Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Sembcorp Bournemouth Water

1. We welcome the White Paper; it provides a policy link from the Natural Environment White Paper to the proposals for changing water regulation and the water industry (the Cave and Walker reports, the Gray review and Ofwat’s Future Price Limits (FPL)). However, it would have been helpful if the White Paper had been published before the FPL consultation. There is some inconsistency between the two publications and some of Ofwat’s proposals do not reflect the spirit of the White Paper. In general, the White Paper prefers a more pragmatic and evolutionary approach than does Ofwat, and has a clearer vision of the way forward.


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?

2. Customers are clear about what matters for them—they want a continuous supply of clean and wholesome water. Other concerns are subsidiary—they want to pay a fair price and they do not want the environment damaged in their name—but a completely reliable water supply system is their highest priority. They do not want to see radical reform in the pursuit of relatively small financial benefits if this puts the primary service at risk.

3. Accordingly, we agree that now is not the time to take risks with the successful source to tap model, particularly as investor confidence is so important to meeting future challenges. We accept that some regulatory changes are needed, but we think that the key to meeting future challenges lies in allowing a more diverse and local approach to develop, rather than the replacement of one restrictive regulatory approach with another.

4. So, we support a genuinely evolutionary approach to industry reform and initiatives, which like Defra’s timetable for changing the large-user threshold, will allow the incremental evaluation of the benefits of retail competition and minimise the risks to all stakeholders.

5. We are concerned at the continued use of Scottish evidence to support radical change. The situation in Scotland is very different from England and Wales. We have already achieved the same efficiency improvements and more. We do not have the same subsidised cost of capital, yet our bills are much lower, and our customers are far more satisfied than those customers north of the border. There are lessons from Scotland and we should use these to inform our thinking, not as a blueprint for a radical new approach.

6. We support the Defra proposals to reform the existing Water Supply Licencing regime. However, there are wider lessons for Defra and Ofwat, mostly relating to the need to consider and test proposals before enshrining them in legislation.

7. We do not agree that new market entry arrangements and formal separation are essential conditions for innovation and change. There is a vibrant process of strategic market entry in the water industry. New owners play an active role—they bring ideas and business models. And well-designed and executed regulatory incentives, such as Ofwat’s service incentive mechanism, can encourage both innovation and rapid improvement.

8. While we welcome the decision not to push for legal disaggregation of the companies, (and we think a retail price limit is a reasonable evolutionary step), we do not agree that establishing a retail price limit on its own will provide the wholesale business with a much stronger incentive for improved efficiency. To make a difference Ofwat needs to put in place positive incentives to allow the retail and wholesale businesses to meet both customer expectations and environmental challenges without an increase in complexity and uncertainty.

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

9. We support the aims for reform of the abstraction regime. The formation of a well-resourced National Advisory Group to lead a broad consultation on abstraction regime is a positive step.

10. We also support the proposal for the EA to lead a study of the scope for interconnections to relieve water stress and deal with future water resource problems. It is important that this work is completed in time for the next water resource management plans (WRMPs) and the next price review.

11. We welcome the statement of principles to maintain abstractor confidence and the proposals for the EA to work to establish a working water market.

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

12. The White Paper includes little that is new on water efficiency. We had hoped to see proposal for more affirmative action to take water efficiency to a more productive level. For example, while improved product labelling will help customers choose more efficient appliances, some sort of subsidised replacement of household fittings would encourage decisions to replace the damaging equipment.

13. The discussion of metering and new tariffs in the water efficiency context highlights the potential for consumer acceptability issues. More affirmative and supportive action from government could help to overcome these.

14. Finally, we are concerned that some of Ofwat’s FPL proposals (which appear to rule out price limits providing any subsidy for free supply pipe leak repairs and provision of water butts, and make higher levels of metering unattractive) run against those in the White Paper.

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

15. We have supported Defra’s proposals for the use of social tariffs; however we are also concerned that it might become compulsory to offer a social tariff even where better affordability options exist. Because we have managed to keep price increases to a minimum our bills are substantially below the level of most other companies. This, with our understanding of our customers and the issues that affect them, minimises the water affordability issues in our area. We will continue to identify customers with affordability problems and deal with them sensitively and constructively, offering meters to customers where there are benefits, but we may not need an affordability tariff.

16. Finally, we cannot see how market reform proposals will make any real contribution to affordability issues—the Defra and Ofwat impact assessments appear to promise a bill reduction of around £5 per customer after 30 years! The industry needs to be sure that changes to water regulation decreases costs or provides additional or better services that reflect the increased costs. Change is always good but is usually more expensive than hoped and with benefits at the level predicted we would suggest a careful look to ensure that changes are driven by outcomes that customers want and not idealism.

23 January 2012

Prepared 4th July 2012