Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Water UK
WATER UK REPRESENTS UK WATER AND WASTEWATER SERVICE SUPPLIERS AT NATIONAL AND EUROPEAN LEVEL.
1. The Continuing Role of Government in Delivering Market Reforms
1.1 The White Paper “Water for Life” sets out the Government’s proposals for market reform in the water sector. Successfully delivering the Government’s objectives will require all those involved to work collaboratively. Stakeholders will approach the issues from a number of different positions and only the Government is in a position to reconcile those positions to achieve the best outcome.
1.2 The Government also has a continuing role in guiding the development of the market over the longer term, even where certain elements of the market are subject to normal competitive forces. The absence of power to secure overarching strategic objectives for the sector could lead to the types of problems experienced in other sectors where market reforms have been introduced. This would risk undermining the sector’s current reputation for delivering the highest quality of water and waste water services.
1.3 The implementing legislation will therefore need to reserve a role for the Secretary of State if Defra is to retain the necessary authority to achieve its policy objectives.
2. Retail Competition
2.1 Water companies are committed to delivering more and better services to business customers. This includes businesses choosing their supplier, in line with Government policy set out in the Water White Paper. Once the appropriate framework is in place, water companies will be in competition with each other in order to win market share, differentiating themselves through features such as quality of service and lowering prices to business customers.
2.2 The industry agrees with the Government’s analysis that there is no case for introducing competition into the household market and we share the Government’s conclusion that there is no need to force legal separation of the existing water companies.
3. Timescale
3.1 We support the Government’s decision to work with the Scottish Government to help deliver a cross-border retail market. It is important for Water UK’s members both in Scotland and in England that new market arrangements are appropriate, proportionate and robust.
3.2 The Scottish experience has demonstrated that the path to market opening entails detailed, collaborative working to ensure that arrangements are fit for purpose. The industry both sides of the border will want to play a full part in this process to ensure that it is implemented as quickly as reasonably possible. A market opening in 2015, as announced by Ofwat without consultation, would entail an unacceptable degree of operational risk due to resource constraints at companies and in Government and its agencies. Water companies will bear by far the greatest burden of setting up the market and they have significant concerns about the achievability of Ofwat’s timescale.
3.3 Attempting to introduce retail competition reforms, upstream reform and significant changes to the price review process affecting all customers, all at the same time, does not make sense. The DWI and Environment Agency will also need time to make sure that both drinking water quality and the environment continue to be protected.
3.4 It is also unclear whether the Government sees upstream reforms as being simultaneous with, or subsequent to, the proposed retail market reform. Implementing retail reforms first would have obvious advantages. This is because, unlike the retail market reforms, there is no experience of upstream reforms to draw upon from Scotland, where competition in such areas is illegal.
3.5 We believe a more structured and methodical approach to building the necessary market infrastructure is required.
3.6 A step by step approach should be taken with the most straightforward changes—which may yield the most obvious sources of benefit—introduced first. Further refinements or more fundamental measures should be implemented only when the Government has made a full assessment of the benefits and risks associated with upstream reform and following the successful establishment of the retail market arrangements. This emphasises the importance of continued Government involvement in the implementation of market reforms.
4. Contribution to the Local Economy
4.1 Water companies don’t just pump water into the regions in which they operate—they pump millions of pounds into their local economies. Water companies are regionally focused, and most investment stays in the region, supporting thousands of local businesses and tens of thousands of jobs at all skill levels. This provides a crucial boost to the local economies of all parts of the country, even in difficult economic times.
4.2 Water and sewerage services are a vital part of the infrastructure needed for new development, especially in areas of high population growth, and we plan decades ahead to ensure that future demands can be met.
4.3 We support local tourism and fragile seaside town economies through our real-time information on water quality and our work on cleaning up rivers and beaches. We work closely with local shopkeepers and local authorities to ensure that water quality messages are accurate and supportive of those whose jobs depend on tourism.
4.4 Water companies are integrated into the regions in which we operate, and are formed, and informed, by the communities in which we live. We can demonstrate to people living within each region that the environmental work we do has direct benefit to them.
4.5 If in the future—as implied in the Water White Paper—the geographical link between water company and customer were broken environmental projects would be less attractive to companies. It would also be far harder to make the case for a company investing in environmental improvements and there would be less certainty that companies would deliver benefits to customers over the long term as a result.
5. Integrators
5.1 As Defra’s Natural Environment White Paper points out: “Government alone cannot create a greener economy. Markets that trade sustainably in natural goods and services are essential.” Water companies, in their catchment management work, have created unique and sometimes counter-intuitive coalitions, working with conservation groups, community groups, local government and crop protection companies. The engagement work with farmers and customers, undertaken collaboratively has not only benefitted the agricultural community but has also provided benefit for water bill payers, the environment and biodiversity alike.
5.2 It is, however, difficult to map a philosophical arc that links the first part of this Water White Paper, which envisages a holistic and sustainable industry by definition rooted in its communities, and the increased competition plotted out in the later sections of the document. Catchment management projects requiring many hours and days of one-to-one engagement and education will not seem attractive if profit takes centre stage, especially when hard engineered solutions such as treatment works provide solutions with predictably measurable results.
5.3 The twin drivers of demographic and climate change will mean that, in many parts of the country, a gap could begin to develop between the amount of water available, and the many sectors that have need of it—households, the environment and wildlife, agriculture and industry amongst them. Few sectors encourage their customers to use less of their product; however, water companies have been instrumental in both raising awareness of the precious nature of this finite resource, and supporting the view amongst the customer base that reducing water use is a social justice issue, that it behoves everyone in a community to use water wisely when there is not a lot of it to go around.
6. Public Service Obligations
6.1 The water industry is proud to provide an essential public service. At present we provide services to the entire communities in which we operate, on a regionally averaged basis. This means rural communities receive the same high quality drinking water as urban ones, but are not faced with an unaffordable cost.
6.2 We deliver Government social policy objectives such as ensuring that no household customer is disconnected because they are unable to pay and operating the WaterSure scheme to protect metered customers with unavoidably high water use from unaffordable bills. We will look to meet the Government’s expectation in Water for Life of the early introduction of social tariffs.
6.3 This will add to the many things that companies already do to help customers who have difficulty in paying their bills—such as offering flexible payment plans, assistance through charitable trusts and restart plans, and funding support via debt advice agencies.
6.4 The Government needs to play its part too.
6.5 Social tariffs should be targeted to provide assistance to those in need—but much of the information on who is in need is held by Government. Government must help by allowing water companies to make use of this information.
6.6 To stop the burden of bad debt rising ever higher—it already adds £15 to every customer’s bill—we need the Government to implement the requirement for landlords to tell water companies who their tenants are.
6.7 And as the Government implements its other policy objectives, it will wish to guard against unintended consequences.
6.8 For example, the Government has said that the “costs principle” for access pricing is anti-competitive and gives incumbent water companies little incentive to become more efficient. Parliament implemented the costs principle in order to ensure that households do not subsidise business customers.
6.9 Unless the underlying purpose of avoiding hard-pressed families and pensioners subsidising big businesses like supermarkets is maintained, the legitimacy of Government’s reform programme would be undermined.
6.10 Given how significant the costs principle is in protecting household customers, and maintaining investor confidence, we find it surprising that Defra’s extensive impact assessment of their retail reforms does not include an assessment of the risks of replacing the costs principle. The Government must remedy this.
7. Investors
7.1 The water industry needs to invest £22 billion over the next five years in order to safeguard the high quality of service to customers and the environment, now and in the future. There are only three sources of finance: tax-payers, bill-payers and investors.
7.2 If customers had to pay for this investment on a pay-as-you-go basis, bills would rise to unacceptable levels. Ensuring that the water sector remains a good place for investors to do business is therefore crucial. Since privatisation, the sector has delivered £98 billion of infrastructure investment at no cost to the public purse. At present, water companies are able to raise debt financing at rates which are lower than many European sovereign states, helping to keep down water charges in England and Wales.
7.3 Returns on capital make up around a quarter of customer bills. An increase in the cost of capital of just 1% would translate to around a 5% increase in customer bills.
7.4 Both Defra and Ofwat have produced impact assessments of the profound changes they propose to make—to the industry structure and to the price review arrangements respectively—which show that just a small increase in the cost of finance would be enough to wipe out all the benefits. Ofwat’s own calculations show that the radical changes it proposes to make to its price review arrangements are, at the high end, expected to yield savings of £2.5 billion over a thirty year period. Ofwat has also calculated that an increase in the cost of capital of just 0.2% would be enough to more than wipe out these benefits.
7.5 The Government and Ofwat must therefore take great care to ensure that its actions do not inflate financing costs through investors’ perceptions of sectoral risk. If this were to happen, the adverse impact on customers’ bills and company investment programmes would be significant.
8. Public Health
8.1 The White Paper makes no explicit reference to the vital role that water companies play in protecting and promoting public health. The provision of water and sanitation services is essential in maintaining the health of the nation.
8.2 The Water White Paper should have considered how the changes and reforms proposed will be managed to ensure that this overarching responsibility to public health is not compromised.
January 2012