Environment, Food and Rural Affairs CommitteeWritten evidence submitted by the United Utilities Group PLC
1. 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?
1.1 The White Paper recognises that the current industry model has been successful and delivered multiple benefits to customers and the environment. We agree with the evolutionary approach to changes to this model outlined in the White Paper. A step-by-step approach to increasing competition within the water sector is sensible, as is the decision not to introduce fundamental structural change.
1.2 We agree that vertically integrated company structures are the most effective in securing a resilient water industry able to plan and deliver for the future. United Utilities agrees that there is no case in the foreseeable future for opening up the household market to competition.
1.3 The White Paper proposes repeal of the “costs principle” which currently governs access prices. That principle seeks to achieve competition which neither increases the overall costs of supply, nor implies cross-subsidy from customers not eligible for the competitive market to customers who are eligible. In any replacement access pricing regime it is essential that this underlying principle is maintained. This is particularly the case for the proposed competitive market in England which, unlike that in Scotland, extends to upstream markets (this form of competition is prohibited in Scotland). Defra should publish guidance for Ofwat on a new access pricing regime and we would expect its contents to be the subject of widespread consultation with stakeholders. We would ask that the Committee endorse the intent behind the costs principle.
1.4 Delivering the expansion of competition set out in the White Paper will represent a huge change project for the industry, including its regulators. Developing market codes and the IT systems to register and switch customers will add further to the industry’s costs. If poorly implemented, those costs will outweigh benefits to customers. Ensuring sufficient time and effort goes into preparation for the expansion of the competitive market is essential. The costs of establishing the new market should be recognised as a “relevant change of circumstance” and funded within price limits.
2. Are the proposals to protect and enhance water resources, for example on abstraction regime reform, likely to be fully effective?
2.1 The long term considered approach set out within the White Paper for abstraction regime reform is sensible and welcome. We support the development of a more flexible abstraction regime, reflecting the complex interaction between abstraction and the environment and permitting trading between abstractors in response to their changing needs. That said, the ability of United Utilities to plan and deliver secure supplies of water rests fundamentally on having security in the ability to abstract to meet essential customer demand and having sufficient capacity in reserve to cater for plant outages, drought and other contingencies.
2.2 The White Paper’s proposals are embryonic, with much design work still to do but we welcome the recognition of the value of discharges to the aquatic environment. We also welcome the focus on diffuse pollution sources (whether urban or agricultural) and on catchments as a whole. Successful catchment solutions require regulation that reflects the softer nature of the controls being employed, the level of certainty of achieving outcomes, and the timescales over which effects may be realised.
3. How best can the White Paper’s aims to promote water efficiency and the use of sustainable drainage be implemented?
3.1 We believe action beyond that recommended on water efficient product labelling should be taken. This could, for example, include allowing water companies to promote products that bear clear labels and allowing such promotion to count towards achievement of water efficiency targets. More generally, the regulatory regime should move towards a positive incentive for companies to help their customers save water.
3.2 We agree with the emphasis on retrofitting water efficiency devices in existing premises and the use of water footprinting. We also need a more joined-up approach between the water and energy sectors. Hot water saving measures that also save energy should be eligible for finance through the green deal. Even if not universally available, this should be part of the measures available to companies that operate in areas of severe water stress.
3.3 Whilst the sentiments on sustainable drainage are welcome, arguments of disproportionate costs may mean that most developments continue to connect to the sewerage system. The White Paper also refers to “working with the water industry and retailers to provide better information at point of sale to explain the benefits of SuDS and promote their use”. Whilst we would agree with the sentiment, there has been little progress to date.
4. Do you support the White Paper’s proposals on affordability of water bills for householders?
4.1 Affordability is an acute issue in the north west of England. United Utilities’ water bills are close to the national average but income deprivation is worse than in any other region: more than half of the nation’s most deprived communities are in the north west, which has only 13% of England’s population. Based on analysis by Ofwat, we estimate that once households in South West Water’s region receive their proposed £50 billion reduction, affordability will be more severe in the north west than in the south west.
4.2 In these circumstances we are not convinced that company social tariffs will help address affordability for our customers—too many are in need to make the cross-subsidy required acceptable and those remaining customers expected to provide the cross-subsidy are themselves likely, in the current economic environment, to be hard-pressed. Affordability issues will be made only more acute if domestic customers are made to bear the costs of introducing competition, a far greater risk with abolition of the costs principle.
5. Does the White Paper omit any key issues where further policy action is required to ensure sustainable, reliable and cost-effective water supplies?
5.1 National problems of water scarcity and resilience will in time need national solutions. We would like to see a greater emphasis on the scope for schemes that cross company boundaries, where possible leveraging other major infrastructure developments. The white paper identifies an enhanced role for the Environment Agency identifying such opportunities and we would support the EA taking an active approach to this new role.
5.2 More needs to be done to tackle bad debt to maintain the legitimacy of water bills. We look forward to the government enacting the provisions on landlord liability in the Flood & Water Management Act.
23 January 2012