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

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 In general we welcome the principles as set out in the White Paper for taking forward reform. However we raise concern about whether, in implementing the principles, enough consideration has been made of the potential consequences, and the potential complexity of the process.

1.2 Since 2008 Osprey, part of the Anglian Water Group, has been offering water and waste water services to any non-domestic customer in Scotland. Anglian Water therefore has experience of the process of liberalisation in a utilities market and is familiar with the complexities and potential pitfalls.

Impact on investor confidence

1.3 In light of the sector’s success in securing £95 Billion finance for infrastructure investment since 1989 we are pleased that the Government recognises the need to avoid taking risks which might undermine investor confidence.

1.4 However, the White Paper’s proposals sit amongst a range of regulatory changes that affect the water industry. These include proposed changes to water company licences, the changes proposed in Ofwat’s Future Price Limits consultation, and a new approach to monitoring compliance. Whilst many of the changes are welcome, taken together, they add up to the most radical change to the water industry since privatisation and the scale of the proposed changes adds a significant amount of potential uncertainty to the way we do business.

1.5 Both the changes themselves and the uncertainty surrounding them have the potential to increase the perception of risks to the sectors current or future investors. Some financiers are already looking carefully at the potential implications. It would be unfortunate if the net result of the proposed changes were to be an increase in financing costs which ultimately is borne by the customer.

1.6 We would therefore urge the government to urgently consider the potential impact on consumers of regulatory and legislative uncertainty. Including a range of unintended consequences if enough time is not given to assessing the risks and opportunities. We strongly emphasise the combined impact of legislative and regulatory change needs to be fully considered rather than the narrower consideration of the proposals set out in the White Paper.

The potential for de-averaging of prices

1.7 There are potential issues over the interaction between competition law and regulation specifically on how Ofwat prices third party access to services. A very strong basis in law and regulation for the maintenance of regional average pricing for wholesale or network services is needed. Without this, wider competitive entry in the market will increase the risk of water companies being open to accusations of anti-competitive behaviour from new entrants due to the current system of cross subsidy. This may in turn produce costly legal challenges.

1.8 Companies will seek to minimise such risk, as well as looking to price competitively in contestable markets. One predictable response will be to bring charges to customers in line with the actual cost of supplying water to business customers. In areas which are remote or hard to supply this could lead to significantly higher charges. The impact on small businesses as a result of this could be particularly severe. Water companies may be forced to implement price rises amounting to two or three times the current level of bills so for some SME customers there could be significant winners and losers. There are sound economic arguments for pricing to reflect costs of supply, but we would like to see further evidence of the potential impacts on customers before any changes are made.

Implementation complexity

1.9 Anglian Water’s experience of liberalisation in other utility markets and indeed from the implementation of the business retail water market in Scotland reveals the potential complexity of implementing such changes. Visibility throughout the process is essential as are the agreement of robust plans and governance arrangements. Currently a high-level timeline for retail market implementation has been drawn up by Ofwat without the participation of the potential market participants . Successful market implementation requires the commitment and involvement of the participants themselves, not least because of the cost and resources likely to be required.

1.10 Changes must be considered and consulted on in detail at Draft Bill stage to ensure that the impacts and risks of the changes are fully understood by all participants. We would also urge government to make clear what powers it should retain in relation to the implementation and regulation of the retail market.

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

2.1 Anglian Water has advocated strongly for reform of the abstraction regime, recognising the severe pressures on water resources that we already face and which may well be exacerbated by climate change. We have been fully involved in the discussions that have led to the proposals and intent to develop policy set out in the White Paper.¹

2.2 We are pleased that the Government’s thoughtful proposals on Abstraction Reform, as they stand in the White Paper, give the industry time to plan for the changes. This will allow for the investment required to research how best to implement the plans.

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

3.1 The proposals go some way to help promote the use of SuDS. Though we are concerned that the “affordability” clause within the Standards may dilute the principles of sustainable drainage.

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

4.1 Anglian Water is keen to address issues of affordability and since 2005 has consistently advocated changes that could provide a comprehensive approach to the issue of affordability. However, Ofwat have used their powers of approval to block our tariff proposals and in their view the government direction was not clear enough.

4.2 The Floods and Water Management Act includes a section on “social tariffs” allowing companies to introduce initiatives to address affordability. However, this section of the Act has not yet received a Commencement Order, because ministerial guidance needs to be developed. The guidance is currently drafted and is out for consultation.

4.3 The guidance is unclear about the role and powers afforded to both Ofwat and the Consumer Council for Water, but it implies that both bodies will retain the power to veto company proposals. If this is the case, it will be even easier for Ofwat to continue to hold back attempts to deliver affordable water to vulnerable customers. It is essential that final guidance is clarified in order that we might be encouraged to put forward proposals with a reasonable expectation that they would be capable of being implemented.

4.4 We would recommend that Ofwat’s powers on “social tariffs” be removed.

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 We welcome the recognition that new water resources need to be considered and planned for and appreciate the leadership the government is showing by initiating the discussion in which we want to fully participate.

5.2 We would urge the Government to consider further the environmental safeguards that would need to be applied to new entrants to the market. Without safeguards there is the potential for a “free rider” problem to emerge if the environmental custodianship carried out by the asset owning companies is not catered for in pricing.

Footnotes

1. We have published to two papers: (i) “A right to water?” a joint report by Anglian Water and Frontier Economics (published 10.02.11) which sets out concrete recommendations for moving towards a more sustainable allocation regime; (ii) “Trading Theory for Practice” a joint report by Anglian Water, Essex and Suffolk Water and Cambridge Water (published October 2010) which provided evidence of the potential benefits of water trading between water companies in East Anglia and recommended changes to make trading easier. Both reports are available at http://www.anglianwater.co.uk/_assets/media/a-right-to-water-abstraction-report.pdf

January 2012