the Government has identified for consumers?

Tony Smith: Competition for business customers will help them reduce their bills modestly, potentially, and it will help them get, hopefully, a better service from their supplier. What it will not do is fundamentally address a big bill gap for, say, business customers in the south-west, because, at the moment, all that is being talked about in terms of business competition is the retail component, which, at the very most, is probably about 15% of the bill. The unfairness issue in the south-west is probably bigger than that. Competition can help business customers but it will not necessarily go all the way to resolving those issues around the overall scale of the bill in the south-west.

Q148 George Eustice: Do you think as well that £50 to a large restaurant that is metered and uses huge amounts of water in a year does not make a great deal of difference?

Tony Smith: No, I agree. It is a relatively modest amount.

Q149 George Eustice: I wanted to ask you about water efficiency as well, because I know there is quite a bit in the Bill that aims to encourage consumers to think more carefully about how much water they use and to have kitemarks on dishwashers-things like that to encourage people to buy appliances which are water-efficient. To what extent do you think perceptions about leakage in the water system deter consumers from thinking themselves about their water, if, basically, all this water is just leaking through the pipework? They have got a point, haven’t they? Why should they have only one bath every other day or something, when the water companies have got leaks they are not fixing?

Tony Smith: The good news is that customers-most customers anyway-are quite receptive to playing their part in using water wisely. As long as we as CCWater, water companies and others make it easy for them-in other words, tell them what to do to actually save water, they are very receptive. Certainly, our tracking survey, where we track water customers’ views, is showing that around 70% of customers now are doing something active to save water. That is starting to affect a number of companies that are now reporting, particularly in the south-east, a reduction in demand for the first time over the last two or three years.

These things are working, but you are right that the biggest barrier-and we know this from customer research-to customers playing their part is the perception that others are not, particularly the water companies, and the biggest issue there by far is leakage. The water companies really need to play their part in that regard in achieving their leakage targets. We think the regulatory system probably needs to take account of leakage, which is a very large issue in the customer’s mind. At the moment, the sustainable level of leakage that Ofwat uses to set companies’ leakage targets does not really do that. It does not really address the perception issue that customers have. Obviously, the perception issue becomes that much more acute during times of drought, because they are being asked to save water and if their perception is that companies are not doing the same then obviously that can affect their appetite to actually play their part. It is a very important point and one we should not underestimate.

Q150 George Eustice: Do you think the companies are doing enough?

Tony Smith: Most of them, although not all of them at the moment, are achieving their leakage targets, but, as I say, I think there is a question about the regulatory system that does not really take account of that perception issue. The perception issue is really important not just in the overall question, "Are they achieving their leakage targets?" but also in the speed with which they address leakage reports. It causes customers concern if they report a leak to a water company and it apparently takes days for the company to come and resolve that problem. The smarter companies realise that and are much more proactive in resolving those problems. We think, particularly in times of drought, that is very, very important from the customer’s perception.

Q151 George Eustice: Which are the best performing companies and the worst performing ones?

Tony Smith: In that regard, we know that Southern Water, for example, in the past has been very active in terms of resolving visible leaks. But on the other hand some of the companies, I think, failed their leakage targets last year. That does not look very good as far as the customers are concerned when now we start to talk about drought.

Q152 George Eustice: Do you know which ones missed?

Tony Smith: I think that Yorkshire failed its leakage targets.

Q153 Chair: May I interject a cautionary note here? I hope this is something that the regulatory system does allow for. Last year, we had temperatures of minus 17 for four or five consecutive nights. I challenge any pipe to prevent leakages in those conditions. I think we have to have a reality check here before we fire off. Are we saying that there is enough slack in the system to recognise that there are extreme conditions sometimes that will throw the leakage off course?

Tony Smith: Absolutely. Do not get me wrong-I am not saying that we should be criticising the companies who necessarily did have that problem with cold weather. I absolutely agree with you. The problem here is one of customer perception, which is the thing I am flagging up. If you get the combination of companies failing their leakage target and then a drought, it is an unfortunate mix in the customer’s mind. You are right that there are circumstances where a company might, in a particular year, fail its leakage targets-

Q154 Chair: It was two years running.

Tony Smith: But the customers will not necessarily recognise that.

Q155 Amber Rudd: Do you accept that this country is going to need near-universal metering at some stage in order to meet the increasing pressures on our water supply from climate change and population growth?

Tony Smith: We think that Government have got this right in terms of their approach of addressing metering through local requirements, because the need for metering varies across the country. The implementation of metering needs to be very sensitively done because, although some customers will benefit a lot from having a water meter, some customers will have an instant hit on their bill, sometimes in excess of £200.

The transitional arrangements that companies put in place to address that problem and the protection for those customers who ultimately, when they have a higher bill, need affordability help, are very, very important. What we would not want is for metering to become a reason for customers to be alienated by the water companies and the regulated system. We have been working very closely with the companies who are now putting in metering programmes, particularly the compulsory ones, like Southern, South East Water, to make sure that they do it very sensitively, that they have got the right protections in place, and we think that is the way to try and minimise the risk of metering programmes. Our view is that, over the long term, metering is the right solution.

Q156 Amber Rudd: 100%?

Tony Smith: Yes.

Q157 Amber Rudd: 100% metering?

Tony Smith: Ultimately, but you need-

Q158 Amber Rudd: Sensitively done.

Tony Smith: It needs to be sensitively done and it needs to be done at a pace that makes sense for the local region, so we think Government have got the approach to metering right in the White Paper.

Q159 Neil Parish: Ofwat told us it was confident that abolishing the cost principle would not leave the household customers subsidising big business. Do you share that confidence and, if not, what safeguards would you like to put in there?

Tony Smith: We are in favour of the cost principle being replaced, because it has been a major constraint on competition for business customers. The issue around making sure that what replaces it does not allow a disadvantage to fall on ineligible customers-obviously particularly domestic customers-is absolutely crucial. We are pretty confident that Ofwat can do that. It is a key part of its regulatory role but we will be keeping a very close eye on it to make sure that customers get the benefit of the elimination of the cost principle but that ineligible customers do not suffer disbenefit as a result of it. We will be working very closely with Ofwat to make sure that happens.

Q160 Neil Parish: That is right. In Scotland, Scottish Water is a publicly owned company and then there are retail companies that can then sell. You can get competition but within the business sector, not within the household sector. Would you ultimately like to see competition introduced to household consumers throughout England and Wales?

Tony Smith: We have done quite a lot of customer research around this issue, and business customers are very keen on competition-particularly the larger ones but even small business customers are very pro-competition. Domestic customers are much more ambivalent. Domestic customers, when they understand how competition might work, roughly fall into groups of about 30% who want it, about 30% who do not want it, and about 30% who do not know or have not quite decided. They are very ambivalent. When you explore why that is, it is largely to do with their experience in energy, which has been very mixed in terms of mis-selling, price volatility and tariff complexity. Those are the issues that customers have not necessarily viewed as beneficial to them.

Q161 Neil Parish: The message is loud and clear that, if we were to introduce any sort of competition like that, it would have to be accessible for people and they would have to understand it, otherwise, they are not really interested.

Tony Smith: Yes. I think the first thing to do is to make sure it works for business customers because business customers do want it. Again, we are positive about what the White Paper is proposing to do, which is to do a stepwise approach and make sure it works, because the worst thing we can have is a competition regime that is introduced prematurely, that does not work and that causes customers to lose faith in that regime.

Q162 George Eustice: What, in your view, are the main risks that could make this experiment go wrong?

Tony Smith: Competition?

Q163 George Eustice: Yes.

Tony Smith: We are quite positive about the concept of competition. The biggest risk to the move to retail competition is we try and move too fast and the system cannot cope. If we move to zero megalitres, basically all business customers-I think over a million customers-would then be open to competition. We have just got to make sure that the system could cope with that and that it does not cause what happened in the energy sector, where the switching system does not work and it caused customers big delays when they wanted to change suppliers. That is probably the biggest risk in the retail part.

Again, upstream competition could benefit all customers because it could cause water to be allocated more effectively than it is now. The risks there are that, if you start pricing very locally, some customers could get very big changes in their bills-some down but some up a long way-and that could cause some alienation. The second issue is making sure that the system can still have enough certainty in it to get the right investments at the right time to make sure that the long-term security of supply, which is a customer’s high priority, gets addressed. There is a danger that, if you have a competitive regime, there will be so much uncertainty that people will defer investment for a long time and it means that, in the end, long-term security of supply could be jeopardised.

Q164 George Eustice: Don’t you deal with that by separating the wholesale from the retail function? The wholesale is a protected monopoly-a regulated monopoly, in effect.

Tony Smith: Yes. That is the quite encouraging approach that Ofwat is proposing, which is the fundamentals of the regulated system around the upstream bit of the value chain get retained-so things like the regulated capital value and so on-which does give investors a degree of certainty about what is going to happen in the future. Those are all encouraging signs, but, obviously, there is some detail to be thought through on things like interconnection. We think, in the round, it could probably make sense. There is quite a lot of detail to make sure that either customers are not disadvantaged as a whole or customers in particular locations do not get disadvantaged by what is proposed, particularly for upstream competition.

Q165 Richard Drax: When should the competition in the retail market be open for business in your view?

Tony Smith: When it can cope is the short answer. I think we need to be ambitious but we need to be realistic, and we want a competition regime that, when it starts, works, broadly speaking. One of the biggest issues there is to just make sure that the system could cope with a very large number of customers, some of whom may choose to switch. I think we have just got to make sure that the regime is capable of coping with that.

Q166 Richard Drax: Water UK argues that an April 2015 market opening "would entail an unacceptable degree of operational risk".

Tony Smith: That would be a concern to us. We do not have a particular view on when the right time is, but we just want to be reassured that the system that lies behind it would be fit for purpose. Those sorts of concerns would be a concern to us. The worst thing that can happen is that customers experience a system that does not work for them, because then the competition regime would fall into disrepute.

Q167 Chair: Could I return to water efficiency and the Anna Walker recommendations? Do you have any preference? What would you favour as being the measures most capable of increasing water efficiency? Do you have any favourites?

Tony Smith: Our view is water metering can play a part but it is not a solution in itself. It can help customers play their part. The work that we have done on alternative tariffs-and the work that some companies have done on alternative tariffs-is not that positive in the sense of customers’ receptiveness or, indeed, their behaviour change when they have alternative tariffs. There is quite a lot of work that needs to be done, not from a statutory point of view but to get customers thinking water efficiency is quite important for everyone. I think it is quite a long-term job but, as I was saying earlier, customers are receptive to playing their part.

We have got to make sure we do not blame customers and that we do not penalise customers for using water, but that we help them by giving them ideas on how to save water, backed up by sensitive implementation of metering. That is our preferred approach. Things like rising block tariffs and seasonal tariffs could potentially play a part over time, but customers’ receptiveness and their likelihood of acting on those tariffs at the moment looks to be quite low. The danger is we could implement things that do not have a positive effect.

Q168 Chair: In terms of who the regulator should be, is it correct that, in Northern Ireland-or the Irish market-you actually have three regulators: a regulator for Northern Ireland, a regulator for southern Ireland, and then a third regulator for the Irish market? Do you have any thoughts about who the regulator should be moving forward? At the moment, we have obviously got the regulator for Scotland and the regulator for England. Who should be the regulator for the UK market?

Tony Smith: I think that is more of a political decision than it is a customer decision. I think there is a fairly high degree of consistency between the Scottish regulator, the Water Industry Commission, and Ofwat in terms of the way they regulate the regulated business. There is, obviously, a difference at the moment in the competition regimes, and we are encouraged by the White Paper saying that those two things should be looked at to come in line with each other. Who should regulate that, I think, is an open question. We do not have particularly strong views about it. There is a question for business customers, particularly multi-site customers, in that they, at the moment, face different regimes in Scotland and England and, obviously, it would be beneficial for them if it was the same regime so that they could get one service from one supplier, potentially, across those two countries.

Q169 Chair: In response to Richard Drax’s question, the chief executive of the Water Industry Commission for Scotland told us on the record in his evidence that any market opening date earlier than April 2017 "would be really pushing it". Obviously, there is a debate about where we are with the legislative process. Do you have any ideas about whether 2017 is being over-optimistic?

Tony Smith: As you say, it depends on the legislative timeframe, and it goes back to the question about, as well as the legislative timeframe, whether operationally the competition regime has got all the systems in place to make it work. I do not have a strong view about whether it is 2015 or 2017, but as I say what we will be doing is just making sure that both those elements-the legal framework but also the operational framework––are in place and are actually going to work. That is our main issue, I think, for customers.

Q170 George Eustice: In the evidence that we had from the Scottish industry, they talked about the separation that they had achieved between the wholesale and the retail side, and business streams were spun off. How much separation do you think is required for this to work between the wholesale businesses and the retail? I know Government, in the face of protest from the industry, backed off somewhat from where Scotland was heading.

Tony Smith: We would be concerned about legal separation at the moment, because we noticed that the White Paper’s impact assessment suggests that the costs of doing legal separation and the payback period are much longer and a much bigger cost than just doing accounting separation. Given that the costs of this are going to fall in part on ineligible domestic customers-and they may not benefit, ultimately, from this split-then, actually, for the moment, we need to minimise the cost of the change so that the impact on those customers is minimised. We are, at the moment, happy to see just accounting separation. I think, in Scotland, it is slightly different because the retail services for domestic customers are actually provided in large part by the local authorities, which is different to England, of course.

Q171 George Eustice: Are you not concerned, though, that, in terms of getting service from the wholesaler, the incumbent wholesaler’s subsidiary company or retail division will have first call on those and it will be a barrier to new entrants?

Tony Smith: That is a concern. It is a concern that the regulator can probably keep an eye on, but it is less of a concern to us than the cost of doing legal separation will have for customers. I think step one is to do accounting separation and see if it works; if it does not, then clearly there is an option on doing something more radical later on.

Q172 Chair: You have been given a reprieve, under the Public Bodies Act, until 2014. Do you believe that Defra should commit to retaining the Consumer Council for Water in its current form until the forthcoming market reforms have been fully implemented? Do you see a future role, as did David Gray, after that time?

Tony Smith: Yes is the short answer because, as we have discussed, there are timing questions about the competition regime. There are issues today for business customers that we are trying to address, and many of these issues have been there since privatisation, particularly transparency of charges and transparency of things like back payments that companies make that affect customers now. As David Gray suggested, there will be issues around the implementation of business customer competition, as there were in energy.

If CCWater is not there, the alternative proposals for CCWater do not really address business customer issues; it is all around domestic customers. Business customers who, today, have got issues with the water industry and probably will have during the implementation of the competition regime, would be unprotected in that sense. It is quite important, as David Gray suggested, that business customers have somebody representing them, either to water companies individually or to the regulated system-to Ofwat-which is what we do today.

Chair: That is very helpful. Thank you very much for contributing and being so generous with your time today. I think we have benefited greatly.

[1] Note by witness: the £130 million refers to income the Environment Agency receives through charges for water resource activities.

Prepared 4th July 2012