Water Bill

Written evidence from Thames Water (WB 11)

Summary

1. We support the introduction of competition for business customers. However, companies need the flexibility to exit the market, and we risk customers paying more than they have to if this option is not available.

2. ‘Upstream’ competition may offer limited benefits in some circumstances. But it brings with it financial and practical risks, and the case for the contribution it can make to increasing resilience has been overstated.

3. Critically, the proposals to introduce upstream competition are not aligned with the Government’s programme for abstraction reform. This risks a confusing ‘stop-gap’ solution, with competition to provide water preceding far-reaching changes to the rules for abstracting it.

4. Ofwat will need new powers to introduce the reforms being proposed. But these must be carefully drawn, with the appropriate checks and balances.

5. We support the increased focus in the Bill on resilience, an issue the draft Bill did not address. But the new provisions will not on their own do enough to address the risk of water shortages.

6. Instead of amending the ‘general duties’ for Ofwat and Ministers to increase the focus on long-term resilience, we would rather see a National Policy Statement for Water - as originally envisaged - given that securing long-term resilience of water supplies is likely to involve the construction of strategic infrastructure.

7. Amending the Bill to give water companies powers to tackle wrongly-connected household drains would represent a minor regulatory change for a significant environmental benefit

8. Although no action is needed in this Bill, we would urge the Government to enact provisions in the 2010 Flood and Water Management Act that would make landlords liable for tenants’ bad debt until they pass tenants’ details to companies. Research shows that customers support increased powers for companies.

Market reform

Retail competition

9. We support the Bill’s proposal to introduce choice for business customers, which is expected to see the business retail market expand to 1.2m customers across England and Wales from 2017, with revenues of c. £2.5bn.

10. However, the Bill does not allow the water and sewerage companies to separate into wholesale and retail companies. The effect of this is that the business retail function of the incumbents will lose customers to entrant retailers, but not be able to recover the losses or make gains through competition.

11. We would like to see an amendment to the Bill that would allow companies to legally separate their retail functions from their wholesale functions (known as Optional Legal Separation), enabling the creation of two separate companies. The approach would be most straightforward for non-household customers where competition is enabled, but could apply to both household and non-household customers.

12. The non-household split is similar to that enabled in Scotland for Scottish Water, where Scottish Water spilt into Scottish Water (a wholesale business) and Scottish Water Business Stream (a retail business). The Water Industry Commission for Scotland, which has successfully introduced retail competition for businesses north of the border, albeit on a much smaller scale, has made clear its view that this is essential if retail competition is to succeed.

13. The benefits of Optional Legal Separation include:

- Defra’s own cost benefit assessment demonstrates that this proposal has increased household, non-household and overall cost benefit relative to current Water Bill proposals. [1]

- The separation would allow the development of truly national retail businesses incentivised to focus exclusively on business customer services, and benefitting from economics of scale and scope. It also avoids the inefficient need for an incumbent's group to have two separate business retail entities if it wishes to compete for customers nationally.

- The separation may catalyse competition "in" the market more quickly by allowing growth of specialist retailers through acquisition as well as organic growth. In addition, the incumbent’s remaining household customers may benefit more quickly from the efficiencies driven by non-household retail competition.

14. Optional Legal Separation is supported by Ofwat [2] , existing companies (including Severn Trent, Southern Water, Wessex Water and Yorkshire Water [3] ), licensed water suppliers and potential competitors (such as Scottish Business Stream), and the EFRA Committee.

Upstream competition

15. Arguably the most significant changes the Bill sets out are new arrangements for ‘upstream’ competition. We recognise that there is a case for third parties to provide upstream services and, through the publication of an OJEU notice, have already sought to identify third parties that may be able to offer additional water to meet future demand.

16. Any reform of upstream markets, however, raises financial and regulatory risk. For example, the introduction of competition could, in principle, give rise to the risk that past investment is stranded. Second, a lack of clarity as to the future regulatory regime could undermine incentives to invest (by both incumbent companies and third parties).

17. The Government has recognised and sought to address these risks in high level statements of policy. For example, it made a strong commitment in the White Paper ‘…to preserve the features of the current regime that have proved so attractive to investors’. It also stated that it would ‘not introduce changes that risk unsettling investor confidence in the stability of the water sector, particularly at a time when new investment will be essential, and as competition for capital gets tougher’.

18. It remains unclear, however, how these policy aims will be realised. This is partly because the Bill leaves much of the future regulatory treatment to be defined at an unspecified future date.

19. We would therefore encourage clarity to be provided, either on the face of the Bill or through the production of clear and binding Government guidance. If not, there is a danger that greater uncertainty will increase the risks associated with investment, pushing up the cost of finance and, ultimately, pushing up customers’ bills.

20. Beyond these financial and regulatory considerations, there is also a significant risk that the reforms in the Bill lead to a loss of coherence in the regulatory framework that has been developed over two decades for a vertically integrated industry, and a subsequent loss of public confidence. In particular, there is a need to resolve questions about responsibility for maintaining drinking water quality; ensuring security of supply; producing Water Resource Management and Drought Plans; securing demand reductions in drought and determining levels of service. Other key areas to be addressed include responsibility for pollution incidents and the provision of sewerage and sewage treatment to meet growth.

21. Companies worked closely together during 2011 and 2012 to ensure customers received clear and consistent messages about how the drought was affecting water supplies, and what practical steps they could take. We would advocate developing reforms in such a way that a campaign of this sort, which was well received by stakeholders including Defra and the Environment Agency, remains possible. These practical considerations are not insurmountable, but will require time and careful attention to resolve.

22. Finally, there is a fundamental mismatch between the timing of the introduction of upstream provisions with planned reforms to the water abstraction regime. The current timetable for upstream reforms envisages their introduction in 2019-20. The Government plans to consult on proposals to reform abstraction at the end of 2013, with primary

legislation due in the next Parliament. This risks a situation in which competition to provide water for public supply comes into force ahead of potentially far-reaching changes to the system that governs the way it is done.

23. There are two problems with this approach. Any new entrants to the market will require abstraction licences, and the knowledge that significant changes will be made to the regime governing these licences in a short time after will act as a disincentive. Beyond this, there is a risk that creating a market before abstraction is reformed will incentivise those holding currently under-used or unused ‘sleeper’ abstraction licences to sell them to the highest bidder, putting more pressure on already-strained water resources.

24. One way to facilitate progress would be to focus initially on retail competition, allowing any reforms required to introduce competition into upstream markets to be introduced subsequently. This approach would also allow sufficient time to ensure that upstream measures could be properly aligned with long-term abstraction reforms planned for the next Parliament.

New powers and obligations for Ofwat

25. We agree with the time-limited expansion of Ofwat’s role to vary water company licence conditions in order to implement the provisions of the Bill, but given the critical nature of these licences for companies’ ability to operate successfully, these powers must be carefully drawn.

26. We support the Government’s view that Ofwat should only be granted those powers it needs to implement the changes required by the wider legislation, and welcome the changes made to the wording of the powers within the Bill, which have improved the clarity of their intended use.

27. We also favour the introduction of a power of veto for the Secretary of State, to provide a check and balance on the way Ofwat exercises this power.

28. We would like to see the publication of guidance by Ofwat, subject to public consultation, on the methodologies it will employ when using these new powers.

Resilience and the environment

29. 2012 was a year of extremes and, before a prolonged period of higher than average rainfall started in early April, we had one of the driest two-year periods on record, which left our water resources in a perilous state. As a nation we escaped serious impact because this period was followed by an exceptionally wet summer and autumn. However, it is statistically equally probable (3% in each case) that we could have had a summer and autumn so exceptionally dry that emergency restrictions on water use would have been needed.

30. The financial impact of such restrictions – which involve rationing the amount of water available for public use – has been assessed as in the range of £236m - £329m [4] , every day, for London alone.

31. We welcome the Government’s recognition of the need to increase the resilience of public water supplies to the pressures of drought, climate change and population growth. Some, although not all, of the provisions in the Bill designed to improve resilience will do so. But they will not on their own provide the level of resilience that is needed to address the challenges we need to address.

Non-water company storage

32. We support the aim to "build in additional resilience". It is, however, unlikely that proposals to boost supplies with surplus stores from third parties, including farmers, would make a significant difference to the resilience of the public water supply in our region. On-farm reservoirs are too small in our assessment to make a meaningful difference.

33. Where spare capacity does exist, we would caution that the quality of water from agricultural sources may be very poor, potentially with high levels of nutrients, pesticides and metaldehyde. Moreover, existing levels of treatment may not be

sufficient to bring the relatively high concentrations of such substances within prescribed levels, and significant controls would be needed to avoid such problems.

Directions by the Secretary of State

34. We support the proposal to clarify the powers of Direction that exist within the water resources planning framework in order to be explicit that such Directions may include specifying a level of service that a water resources plan must address. The Secretary of State arguably already has such a power (as envisaged in section 37A(d)), and it follows that making the power more explicit would not constitute a material change to the regulatory framework.

Amending ‘general duties’

35. We fully support the policy intent behind the proposal to amend the ‘general duties’. However, it is an open question as to whether it represents the most effective way of securing the long-term resilience of water and sewerage services, and of water and waste networks.

36. The amendment has the potential to increase the priority afforded to long-term resilience, but changing the duties carries some risk of jeopardising the clarity and stability of the regulatory framework.

37. The success of the privatisation of the water industry can be attributed in large part to the stability of the regulatory regime.  This has helped to attract substantial investment, at a relatively low cost, which has been reflected in the service improvements and bills paid by customers.  To maintain this success, we would caution against changing either the overarching duties in the statutory regulatory regime, or any significant change in the way that those duties are interpreted and applied.

38. An alternative approach would be to develop a National Policy Statement for Water. Given that securing the long-term resilience of water supplies is likely to involve the construction of strategic infrastructure, this would have the advantage of providing support for the means of ensuring resilience, rather than solely emphasising its importance as an end to be pursued.

39. We welcomed the inclusion of large scale water storage and transfer schemes (ie those deemed Nationally Significant Infrastructure Projects, or NSIPs) in the Planning Act 2008. The Act requires NSIPs be determined by Government, in line with the National Policy Statement (NPS) for the sector in question.

40. While NPSs have been developed to accompany the provisions in the Act for several sectors, the critical issue of water supply remains unsupported by a NPS. We regard this as an anomaly, particularly given the existence of a NPS for Waste Water.

41. Critically, a NPS for Water would confirm the essential nature of, and urgent need for, water resource infrastructure, as well as providing clear support through the planning process for large scale storage reservoirs and water transfers.

42. Our draft Water Resource Management Plan (WRMP) sets out the need for a strategic water resource in the medium to long term, and establishes that detailed studies of three options – indirect wastewater re-use; large-scale transfers and reservoir storage - will be needed to determine which approach is selected in the next WRMP in 2019, and promoted thereafter. Other companies also identify in their WRMPs the need for such options in the longer term.

43. On this basis, there is a significant possibility that the option eventually selected would fall within the definition of an NSIP, and require a NPS. In the absence of a NPS for Water, promoting such projects would be a longer, more costly and more uncertain process.

Ensuring sustainable abstraction

44. We support the provisions in the Bill to abolish the current Environmental Improvements Unit Charge (EIUC) system. This mechanism involves the creation through a small levy on all abstraction licence payments of a central fund, held by the Environment Agency, to provide companies charged with completing work to reduce the pressure from abstraction on designated water sources.

45. The EIUC system had become over-complicated and burdensome, with funding settlements taking years to be finalised and not being paid. It is anomalous as the only area of water industry funding that falls outside the regulatory price control, and the Bill proposes to bring funding within that process.

46. This change could make such schemes easier to deliver, and provide tangible benefits to the environment. Taken together with changes to the Water Resources Management Plan framework, these changes can help make water resource planning more efficient.

47. Of course the success of this change will depend on Ofwat's agreement to fund these schemes through the price review process. We would expect Ofwat to treat these schemes as they do others prescribed by the Environment Agency’s National Environment Programme. This means they are obligations companies are required to deliver and that should, therefore, be recognised in price limits.

Omissions

Wrongly-connected household drains

48. The problem of wrongly connected household drains affects up to one in ten properties in parts of our region, and an estimated 300,000 properties in England and Wales. It increases flood risk and pollutes watercourses, with 1.5 Olympic swimming pools' worth of foul waste entering watercourses daily in our region alone.

49. While companies are accountable for tackling this pollution, enforcing work at private properties to address it is the responsibility of local authorities, who are not incentivised or always resourced to give it the priority it warrants. Granting companies these powers, in addition to local authorities, would make the resolution of misconnections potentially more efficient for local authorities, companies and customers. It would represent a minor regulatory change for a significant environmental benefit, potentially helping to meet the requirements of the Water Framework Directive in urbanised catchments.

Affordability and debt

50. We agree with the Government that neither disconnection nor reduced flow are appropriate ways to dissuade customers from leaving their water bills unpaid. However, in their absence a meaningful disincentive is needed. The economic downturn has led to an increase in ‘bad debt’ on our books, and the spiralling cost of bad debt is placing an increasing burden on customers forced to pick up the tab.

51. The Bill could be used to take forward Anna Walker’s recommendation that companies should be able to pursue debt through magistrates’ courts, as local authorities do for unpaid Council Tax bills.

52. Asides from any provisions that could be included in the Bill, a clear and workable option to tackle bad debt already exists. Provisions in the Flood and Water Management Act 2010 require "…all property owners to provide the details of their tenants to water and sewerage companies or to assume liability for payment". The high turnover of occupancy in London’s short-term rental sector makes bade debt in the rental sector a particular problem in our region, and the economic downturn has led to even faster turnover of tenants.

53. To test public acceptability of this option we have completed research [5] which demonstrates a high level of support for companies to have greater powers to tackle bad debt:

- Most customers didn’t realise there is a growing problem of bad debt, with only 29% aware of the issue.

- Nearly four out of five were worried that the failure of some customers to pay adds £11 per year to the bills of those who do pay.

- Customers were unaware of the restricted powers water companies have compared with other utilities, and generally felt firms should have more authority to recover unpaid money. 

- Two thirds of customers felt that Thames Water should have greater powers to tackle debt than they do at present.

- 81% think landlords should be obliged to provide tenants’  details or face being liable for the bill.

December 2013


[1] http://www.parliament.uk/documents/impact-assessments/IA13-19B.pdf. Introducing retail competition in the Water Sector; Defra, June 2013 (page 6).

[2] See for example the Ofwat Chairman’s September 2013 Lorch Lecture at Cranfield University.

[3] See for example company submissions to the Efra Committee’s draft Water Bill inquiry.

[4] Page 8; A Non-Essential Use Drought Order for London: Economic Impact Assessment (NERA, April 2012)

[5] The survey findings are the result of questioning 1,000 people on Thames Water’s online customer panel throughout August 2013. The panel is made up of a representative sample of customers from across the region and matches the demographic profile of the company’s customer base.

[5]

Prepared 5th December 2013