Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Severn Trent Water


1. Severn Trent welcomes the Water White Paper, supports its overall strategic direction and looks forward to its timely implementation. We would, however, like to make a number of recommendations about how the positions set out in the Paper could be strengthened further.

Key tests for Judging the White Paper

2. We believe the tests that should be applied to the White Paper are:

(a)Will it be of benefit to customers? Will it help maintain safe and reliable services at affordable prices?

(b)Will it benefit the environment? Does it help to address the challenges posed by climate change and population growth?

(c)Will it help maintain future investment? Does it provide a sound basis for the water industry to continue to invest an estimated £96 billion needed over the next 20 years?1

3. We very much welcome the White Paper as it supports many of the changes we proposed in our publication Changing Course. We would, however, like to see the proposals implemented and believe that the Government should confirm it will introduce legislation this calendar year.

Delivering for Water Customers

1. The Paper proposes greater wholesale competition. The key to making this happen successfully will be the development of a clear framework for how companies should set prices for other companies wanting to use their infrastructure. The Government should ask Ofwat and the OFT to work together to devise a suitable framework of access prices and remove the cost principal as proposed.

2. Non-household retail competition will provide benefits to customers, largely in terms of service delivery. The danger to be avoided is a system in which household customers effectively subsidise the costs to non-household customers. The Government should develop controls to prevent this from happening.

3. The Paper signals the Government’s support for a relaxation of the regime that prevents significant market consolidation. This is good for customers as it will, in time, allow more efficient companies to grow. The Government should press ahead and relax merger and acquisition constraints.

4. The Paper’s support for water trading is welcome. Enhancing the connections between the regional water companies will enhance resilience and help ensure that customers benefit from the “best value” source of water.

Delivering for the Environment

5. The Paper is right to promote catchment management to help enhance the ecological and chemical status of water courses. But there are more environmental opportunities available to policy makers:

(a)The Government should signal its support for flexible consents for discharging into rivers. When a river is running low, discharge from treatment works has a proportionally greater impact and the standard to which it is cleaned should reflect this. When a river is in spate and discharges are heavily diluted, it is not environmentally sound to use carbon intensive processes to treat discharges beyond a level that would benefit the river.

(b)Within the context of the Water Framework Directive, there needs to be clearer information of what constitutes “disproportionate” costs. The Water Framework Directive is likely to be the biggest single factor pushing up customers’ bills. Without clearer guidance on what constitutes disproportionate costs, the risk is that customers could pay more for worse overall environmental outcomes if, for example, the environmental cost of carbon emissions are not taken into account when making investment decisions.

(c)The Government should work with the EU Commission to develop a simple measurement system that reflects accurately the progress being made. British rivers are said to now be in better condition than at any time since the Industrial Revolution. The problem is that the Water Framework Directive’s “one-out, all-out” way of measuring water status (ie by classifying a water course as requiring improvement if a single measure is not met) does not reflect the progress being made, which in turn jeopardises public support for necessary investments.

6. The White Paper could do more to complement other Government policies and encourage the use of sewage sludge to generate low carbon, cost efficient energy. We already generate around a quarter of our own energy and could do more if the Government supported the recommendations of the recent Office of Fair Trading report on the market for sewage sludge. The aim of the recommendations is to allow water companies to participate in the market sludge on a fair, competitive basis. The Government should implement the OFT’s recommendations as soon as possible.

7. The White Paper proposes fundamental reform of abstraction licensing. We support reform and welcome the Government’s proposed process for consultation. The Government should:

(a)Explore a more market-led approach to balancing environmentally sustainable supply with increasing customer demand.

(b)Confirm that, if abstraction licences are at any stage withdrawn, it will ensure that water companies maintain a reasonable return on past investments and will be able to fund investments into more sustainable alternatives.

8. The White Paper suggests that promoting sustainability should be a primary duty of Ofwat. Promoting environmental sustainability should be central to the whole industry’s approach, but making it a primary duty of Ofwat risks confused decision making and forcing Ofwat into a policy-making (rather than a regulatory) role. Promoting environmental sustainability should be a primary responsibility of DEFRA, which should reflect this responsibility in the guidance it gives to Ofwat. Sustainability should not itself be a primary duty of Ofwat.

Maintaining Future Investment

9. The water industry has invested £90 billion of private money since 1989 to maintain clean, reliable water and sewage services at no cost to the taxpayer.2 We estimated (in Changing Course) that it will have to spend another £96 billion over the next 20 years. In today’s uncertain financial climate, the Government’s and Ofwat’s commitment to maintaining the use of the Regulatory Capital Value (RCV)—and keeping it in the wholesale part of the value chain, where the big investments are needed—is essential. To maintain investor confidence, the Government should re-confirm its commitment to the RAV.

10. Water industry debt now stands at over £33 billion, up from zero at the time of privatisation. The dangers of excessive debt are well known, and in recent years, the water industry has seen a trend away from equity financing (in which financial risk lies with the shareholder) and towards debt financing (in which greater risk is ultimately borne by the customer). The Government should promote the long term financial sustainability of the water industry by encouraging an appropriate balance of equity and debt investment.

January 2012

1 Changing Course, Severn Trent Water

2 Caroline Spelman, Forward to the Water White Paper

Prepared 4th July 2012