Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Thames Water

Overview

We believe the water industry in England and Wales is in broad terms working well and do not, at present, see an overwhelming case for primary legislation. The Paper outlines several positive steps that will help companies deliver a high-quality and good value service for customers and the environment. However, there are inconsistencies between proposals for market reform and the Paper’s broader aspirations. A fuller understanding of the implications is needed to avoid unintended consequences, and ensure a consistent and coherent overall approach.

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?

1. We welcome the Government’s intention “…to preserve the features of the current regime that have proved so attractive to investors”,1 and its decision not to mandate structural change.

2. There is potential value in bringing competitive pressures to bear, given a dispassionate analysis of the costs and benefits. However, there is an inconsistency between proposed market reforms and the Paper’s broader aspirations.

3. The Paper, for example, advocates a collaborative approach to water resource planning and a holistic view of managing catchments, both of which have much to recommend them. We also know that this broad approach is supported by a majority of our customers. However, there is a fundamental disconnect between these principles and proposals that facilitate the unbundling of the integrated water supply chain. While it is possible to create a competitive market for water resources, this should be seen as an alternative to a collaborative approach: policy solutions based on planning and co-ordinating sit uneasily alongside market-based approaches.

4. If water supply interactions between companies were principally governed by market arrangements, the incentives and opportunities to work collaboratively with each other and the Environment Agency would be greatly reduced. Equally, a collaborative framework to support enhanced water resource planning would be a constraint on the development of competitve markets. These questions present serious practical problems.

5. Having one company responsible for water resources; a second for the pipe network and a third for the retail element of the service could serve to undermine the existing relationship between customers and companies. It would spread accountability for the quality and reliability of water supply across a number of companies in a way that is, as yet, undefined.

6. This could be confusing for customers, and the perceived lack of accountability would weaken their confidence in the quality of the water they receive.

7. During the drought of 2006, we were able, through appeals to our customers to use water wisely, to reduce demand by more than 5%. Such an approach is unlikely to be possible in a situation in which resources are allocated through the use of market mechanisms, given the separation of accountability for communicating with customers; managing losses from mains pipes; and minimising the volumes taken from the environment.

8. Beyond these practical concerns, it is worth noting that investors regard the existing integration of the value chain as a strength of the sector. Furthermore, investors and rating agencies are concerned at the apparent contradiction between the Government’s intention to preserve confidence, and the planned removal of the pillars of the existing regime that build confidence.

9. Proposals to reform the wholesale access pricing regime could have significant implications for companies and investors. While the planned removal of the costs principle from legislation could conceivably unlock value for customers in the long term, no impact analysis has been completed. It follows that the case has not yet been made. By contrast, the helpful impact analysis of legal and functional separation that has been completed recognises the reality of the industry’s financing arrangements. A comparable analysis is needed to demonstrate that the benefits of access pricing reforms outweigh the costs.

10. We are pleased that the Government is “…strongly minded2” to use a future Water Bill to reform the anachronistic Special Merger Regime. This currently hampers mergers within the sector, and leaves some customers paying more for their water than if consolidation were an option.

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

11. As well as providing for today’s customers, companies must ensure enough water is available to support and sustain tomorrow’s economic growth. Their ability to do so, and to cope with the likely impacts of climate change, will be heavily influenced by reforms to the abstraction regime.

12. The Paper takes significant first steps towards introducing the necessary improvements.3 These include positive measures to break down existing barriers to abstraction licence trading,4 which will help ensure more efficient allocation of supplies.

13. We strongly welcome the proposed reform of the process through which companies restore sustainable abstractions. This is urgently needed to replace the existing mechanism, which has demonstrably failed to provide an effective funding mechanism, and come at a cost to water customers.

14. The Abstraction Incentive Mechanism5 (AIM) will, we understand, act as an interim measure until longer-term reforms are introduced. We would urge caution here, however, as the data needed to underpin the variable pricing the AIM proposes is not currently available. We would instead argue for a short-term focus on accelerating measures that will ensure the existing system operates as effectively as it can.

15. The Paper sets out the Government’s intention to start using its power to remove or vary, without compensation, licences causing “serious damage”.6 This will require a clear and evidence-based definition of “serious damage” to be agreed. If licences are to be varied or revoked without risking security of supply, or coming at an unnecessarily high cost to customers, companies will need the time and funding to put alternatives in place. The uncertainty this creates is inconsistent with the aim of maintaining investor confidence.

16. Any reforms should avoid stranding existing assets, which could see customers denied benefits for which they have already paid, and companies unable to make the most efficient use of their assets.

17. Opening up the provision of water resources to new entrants will require an agreed methodology and rigorous scrutiny. Critically, new entrants’ proposals will need to be subjected to the same level of analysis already applied to companies’ plans, to ensure they are robust, reliable and founded on a realistic cost base. Without this, there is a risk that companies are unable to provide customers with the water they need.

18. The need for this challenge was demonstrated during the 2010 Public Inquiry into Thames Water’s WRMP09, when a third party claimed that it had identified a cheaper alternative resource.7 On closer scrutiny it was revealed that the costs provided were unrealistically low, and the volumes of water available were overstated.

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

19. The Paper is disappointingly light on measures to promote water efficiency. We would like to see a more dynamic approach that recognises the range of stakeholders whose actions influence consumption.

20. Voluntary water efficiency labelling for consumer products8 is highly unlikely to have a significant impact. It should be replaced with a mandatory approach, and supplemented by a Government-led awareness campaign to help ensure the need to act is understood, and the potential benefits realised.

21. The Green Deal is cited as a mechanism to improve water efficiency.9 However, energy efficiency remains the focus of the Green Deal, reinforcing the perception that water efficiency is of a lesser order of importance. Rather than treating water efficiency as energy efficiency’s “poor relation”, we should seize the opportunity the Green Deal presents to make real progress.

22. Bringing about the step-change needed will rely on strong leadership to secure the active involvement of the range of stakeholders whose actions influence water consumption. Re-starting the multi-agency Water Saving Group that helped ensure a collaborative approach during the drought of 2006 would help provide the necessary focus and leadership.

23. We welcome reform of the existing water efficiency incentive,10 which can only be truly effective if it is directly linked to companies’ supply/demand projections.

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

24. We were the sole company to argue for the amendment of the Flood and Water Management Bill to include a social tariff, and are pleased that final guidance is imminent.

25. Companies are developing plans for social tariffs in line with the provisions of the Flood and Water Management Act 2010. However, there remains an unresolved question of whether the Act’s provisions override companies’ licence condition “e”, which prevents them from treating any group of customers with “undue preference”.

26. Disappointingly, the Paper does little to address bad debt, and raises the worrying possibility that progress made through the Flood and Water Management Act will be reversed.

27. Despite supporting primary legislation which, in line with the recommendations of the Walker Review, includes a provision to “…require all property owners to provide the details of their tenants to water and sewerage companies or to assume liability for payment”, the Government now intends to examine the potential for non-regulatory alternatives.

28. We support the broad aspiration to minimise the regulatory burden. However, it should not make a casualty of the only measure available to prevent those unwilling to pay for their water from, in effect, stealing from honest customers. The costs of non-payment are currently borne by paying customers at a rate of £14 on each bill annually. A legislative requirement is essential to make landlord liability work and remove this loophole.

29. We agree with the Government that neither disconnection nor reduced flow are appropriate ways to dissuade customers from leaving their water bills unpaid. However, in their absence a meaningful disincentive is needed. It is disappointing, therefore, that the Paper makes no mention of Anna Walker’s recommendation that companies should be able to pursue debt through magistrates’ courts.

Does the White Paper omit any key issues where further policy action is required

to ensure sustainable, reliable and cost-effective water supplies?

30. The Paper does not adequately take into account likely water quality failures under standards set by the Priority Substance Directive. The projection of compliance with the Water Framework Directive11 is, as a result, unrealistic.

31. Many “Priority Substances” are currently present in the treated effluent discharged from our sewage works in levels which have not been demonstrated to cause harm, but which are far in excess of the Directive’s proposed standards. The widely-used anti-inflammatory diclofenac has, for example, been found in excess of double the proposed permitted level in the effluent of more than 100 sewage works in England and Wales tested in an ongoing analysis.12

32. Meeting the limits in the Directive and, in particular, those under discussion if the list is extended,13 would require costly, energy-intensive treatment methods, for what we believe would result in only a very limited environmental benefit.

33. Without action to address these standards, the potential costs to the UK water industry of compliance have been estimated at £27 billion.14

34. Without this investment the UK seems condemned to fail the requirements of European water quality legislation. With it, water bill payers seem committed to fund negligible environmental improvements at a disproportionate cost.

January 2012