Ofwat Price Review 2009 - publications.parliament.uk · Ofwat Price Review 2009 5 1 Introduction 1. The Water Services Regulation Authority (Ofwat) is the water industry’s economic

House of Commons

Environment, Food and Rural Affairs Committee

Ofwat Price Review 2009

Fifth Report of Session 2008–09

Volume I

Report, together with formal minutes

Ordered by the House of Commons to be printed 15 July 2009

HC 554-I Published on 22 July 2009

by authority of the House of Commons London: The Stationery Office Limited

£0.00

Environment, Food and Rural Affairs Committee

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Mr Michael Jack (Conservative, Fylde) (Chairman) Mr Geoffrey Cox (Conservative, Torridge & West Devon) Mr David Drew (Labour, Stroud) Mr James Gray (Conservative, North Wiltshire) Patrick Hall (Labour, Bedford) Lynne Jones (Labour, Birmingham, Selly Oak) David Lepper (Labour, Brighton Pavilion) Miss Anne McIntosh (Conservative, Vale of York) Dan Rogerson (Liberal Democrat, North Cornwall) Sir Peter Soulsby (Labour, Leicester South) Dr Gavin Strang (Labour, Edinburgh East) David Taylor (Labour, North West Leicestershire) Paddy Tipping (Labour, Sherwood) Mr Roger Williams (Liberal Democrat, Brecon & Radnorshire)

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Ofwat Price Review 2009 1

Contents

Report Page

Summary 3

1 Introduction 5 Key challenges for PR 09 7

Transparency and burden of process 9 Consumer engagement 10

2 A sustainable water policy 11 Introduction 11 Environmental improvements 12 Climate change mitigation 15 Climate change adaptation 16

Water efficiency 17

3 Affordability 20 Public funding for supporting water customers 21 Addressing affordability through tariff structures 22 Metering 24 Bad debt 27 Surface water drainage charging 28

4 Financing 29 Protection of critical infrastructure 32 Competition 33 Innovation 38

5 Conclusion 39

Conclusions and recommendations 42

Formal Minutes 48

Witnesses 49

List of written evidence 50

List of Reports from the Committee during the current Parliament 51


Summary The challenge for Ofwat and the water industry in the 2009 price review is to deliver affordable, sustainable water management. The water industry will continue to require substantial long-term investment to deliver the Government’s water policy objectives set out in Future Water. The level and rate of that investment directly affects customers’ water bills.

Affordability: A growing number of consumers have difficulty paying their water bills and the number of households in ‘water poverty’ is set to rise in the future. We conclude that Ofwat’s remit should be strengthened to enable it to pursue more innovative solutions to water affordability. Water companies should do more to inform customers about how they can reduce their water bills and about the financial support schemes available. All parts of the water sector should look to the energy sector for examples of mechanisms that can support vulnerable customers.

The Government has acknowledged the importance of water affordability and appointed the Walker review to consider the affordability of household water charges. Water metering, currently installed in a minority of households, is one of the issues that the Walker review is considering. We conclude that while metering could have an impact on water demand, especially in areas of water stress, it is not a substitute for a robust water efficiency policy. Defra must set out a clear case for more extensive metering before adopting an expensive approach that may have limited benefits.

Investment: The scale of investment in water infrastructure varies from region to region. Much of that investment is required to meet environmental standards. In areas of sparse populations this has had a disproportionate effect on water bills. We recommend that Defra investigate a fairer system of paying for measures that benefit the whole nation, but which the industry has to fund.

Surface water drainage: Many sports clubs, churches and voluntary organisations, such as the Scout Association, have found that their water bills have increased sharply due to a change in the method of calculating surface water drainage charges. Ofwat argued that these increases could have been mitigated if the water companies involved had implemented the charging changes in a more measured and sensitive way. Ofwat should have intervened earlier and harder rather than allowing an individual water company to take the blame. We conclude that Ofwat must now work hard to lay out in clear terms how water companies should price waste water services for these customers of limited means.

Sustainability: Future Water provides a vision of the sustainable water management challenges of the next two decades. Defra should set out how delivering Future Water’s objectives will affect the water sector. We conclude that delivering environmental improvements in the water sector should not be at the expense of other environmental costs.

Climate change adaptation: The recent climate change predictions have highlighted the challenging environment in

4 Ofwat Price Review 2009

which the water industry will operate in the future. We emphasise the importance of climate change adaptation and the objectives of the Climate Change Act 2008 to the water sector. Climate change is likely to lead to an increase in the frequency and intensity of flooding. Protecting the nation’s critical infrastructure against flooding is expensive and we conclude that the regulator should assess whether investments to protect such infrastructure should be paid for by the customers or the company.

Water scarcity: Water scarcity will become an increasingly critical issue in the South and East of England. It is therefore imperative to improve water use efficiency. We conclude that the present regulatory regime places insufficient emphasis on the need to preserve scarce water resources. We recommend that the regulator and Defra explore the scope for more extensive water efficiency obligations and look to the energy sector for examples of best practice on efficiency incentives. We consider ways in which customers could improve their own water efficiency for both consumption and waste water reduction, and recommend that customers who install water efficiency measures receive the benefit

Sustainable drainage systems: We support the wider use of sustainable drainage systems (SUDS), which have environmental and economic benefits. Customers who install their own sustainable drainage should benefit from tariffs which properly reflect the reduced volume of waste water which will result. The regulator and Government should explore how the costs of highway drainage, which only water customers currently bear, can be shared with local communities.

Cost of capital: A major cost of water company operations is raising the necessary funds for large scale investment. Consumers have a critical interest in the cost of that financing as they affect the price paid for water services. The uncertainty created by the Cave and Walker reviews, which are reporting during the price review, may increase the cost to the water companies of raising finance—consumers’ bills could reflect this in higher charges. The changes to the regulatory regime proposed in the draft Flood and Water Management Bill also have the potential to affect the cost of capital.

Competition: The Cave review of competition and innovation in the water industry has recommended that the sector move towards greater competition. The Government has accepted that approach. We recommend that Defra provide us with more detail on how competition will work, and subsequently shape the industry, what the risks might be, and how they will be managed.

The future: The next price review is in 2014, by that time the current regulatory model is likely to be unsuitable as the industry embraces more competition and the pressure to reduce water demand grows. The regulatory framework will have to adapt to these changes and to take better account of the value of the water supplied to and removed from customers’ properties. We therefore conclude that Defra should undertake a fundamental review of Ofwat’s remit, with the goal of ensuring that the regulatory mechanisms and the regulator’s responsibilities and powers are appropriate for the challenges ahead.


1 Introduction 1. The Water Services Regulation Authority (Ofwat) is the water industry’s economic regulator for England and Wales.1 Every five years, Ofwat sets limits on the prices the water companies can charge their customers.2 The 2009 price review (PR 09), which will set price limits for customers’ bills for each year between 2010 and 2015, is the fourth price review since privatisation of the water industry in 1989.

2. Most people in this country take a constant and unlimited supply of clean, affordable water for granted. In 2008–09, the average water and sewerage bill was £331—£700 less than the average energy bill.3 What may not be apparent to the average customer is that only a third of their bill pays for the operating costs of supplying drinking water and removing waste water—the remaining two thirds of their bill covers: return to debt and equity investors (30%); capital charges (charges for depreciation and infrastructure renewal) (28%); and business taxes (6%).4

3. PR 09 has four phases; Phase 1 began in March 2007, when Ofwat began consultation with water companies and other stakeholders. The price review is currently in its third phase, which concludes in November 2009 when Ofwat publishes its final determinations of price limits. Ofwat’s memorandum sets out the process in some detail.5 The regulator’s website provides links to the various sets of guidance issued to the companies during the course of the price review.6

4. Defra’s role in the price review is to ensure that the regulator has a clear statement of the relevant legal obligations and to provide guidance on the social and environmental matters that the regulator should have regard to in the price review.7

5. In their draft business plans, submitted to Ofwat in August 2008, the water companies estimated that water bills would need to be increased by just under nine per cent in real terms for the period 2010–2015 to cover costs and provide an adequate return. Table 1 sets out how key cost elements, based on the companies’ draft business plans, would contribute to predicted changes in bills.

1 Ofwat regulates 21 monopoly private water companies in England and Wales. Ten, including Welsh Water (the single, not-for-profit water and sewerage company in Wales) are water and sewerage service providers, and 11 are water only suppliers. Scotland and Northern Ireland each have a single, publicly owned, water and sewerage company, subject to separate regulatory regimes.

2 In this report the term “water companies” refers to both water only suppliers and water and sewerage suppliers.

3 Ev 70. In 2008–09, companies’ average water bills ranged from £90 to £204, with an overall average of £157. Average sewerage bills ranged from £115 to £293, with an overall average of £174. Ofwat web page, How Customers are Charged 2008–09. www.ofwat.gov.uk/regulating/reporting/rpt_tar_2008–09headlines#2

4 National Audit Office break-down of water customers’ bills in 2008–09.

5 Ev 68

6 www.ofwat.gov.uk/pricereview/pr09phase1

7 Ev 88. Defra submitted two key documents to Ofwat in 2008: A Statement of Obligations covering the legal requirements that the companies should fulfil; and Social and Environmental Guidance covering how Ofwat might contribute to wider social and environmental matters.


Table 1: Drivers of change in average bills 2010–2015 (2007–08 prices) 8

Total (£) (£) Average bill in 2009–10 326

Less (1) past efficiency savings –6

Plus (2) maintaining base services 4

of which: changes in revenue changes in operating costs changes in capital maintenance changes in impact of taxation changes in the cost of capital

–7 12 16 –5

–12

(3) maintaining and enhancing security of supplies to all consumers

17

(4) the impact of improvements in services 25

of which: drinking water quality environmental improvements improvements in service performance

5 16 4

Less (5) scope for reduction through future efficiency improvements

–11

Average Bill at 2014–2015 355

Change from end of last period 29

Source: Ofwat, Setting Price Limits for 2010–2015: Overview of companies’ draft business plans, September 2008.

6. The Committee announced this inquiry on 29 January 2009. We invited views on the price review and in particular: how it was being conducted; planning for climate change; how environmental improvements should be paid for; the affordability of water services; and how the price review related to the Cave and Walker reviews9 and the draft Flood and Water Management Bill.10 In parallel with this inquiry, we have conducted pre-legislative scrutiny of the draft Bill. Some of the evidence taken during that inquiry has been relevant to the price review and some of our conclusions in this report relate to the draft legislation.

7. We received 27 written submissions and held six oral evidence sessions. We are grateful to all those who provided us with evidence—a full list of witnesses is appended to this report.

8 Figures are from draft submissions and are liable to change in the final submission summary. Ofwat, Setting Price

Limits for 2010–2015: Overview of companies’ draft business plans, September 2008.

9 Professor Cave’s final report, Independent Review of Competition and Innovation in Water Markets, was published in April 2009. Defra published the interim report from the Walker Review on 29 June 2009, Anna Walker, The Independent Review of Charging for Household Water and Sewerage Services: Interim Report, June 2009.

10 Draft Flood and Water Management Bill, Cm 7582, April 2009.


Key challenges for PR 09

8. Ofwat told us that it put “customers at the heart” of its approach to PR 09 and that at the same time it had to “ensure that water companies can deliver their services, including the statutory improvement programmes, efficiently and effectively”.11 It considered its key challenge was to reconcile these two objectives, in the context of water companies’ “biggest ever” proposals for capital investment.12

9. The water industry is usually considered a stable sector of the economy, which enables investors in the industry to have a degree of confidence.13 However, there are several sources of uncertainty surrounding this price review. The Minister for the Natural and Marine Environment, Wildlife and Rural Affairs, Huw Irranca-Davies, told us that PR 09 was going to be rather unusual because of the number of “quite big” things with potentially “big bills” that could come up between this and the next price review in 2014.14 The Minister identified some of those factors, including: the outcome of the Walker review into household water charging; the climate change projections; water resource management plans prepared by the water companies; the Water Framework Directive; the Flood and Water Management Bill; and infraction of the Urban Wastewater Treatment Directive proceedings.15 In addition this price review is taking place against the background of a considerably more challenging economic situation, which has an impact both on the ability of customers to pay water bills and the ability of water companies to finance the necessary investment.

10. In this report we consider the three fundamental questions for Ofwat:

• Does the regulatory framework encourage a sustainable water policy;

• Can the consumer afford the resulting increases in charges; and

• Are the companies able to raise the required capital on the money markets and at what cost to the consumer?

11. On 17 June 2009, Defra published the UK’s climate change predictions up to 2080. The predictions illustrate the likely future climate within which the water industry and its regulatory framework must operate. The predictions suggest that areas of the UK will be subject to greater water scarcity in the summer, other areas will have increases in winter rainfall, and across the country severe weather events will occur with increasing frequency and intensity.16 The regulator said that it did not expect the companies to factor in climate change predictions in their draft business plans since publication of the new scenarios had been delayed until a late stage in the PR 09 process, but Ofwat would “facilitate any

11 Ev 68

12 Ibid

13 Standard & Poor, Enhanced competition, Standard & Poor’s assessment of the UK water sector, December 2008.

14 Q 240

15 Ibid

16 Defra, Adapting to climate change: UK climate projections, June 2009.


investment justified before 2015 in terms of the latest evidence when it becomes available”.17

12. Defra requires Ofwat to contribute, through the price review, to the Government’s sustainable water objectives set out in the 2008 water strategy, Future Water.18 Future Water acknowledges the UK’s obligation to meet the requirements of EU Directives such as the Bathing Water Quality Directive, Water Framework Directive and Urban Waste Water Directive.19 These Directives set higher standards for water and waste water and, in many cases, require significant investment by the industry over many years.

13. The challenge for Ofwat is to balance the requirement for sustainable water supplies, delivered by water companies able to pay for necessary environmental improvements, with bills that are affordable for consumers. This must be delivered against the background of the current economic recession and the predicted impacts of climate change.

14. In this report we consider some of the potential outcomes of policy work still in progress, such as the recommendations arising from Professor Martin Cave’s review of competition;20 Anna Walker’s review of household charging;21 and the draft Flood and Water Management Bill.22 Ofwat will publish its final determination for PR 09 before the full implications of these three documents are clear. Within the regulatory regime, the companies can apply to Ofwat for an interim price determination if there has been a substantial change of circumstances. In this price review that mechanism has been augmented by a ‘change protocol’. Defra’s submission explains that:

As part of PR 09, Ofwat is developing a Change Protocol. This provides a mechanism for water companies and Ofwat to take account of significant factors that may arise during a price review period which are identified or defined too late to be included when water price limits are determined. This will enable, for example, relevant outcomes from the Cave and Walker Reviews and any relevant legislation in the forthcoming Floods and Water Bill, to be addressed before the next price review.23

15. The Government’s decisions on implementing the Cave and Walker reviews’ recommendations and the content of the Flood and Water Management Bill will still be unresolved when Ofwat comes to make its final determinations for this price review. The uncertainty generated may affect the companies’ ability to raise money on the capital markets. Despite the ‘change protocol’ mechanism, we conclude that Defra should set out the probable timing of its full responses to the Cave and Walker reviews;

17 Ev 71

18 Defra, Statutory Social and Environmental Guidance to the Water Services Regulation Authority (Ofwat), August 2008. Department for Environment, Food and Rural Affairs, Future Water, Cm 7139, February 2008.

19 Council Directive 76/160/EEC (Bathing Water Directive), Council Directive 2006/60/EC (Water Framework Directive), Council directive 91/271/EEC (Urban Waste Water Directive).

20 Professor Martin Cave, Independent Review of Competition and Innovation in Water Markets : Final Report, April 2009.

21 Anna Walker, The Independent Review of Charging for Household Water and Sewerage Services: Interim Report, June 2009.


23 Ev 90


and to what extent and how the regulation of the water industry will be altered by the Flood and Water Management Bill.

Transparency and burden of process

16. This Committee published two reports into the 2004 Price Review.24 In the second report we found the process to be open to accusations of “horse trading’” as the regulator “cuts the price limits in response to companies overstating their likely costs”.25 Dame Yve Buckland, Chair of the Consumer Council for Water (CC Water), told us that in the past the price review had sometimes been seen as “the opening of the sweetie shop and everyone dashes in and grabs as much as they possibly can and then dashes out again”.26

17. Innovations in the process such as the Strategic Direction Statements (SDS) and Capital Expenditure Incentive Schemes (CIS),27 have both improved the ability of companies to plan for the long term and provide the public with a clearer understanding of the basis for those plans. This price review’s methodology has placed more information about the water companies’ plans in the public domain. This greater transparency has enabled stakeholders, including consumers, to take a view on the merits of the water companies’ business plans and to see the likely impact on water prices. Water UK, which represents the UK’s water companies, described Ofwat’s PR 09 methodology as lacking transparency and engagement with the industry. It considered that its guidance had been “piecemeal” and “fallen short of the degree of transparency and consistency of process that had been established during the PR 04 process”.28 The Minister noted that transparency was a “genuine issue”, although not one on which he considered he should dictate, but noted that the public were more likely to accept price rises if the reason for those increases was clearly articulated and transparent.29 Greater levels of transparency in the long-term planning of the industry should have reduced the inclination for ‘horse trading’.

18. Mr Martin Hurst, Defra’s Director of Water, explained that the Government’s guidance to Ofwat included reference to the desirability of “proportionality and transparency”.30 This guidance also states that Ofwat should develop a simplification plan and “consider ways in which to reduce or streamline the information requirements placed on companies. The Government expects Ofwat to justify any new burdens on compelling cost-benefit grounds”.31

24 Environment, Food and Rural Affairs Committee, First Report of Session 2003–04, Water Pricing, HC 121 (including

HC 1240-i and -ii, Session 2002–03); Environment, Food and Rural Affairs Committee, Nineteenth Report of Session 2003–04, Water Pricing: follow-up, HC 1186.

25 Environment, Food and Rural Affairs Committee, Water Pricing: follow-up, para 20.

26 Q 121

27 Ofwat describes Strategic Direction Statements as the opportunity for water companies to set out for consumers, regulators and other stakeholders the “direction of travel over the longer term—say 25 years hence”. It describes the Capital Expenditure Incentive Scheme as setting out the expenditure assumptions and rewards or penalties for water companies of out-performance or under performance. www.ofwat.gov.uk.

28 Ev 139

29 Q 244

30 Ibid

31 Department for Environment, Food and Rural Affairs, Statutory Social and Environmental guidance to the Water Services Regulation Authority (Ofwat), August 2008, para 2.28.


19. Economic regulation of a monopoly utility is necessarily complicated. In our Water Pricing report we quoted the National Consumer Council, which said “one of the difficulties with the price setting process is the, largely necessary, complexity of the process, which makes it difficult for those outside the industry to assess the merits of companies’ plans”.32 The water companies also sought to persuade us of the burdensome nature of the process. For example, United Utilities’ draft business plan was 4,000 pages long and Thames Water’s ran to “several thousand pages”.33 The Minister accepted that it was necessary to ensure the information relating to the price review was “translated in an easily readable way”.34

20. We recognise that economic regulation of a monopoly utility will be complicated and welcome the improvements in transparency in this price review. We commend Ofwat and the companies’ determination to place more information in the public domain and recognise that Ofwat will need to publish a series of guidance and information as the process develops through consultation and discussion. Nevertheless, the current regime’s complexity risks hampering the regulator’s wish to increase transparency. We recommend that Ofwat and Defra seek ways to rationalise, and make more comprehensible, the process to companies. We further recommend that Ofwat and Defra consider what further information relating to the price review can be placed in the public domain, and ensure that such information is comprehensible and comprehensive. The volume of a submission is no substitute for the quality of its content.

Consumer engagement

21. Ofwat’s framework and methodology for the price review emphasises that companies must take into account the impact their plans will have on consumers.35 Companies are encouraged to understand what customers want and are prepared to pay for. This price review has had greater consumer input and we welcome the formal role of the Consumer Council for Water (CC Water), including undertaking research into consumer priorities for PR 09.36 CC Water found that 64% of customers are positive about the service and value for money they receive from water companies.37 Some companies, such as Yorkshire Water, have secured the overwhelming support of consumers for their business plan; others have, as yet, failed to convince the majority of their consumers of the acceptability of their plans. Consumers need to be aware that some of the water companies’ investments are mandated by statute and the companies are therefore limited in the extent to which they can reduce their investment plans. The companies need to be clear what is required of them as part of any price review and, equally, consumers need, as a minimum, to accept the costs involved. We therefore welcome the recommendations (numbers 14 and 15)

32 Environment, Food and Rural Affairs Committee, Water Pricing, para 12. HC 121, First report of Session 2003–04.

33 Ev 128; QQ 164–165 (Mr Antolik)

34 Q 244

35 Ofwat, Setting price limits for 2010–15: framework and approach, March 2008, p 7.

36 Corr Wilburn Research and Development for the Water Industry Stakeholder Steering Group, Deliberative Research Concerning Consumers’ Priorities for PR 09, June 2008. http://www.ofwat.gov.uk/pricereview/pr09phase1/pap_rsh_pr09conspriorexecsumm.pdf

37 Q 4


made by Professor Cave in his review of competition in the industry that there should be negotiated settlements between customers and other stakeholders over quality and service standards.

22. We recommend that Ofwat require companies to demonstrate how consultation with their consumers has informed their business plans. We further recommend that it be a condition for Ofwat’s approval of a company’s business plan that the company demonstrate that its plan is understood by the majority of its consumers.

2 A sustainable water policy

Introduction

23. Future Water provides a vision of the sustainable water management practices needed to meet the challenges of the next two decades, including responses to seasonal water scarcity and increased volume and intensity of rainfall in parts of the country.38 For the first time, this price review has introduced 25 year Strategic Direction Statements (SDS) in which the companies set out for consumers, regulators and other stakeholders their “direction of travel over the long term”.39 Ofwat considered that SDSs represented a “significant new step” which addressed the need for longer term planning and put “environmental improvements and costs in the context of long-term benefits”.40

24. Water companies support this longer term approach. United Utilities believed that Future Water and SDSs together set out a “clear, strategic and coherent approach” leading to a much more rigorous approach to tackling issues such as “climate change, water resource management and sustainability”.41 However, Natural England questioned the impact of the SDSs since their 25 year horizon was inconsistent with the current five year business plans, thereby restricting the companies’ ability to “secure any longer term obligations”.42 The Blueprint for Water coalition, representing environmental NGOs, viewed PR 09 as a break-through at the “company and regulatory level in the attitude towards tackling [water] quality problems at source” and believed this approach would help to find long term, cost-effective solutions.43 However it considered that the amounts of investment being planned were the minimum required to achieve environmental objectives, particularly since much of this was to make up for historic deficits.44

25. The test of PR 09’s success is how far it provides incentives to water companies to achieve Future Water’s vision for sustainable water management. We recommend that Defra sets out how it envisages delivery of Future Water’s objectives will impact on the industry and the regulator. Water customers will be part of the delivery mechanism of

38 Defra, Future water: the Government’s water strategy for England, CM 7319, February 2008.

39 Ev 69

40 Ibid

41 Ev 128

42 Ev 115

43 Ev 151

44 Ev 150


Future Water, particularly in relation to reducing water demand. Defra should include in its analysis the role played by water customers and the likely impact upon them.

Environmental improvements

26. There have long been requirements on water companies to safeguard the provision of clean and safe drinking water. In recent decades a wider range of requirements related to environmental standards have been imposed, particularly to require improved water quality for ecological and health reasons. For example, the Urban Waste Water Treatment Directive imposes stringent conditions on the treatment of waste water to reduce pollution levels and the Bathing Water Directive sets quality standards which must be met for each individual bathing area.45 Under the Water Framework Directive,46 Member States must draw up river basin management plans setting out objectives for each water body and summarise the measures which will be taken to achieve that objective.47 The Water Framework Directive also requires bodies of water to achieve “good” ecological and chemical status by 2015,48 but it permits derogations for some measures where there are economic grounds for taking alternative approaches. This would give the UK the option to phase or delay implementation beyond the timescales set out in the Directive. Severn Trent Water supported a ‘freeze’ on its implementation.49

27. A large part of water company investment is therefore needed to meet EU requirements. Severn Trent Water, for example, state that nearly half of its investment in sewerage treatment (ie £117 million) is to meet Urban Waste Water Treatment Directive requirements, with a further £24 million in response to the Habitats, Fisheries and Groundwater Directive. The Company will also spend £41 million as the first tranche of expenditure to meet the Water Framework Directive’s requirements.50 Other companies report similar levels of expenditure.

28. Ofwat believed that it was Government’s responsibility to determine the environmental standards, and the regulator’s role was to put in place a framework to allow companies to “finance and deliver” these outcomes.51 Severn Trent Water said that it was essential for the environment and customers that Ofwat viewed their proposed package of investment holistically but it was concerned that in practice Ofwat might view parts of the plan in isolation. This could lead to a “price determination which will not provide the best outcome for customers, the environment and investors”.52 Similarly, Water UK was concerned that the price review mechanism encouraged “end of pipe” solutions rather than addressing water quality issues at source. The organisation did, however, “congratulate”

45 Council Directives 91/271/EEC and 76/160/EEC.

46 Council Directive 2000/60/EC.

47 Defra, Statement of Obligations: information for Water and Sewerage Undertakers and Regulators on Statutory Environmental and Drinking Water Provisions Applicable to the Water Sector in England, December 2007.

48 A body of water is defined as a stretch of a river or coastline, a lake or a groundwater body.

49 Ev 43

50 Ibid

51 Ev 72

52 Ev 43


Ofwat for its “commitment to sustainable solutions” shown by its assurance that “all well-justified catchment management schemes will be funded”.53

29. The Consumer Council for Water (CC Water) recognised that there was a need to meet EU environmental requirements and that customers also wanted to see “a sustainable water industry”.54 However, it believed the ‘polluter pays’ principle should apply so that current water customers were not alone in paying for improvements.55 Environmental improvements by water companies could be paid for by water customers or through general taxation. Ofwat told us that 96.5% of the cost of mitigating water pollution in England and Wales was met by water customers, which seemed to them to be “more than a fair share”.56 Water UK warned that the costs versus benefits of environmental improvements must be robustly assessed and customers should not “pay more than they should”.57

30. Dame Yve Buckland, Chair of CC Water, believed that “… if the money did come out of taxation there would be a longer and much harder look at the cost benefit analysis behind some of the proposals”.58 However, the Blueprint for Water Coalition, representing environmental, water efficiency and fishing/angling organisations, warned that CC Water should not “neglect its sustainability duty” and that opposition to the “scope and scale of essential environmental investment” reflected CC Water’s narrow focus on price.59

31. Anna Walker, chair of the independent review of household water and sewerage charges, believed that high water bills,63 resulting from replacement of infrastructure to deliver high environmental standards, would have to be faced in the water sector as a whole and would impact on water customers.60 She emphasised the importance of transparency in the costs of environmental improvements, telling us that it was important to explain to water customers “…what is at stake, what the costs are, and gathering their views in…”.61 She added that for environmental improvements to have legitimacy people had to understand “what it is that they are paying for and why”.62 This sentiment was echoed by CC Water which considered that there needed to be a greater analysis of cost benefits and how to “sell those benefits to consumers”.63

32. Some water companies considered the proposed balance between funding environmental improvements and keeping bills affordable to be about right. United Utilities said the draft business plans “strike the right balance between the need for long-

53 Ev 71

54 Ev 18

55 Q 119

56 Ev 72

57 Ev 139

58 Ev 139, Q 119

59 Ev 151

60 Q 3

61 Q 10

62 Ibid

63 Q 121


term environmental improvements—particularly to deal with the issue of climate change and the affordability of paying for those improvements in the current economic climate”.64

33. We recommend that Defra explore the potential for derogations to implementation of the EU Water Framework Directive’s requirements to enable the phasing of environmental improvements and their related costs, where the near-term burden of these on customers would be severe.

34. We further recommend that Defra provide clear guidance to Ofwat as to the application of cost benefit analysis and Ofwat’s guidance to the companies needs to be clear and unambiguous.

35. Investment in water infrastructure varies significantly between regions of the UK, due in part to wide differences in the standard of historic infrastructure and in part to geographical characteristics of regions. Water prices also vary from region to region, reflecting infrastructure costs and uneven population distributions whereby large geographical areas with small populations have high costs spread among few people. For example, South West Water customers’ bills are predicted to increase on average by £20 in real terms by 2014–15, compared to a £12 average rise for a Severn Trent Water household, and this comes on top of bills which are already nearly 60% higher than those of Severn Trent Water.65 In the course of her review, Anna Walker conducted several workshops around the UK. She told us that at the workshop in Plymouth she was struck by the strong sense of unfairness about high water charges in the South West.66

36. CC Water argued that national environmental benefits were paid for regionally and that the benefits were taken up more by those on higher incomes while the costs were borne equally by all, regardless of income.67

37. The question of whether disproportionately high water charges should be borne solely by those living or operating businesses in a particular region, or spread more widely across the country, is complex. In the first instance the extent of differences in charges and service levels needs to be established, before posing the questions of whether those differences are appropriate, and what the consequences would be on different consumers of either reducing these, or indeed introducing further differences in the form of cross-subsidies. The Minister referred to the “idea of spreading of either the taxation burden or the water rates burden wider across the country”, but noted that there were potential downsides such as reducing the incentive for water efficiency.68

38. Anna Walker’s interim report, published in June, considered that “costs should reflect regional differences and that water prices should continue to be regionally based and geographically averaged”. However, the report also said that “arguments as to whether

64 Ev 128

65 Anna Walker, The Independent Review of Charging for Household Water and Sewerage Services; Interim Report, June 2009. Severn Trent Water’s average annual household bill is £292 for 2008–09, rising to £304 by 2014–15 at the end of the PR 09 period. South West Water’s bills increase from £497 to £517 over the same period.

66 Q 2

67 Consumer Council for Water evidence to the Walker review.

68 Q 258


environmental improvements should be paid for by the local water customer, the national water customer or the taxpayer are complex” and further views would be sought before a final conclusion could be reached.69 Regardless of who pays for these improvements, Walker urged increased transparency, including full quantification of the additional cost on the national average bill and “those of each water company area”.70

39. We note that the introduction of retail competition into the water industry could increase the charging variations within each company’s region. Regional cross-subsidies already exist within the utilities sector, such as the power distribution cross-subsidy provided to the Scottish Highlands and Islands.71 Rural populations have also benefited from cross-subsidies, such as the Countryside Stewardship Scheme, which reflect the greater environmental costs that they are responsible for.72

40. The question for Defra is whether environmental improvements in certain regions, such as measures to protect beaches in the south west, should be seen as a national benefit to be paid for by tax payers or as a regional infrastructure deficit to paid for by local water customers. Ofwat and Defra have so far failed to make the argument that regional variations in the costs customers must bear for environmental investment are fair and appropriate. We have found it hard to see how alternative charging mechanisms for infrastructure investment could be made to work effectively without significant changes to the current underlying regional charging regime. Defra must therefore examine how changes might be made to the way water industry investment is paid for when it is directly and expressly for the purpose of improving environmental standards for national benefit.

Climate change mitigation

41. Government policy recognises the need for all sectors of the economy to take action to reduce greenhouse gas emissions to meet the Climate Change Act’s targets of an 80% reduction in carbon emissions by 2050,73 with at least 34% by 2020, relative to 1990 levels.74

While greenhouse gas emissions from the water industry contribute less than 1% of the UK’s emissions, when energy used to heat domestic water is taken into account, water use generates around 5% of emissions.75 Water companies referred to their efforts to reduce their own carbon footprints, with for example, Severn Trent Water planning to increase the percentage of renewable energy it generates from 17% to 30% by 2013.76 The company

69 Anna Walker, The Independent Review of Charging for Household Water and Sewerage Service; Interim Report,

June 2009, p 10.

70 Ibid

71 National Grid, Electricity transmission charges policy, June 2008. Under the Energy Act 2004 there is an additional £45 million provided for areas with high distribution costs cover for the social costs of owning and maintaining the Highlands & Islands distribution network. This is spread across all GB users.

72 www.naturalengland.org.uk

73 Climate Change Act 2008, section 1 (1) (a)

74 “CCC recommends a minimum 34% cut in greenhouse gas emissions by 2020, with a 42% cut if a global deal is achieved”, Climate Change Committee press notice, 1 December 2008. This target could be increased to 42% relative to 1990 (31% relative to 2005) if a global deal to reduce emissions is achieved.

75 Ev 108

76 Ev 43


pointed out that delivering the Water Framework Directive’s objectives will increase carbon emissions.77 Yorkshire Water expected their annual operational carbon emissions to rise by 10% by the end of 2015—86% of this increase would be due to “tighter environmental standards”.78 It wanted greater Government recognition of “the carbon impact of tighter river and coastal water quality legislation” so that “environmental improvements should only be proposed where the benefits exceed the carbon impacts”.79

42. Defra should assess the impact of new requirements for water companies to improve water quality and conservation to ensure that only policies with net positive environmental outcomes are adopted. Ofwat should require the water companies to set out the carbon impact of their business plans and the measures they will put in place to mitigate any increases.

Climate change adaptation

43. The water industry acknowledges the imperative of long-term planning for climate change, including adapting infrastructure and services. Ofwat said that it wanted “each company to put forward proposals both to mitigate its own impact on the climate, and to adapt to the effects now and in the future”.80 The UK’s climate projections anticipate that all areas of the UK will get warmer, with increases of up to 4 degrees celsius in south east England by 2080. Summer precipitation is expected to decrease, for example by up to 23% in south west England, while winter rainfall will tend to increase across the UK and by up to 16% in north west England by 2080.81

44. We received evidence setting out concerns about whether the current regulatory framework was encouraging sufficient adaptive measures to be taken. Water UK believed that the industry, Government and regulators were not working together to develop a common response to factor in climate change impacts into planning decisions for both clean and waste water.82 Yorkshire Water was concerned that Ofwat had “required companies to remove climate change adaptation and wind power from their plans”.83 The company was not proposing immediate investment to adapt assets as the impacts were still “too uncertain” but was planning strategic research into the impacts of the latest projections on infrastructure before revising design standards.84

45. We suggested to the Minister that provisions of the Climate Change Act 2008 should be applied specifically to the water sector via the Flood and Water Management Bill.85 The Bill could include an express requirement for those carrying out their responsibilities to achieve the Climate Change Act’s objectives for effective adaptation in relation to water

77 Ev 43

78 HC 555-II, Ev 42

79 Defra, Adapting to climate change: the climate projections, June 2009

80 Ev 71

81 Ibid

82 Ev 139

83 HC 555-II, Ev 53

84 Ibid

85 Climate Change Act 2008, Part 4.


supply.86 While Defra officials noted that local actions would take place within “that sort of framework” they would, subject to the Minister’s views, look at “whether some sort of explicit linkage might be made”.87 Defra is currently consulting on how the power given to the Secretary of State under the 2008 Act, to require organisations to report on their adaptation programmes, will be discharged.88 This includes proposals that Ofwat and water companies would be “priority” reporting organisations expected to report on their adaptation plans to the Secretary of State during 2010–2011.89

46. Climate change is predicted to have a significant impact on water availability throughout the country. The management of water resources will have to take climate change into consideration. We welcome Defra’s proposal that Ofwat and water companies be considered as priorities for early reporting on how they will adapt to climate change. However, Defra should consider if changes are needed to the regulatory regime to ensure that water companies have incentives to take early action to adapt to climate change. We further recommend that the Flood and Water Management Bill should place an explicit requirement on water companies and Ofwat to exercise their functions with regard to the adaptation objectives of the Climate Change Act 2008.

Water efficiency

47. Household demand makes up most (62%) of potable water demand in the UK. Anna Walker found that while per capita consumption (currently averaging 148 litres per person per day) has remained relatively steady over the last decade and is low in comparison to Mediterranean countries, it is “higher than in other European countries with a similar climate”.90 Demand per capita is expected to fall, but this will be more than offset by the expected 10 million increase in England’s population by 2031; and the trend towards smaller households, which have higher per capita usage.91 The Environment Agency predicts that by 2020 demand could increase by 5%.92

48. Water companies currently have a duty to promote the efficient use of water. However, they spend less than 1% of total expenditure on water efficiency and the Walker interim review concluded that the effect has been “equally small”.93 Ms Walker told us that the regulatory system as a whole needed to incentivise companies and customers to “think about using water carefully and economically”.94

86 HC 555-II, Q 310

87 Ibid

88 Climate Change Act 2008, Section 62.

89 Defra, Consultation on the adaptation reporting power in the Climate Change Act 2008, June 2009.

90 Anna Walker, The Independent Review of Charging for Household Water and Sewerage Services; Interim Report, June 2009, p 31.

91 Office of National Statistics, 2006-Based Sub-national Population Projections. http://www.bournemouth.gov.uk/Residents/Research_Information/Themes/population_migration/population_projections.asp

92 Ibid


94 Q 13


49. Ofwat has now introduced water efficiency targets on a trial basis for this financial year, but they will be mandatory from 2010–15.95 However, the targets are not stretching in comparison to achievements elsewhere in Europe. In Germany, for example, per capita consumption was already at 129 litres per day in 1998—the target at which the UK is aiming today.96

50. Waterwise, an NGO promoting water efficiency, hoped for a “significant step change in the scale and number” of the water efficiency schemes proposed in the water companies’ PR 09 business plans and funded by the final price settlement. It considered that PR 04 lacked firm evidence on the costs and benefits of larger scale water efficiency programmes.97 The Environmental Industries Commission, a trade association for the environmental technology and services industry, believed that better regulatory incentives were needed for companies to invest in water efficiency, and other environmental improvements.98 Northumbria Water agreed with this and called for more positive incentives since the current approach was too focussed on targets and penalties rather than rewards. It considered that incentives currently in place mainly related to “reducing costs” and did not “adequately address important issues such as climate change and sustainability”.99 South East Water wanted to see “changes of behaviour and investment in water efficiency of buildings” as well as water efficient devices and customer information, but did not consider that retail competition would in itself promote water efficiency.100

51. Regina Finn, Chief Executive of Ofwat, emphasised that water efficiency was a key area since the challenge in the longer term is how “ensure that both the industry and customers properly value this really essential life resource” and establish incentives for the “right behaviours”.101 Ofwat consider that the industry has no incentive to increase the volume of water sold because, under the ‘Revenue Correction Mechanism’ a water company would forfeit any additional revenue resulting from those sales.102

52. Waterwise noted the specific problem of water efficiency retro-fit programmes being classified as operating expenditure, rather than capital expenditure, which meant that water companies had an incentive to deliver “large scale supply-side schemes” as these could increase regulatory asset value and hence potential gains.103 The NGO referred to the Cave interim report’s conclusion that water companies were “unadventurous with regard to tackling environmental problems” and focused on “pouring concrete”.104

95 Ofwat, Water supply and demand policy, November 2008. Within current operating budgets companies are required

to undertake activity to save 1 litre per property per day, for household and non-household customers. Above this baseline an allowance will be made in price limits for companies pursuing additional water efficiency measures.

96 http://www.ifpri.org/media/water2025.htm

97 Ev 106

98 HC 555-II, Ev 170

99 Northumbrian Water Ltd, Ofwat Draft PR 09 Methodology, A response from Northumbrian Water, January 2009. www.ofwat.gov.uk

100 Ev 146

101 Q 202

102 Ofwat website, PR09/10 Revenue Consultation Mechanism worked example, April 2008. www.ofwat.gov.uk

103 Ev 70

104 Ev 108


53. Witnesses provided us with ideas for a range of water efficiency approaches, including a scrappage scheme to enable householders to replace inefficient water appliances, such as washing machines, dishwashers and showers, with more efficient equipment.105 Unison believed this could cut water consumption by 50%, with a consequent reduction in need for infrastructure investment, helping to keep customers’ bills down.106 A number of witnesses considered that metering could help to cut consumption since it helped to put a value on water more explicitly and we examine this in more detail below.

54. Anna Walker linked affordability and water efficiency in her interim report published in June 2009. She recommended that companies be required to develop their own water efficiency programmes, which would contribute to their enforceable water efficiency target, with priority given to low income customers in debt or in receipt of Council Tax Benefit.107

55. There are clear parallels with approaches for improving energy efficiency levels, although there are differences between the sectors; for example the size of water bills is lower and arguably this lessens the incentive to reduce usage. Anna Walker told us that the water industry is “behind the energy industry” in terms of providing information and education to customers on efficiency and “more thought needs to be given to water efficiency”.108 We recommended in our report on Energy efficiency and fuel poverty published earlier this year that energy efficiency targets be set for existing homes, delivered through an area-based approach, focusing first on the areas of most need.109 Funding for this would come from Government schemes such as Warm Front as well as the Carbon Emissions Reduction Target (CERT) activity funded by energy supply companies.110 This is a model whose merits could usefully be considered for the water industry. Analysis of the full range of water efficiency technologies available is outside the scope of this report, but there is evidence that businesses and households have further opportunities to reduce water usage.111

56. We are not convinced that the mechanisms in the price review are sufficient to promote the increases in water efficiency necessary to ensure that water demand can continue to be met in periods of water scarcity. We consider that there are models from the energy sector that could usefully be adapted for water supply and Ofwat should assess how best practice in achieving improvements in energy efficiency can be applied to the water sector. We recommend that Ofwat and Defra explore more extensive water efficiency obligations, either by placing limits on volumes sold or a (CERT style) measures based approach. Ofwat should benchmark the performance of the UK industry in delivering sustainable water management on an international basis.

105 Ev 137

106 Ibid


108 Q 27

109 Environment, Food and Rural Affairs Committee, Third report of Session 2008–09, Energy efficiency and fuel poverty, HC 37, para 164.

110 The Carbon Emissions Reduction Target (CERT) is an obligation on energy suppliers to achieve targets for promoting reductions in carbon emissions from the household sector.

111 www.envirowise.gov.uk


3 Affordability 57. Investment in the water industry over the last 20 years has been paid for by customers paying prices which have increased by more than inflation. While research conducted in 2009 found that over two thirds of customers perceived their water and sewerage bills to be “fairly or very good value for money”,112 there are problems of affordability for many customers. Water affordability is commonly taken to mean that 3% or less of household income is spent on water and sewerage bills.113 An OECD study found that water charges in England and Wales represent a higher proportion of the income of the lowest decile income group than in any of the nine countries it studied, except Mexico, and the ratio of the proportion paid by that group compared to the average is the highest of any of these countries.114

58. Citizens Advice (CAB) told us that they were dealing with increasing numbers of people, particularly in those regions with high water charges, who could not afford to pay their water bills. CAB dealt with some 57,000 such cases in 2007–08.115 It criticised Defra for ending the monitoring and reporting of water affordability and wanted to see this re-instated using the 3% threshold.116

59. There are two main groups likely to have difficulty paying water bills—those on low incomes with high essential usage and those on low incomes in areas where water prices are high. In the south west, 30% of customers spend more than 3% of disposable income on water charges and those living alone and in receipt of job seekers allowance could be paying up to 16% of their income.117 Nationally, 40% of the lowest income households would be defined as ‘water poor’ using the 3% threshold.118 This situation is likely to deteriorate in the current challenging economic circumstances and CAB anticipate that debt cases will increase by 4% annually.119

60. Defra said that “ensuring affordability of water supplies for households is one of the Government’s key social goals for water policy”.120 The Minister said that water affordability was of increasing concern and added that it was regionally specific and “specific to certain types of households and certain types of users”.121 He was hopeful that the Walker review would come forward with recommendations to tackle water affordability.122 The Walker interim report said that “levels of water debt have reached an

112 Water Industry Stakeholder Steering Group, Understanding customers’ views, PR 09 Quantitative Research into

Customers’ Priorities, 2009.

113 Fitch M and Price H, Chartered Institute of Health, Water Poverty in England and Wales, 2002.

114 OECD, Improving Water Management: Recent OECD Experience, 2003.

115 Ev 120

116 Ev 121

117 Ev 120

118 Ev 121

119 Ibid

120 Ev 88

121 Q 251

122 Ibid


all-time high and concerns are being voiced about the affordability of bills, particularly in some parts of the country”.123 The report contains a number of recommendations relevant to our inquiry. It said that the regulator needed to be more pro-active in addressing affordability issues and questioned whether Ofwat should be given more powers in this regard.124 Ms Walker will seek further evidence on water affordability and other issues in order to produce final conclusions later in the year. She told us that any recommendations from her report that the Government accepted could be incorporated into the regulatory regime before the next price review in 2014.125

61. There are three ways to improve affordability—either reduce capital investment which is driving price rises; use the pricing mechanism to enable some water customers to subsidise others; or shift the burden to the taxpayer either to support those struggling to pay bills via the welfare and tax system or through using public funds to pay for water industry investment. No clear consensus on tackling affordability emerged in the evidence we received. Some considered that support should come from the public purse, via the taxpayer, and others that water company customers and/or shareholders should bear the costs of making bills more affordable for those struggling to pay.

Public funding for supporting water customers

62. A number of witnesses proposed that taxpayers should support those in difficulty meeting water bills.126 The Minister noted that the use of the benefits and tax systems was one way forward.127 Anna Walker’s interim report concluded that, although any future charging system should be addressed against the “fairness principles” which her review had identified, “issues of affordability have to be resolved outside the main charging system”.128 Citizens Advice described the current system of support as like something out of the nineteenth century with a set of highly restrictive rules administered at companies’ discretion and recommended that instead the Government should keep bills down by paying for environmental improvements and use the tax and benefits system to ensure people have a reasonable income.129

63. Supporting those in water poverty via the public purse means increasing taxes for all, including for some of those in ‘water poverty’. Whether this would provide less or more relief to particular households would depend on individual circumstances and the details of such a scheme. However, a benefit of supporting people in high cost regions via the public purse is that regional impacts would be shared nationally. Indeed, Anna Walker’s interim report asks for views on the potential for a “regional water benefit, paid for by the national

123 Anna Walker, The Independent Review of Charging for Household Water and Sewerage Services; Interim Report,

June 2009, p 7.


125 Qq 6, 15

126 Ev 140

127 Q 253


129 Ev 126


taxpayer”.130 Impacts on water poverty through particularly high bill increases in one region would be spread across the country, whereas supporting those in water poverty via water customer bills would add costs to water customers in that region only.

64. We welcome the contribution that the Walker interim report has made to the debate on how to improve affordability of water bills for all customers and look forward to the Government’s response. Central to this response must be adoption of a firm definition of water affordability to be used by all relevant agencies together with strategy for improving the monitoring and reporting of water affordability.

Addressing affordability through tariff structures

65. Currently, the Vulnerable Groups tariff is the only social tariff applied to water customers in England and Wales.131 The tariff allows qualifying metered customers to be charged the average unmetered bill.132 In 2008, only around 24,000 households were in the scheme,133 although Defra told us that some 300,000 customers would be eligible.134 The Environment Agency’s Position Statement on household water metering states that the “tariff exists so that specified low-income metered customers don't feel pressure to use less water than they need to. It is not intended to address the issue of water affordability for low-income customers in general”.135 Some witnesses recommended that those living in high cost areas have their bills capped at the national average. Anna Walker’s interim report recommended that customers receiving council tax benefit in high bill areas should have their metered water and sewerage capped at the national average through the use of discounts and be “eligible for a wider range of social tariffs”.136

66. CC Water studies have found an unwillingness by customers to subsidise other customers—most would pay a maximum of £1 a year and only 3% would be prepared to pay more than £10 a year.137 While people were more willing to help vulnerable people such as the disabled or those with health problems, even customers who were themselves on benefits did “not believe there ought to be a cross-subsidy” and that “it should be the tax and benefit system that reflects the safety net around affordability”.138 However, cross subsidies already apply and, as Thames Water noted in respect of surface water drainage charges, “where an existing cross-subsidy is being unwound, the losers may need to have some sort of support during that transition process” and “ideally the Government should


June 2009, p 15.

131 http://www.environment-agency.gov.uk/research/library/position/41229.aspx. Households qualifying for 'vulnerable groups' status are, typically, those who use a lot of water, such as large families or people with particular medical conditions, who also get other state benefits.

132 The Water Industry (Charges) (Vulnerable Groups) (Amendment) Regulations 2005 (SI 2005/59).

133 Q 253

134 Ev 88

135 Environment Agency web pages, Position Statement on Household Water Metering. http://www.environment-agency.gov.uk/research/library/position/41229.aspx.


137 Consumer Council for Water Charging Research 2007, as quoted in Anna Walker’s interim report, p 114.

138 Q 102


be providing that support”.139 Ofwat told us that while it does not support the introduction of social transfers through the water and sewerage charging system, it has supported companies wishing to help specific groups of customers where this is a “win-win” scenario which reduces the “effect of debt on the generality of customers”.140 It notes, however that “whilst social tariffs can be very beneficial for those customers qualifying for them” the £11 each customer pays to cover customer debt would “not be reduced by a significant amount of their extension”.141 The regulator is unwilling to propose more cross-subsidy, citing this as an issue where Parliament must decide policy. Ofwat told us that while it would continue to work with companies on issues including help for vulnerable customers and fair tariffs, “social policy, including explicit definition of and support for individual customers or groups of customers is a matter for Parliament in the first instance”.142

67. In addition to social tariffs, there is potential to develop new tariff structures to make bills for low users more affordable, with safeguards for those requiring more water for medical reasons and large families on low incomes. New types of tariff, such as rising block tariffs, can lead to increased costs for some groups, in particular those with high essential usage, unless mitigating measures are adopted.143 Anna Walker’s interim report concluded that the adoption of rising block tariffs was unlikely to maximise fairness and “cannot be used to target effectively those that need help in paying their bills”.144 The interim report concluded that seasonal tariffs, however, “appear to show potential for controlling summer-time peak demand”.145 Moving to any tariff based on usage would require the extension of metering, which we examine below.

68. Ofwat argues that it has gone as far as it is prepared to go without Parliament sanctioning the further use of cross-subsidies to support customers struggling to pay water bills. Ofwat’s remit should be strengthened to enable it to require water companies to adopt more progressive methods of tackling water affordability for all customers. Defra needs to set out how Ofwat can be equipped with the necessary tools to implement this.

69. There is a need for innovative solutions and the water sector can learn from the energy sector on how to support vulnerable customers. In particular water companies need to be far more pro-active in disseminating information on the availability of support schemes for vulnerable customers and in providing advice on water efficiency.

70. As part of our scrutiny of the draft Flood and Water Management Bill,146 we considered the need to encourage greater use of “sustainable drainage” infrastructure—this entails using physical features such as swales, ditches and ponds to absorb surface water, in

139 Q 179

140 Ev 84

141 Ev 68

142 Ev 120

143 Rising Block Tariffs provide a stepped series of prices for water supply with charges rising with increased consumption.


145 Ibid



preference to using traditional civil engineering approaches to take water away from premises. Anna Walker recommends that Ofwat should consider how variation could be introduced into the charging for surface water drainage.147 She also raised the possibility of transferring costs of highway run-off to local authorities and incentives for authorities to reduce the volume of such run-off.148

71. We endorse policies which encourage the greater use of sustainable drainage since this can have both environmental and economic benefits. Customers who install such drainage systems should share the benefits, through lower tariffs, of reduced costs from lower volumes of surface water run-off generated. We recommend that Defra explores how individual households can be informed about sustainable drainage systems and encouraged to install them. The costs for highway drainage, that water customers currently bear, should be shared with local taxpayers who benefit from the service.

Metering

72. Metering is the usual method of charging for water in most other European countries. Historically water companies in the UK have recovered costs by charging domestic customers according to the rateable value of their home.149 More than two-thirds of households nationally receive bills on this basis.150 While customers are not required to change to a metered supply, they may opt to have a water meter installed “free of charge”,151 and companies can compulsorily meter homes where they are using water for “discretionary purposes” such as garden sprinklers, or where there is a change of occupier.152 Each year, 2% of homes switch to a metered supply.153 From 2010, a company in an area of water stress can impose metering if this is proven to be cost effective.154 Currently there is a wide variation in the proportion of each water company’s customer base charged according to usage as opposed to rateable value. For example, only 10% of Portsmouth Water customers are metered compared to 60% of Anglia Water and South West Water’s customers.155

73. Research for the water industry on the impact of metering trials conducted in the late 1980s and early 1990s concluded that water demand could be cut by 10–15% by installing domestic meters.156 Ofwat considered that those currently opting for metered supply only


June 2009, p 14.

148 Ibid

149 Defra, Future Water, p 12.


151 Water Industry Act 1999.

152 Water Industry (Prescribed Conditions) Regulations 1999 as amended.


154 Water Industry (Prescribed Conditions) Regulations 1999 as amended.


156 UKWIR, Critical Review of Relevant Research Concerning the Effects of Charging and Collection Methods on Water Demand, Different Customer Groups and Debt (05/CU/02/1). http://www.ukwir.org/ukwirlibrary/90898.


cut back their usage by around 5% as the customers for whom it is an attractive financial option tend already to use less than the average user.157 A number of witnesses supported full compulsory metering to help cut demand. Others expressed doubts about the cost and effectiveness of metering. The Environment Agency estimated that compulsory metering combined with retrofitting water efficiency measures could achieve “significant savings” and offset half of the increased demand expected from planned development in the south east of England.158 The National Trust advocated full metering throughout the UK; they told us that introducing full metering and intelligent tariff schemes to southern England could “halve the deficit between supply and demand predicted by 2030”.159

74. Theoretically, tariff structures combined with metering can encourage lower usage. However, the evidence internationally is that prices have limited impact on demand and would need to double to achieve a reduction of only 10–20%.160

75. Some witnesses, whilst supporting the principle of metering, expressed misgivings about universal metering. Ofwat considered that the additional costs of metering over the present system would be £35 per customer per year. The level of reduction in demand necessary to pay back this cost would be considerably less in areas where water scarcity requires major investment in water supply. Areas where minimal investment is necessary would need to reduce demand by seven times as much to be as cost effective—and in these areas a family household would not recoup the costs even if they stopped using water entirely.161 Research for the Consumer Council for Water found that most customers agreed that paying for “what you use is fairer than an unmeasured system of water charging”. CC Water considered that metering can only have the anticipated impact on demand if adopted as part of a package of efficiency measures.162

76. The Minister said that the Government is “quite warm towards the idea of metering” because of its potential benefits in relation to water efficiency and affordability.163 While not pre-empting the Walker review’s findings, the Minister noted that the Government’s view was that near universal metering would be necessary in water-stressed areas before 2030.164 He subsequently said that there was “no better incentive to be water efficient” than metering.165 This reflects the vision in Future Water, which argued that the use of rateable value for charging was “increasingly indefensible, particularly in water stressed areas”.

157 Ev 84

158 Environment Agency, Water efficiency in the South East—retrofitting existing housing, 2007.

159 Ev 100

160 Dalhuisen JM, Florax RJGM, De Groot HLFM and Nujkamp P for Tinbergen Institute, Price and Income Elasticities of Residential Water Demand (TI 2001–057/3), 2001.

161 Ofwat state that with an assumed annualised cost of £35 for providing a metered service, volume savings of 23m3/year are required per meter in a zone where planned investment is relatively high (£1.50/m3) compared to a reduction of 175 m3/year in zones with minimal planned investment. Unmetered per capita consumption is estimated to be 55m3 per year (151 litres per person per day). Ofwat, Response to the Walker Review call for evidence, February 2009, p 18.

162 Consumer Council for Water, Response to Defra’s Consultation on water metering in areas of serious water stress, January 2007.

163 Q 257

164 Ibid

165 HC Deb, 26 June 2009, col 1119W.


Future Water noted that less than 30% of customers were metered, meaning that a large proportion of bills bore little relation to usage.166

77. Anna Walker’s interim report concluded that “the link between rateable value and income has become very tenuous” and that that system is “no longer effective at targeting customers who are struggling to pay their bills”.167 The interim report rejected alternatives such as using council tax bands, occupancy levels, property type and levying a flat rate per household, and concluded that “charging by use of water meter meets more of the principles of fairness than any other method of charging”.168 It said that compulsory metering is justified in three circumstances—where discretionary water use is high; where the true value of water is high; or where levels of metering are already high.169

78. Anna Walker told us that once 60–70% of households in a region are metered, “those who are unmetered are paying a lot”.170 She accepted in her interim report that running rateable value and metering in parallel is an acceptable interim solution but “the basis of water charges should move towards volume consumed. The speed of which depends on the costs of metering and finding solutions to the issues of affordability”.171

79. Given the stage we are currently at in the price review timetable, it is frustrating that, despite clear support in Anna Walker’s interim report for charging based on volume, the Government’s initial response on metering may not appear until the autumn.

80. We consider that metering can have an impact on water demand, but it should not be adopted as a substitute for a robust water efficiency policy. Before investment is diverted to metering there must be a robust empirical case to demonstrate that the costs do not outweigh the benefits and that demand especially in water-stressed areas cannot be reduced more cost effectively through sustainable water use management. We recommend that the Government set out at the earliest opportunity (ie before Walker produces her final report in the autumn) the evidence that metering reduces consumption in the long term; and reduces consumption by a sufficient amount to offset the additional costs associated with having a meter.

81. The wider adoption of metering creates a risk for water companies that declining volume sales will lead to declining revenue (unless costs fall at the same rate). Consumers could face higher unit cost bills as a result of cutting their consumption, so that there is little change in the total charge.

166 Defra, Future Water: the Government’s water strategy for England, CM 7319, February 2008, p 12.


168 Ibid, p 11

169 Ibid, p 12

170 Q 14



Bad debt

82. Outstanding customer debt (more than three months old) has passed the £1 billion mark for the first time.172 The cost of customer debt in the water industry currently adds £11 annually to each household water bill.173 There is a huge variation in the levels of debt maintained by water companies.174 In 2006–07, some 8.7 million pre-court action notices were issued and 193,000 county court claims were made, with widely varying rates of both among water companies.175

83. CC Water told us that there is a difference between those who ‘won’t pay’ and those who ‘can’t pay’. It said that some who potentially could pay are bad at money management and do not handle bills well, particularly those received on a six monthly or annual basis. Companies contacting customers at the right time would help such people because “if you can prompt them to pay in the right way you do not get into a problem in the first place”.176 However, there is an absence of data on the circumstances of people in debt. Better information on debt would enable understanding of why problems arise for some customers and enable more accurate targeting of assistance.

84. Water UK considered that Government should legislate to enable companies to recover outstanding revenue outside of the court service.177 Thames Water suggested that changes were needed to recover debt from the ‘won’t pays’, specifically enabling companies to bill named people who would then be liable for bills, as opposed to the current practice of billing ‘the occupier’ of a property.178 However, Ofwat said that while it is difficult to distinguish between the ‘won’t pays’ and ‘can’t pays’, as well as those in another ‘struggling to pay’ category, it endorses a “firmer approach” with the ‘won’t pays’.179

85. It is right that the water industry cannot disconnect customers who do not pay bills.180 However, the debt remains attached to a property whether or not it is occupied. Without more accurate data it is not possible to determine how much bad debt is attached to vacant properties.

86. A more accurate picture is needed of which customers are in debt to enable differentiation between those who can’t pay and those who won’t pay.

87. We recommend that Ofwat require water companies to disclose more information on bad debts levels, such as where debt is attached to vacant properties. We recommend a mechanism whereby property owners have to inform water companies on vacating a property so that the standing charge is no longer applied.

172 Ev 16


174 Ev 13

175 Ofwat Debt and Disconnection figures 2006–07.

176 Q 100

177 Ev 139

178 Q 179

179 Ev 84

180 Water Industry Act 1999.


88. We support a named person being identified as responsible for a property’s water charges, so that legal redress can more easily be sought for outstanding debt.

89. Companies should look at billing schemes which suit low income customers, for example to enable payments to be spread evenly over a year.

Surface water drainage charging

90. We received evidence from a number of not-for-profit organisations, including sports organisations, church groups and the Scouts, about the increases in water bills associated with changes to the method of charging for surface water drainage. Previously, these charges were calculated on the basis of rateable value but several water companies have now introduced charging on the basis of the area drained. In some cases this change has led to large increases in water bills, particularly for organisations whose premises have a negligible rateable value. For example, the Scouting Association told us that the change had already increased some Scout Groups’ bills by £600 “which could translate to £1.5 million for the movement as a whole”.181 While Ofwat had suggested ameliorating measures could be introduced, including soak-aways, the Scout Association said that for many groups the “cost of putting in such a system and the space needed was prohibitive”.182 It considered that some water companies had acted counter to Defra’s social and environmental guidance that required it to ensure a “strong, healthy and just society”.183 The Churches’ Legislation Advisory Service said they disagreed with “Ofwat’s basic position on charging” since charging all non-domestic customers in the same way transfers the burden from commercial organisations, which can pass on costs via their prices, to not-for-profit organisations which “do not have that option”.184

91. Organisations, such as the Rugby Football Union, told us that the change to site area charging came as a result of a direct edict from Ofwat to the water companies.185 It said that correspondence with United Utilities had “finally” led to a suspension of the increases “pending further review into the new charging system”.186 Severn Trent Water told us that it was “reluctantly” increasing charges at Ofwat’s request, but said the changes needed to be planned out sensibly and introduced “over a long period of time”.187 Thames Water said it had no plans to move to such a charging system under this price review period since the ability for customers to mitigate the cost by providing, for example, sustainable drainage systems, was limited by London’s geology.188 Yorkshire Water told us that it was operating within Ofwat guidelines but was able to minimise the impact—citing, for example, its £75 charge for a Scout hut with less than 750 square metres of roof space.189

181 Ev 102

182 Ibid

183 Ev 102

184 Ev 113

185 Ev 138

186 Ibid

187 Q 184

188 Q 186

189 Q 187


92. Ofwat described the criticisms as being due to one company failing to implement a change in charging policy in a proportionate way and that other companies introduced the system without complaint.190

93. The Minister told us that Defra’s social and environmental guidance “allows for the flexibility to put forward a sensitive and sympathetic way of charging”. He added that “where you have a load on a system through surface water run-off into a system, people should be expected in one way or another to contribute, but there is an issue of proportionality and fairness within this”.191

94. The Minster agreed that it was not acceptable for Ofwat to pass responsibility to the water companies or claim it had no legal powers to correct the situation.192 He added that the guidance made it “absolutely clear that there is the ability to have some discretion here within the regime that will allow the concerns of those groups to be properly addressed”.193 In his view “this is eminently fixable and I hope imminently fixable”.194

95. The level of anger surrounding this issue illustrates the importance of companies having sufficient information about their customers and taking account of their needs when implementing changes in charging policy. This will be something companies need to take more account of in future as changes to implement recommendations made by the Cave and Walker reviews will need to be clearly explained to consumers and their implementation undertaken carefully.

96. We consider that Ofwat should have intervened earlier and harder on this issue. It is not sufficient for the regulator to lay the blame with a company for poor communication while not attempting to help clarify action that water companies needed to take.

97. Ofwat must now develop a clear protocol to guide all water companies to ensure that a fair and affordable charging regime can be introduced throughout England which properly reflects community based organisations’ ability to pay for water services.

4 Financing 98. The water industry is capital intensive.195 The Consumer Council for Water pointed out that by 2010 water and sewerage companies will have delivered an investment programme of almost £80 billion since privatisation, paid for by customers paying bills now more than 40% higher in real terms than they were in 1989.196 Ofwat will provide for the cost of capital by setting a Weighted Average Cost of Capital (WACC) allowance and

190 Q 214

191 Q 246

192 Ibid

193 Ibid

194 Q 248

195 Q 171

196 Ev 18


using it to calculate the revenue required by companies to provide a return to investors. The level of the WACC will have a large effect on customers since a 1% change in the WACC would make a difference likely to be in excess of £450 million a year in bills (i.e. around £20 a year per customer).

99. Ofwat told us that the price limits associated with company draft proposals, submitted in August 2008, would entail an increase in the average bill of £29 (ie 2.4% above RPI).197 The companies projected a required increase of just under 9% for the period 2010–2015, which was “substantially less” than the £48 increase in bills which arose from the 2004 price review.198

100. The draft business plans were developed before companies were fully aware of the scale of the changing economic and financial climate.199 The regulator told us that it would be setting draft price limits, including the cost of capital component, on 23 July 2009,200 after which it would listen to representations from the Consumer Council for Water and the water companies before setting final price limits in November 2009.201

101. In the past the industry has not carried a high cost of capital, due to its secure source of customer revenue. Ofwat told us that over the first three years of the last price review period (up to 2007–08), companies made on average a post-tax return on capital of 5.6%, slightly less than the 5.8% Ofwat had allowed in the price limits set in 2004.202

102. The cost of capital for an individual company depends on interest rates (in the debt market, or the rate imputed for share issue pricing) and the perceived risk of the loans and equity in a particular company, which ratings agencies assess. Ofwat told us that it is a licence requirement that all water companies must have an ‘investment grade credit rating’ (rated A- or B+++) from the ratings agencies. The trend to reduce gearing (debt to equity ratio) in many sectors of the economy following the recent period of financial instability may limit businesses’ ability to borrow further at an affordable price, and hence ultimately affect the cost of obtaining capital in the future.

103. In the recent past, the water industry was able to raise debt cheaply. Such cheap debt is no longer available, but the companies took advantage of the opportunity while it lasted. Ofwat told us that although water companies generally were now finding it more difficult to get finance, companies still seemed to be in a “reasonably good position to be able to access the markets”.203

104. A recent Moody’s ratings agency analysis of the water industry considered that the impact an economic slowdown may have on the water companies’ customer revenues should be limited within the existing regulatory regime. The security for investors was the ‘regulated asset value’ (RAV) of the company, however, and, as Yorkshire Water put it, “in

197 See Table 1, page 6

198 Ev 70

199 Ev 70

200 Q 205

201 Ev 68

202 Q 188

203 Q 194


so far as that security is threatened, either by deflation or by talk of splitting up the RAV as part of competition proposals, then that will make it harder to secure funds”.204 The company anticipated that the Cave review’s proposals for retail competition for business customers “are likely to be of significant concern for investors”.205 The companies’ submissions to the price review do not include any costs of competition.206

105. Welsh Water, as a not-for-profit organisation, has built up reserves (rather than having to make dividend payments to equity investors) which, it told us, has allowed it to borrow less than other water companies.207 Other water companies, however, expressed concern about the cost of servicing a large and increasing debt in the future, and the reaction to that from investors and customers. Severn Trent Water told us:

… we estimate that industry debt could rise by some £90 billion by 2035. For Severn Trent Water, the amount of debt equates to around £1,000 of debt for each customer today, rising to £2,600 by 2035. This suggests that bills will have to continue to rise in future years to fund the repayment of this debt and it is also a concern that such a situation is not financially sustainable.208

Thames Water, similarly, told us:

We are concerned that the WACC settlement … will provide sufficient funding for the companies to be able to access the markets because while the water sector is attractive, and it does have the protections of the regulatory regime, there is actually a question even today as to the actual depth and liquidity of that market and, while funds may be there, they may be prohibitively expensive and fundamentally that is passed on to customers in some form. We want to see a settlement which will recognise … the industry’s challenges ….209

In practical terms, the mechanism by which the price review deals with such issues is through the single cost of capital allowance set by Ofwat.

106. Severn Trent Water wanted Ofwat to take a long-term view on the cost of capital, to maintain a strong credit rating that allowed companies to continue to be able to borrow.210 Yorkshire Water emphasised the current uncertainty about the level of the average cost of capital.211 When we raised this with Ofwat, they told us that when they set the cost of capital allowance, they “do not set it based on today’s cost of raising debt in the market, we take a longer term view because it is a longer term business and companies have raised some advantageous finance already and have that on their balance sheet”.212

204 Q 171

205 Q 173

206 Q 183

207 Ev 131

208 Ev 46

209 Q 171

210 Q 176

211 Ibid

212 Q 207


107. The regulatory regime, and prospective changes in the regime, contributes to the cost of capital for water companies because it influences lenders’ assessment of regulatory risk, which in turn might affect lenders’ assessment of the financial risk implicit in the companies’ gearing. For the period covered by PR 09, the regulatory risk may be rising due to uncertainties due to the outcome of the Cave and Walker reviews, and the content of the draft Flood and Water Management Bill.

Protection of critical infrastructure

108. Our report into the 2007 floods and evidence session with Sir Michael Pitt,213 noted that there were concerns about the adequacy of plans to protect critical infrastructure. Sir Michael’s final report recommended that “longer-term resilience building is expected to be formally integrated into the periodic review cycles of the economic regulators”.214 Ofwat told us that for PR 09 they had asked each company to specifically review resilience of its critical infrastructure to surface water flooding and how it would meet the challenge of continuing to supply consumers in extreme situations. The regulator “made it clear to companies … that we expect that resilience should to be improved over time in a phased, transparent and systematic manner”.215

109. There is a wider issue about whether, ultimately, water companies or their customers pay for protecting critical infrastructure. Professor Cave noted that it was likely the cost of resilience would ultimately be borne by the customer.216 Our water company witnesses described their capital investment plans, including critical infrastructure protection measures, which will mainly be paid for by their customers, although Yorkshire Water identified some projects whose costs will be borne by its shareholders.217 In the course of the price review, Ofwat will have to approve the sums which would be passed to customers. CC Water expressed concerns that the Flood and Water Management Bill:

… might have the effect of imposing costs on water companies and therefore their customers, whilst the benefits are accrued by others. Our strong view is that water customers should not pay for resolving general flooding. 218

110. The recent climate change predictions and associated increase in flood risk highlight the continuing need to protect the critical infrastructure of the water industry and other utilities. The protection of critical infrastructure has different beneficiaries and the costs should be distributed according to those who stand to benefit. Some protection clearly provides an improved service to water customers, who should bear the cost. Other measures, though, are intended to allow water companies to continue to meet their service delivery obligations, and thereby benefit the companies. In practice the distinction might be a difficult one to make. Nevertheless, Ofwat should critically assess

213 Environment, Food and Rural Affairs Committee, Flooding: the Government’s response to Sir Michael Pitt’s review,

HC 245-i, Session 2008–09.

214 Sir Michael Pitt, Learning the lessons of the 2007 floods, June 2008.

215 Ev 84

216 HC 555-II, Q 171

217 HC 555-II, Ev 55

218 HC 555-II, Ev 7


what measures it allows companies to pass on to their customers, to ensure that the companies bear the costs of those investments which are essentially part of ‘doing business’.

Competition

111. In April 2008, the Government asked Professor Martin Cave to conduct an independent review of competition and innovation in the water industry. The final report of the Cave review was published a year later. The aim of the Review was to recommend changes to the frameworks of the industry to deliver benefits to customers and the environment, not to consider competition or innovation as ends in themselves.219 Professor Cave’s recommendations covered extending retail competition by abolishing the current threshold for non-domestic users; abstraction and discharge trading; creating the conditions for “upstream” (infrastructure and wastewater) competition; the industry’s structure and innovation.220

112. In England and Wales, there has been limited competition in the water industry since privatisation, through the use of ‘inset’ agreements. 221 Inset agreements enable a degree of competitive tendering for the provision of clean and waste water services to new developments. To date there has been limited take up of these agreements and we do not consider them particularly relevant to the consideration of the Cave review’s recommendations.

113. In Scotland, there has been retail competition for business customers since April 2008. The competition framework was introduced by the Water Services etc (Scotland) Act 2005. The Water Industry Commission for Scotland is responsible for implementing the framework set out in the Act, and licensing all participants in the market. The Commission’s evidence describes the Scottish experience of introducing retail competition and considers the potential for further reform of the Scottish water industry.222 Retail competition requires the legal separation of “customer facing activities”, such as billing, from the network and treatment activities.

114. In this price review, Ofwat has started the process of companies preparing for separation. Ofwat’s submission states that:

We have already asked companies to consider what our own proposals for more use of the markets for goods and services would have on their businesses; we expect to see any proposals for changes included in business plans.223

The Water Industry Commission for Scotland notes that separation of the retail elements of the water company removes the financial incentive on a single, vertically integrated water supplier, to maintain or increase supply. For the new retail element of the company

219 Professor Martin Cave, Independent Review of Competition and Innovation in Water Markets: Final report, April

2009.

220 Ibid

221 HC 555-II, Q 135

222 HC 555-II, Ev 174

223 Ev 68


there is argued to be an incentive to provide and charge for water efficiency advice and services, to provide the customer with waste management and surface drainage services, such as water harvesting, construction of a sustainable drainage system or pre-treatment of waste before it is discharged to the sewerage system. The Commission argue that “in each case, the customer may save money and there can be environmental benefits”.224 Retail competition may also provide additional benefits to companies that manage a number of properties—such as shops or restaurant chains. Those companies can benefit from arranging to have a single supplier for all their sites and centralised billing arrangements. The Commission’s evidence sets out further benefits of retail competition in terms of more effective use of water resources and wastewater treatment capacity; and the incentives for companies to innovate.225 Ofwat’s most recent international comparison of water and sewerage service performance shows that the reduction in Scottish Water’s operating costs by £170 million from 2002, a 40% improvement, only brings its performance into line with England and Wales.226

115. Professor Cave described his preference for the implementation of competition:

I think the sensible thing to do is to do a certain number of things first and then pause and see if they have worked. If they have worked, then new legislation may be required for the next lot, and then if those work you might want to do something else, and so you go on..227

An approach he described as “trust and verify”.228 Mr Hurst, Director of Water at Defra, characterised the approach as “an incremental approach from the edges”..

229

116. Professor Cave recommends a step-by-step approach to implementing competition in England and Wales. The starting point would be retail competition for non-domestic customers, as was the case in Scotland. Professor Cave considered that that form of competition would be relatively easy to implement, although moving up the water value chain to pipes and other infrastructure would be more difficult.230

117. Professor Cave explained that the financial benefits of retail competition for consumers were limited. He explained that competition only applied to ten per cent of the value chain, even savings of 30% due to competition would amount to around a three per cent reduction in the size of water bills.231 Therefore, for domestic customers, Professor Cave considered the costs of competition would exceed the benefits.232

224 HC 555-II, Ev 174

225 Ibid

226 Ofwat, International comparison of water and sewerage services report, 2008.

227 HC 555-II, Q 161

228 Ibid

229 Q 260

230 HC 555-II, Qq 134,155

231 HC 555-II, Qq 137 ff, Q 151

232 Q 136


118. Mr Hurst described some of the potential benefits of competition, but explained that the Cave review had not considered “the large majority of the water business” for two reasons:

One is because the infrastructure actually is not readily able to be unbundled, but also because we are absolutely clear that we cannot take this forward, and Martin Cave says this explicitly, in a way that jeopardises water company financability. If you take this forward in a way that would drive up water company financing costs, then every customer would end up paying the burden.233

This reflects the significant capital investment of the industry, where over half of the costs subsumed in bills are the return to debt and equity investors and depreciation and infrastructure renewal. For these ‘upstream’ parts of the business, Cave calls for greater use of negotiated settlements with customers and other stakeholders.

119. The Minister emphasised that he was not interested in competition for competition’s sake, but he noted that “Ofwat’s calculation is that you would increase total productivity somewhere between half and two per cent each year by opening up this limited element of competition”.234

120. The Consumer Council for Water supported increasing competition in the water sector. According to CC Water’s research, 84% of business customers favour competition as a means of introducing innovative customer service.235 However, CC Water noted that domestic competition should be progressed “…if it can be clearly demonstrated to be the most appropriate means of securing service improvements and increasing value for money for consumers…”.236 Its research showed that:

57% of domestic customers said that they supported the principle of competition in the water industry. When they understood that in practice some customers could be worse off, only a third of those surveyed still supported competition, one third did not, and the rest were unsure. Those customers that welcome competition believe that it would lead to lower prices, with most saying that they would expect to save 20% by switching supplier.237

121. Our water company witnesses gave us their detailed views on the potential impact of non-domestic competition. 238 They had a range of concerns:

• The costs of establishing and maintaining legally separate retail businesses, including duplicated overheads;

• An increased regulatory burden for companies, including procedures to prevent cross-subsidies between the competed and non-competed businesses;

233 Q 260

234 Ibid

235 Ev 19

236 Ibid

237 Ibid

238 HC 555-II, Evs 53, 56, 65


• A potential increase in companies’ cost of capital as a result of greater risks for potential investors in the companies (paragraph xx). For Yorkshire Water, for example, a 0.25 percentage point increase would produce a 0.6% increase in average household bills;

• The quality of service for domestic customers could be adversely affected by non-domestic competition, if the links between operational activities and customers were broken; and

• A potential increase in bad debts, if customers switch to new suppliers without settling their accounts.239

Yorkshire Water considered the case for extending competition, outlined by Cave, to be “not convincing”. 240 Severn Trent Water doubted that the benefits of ‘vertical separation’ would cover the costs,241 and Thames Water considered that the Cave review had “significantly underestimated the costs for the introduction of competition”.242

122. Professor Cave was also aware of the potential impact of competition on companies’ cost of capital. His proposals, he told us, focussed on the less capital-intensive areas of activity, which he calculated would not impact on the cost of capital to the degree postulated by some commentators:

… we have tried to develop this notion of doing something that does not initially involve very large capital investment to see if it works, to see what the impact seems to be on investment sentiment. Always take steps slowly and cautiously, taking into account the effect on the cost of capital of what competition might be. That is one of the reasons why I think this sort of trust and verify approach is necessary in these circumstances because you could blow the whole gains from competition very quickly just through increases in the cost of capital.

The kind of estimate [for the cost of capital] we have used in our evaluations … are a possible increase of between 30 and 80 basis points, that is between 0.3 and 0.8 per cent. We are thinking that is probably more realistic. 243

123. Ofwat is strongly in favour of introducing competition. In evidence to our inquiry into the draft Flood and Water Management Bill the regulator has argued that the draft Bill should include provisions to take forward the Cave Review recommendations. Regina Finn told us that the Cave review informed the debate about how the water industry should develop the “use of market mechanisms to deliver […] benefits to customers and also to deliver information to help us to reveal and understand the value of the resource that we use and make sustainable choices”.244 Ofwat told us that, provided “the core service to customers” is always protected, competition can introduce more choice, as had happened

239 Ev 65

240 HC 555-II, Ev 56

241 Ibid

242 Ev 65

243 HC 555-iii, Qq 179–180

244 Q 230


for business customers in Scotland.245 Ofwat considered, though, that assessing the extent to which market forces could deliver benefits depended on having information to be able to understand not just the costs but also the “the value of water” in different areas of the country.246

124. Welsh Water, which has a not-for-profit structure, unique within the water industry, expressed considerable concerns at Ofwat’s agenda to “break-up the water industry in the name of competition”.247 The Minister described Welsh Water’s position as “not anti-Cave; their concern is whether they can survive and thrive under Cave”.248 The company’s memorandum said that competition will “undermine the public service nature of the water and sewerage industry, with significant ‘cross subsidies’ unwound creating large numbers of ‘winners and losers’. It will also increase the cost of financing the water industry…”.249 Welsh Water performs well and has a good level of customer satisfaction.250 Anna Walker noted that Welsh Water provided a different form of company that offered “potentially different benefits”, which “does certainly seem to work for Wales”.251 Similarly, the Minister said that Welsh Water was a “very interesting innovative model and it is generally well liked”.252

125. There is potential, under the Government of Wales Act 2006, for water regulation to become a devolved matter. At present there have been no Legislative Competence Orders passed in relation to water or flood defence and therefore under the current legislation Ofwat would be able to impose competition on Wales. However, the Government’s response to the Cave review states that “extending retail competition will remain a decision for the UK and Welsh Assembly Governments…”, which suggests that notwithstanding the formal legislative position it will be for the Welsh Assembly Government to decide whether to take forward water competition in Wales.253

126. The Government’s response to the Cave Review published in the Budget 2009 states that it “welcomes” the conclusions of the review and will take them forward.254 It provides little detail beyond expressing agreement with several of the Review’s conclusions and announcing a consultation will take place on the implementation of: legal separation of retail operations for ‘large’ companies; reforms to the upstream water supply licensing regime; and reforming the mergers and inset regimes.

127. The introduction of some further competition into the water industry appears inevitable. It will not happen in this price review, but the likelihood of competition in the

245 Q 231

246 Q 234

247 Ev 131

248 Q 262

249 Ev 133

250 Q 262

251 Q 13

252 Q 262

253 HM Treasury, Budget 2009: Building Britain’s Future, HC 407, April 2009, p 78.

254 Ibid


near future may have an impact on the cost of capital for water companies and therefore affect the price consumers pay for water services before the potential benefits arise.

128. The Government response to the Cave Review, published in the Budget 2009 provided little information about the Government’s views. The Government needs to provide a full response to the Cave report which explains:

• What forms of competition are being considered, for which sectors and to what timetable;

• The potential risks of introducing each form of competition and how those risks will be managed;

• How Professor Cave’s ‘trust and verify’ approach will work and what the Government’s measure of success will be (before moving to the next stage of competition);

• What procedures will be used to reverse competition should the approach fail to achieve the required benefits;

• How competition will affect regional differences in water pricing and investment;

• The Government’s view on how different forms of competition will influence the cost of capital for companies, and

• How the approach to competition promotes sustainable water management.

129. The first stage of competition will apply to business customers, as in Scotland. As the domestic consumer will not gain from retail competition, they should not be expected to contribute towards the higher cost of capital that will result from non-domestic retail competition.

130. We recommend that Defra and Ofwat fully involve consumers (through CC Water and others) in the discussion around the introduction of competition. Before such a major change is introduced consumers should be fully aware of the possible risks and the hoped for benefits.

131. Defra should consider how competition can be introduced in different regions, including taking into account Welsh consumers apparent contentment with the Welsh Water model. Ofwat should not impose competition on Welsh Water if this goes against the wishes of consumers.

Innovation

132. Professor Cave’s review included an examination of innovation in the water industry. The final report states that:

There are significant weaknesses in the sector’s current approach to research and development. There is a fundamental lack of alignment between the different elements of the innovation chain leading to misdirected research and development and low take up by water companies. There are only weak incentives to encourage


companies to innovate. This is compounded by a lack of funding at key points of the innovation chain because of the risk profile of innovation in the water industry. De-risking funding is therefore critical.255

133. Professor Cave made several recommendations to stimulate innovation in the industry. He argued that competition would stimulate innovation; he recommended the creation of an industry research and development body and an innovation fund; and that Ofwat have a statutory duty to promote innovation.

134. Professor Cave gave an example of how innovation may be driven by competition. If a water retailer provided a customer with water efficiency measures that reduced their consumption, and therefore, costs, the financial benefit of that saving could be shared between the retailer and the customer. Professor Cave described water efficiency innovation as coming about by “…dissociating the retailer from any interest in the quantity of water [supplied] because the retailer does not have any connection with the pipes business or with the treatment business…”.256

135. The Environmental Industries Commission (EIC) supported Professor Cave’s recommendation but noted that competition in “upstream activities” such as treatment processes was a long way off. EIC therefore recommended that:

… companies need greater incentives to invest in innovation in these [upstream] types of innovation in the short to medium term. Comparative efficiency has delivered some innovation in the sector but this is limited to company’s requirements for short term pay backs, the preference for capital investment and individual company’s attitude to risk.257

136. The Consumer Council for Water reported that “business customers tell us that they want to see more innovative customer service such as e-billing, remote meter reading and the ability to monitor water consumption online”.258

137. We welcome Professor Cave’s suggestions for promoting innovation, although it is not clear to us that competition will be the route to greater innovation in areas such as sustainable water management.

5 Conclusion 138. The UK faces the twin challenges of dealing with a scarcity of water in certain parts of the country and at certain times of year, and overabundance in other places and seasons. These two do not balance each other out but present separate challenges. For the water industry, the challenge is maintaining affordable, high quality supplies during a period of rising demand and environmental standards but constrained supplies of water and finance. Ofwat’s role in PR 09 is therefore crucial in establishing the right balance between ensuring

255 Professor Martin Cave, Independent Review of Competition and Innovation in Water Markets: Final report, April

2009, p 110.

256 HC 555-II, Q 173

257 Ev 133

258 Ev 19


that water companies can finance and operate their activities sustainably with the costs companies charge customers over the coming five years.

139. There have been criticisms of the regulatory system because it does little to provide the incentives to improve efficiency or to ensure that investments reflect the value of water. Lord Smith, Chairman of the Environment Agency, considered that, for the future, it would be worth “taking a serious look at whether the current Price Review process really is sensible in the longer term in the light of the Cave and Walker Reviews, in the light of experience over a number of Price Reviews now” to establish if substantial change could be made.259 Severn Trent Water said that they believed “that a review of the regulatory framework for economic, quality and environmental regulation is appropriate in the longer term, that is, after PR 09 is concluded”.260

140. Regulation of the water industry will have to change to keep pace with future developments. The impact of Cave and Walker will create a water sector closer to the energy sector. Moves to value water will make consumers more aware of the opportunities to reduce their water demand.

141. Demand for water must be reduced to avoid the environmental and economic costs of continuing to provide current supply levels at a time when climate change means that less water will be available where and when it is needed. This requires measures to improve water efficiency of households and businesses. We are not convinced that universal metering will reap sufficient benefits in terms of reduced demand to payback economically, nor that demand can be controlled through increasing prices within acceptable levels.

142. We have concluded the water industry could learn from the energy sector. Energy regulation has moved from the RPI-X model (used in water) to a model where the regulator’s principle concern is to ensure the effective operation of the competitive market. The bulk of regulatory burden for energy companies is demonstrating compliance with statutory obligations related to energy efficiency.

143. Defra has expounded a principle that Ofwat should follow. Mr Martin Hurst, Defra’s Director of Water, directed the Committee to its guidance to Ofwat that the regulator should develop “proportionate and innovative regulatory solutions”.261 It appears, however, that Ofwat feels constrained unless given more explicit instruction as to how far it can pursue that principle.

144. We recommend that Defra undertake a fundamental review of Ofwat’s role and remit to enable it to effectively regulate a future water industry where the value of water and waste water will have a crucial role in determining water companies’ charging regimes. If competition is going to be introduced and water efficiency and water demand management are going to become more important, the regulatory regime should be amended. We recommend that Defra set out a timetable for review of the current regulatory approach in relation to those parts of the industry that are likely to

259 Q 130

260 Ev 43

261 Q 244


be affected first by the introduction of competition. The timetable should allow any recommended changes to be introduced before the next price review.

145. Providing households with water and waste water services is likely to remain a monopoly activity for the foreseeable future and it is essential that the current mechanism works robustly for millions of customers. The review should therefore consider how the regulatory regime accommodates both competitive and non-competitive parts of the industry operating in tandem.

146. We recommend that the regulatory review examines how lessons from energy sector regulation can be applied to the water sector, so that a framework that incentivises companies to encourage their customers to be more water efficient can be adopted.


Conclusions and recommendations

Key challenges for PR 09

1. The challenge for Ofwat is to balance the requirement for sustainable water supplies, delivered by water companies able to pay for necessary environmental improvements, with bills that are affordable for consumers. This must be delivered against the background of the current economic recession and the predicted impacts of climate change. (Paragraph 13)

2. The Government’s decisions on implementing the Cave and Walker reviews’ recommendations and the content of the Flood and Water Management Bill will still be unresolved when Ofwat comes to make its final determinations for this price review. The uncertainty generated may affect the companies’ ability to raise money on the capital markets. Despite the ‘change protocol’ mechanism, we conclude that Defra should set out the probable timing of its full responses to the Cave and Walker reviews; and to what extent and how the regulation of the water industry will be altered by the Flood and Water Management Bill. (Paragraph 15)

Transparency and burden of process

3. We recognise that economic regulation of a monopoly utility will be complicated and welcome the improvements in transparency in this price review. We commend Ofwat and the companies’ determination to place more information in the public domain and recognise that Ofwat will need to publish a series of guidance and information as the process develops through consultation and discussion. Nevertheless, the current regime’s complexity risks hampering the regulator’s wish to increase transparency. We recommend that Ofwat and Defra seek ways to rationalise, and make more comprehensible, the process to companies. We further recommend that Ofwat and Defra consider what further information relating to the price review can be placed in the public domain, and ensure that such information is comprehensible and comprehensive. The volume of a submission is no substitute for the quality of its content. (Paragraph 20)

Consumer engagement

4. We recommend that Ofwat require companies to demonstrate how consultation with their consumers has informed their business plans. We further recommend that it be a condition for Ofwat’s approval of a company’s business plan that the company demonstrate that its plan is understood by the majority of its consumers. (Paragraph 22)

A sustainable water policy

5. We recommend that Defra sets out how it envisages delivery of Future Water’s objectives will impact on the industry and the regulator. Water customers will be part of the delivery mechanism of Future Water, particularly in relation to reducing


water demand. Defra should include in its analysis the role played by water customers and the likely impact upon them. (Paragraph 25)

Environmental improvements

6. We recommend that Defra explore the potential for derogations to implementation of the EU Water Framework Directive’s requirements to enable the phasing of environmental improvements and their related costs, where the near-term burden of these on customers would be severe. (Paragraph 33)

7. We further recommend that Defra provide clear guidance to Ofwat as to the application of cost benefit analysis and Ofwat’s guidance to the companies needs to be clear and unambiguous. (Paragraph 34)

8. Ofwat and Defra have so far failed to make the argument that regional variations in the costs customers must bear for environmental investment are fair and appropriate. We have found it hard to see how alternative charging mechanisms for infrastructure investment could be made to work effectively without significant changes to the current underlying regional charging regime. Defra must therefore examine how changes might be made to the way water industry investment is paid for when it is directly and expressly for the purpose of improving environmental standards for national benefit. (Paragraph 40)

Climate change mitigation

9. Defra should assess the impact of new requirements for water companies to improve water quality and conservation to ensure that only policies with net positive environmental outcomes are adopted. Ofwat should require the water companies to set out the carbon impact of their business plans and the measures they will put in place to mitigate any increases. (Paragraph 42)

Climate change adaptation

10. Climate change is predicted to have a significant impact on water availability throughout the country. The management of water resources will have to take climate change into consideration. We welcome Defra’s proposal that Ofwat and water companies be considered as priorities for early reporting on how they will adapt to climate change. However, Defra should consider if changes are needed to the regulatory regime to ensure that water companies have incentives to take early action to adapt to climate change. We further recommend that the Flood and Water Management Bill should place an explicit requirement on water companies and Ofwat to exercise their functions with regard to the adaptation objectives of the Climate Change Act 2008. (Paragraph 46)

Water efficiency

11. We recommended in our report on Energy efficiency and fuel poverty published earlier this year that energy efficiency targets be set for existing homes, delivered through an area-based approach, focusing first on the areas of most need. Funding


for this would come from Government schemes such as Warm Front as well as the Carbon Emissions Reduction Target (CERT) activity funded by energy supply companies. This is a model whose merits could usefully be considered for the water industry. (Paragraph 55)

12. We are not convinced that the mechanisms in the price review are sufficient to promote the increases in water efficiency necessary to ensure that water demand can continue to be met in periods of water scarcity. We consider that there are models from the energy sector that could usefully be adapted for water supply and Ofwat should assess how best practice in achieving improvements in energy efficiency can be applied to the water sector. We recommend that Ofwat and Defra explore more extensive water efficiency obligations, either by placing limits on volumes sold or a (CERT style) measures based approach. Ofwat should benchmark the performance of the UK industry in delivering sustainable water management on an international basis. (Paragraph 56)

Public funding for supporting water customers

13. We welcome the contribution that the Walker interim report has made to the debate on how to improve affordability of water bills for all customers and look forward to the Government’s response. Central to this response must be adoption of a firm definition of water affordability to be used by all relevant agencies together with strategy for improving the monitoring and reporting of water affordability. (Paragraph 64)

Addressing affordability through tariff structures

14. Ofwat argues that it has gone as far as it is prepared to go without Parliament sanctioning the further use of cross-subsidies to support customers struggling to pay water bills. Ofwat’s remit should be strengthened to enable it to require water companies to adopt more progressive methods of tackling water affordability for all customers. Defra needs to set out how Ofwat can be equipped with the necessary tools to implement this. (Paragraph 68)

15. There is a need for innovative solutions and the water sector can learn from the energy sector on how to support vulnerable customers. In particular water companies need to be far more pro-active in disseminating information on the availability of support schemes for vulnerable customers and in providing advice on water efficiency. (Paragraph 69)

16. We endorse policies which encourage the greater use of sustainable drainage since this can have both environmental and economic benefits. Customers who install such drainage systems should share the benefits, through lower tariffs, of reduced costs from lower volumes of surface water run-off generated. We recommend that Defra explores how individual households can be informed about sustainable drainage systems and encouraged to install them. The costs for highway drainage, that water customers currently bear, should be shared with local taxpayers who benefit from the service. (Paragraph 71)


Metering

17. Given the stage we are currently at in the price review timetable, it is frustrating that, despite clear support in Anna Walker’s interim report for charging based on volume, the Government’s initial response on metering may not appear until the autumn. (Paragraph 79)

18. We consider that metering can have an impact on water demand, but it should not be adopted as a substitute for a robust water efficiency policy. Before investment is diverted to metering there must be a robust empirical case to demonstrate that the costs do not outweigh the benefits and that demand especially in water-stressed areas cannot be reduced more cost effectively through sustainable water use management. We recommend that the Government set out at the earliest opportunity (ie before Walker produces her final report in the autumn) the evidence that metering reduces consumption in the long term; and reduces consumption by a sufficient amount to offset the additional costs associated with having a meter. (Paragraph 80)

Bad debt

19. A more accurate picture is needed of which customers are in debt to enable differentiation between those who can’t pay and those who won’t pay. (Paragraph 86)

20. We recommend that Ofwat require water companies to disclose more information on bad debts levels, such as where debt is attached to vacant properties. We recommend a mechanism whereby property owners have to inform water companies on vacating a property so that the standing charge is no longer applied. (Paragraph 87)

21. We support a named person being identified as responsible for a property’s water charges, so that legal redress can more easily be sought for outstanding debt. (Paragraph 88)

22. Companies should look at billing schemes which suit low income customers, for example to enable payments to be spread evenly over a year. (Paragraph 89)

Surface water drainage charging

23. The level of anger surrounding this issue illustrates the importance of companies having sufficient information about their customers and taking account of their needs when implementing changes in charging policy. This will be something companies need to take more account of in future as changes to implement recommendations made by the Cave and Walker reviews will need to be clearly explained to consumers and their implementation undertaken carefully. (Paragraph 95)

24. We consider that Ofwat should have intervened earlier and harder on this issue. It is not sufficient for the regulator to lay the blame with a company for poor communication while not attempting to help clarify action that water companies needed to take. (Paragraph 96)


25. Ofwat must now develop a clear protocol to guide all water companies to ensure that a fair and affordable charging regime can be introduced throughout England which properly reflects community based organisations’ ability to pay for water services. (Paragraph 97)

Financing

26. The regulatory regime, and prospective changes in the regime, contributes to the cost of capital for water companies because it influences lenders’ assessment of regulatory risk, which in turn might affect lenders’ assessment of the financial risk implicit in the companies’ gearing. For the period covered by PR 09, the regulatory risk may be rising due to uncertainties due to the outcome of the Cave and Walker reviews, and the content of the draft Flood and Water Management Bill. (Paragraph 107)

Protection of critical infrastructure

27. The protection of critical infrastructure has different beneficiaries and the costs should be distributed according to those who stand to benefit. Some protection clearly provides an improved service to water customers, who should bear the cost. Other measures, though, are intended to allow water companies to continue to meet their service delivery obligations, and thereby benefit the companies. In practice the distinction might be a difficult one to make. Nevertheless, Ofwat should critically assess what measures it allows companies to pass on to their customers, to ensure that the companies bear the costs of those investments which are essentially part of ‘doing business’. (Paragraph 110)

Competition

28. The Government response to the Cave Review, published in the Budget 2009 provided little information about the Government’s views. The Government needs to provide a full response to the Cave report which explains: (Paragraph 128)

• What forms of competition are being considered, for which sectors and to what timetable;

• The potential risks of introducing each form of competition and how those risks will be managed;

• How Professor Cave’s ‘trust and verify’ approach will work and what the Government’s measure of success will be (before moving to the next stage of competition);

• What procedures will be used to reverse competition should the approach fail to achieve the required benefits;

• How competition will affect regional differences in water pricing and investment;

• The Government’s view on how different forms of competition will influence the cost of capital for companies, and


• How the approach to competition promotes sustainable water management..

29. The first stage of competition will apply to business customers, as in Scotland. As the domestic consumer will not gain from retail competition, they should not be expected to contribute towards the higher cost of capital that will result from non-domestic retail competition. (Paragraph 129)

30. We recommend that Defra and Ofwat fully involve consumers (through CC Water and others) in the discussion around the introduction of competition. Before such a major change is introduced consumers should be fully aware of the possible risks and the hoped for benefits. (Paragraph 130)

31. Defra should consider how competition can be introduced in different regions, including taking into account Welsh consumers apparent contentment with the Welsh Water model. Ofwat should not impose competition on Welsh Water if this goes against the wishes of consumers. (Paragraph 131)

Innovation

32. We welcome Professor Cave’s suggestions for promoting innovation, although it is not clear to us that competition will be the route to greater innovation in areas such as sustainable water management. (Paragraph 137)

Conclusion

33. We recommend that Defra undertake a fundamental review of Ofwat’s role and remit to enable it to effectively regulate a future water industry where the value of water and waste water will have a crucial role in determining water companies’ charging regimes. If competition is going to be introduced and water efficiency and water demand management are going to become more important, the regulatory regime should be amended. We recommend that Defra set out a timetable for review of the current regulatory approach in relation to those parts of the industry that are likely to be affected first by the introduction of competition. The timetable should allow any recommended changes to be introduced before the next price review. (Paragraph 144)

34. Providing households with water and waste water services is likely to remain a monopoly activity for the foreseeable future and it is essential that the current mechanism works robustly for millions of customers. The review should therefore consider how the regulatory regime accommodates both competitive and non-competitive parts of the industry operating in tandem. (Paragraph 145)

35. We recommend that the regulatory review examines how lessons from energy sector regulation can be applied to the water sector, so that a framework that incentivises companies to encourage their customers to be more water efficient can be adopted. (Paragraph 146)


Formal Minutes

Wednesday 15 July 2009

Members present:

Mr Michael Jack, in the Chair

Mr Geoffrey Cox Mr David Drew Lynne Jones

David Lepper Miss Anne McIntosh Dr Gavin Strang

Draft Report (Ofwat price review 2009), proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 146 read and agreed to.

Summary agreed to.

Resolved, That the Report be the Fifth Report of the Committee to the House.

Ordered, That the Chairman do make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No.134.

Written evidence was ordered to be reported to the House for printing with the Report.

***

[Adjourned till Tuesday 21 July, 11.30 am


Witnesses

Wednesday 20 May 2009 Page

Ms Anna Walker, Chair and Mrs Sue Ellis, Head of Secretariat, Independent Review of Household Charging for Water and Sewerage Services

Ev 1

Monday 1 June 2009

Dame Yve Buckland, Chair and Mr Tony Smith, Chief Executive, Consumer Council for Water

Ev 19

Wednesday 3 June 2009

Rt Hon Lord Smith of Finsbury, Chairman, Dr Paul Leinster, Chief Executive, Mr Robert Runcie, Director of Flood and Coastal Risk Management and Mr Ian Barker, Head of Water, Environment Agency

Ev 35

Monday 8 June 2009

Mr Jonathan Hodgkin, Director of Regulation and Investment, Yorkshire Water, Dr Tony Ballance, Director of Regulatory Finance, Severn Trent Water, Mr Peter Antolik, Strategy and Regulation Director and Mr Richard Aylard, Director, Thames Water

Ev 46


Ms Regina Finn, Chief Executive and Mr Keith Mason, Director of Regulatory Finance, Ofwat

Ev 73


Huw Irranca-Davies MP, Minister for the Natural and Marine Environment, Wildlife and Rural Affairs and Mr Martin Hurst, Director of Water, Department for Environment, Food and Rural Affairs

Ev 91


List of written evidence Page

ACRE Ev 114

Blueprint for Water Coalition Ev 150

Lucy Borland Ev 151

Central Council of Physical Research Ev 127

Churches’ Legislation Advisory Service Ev 110

Citizens Advice Ev 120

Consumer Council for Water Evs 16, 31

Martin Dales Ev 147

Department for Environment, Food and Rural Affairs Ev 88

Drinking Water Inspectorate Ev 144

Dŵr Cymru (Welsh Water) Ev 131

Environment Agency Ev 32

Environmental Industries Commission Ev 133

National Trust Ev 100

Natural England Ev 115

Ofwat Evs 68, 84

Rugby Football Union Ev 138

The Scout Association Ev 101

Severn Trent Water Evs 43, 55

South East Water Ltd Ev 146

Thames Water Ev 65

UNISON Ev 136

United Utilities Ev 128

Anna Walker Ev 13

Waterwise Ev 106

Water UK Ev 139


List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2008–09

Fourth Report Securing food supplies: the challenges faced by the UK up to 2050

HC 213-I

Third Report Energy efficiency and fuel poverty HC 37

Second Report Work of the Committee in Session 2007–08 HC 95

First Report The English pig industry HC 96

Session 2007–08

Fifth Special Report Energy efficiency and fuel poverty: written evidence HC 1099

Eleventh Report The potential of England’s rural economy HC 544-I (HC 155, 08–09)

Tenth Report Badgers and cattle TB: the final report of the Independent Scientific Group on Cattle TB: Government response to the Committee’s Fourth Report of Session 2007–08

HC 1010 (HC 1178)

Ninth Report Draft Marine Bill: Coastal Access Provisions HC 656-I (CM 7422)

Eighth Report British Waterways: follow-up HC 438 (HC 1081)

Seventh Report Implementation of the Nitrates Directive in England HC 412 (HC 1080)

Sixth Report The Veterinary Surgeons Act 1966 HC 348 (HC 1011)

Fifth Report Flooding HC 49-I (HC 901)

Fourth Report Badgers and cattle TB: the final report of the Independent Scientific Group on Cattle TB

HC 130-I (HC 1010)

Third Report The work of the Committee in 2007 HC 250

Second Report Climate change: the “citizen’s agenda”: Government response to the Committee’s Eighth Report, Session 2006–07

HC 189

First Report The UK Government’s “Vision for the Common Agricultural Policy: Government response to the Committee’s Fourth Report, Session 2006–07

HC 48

Session 2006–07

Eighth Report Climate change: the “citizen’s agenda” HC 88-I (HC 189 07–-08)

Seventh Report British Waterways HC 345-I (HC 1059)

Sixth Report The Implementation of the Environmental Liability Directive

HC 694 (HC 1058)

Fifth Report Draft Climate Change Bill HC 534-I (CM 7225)

Fourth Report The UK Government’s “Vision for the Common Agricultural Policy”

HC 546-I (HC 48 07–08)

Third Report The Rural Payments Agency and the implementation of the Single Payment Scheme

HC 107-I (HC 956)

Second Report Defra’s Annual Report 2006 and Defra’s budget HC 132 (HC 522)

First Report The work of the Committee in 2005–06 HC 213


Session 2005–06

Eighth Report Climate change: the role of bioenergy HC 965-I (HC 131 06–07)

Seventh Report The Environment Agency HC 780-I (HC 1519)

Sixth Report Bovine TB: badger culling HC 905-I

Fifth Report Rural Payments Agency: interim report HC 840

Fourth Report The Departmental Annual Report 2005 HC 693-I (HC 966)

Third Report The Animal Welfare Bill HC 683

Second Report Reform of the EU Sugar Regime HC 585-I (HC 927)

First Report The future for UK fishing: Government Response HC 532

Documents

Ofwat Price Review 2009 - publications.parliament.uk · Ofwat Price Review 2009 5 1 Introduction 1. The Water Services Regulation Authority (Ofwat) is the water industry’s economic