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

Executive Summary

1. Northumbrian Water Ltd (NWL) broadly supports the Government’s policy intentions for the water industry, as laid out in the Water White Paper –“Water for Life”. We welcome the desire to build on the strengths of the current industry structure and strongly agree that a stable business and regulatory environment is vital if investor confidence is to be retained so that the investment required over the coming decades can continue to be financed at a cost our customers can afford. At present a stable and predictable regulatory framework allows water companies to raise debt at financing rates which are lower than many European sovereign states, helping to keep water bills down. Any loss of investor confidence in the regulatory framework would cause this favourable situation to change rapidly and the adverse impact on customers’ bills and on company investment programmes would be significant. We therefore support the evolutionary approach to market reform set out in the paper.

2. The reforms and policies in the paper are complex and wide-ranging. Their success is critically dependant upon the development and implementation of appropriate and detailed plans. It is essential that the industry is fully engaged in developing the necessary detail and we would urge government and regulators to maintain a transparent and consultative approach. NWL is very keen to work closely with Defra and the industry’s regulators to ensure Government’s policies are implemented successfully.

3. We welcome the government’s intention to publish a strategic policy statement for Ofwat as this will give clarity and direction to the industry and its regulators about the priorities that government wants to see addressed.

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

4. We are pleased that an evolutionary approach to market reform has been taken. We agree there is currently no case for legal separation of retail and wholesale activities or for extending competition to household customers and we are not convinced these measures will ever be appropriate or offer value for money.

5. We are pleased that the intention is to replace the “cost principle” with “a transparent wholesale access pricing regime that will allow efficient entry by new entrants”. Achieving efficient entry in practice is key to ensuring some customers do not benefit from competition at the expense of others and, in particular, ensuring that households are not disadvantaged by the introduction of competition leading to “cherry picking” from which they do not benefit. We believe that the access pricing rules, or at least the key principles to be applied, should be set out in legislation. This is a key policy with significant public interest and such policies should be determined by government rather than regulators.

6. We understand the aims of introducing upstream competition but would be surprised if there is significant new entry due to the cost and quality hurdles to be addressed. We believe there will be substantial work required to introduce this reform and are concerned that material benefits are unlikely to be realised.

7. It will be important for the Government to fully evaluate the success of these changes before considering the need for further changes in the future.

Are the proposals to protect and enhance water resources likely to be fully effective?

8. We support the intention to review abstraction licencing and introduce water trading. Abstraction licence reform is a particularly complex area and we are pleased that a considered, consultative approach is being taken.

9. We also support bulk transfers between companies, where this is economic. Ofwat has proposed a number of promising approaches to removing regulatory barriers to transfers and we are happy to work with the regulator to develop these further. Trading may be part of the solution but we believe that cooperation between companies also has an important role to play in addressing regional resource issues and enhancing resilience (See “Trading Theory for Practice”: a paper by Northumbrian Water, Anglian Water and Cambridge Water).

10. The effectiveness of proposals in the White Paper to protect water resources depends on the eventual plans taken forward. However, it appears the policies, taken together, represent a comprehensive approach to resolving the issues.

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

11. There are significant challenges both for the water industry and the Government in terms of improving water efficiency. While we recognise that maintaining an adequate supply of water in resource challenged areas will need multiple solutions, improvements to the water efficiency of households is a key measure.

12. We are aware that there are a number of potential “Blue Deal” initiatives being discussed that would operate in a similar way to the Green Deal. We already have an excellent reputation for the innovative promotion of water efficiency, particularly in our Essex & Suffolk area, and would be very interested in understanding how NWL could contribute to the potential “Blue Deal” approach.

13. We support the Government’s focus on sustainable drainage. NWL is coordinating a large scale project on Tyneside and piloting four sewer flooding schemes with sustainable solutions. These projects aim to develop best practice approaches in partnership working and the delivery of sustainable solutions.

14. We particularly support Government looking to remove the right of automatic connection by developers to the existing sewerage system. Connections should only go ahead once all sustainable drainage options for the development have been exhausted. The costs of any upsizing required to accommodate the connection should be met by the developers.

Do you support the proposals on affordability of water bills for householders?

15. Water affordability is a key issue in the North East, which has a very high level of income deprivation. We also have some customers with high levels of income deprivation in our Essex area, for example in the London boroughs.

16. In order to manage the requirement for further increases in bills, cost benefit analysis should be applied to all drivers of new standards and any required investment should be fully justified and phased over time as far as is possible.

17. It is important not to overestimate the benefit that social tariffs might bring for affordability. We agree that any cross subsidisation requires the support of the generality of customers. Our experience to date suggests the willingness of customers to fund such tariffs may be very limited. In addition, care would be required to avoid increases in bills to pay for social tariffs resulting in some customers experiencing affordability problems for the first time.

Are any key issues omitted where further policy action is required to ensure sustainable, reliable and cost-effective water supplies?

18. Customer debt is an increasing issue for the water industry, resulting in a burden on the majority of paying customers to finance non-payers. It would be a major step forward if the government enacted the provisions on landlord liability in the Flood & Water Management Act and we are pleased that government has committed to early consultation.

Other Points

19. We support the Government’s environmental ambitions as set out in this White Paper. We also support catchment management initiatives and efforts to tackle diffuse water pollution. We believe that the water industry is, and can continue to be, a significant partner/leader in delivering an enhanced natural environment as well as growth of the green economy.

20. We are grateful to the Environment, Food and Rural Affairs Select Committee for launching this enquiry and NWL is very willing to supply further information on any aspect of this evidence.

January 2012

Prepared 4th July 2012