Memorandum from South Staffordshire Water
Water Prices and the Environment (HC597)
South Staffordshire Water PLC are members of
Water UK and we understand that you have invited comments on the
above Report from interested parties.
Overall we are happy with the contents of the
Report and feel that the Committee's recommendations are sensible
and demonstrate a good understanding of the pertinent issues arising
from the 1999 Periodic Review of water prices. It is our view
that the maintenance of the infrastructure, particularly underground
assets, is the most important issue that was not adequately addressed
at the 1999 Periodic Review. The Committee's comments in this
area are welcomed. Below we have sought to share with you our
observations on some of the recommendations contained within your
We welcome the suggestion that independent surveys
should be commissioned by DETR. The EAC suggest that the structure
and content of customer research should be discussed within the
quadripartite group. It may also be appropriate to involve bodies
such as the Consumers' Association. (Para 52)
We are not convinced that it should be the role
of Environment Agency to scrutinise the costs of environmental
schemes. Ofwat are better placed to perform this role (Para 90).
Our experience is that water changes are inelastic
and hence demand does not change significantly when the price
charged changes. However, in the interests of allowing customers
to budget for their water bill, smoothed prices are preferred
The UK Government should encourage new European
legislation to be clarified at the earliest opportunity. Our experience
is that uncertainty over the extent of new obligations presents
unnecessary pressures at the time of Periodic Reviews, especially
when there have been premature public statements that water bills
will be falling. (Para 142). This view also applies to the UK-driven
environmental programme (Para 151).
We would dispute the conclusion that a suitable
framework is in place. During the 1999 Periodic Review it was
clear that Ofwat and the DWI had different timetables and that
many of the quadripartite members were not communicating well.
Even today, over twelve months from the Final Determination, the
DWI has not confirmed the necessary Water Company action to deal
with EU lead compliance legislation. (Para 172).
We would like to emphasis the importance of
this issue. The Committee's recommendations are welcome, although
we feel that it is important to agree deadlines and targets for
action to be taken, otherwise the debate over asset maintenance
will linger. (Paras 198-211).
Many of the recommendations relate to a wider,
more involved and strategic role for the DETR. This raises two
important issuesthe independence and resourcing of the
DETR. The EAC should consider whether each of these is adequate.
Currently the policy-making expertise is at Ofwat, whose resources
are far greater than those at the DETR who consider water issues.
In supporting the vast majority of the Committee's
recommendations, we are anxious to understand how their implementation
will be monitored. We would hence appreciate clarification of
the process to ensure that the quadripartite members take actions
to comply with the recommendations.
We are, for example, concerned that Ofwat have
recently concluded that research by MORI into the 1999 Periodic
Review process and the two Competition Commission reports (following
appeals by two water companies) is evidence that virtually all
was well with the price review process, when the EAC's recommendations
indicate the process should be improved. In addition Ofwat's draft
forward programme for 2001-02, albeit published only shortly after
the EAC's Seventh Report, contains few proposals that would comply
with the Committee's recommendations.
Finally, we note the EAC, whilst producing a
comprehensive report, did not comment on all of the key approaches
used by Ofwat to determine price limits. There was clearly widespread
misunderstanding amongst the quadripartite members with respect
to the application of issues such as long run marginal cost (LRMC)
estimates; supply security/headroom requirements; methodologies
to determine an economic level of leakage; demand forecasting
techniques; broad equivalence; cost base; cost of capital; and
the econometric efficiency models. We hope that is useful to flag
these issues with you.