Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Portsmouth Water Ltd

Portsmouth Water is pleased to respond to the Efra Select Committee’s inquiry into Defra’s Water White Paper “Water for Life”.

Our overall view is that we welcome the paper in that it was needed to provide clarity for the industry. Our views are set out in more detail below.

Background to Portsmouth Water

Portsmouth Water has been an independent water company proudly supplying water to Portsmouth for over 150 years.

The Company:

serves large towns and cities such as Portsmouth, Gosport, Fareham, Havant, Chichester and Bognor Regis, as well as rural areas of South East Hampshire and West Sussex;

has the lowest bills in England & Wales and is considered to be one of the most efficient companies in the water sector;

has 21 water sources comprising one group of springs, one river and 19 borehole sites. However, despite being located in the south of England and, therefore, in an area of high water stress, the company has only had one hosepipe ban in 35 years;

can provide a bulk supply to Southern Water of up to 15 Ml/d, currently running at one Ml/day (sweetening flow); and

play an active role in Water Resources in the South East Group (WRSE).

Therefore, we believe that Portsmouth Water is well placed to comment on the White paper. We deal with each of the questions raised on the White paper below:

General Points

The objectives set out in the Water White Paper of meeting customer expectations at an affordable price, reforming abstraction licences to protect the environment and developing and supporting growth will have competing elements. In delivering a framework which will enable successful outcomes to be achieved careful consideration will need to be given to the balance between these competing elements.

Whilst we support the White Paper’s overriding desire to ensure that the environment is protected we are concerned about the impression being given that damage from water supply abstractions, which provide a very important resource for our local communities, is being over stated.

We believe that water companies act responsibly in recognising the need for sustainability in their water resources management plans. As a result at Portsmouth Water we have incorporated licence reductions which ensure the protection of European Habitation in our Water Resources Management Plan 2009 and we are currently engaged in Water Framework Directive investigations, the outcomes of which will be included in our next Plan in 2014.

   We would challenge the basis of any statement that claims that the Company is causing significant damage to its local water environments.

The development of robust Water Resources Management Plans, based upon sound principles which are developed from agreed Planning Guidelines, are the key elements to ensuring that environmental protection is provided whilst at the same time the security of public water supplies is maintained. This is exactly what they are designed to do!

   The linkage between Water Resources Management Plans and the proposal to incorporate sustainability reductions within the Ofwat Price Review is welcomed.

In most areas, even in the South East, water resources issues are temporal; only a problem in dry years and peak demand, affecting maybe only one in every 10 or 20 years. As noted above, Portsmouth Water has only had one hosepipe ban in 35 years.

We are not certain that Ofwat’s proposal for future price limits will compliment the proposals in the White Paper. The separate price limits for retail and wholesale are expressly not in line with it and in our view will be confusing for customers.

Does the White Paper set out the right principles for customers and the water and sewerage industry for taking forward reform of the market for water supply?

We support the relaxation of the threshold for business customers, but would recommend a small threshold to avoid complexity and cost of very low users switching. If the threshold is set to zero this could result from a number of low use commercial customers such as shops with complex supply arrangements switching supplies for relatively little or no benefit and the water Companies having to undertake a disproportionate amount of work to facilitate the switching. Ultimately the remaining customer base will have to incur the costs involved.

The proposed reforms will make our obligations re water quality much more complex. The whole process of delivering water quality which meets regulatory requirements is based on risk assessment from source to tap. How can water companies ensure that their assets are not compromised by these reforms? Have the views of the DWI been taken into account?

These plans will do nothing to reassure investors left with the possibility of stranded assets which will create added risk in the industry.

We are not sure the majority of domestic customers are interested in competition. They tell us that they value security of supply and quality; both are potentially at risk and the benefits may be overstated.

We welcome the absence of the requirement for legal separation of retail. For small companies such as Portsmouth this would have significantly increased costs which we do not believe would produce a tangible benefit to customers.

The proposed reforms necessitate significant changes to the way in which water and waste water services are delivered and are likely to result in a more diverse set of operators within the industry. This contrasts with the existing arrangements where companies not only guarantee delivery from “source to tap” but plan resources and treatment based on the entire water cycle. The proposals may also lead to changes in the relationships between investors, customers and the environment. It is important that delivery of the required changes does not put at risk service delivery, continued financing by investors or affordability.

The White paper contains only high level proposals. Therefore it appears that Ofwat will be left with a lot of discretion as to how these high level proposals are implemented in practice. The detailed elements of the proposals will need to be implemented with considerable care in order to maintain the long term confidence of investors.

Are the proposals to protect and enhance water resources, for example on abstraction regime reform, likely to be fully effective?

One key tool in this area which could be provided now is for charges for abstraction to be based on actual usage. As for domestic households this could encourage companies to minimise their abstractions.

We support the drive to increase inter-connectivity and the trading of bulk supplies of water. However, whilst we support this objective and would want to provide further supplies, their practicality and the difficulties and practicalities associated with trading agreements must not be underestimated.

Bulk supplies of water are generally required when everyone has a shortage and because they are needed on infrequent occasions, can be expensive.

We are sceptical of the number of benefits of the bulk supplies identified by Ofwat in its various papers which were based on the 2008 Draft Water Resource plans. Defra should not be over optimistic in the number of bulk supplies which can be made.

In order that the challenges of climate change can be addressed it is important that the water resources management planning guidelines make provision for the impacts of climate change to be included in the plan.

The effectiveness of catchment management is very dependent upon all parties playing their part to achieve the desired objectives. This is especially true in relation to farmers/agriculture. These parties need to be aligned with the objectives and have incentives aligned with those objectives. Otherwise catchment management is unlikely to be successful.

Initial results from catchment management projects demonstrate positive support from environmental groups and the agricultural community too. However many of the projects will require several years of monitoring to enable a full assessment of success.

Amending the abstraction regime will be complicated by the unwillingness of many incumbents to be disadvantaged, especially if some of their spare water which otherwise might be tradable is removed without compensation.

The timescale to change the regime is also likely to be very long, considering the stakes involved and the required legal process.

We welcome the recognition that “while demand management will have an important role to play, we may need significant new water resources to be developed”. This is a true “twin-track” approach. We cannot rely entirely upon demand management measures to ensure the security of supplies especially as their outcomes are uncertain.

How best can the White Paper’s aims to promote water efficiency and the use of sustainable drainage be implemented?

Water Companies can encourage demand reduction, but cannot “deliver” it. It requires many organisations and stakeholders be involved and to play their part. It will also require many activities that customers will have to pay for. This raises the question as to whether customers want this and whether or not they are willing to pay for it?

We have to recognise that by comparison with many European states, we are perceived as a country which receives plenty of rainfall. We should be making best use of the opportunities that exist to store that rainfall.

An overall PCC reduction in the first five years looks like a target. It will be very difficult to achieve it if we are not funded for metering or if we are required to provide transitional tariffs and social tariffs. If metering remains an option for customers we cannot see how we can meet a target reduction for PCC. Also why should a reduction in PCC be pursued if there is no economic case for it, ie if there is no supply demand imbalance.

We believe that there should have been a more positive policy statement in the paper on water meter installation.

Do you support the White Paper’s proposals on affordability of water bills for householders?

We believe that the statement in 39 is very optimistic and we are not sure that the changes in household bills will be much affected by the market reforms. The estimates of the Cave Report etc. that there will be knock on benefits, are, in our view, unlikely to be delivered.

Yes, we support the proposals but have some concern that the government’s plans could actually lead to higher prices for domestic water customers. The “cost principle” which governs wholesale water prices to ensure they cover the costs of maintaining water infrastructure is proposed to be removed. This means that Ofwat could set a lower wholesale price to encourage new water retailers, but the costs of infrastructure would remain with the existing water companies. Domestic customers, who are not allowed to switch supplier, could end up with higher bills to meet those costs. Alternatively the water companies will face lower margins. This could impact on investor confidence.

There appears to be little in the paper concerning customer debt issues. We need the Government to implement the provision in the Flood and Water Management Act 2010 to make it a requirement for landlords to provide information on the water company details for their tenants, so that water companies have comprehensive information on whom to bill and pursue debt effectively. Government must also help by making information that it holds available to companies, so that they can provide assistance to customers in need. Government must recognise that the costs associated with debt have a financial impact upon customers who do pay bills.

Does the White Paper omit any key issues where further policy action is required to ensure sustainable, reliable and cost-effective water supplies?

We welcome the approach to social tariffs and water efficiency measures as good ways of reducing water usage. However we were surprised that the roll out of water meters was not covered in the paper.

Given the time that change to the abstraction regime will take, we are surprised that there has not been more emphasis on the implementation of bulk water trading in the near-term.

The White Paper leaves a lot of questions unanswered: the detail will only emerge with the publication of the draft Water Bill.

The Company supports the focus in the white paper in improving the standards of service provided to developers. Though careful consideration needs to be given to ensure the reforms result in a framework that protects developers being in a situation where they incur the full cost of new assets although they only require a small part of that capacity.

We look forward to working closely with the Government, Ofwat, and all other stakeholders on these proposals, over the coming months to ensure that the best outcomes are delivered for the customer.

20 January 2012

Prepared 4th July 2012