Memorandum by Thames Water (DWB 22)
A. CURRENT PROVISIONS
1. Abstraction and Impounding: Clauses 1-21
1.1 Balance and sustainability (Part I in
general): Generally, changes should only be made where it is clear
that benefits will occur, and wherever possible those benefits
should relate to customers or the integrity of the water supply
and sewerage system, bringing, for example:
increased choice of supplier for
improved or extended services for
customers, including quality improvements;
improvements to the environment or
sustainability in general;
increased security of service through
better investment in essential infrastructure;
protection of vulnerable customers;
increased stability in regulation,
leading to long term rather than short term investment decisions.
1.2 Before changes to the water industry
regulatory or licence regime are made there should be a transparent
cost-benefit analysis, with a requirement for all regulators,
economic as well as environmental and water quality, to work together
in a co-ordinated way aiming at a balanced and sustainable outcome.
This could perhaps involve a process similar to the "fiche
d'importance" undertaken when the European Community proposes
new legislation. Such a process would help to avoid changes which
are either impractical or simply not good value for money (for
example setting leakage targets below the economic value of the
water saved where the environmental case has not been established.
1.3 The Environment Agency should be constrained
in removing licensed resources unless there is a readily available
open market in alternative sources which could provide alternative
headroom. In the proposed reform of abstraction licences there
is no explicit recognition of the interdependency of water resources,
treatment and supply. For example the supply to London is largely
dependent on outputs from the large treatment works in the Thames
Valley and Lee Valley (eg Thames Water's Hampton and Coppermills
treatment works). These in turn are dependent on abstractions
licensed from the R. Thames and R.Lee. Huge customer-funded investment
has been and continues to be made in these and other treatment
works. In making judgements on future licences and their duration
the Agency must be required to take fully into account security
of supply, in this case for London, and the impact on investment
decisions if security of licensed abstractions is reduced. Whilst
London provides an obvious example of the need for the Agency
to act carefully in reviewing licences with the interests of all
stakeholders in mind, it will be equally true in other locations
on a smaller scale.
1.4 Variation of abstraction licences
without compensation (c.15). Must accommodate the long-term
nature of investment in developing new resources. An effective
time limit of 15 years on essential resources may result in reduced
security of supply and increased costs, as water undertakers'
assets may need to be depreciated over a much shorter time-scale
than at present. Exceptions to the principle of variation or revocation
without compensation should be made in the legislation to require
the EA to recognise the need for preservation of designated sources
which, by virtue of their stand-by purpose in case of drought,
may not be in active operation for periods of over four years.
1.5 Bulk supplies (c.21). From a
competition perspective it is unhelpful to see the Environment
Agency given powers to, in effect, "compel" undertakers
to seek bulk transfers through the reference to their "failure"
to do so in c.21 (2). This should only be as a last resort, with
all alternative market mechanisms, such as Common Carriage,being
exhausted first. In addition it should be possible (or even automatic)
for the donor company, which is ordered by OFWAT to provide a
bulk supply, to have its resource base re-established. If this
does not happen then the donor will have lost commercial opportunity
to export water, as well as having headroom removed, with the
recipient, in some cases, being given a corresponding advantage.
Legislation must recognise that water resource management cannot
be divorced from considerations of fair competition.
22 TO 42
1.6 Water Advisory Panel (c.22).
We support the appointment of an Advisory Panel to the Director
General. However, we consider that regulated companies, as well
as the Secretary of State and the Director should have the ability
to ask the Director to refer major decisions to the Panel. This
would include proposals for Periodic Review methodologies, such
as broad equivalence to prevent the implementation of prejudicial
action by the Directive General, as occurred in the 1999 Periodic
We also consider the advice of the Panel should
be published (with exceptions to preserve commercial confidentiality).
1.7 Consumer Council for Water (c.23).
We support the formation of an independent Consumer Council for
Water. It will be important that this body does not attempt to
replicate some of the functions of OFWAT and thus increases the
regulatory burden and costs to companies. There should be a requirement
for the Council and OFWAT to issue for comment a joint memorandum
of agreement on working procedures.
1.8 Objectives of Regulation: putting
the customer first (c.27). We welcome proposals to improve
the quality and transparency of economic regulation and to put
the consumer first. We are particularly pleased that the interests
of future customers are mentioned (c.27 (4)). This should reduce
the risk that an economic regulator should prefer short-lived
price cuts over long-term planning and investment eg in asset
Regarding the duties of the regulator we consider
(i) The new primary duty of the regulator
to protect customers' interests should be broadened to require
the regulator to specifically take account of customers' views
based on customer research. Insufficient regard to this in OFWAT's
1999 Periodic Review (PR99) led to an inappropriate balance between
price and service which did not reflect Thames Water's customers'
clearly stated views on service improvements they were prepared
to pay for.
(ii) The existing primary duty to finance
companies' functions should not be revised to remove the reference
to securing a reasonable return on capital. Removal of this phrase
changes the meaning and would be perceived by the financial markets
as adding to regulatory risk. This would increase the cost of
capital for water companies unnecessarily.
We support the proposals for the regulator to
publish a forward work plan and to publish reasons for his decisions.
In the draft Utilities Bill there was also a proposal that the
regulator should publish a Code of Practice. Following the widespread
criticism of aspects of the 1999 Periodic Review we consider this
requirement should be reinstated in the Water Bill.
Appeal Process: We consider that the
current appeal processes against decisions of the Director General
(involving an "all or nothing" package approach) are
onerous, unduly lengthy, expensive and therefore limited in their
application. An additional restricted appeal process is required
to review specific individual decisions of the regulator and to
consider proposed actions by the regulator before they are implemented.
We believe that Clauses should be added to the Bill to implement
this proposal, either through the Competition Commission or the
Water Advisory Panel.
1.9 Guidance from the Secretary of State
on Social or Environmental Policies (c.28). If guidance results
in new regulatory requirements (whether formal or informal) being
established there should be an automatic right for the costs of
such policy implementation to be subject to an Interim Determination
of prices, if of sufficient impact, or if not a right to log up
the expenditure for the next Periodic Review. The Director General
should not have discretion as to whether or not such new expenditure
should be included in the determination of Interim or Periodic
Reviews, particularly in the absence of a satisfactory regulatory
appeal mechanism, as noted in the preceding paragraph.
Linked with the above, we have some concerns
on the enforcement policies and the exercise of discretion in
prosecuting. Currently we face an Environment Agency and sometimes
a DWI apparent policy to prosecute without always according full
weight to the circumstances of an event or the significance of
any harm done. As a consequence the industry finds itself on occasion
being prosecuted for events where the cause is demonstrably a
malicious act of a third party or where the impact on the environment
or the customer is at worst marginal and transient, (for example
technical breach of a discharge consent or very slightly coloured
but safe water). Whilst this approach is clearly within the remit
of the Agency and DWI it does result in a popular misconception
that water companies are gross polluters, damages public confidence,
incurs unnecessary costs and impedes the ability of UK water companies
to compete in the large international water market.
We believe it would be in the interests of all
for the Agency and DWI to be given guidance on the implementation
of prosecution policies to ensure consistency across the UK, fairness
in application and any consequential action commensurate with
the seriousness of the crime committed.
1.10 Performance Standards (cc.29 and
30). These proposals are acceptable provided the standards
have customer support and are in the public interest. A transparent
consultation process before implementation would be required.
We would be concerned if this Clause was used, for example, to
set leakage targets unless these were fully funded.
1.11 Financial Penalties (c.36).
Regulatory fines should be proportional to the seriousness of
the breach and its effects on customers and/or the environment.
They should not detract from the ability of the company to invest
in service and environmental improvements for the benefit of customers.
There is a risk of double jeopardy in those instances where a
failure to comply with a statutory requirement constitutes a criminal
offence, for which the courts are the designated forum to determine
penalties in accordance with established precedent and balance
of public interest.
Although we appreciate that these provisions
are based on arrangements recently introduced in the Utilities
Act, we do question whether the Court will always be the most
appropriate forum for appeal in relation to the amount of the
penalty. Appeals against the Director General's determinations
on Periodic Review, and his decisions on Competition Act matters
are referred to specialist panels of the Competition Commission.
It should therefore be considered seriously whether a more consistent
and rounded outcome would be achieved in regulatory as opposed
to environmental or quality matters if those appeals were heard
by the Competition Commission.
1.12 Drought Plans (c.46). Care
must be taken regarding the level of detail to be placed in the
public domain. There are some important issues of security involved
in drought plans which must remain confidential in the context
of public (as opposed to regulator) availability. In addition,
some of the information may be commercially sensitive. It is important
that appropriate safeguards be built into the legislation.
1.13 Reservoirs (cc.49-52). We
generally welcome the proposals to transfer powers from Local
Authorities to the Environment Agency. However, we are concerned
on the proposal to make the detail (as opposed to confirmation
of the existence and robustness) of flood contingency plans available
to the public (c.52). Existing controls on construction and ongoing
inspection of reservoirs are sufficiently rigorous that the need
for preparation and publication of additional compulsory contingency
plans must be questioned in the light of some of the security
issues this raises, not least in relation to the possibility of
terrorist threats, and the avoidance of needless and unjustified
This will be a situation that the Government
is itself familiar with, in relation to its own installations,
and one where overall the most appropriate response in the public
interest is to maintain confidentiality.
B. WORK IN
2.1 There are many aspects of the proposals
on reforming the water abstraction regime which can be welcomed
as facilitating competition, for example the relaxation of qualification
criteria relating to those who may apply for a licence.
2.2 The proposal in the consultation paper
(paragraph 59) to extend the DWI powers of prosecution to contractors
and others supplying water via undertakers' pipes, will facilitate
the protection of the public which is essential under Common Carriage.
However, we believe that this does not go far enough, as explained
in the following paragraph.
2.3 The provision of the Water Industry
Act 1991 and the Water Resources Act 1991 should be amended to
enable new forms of licence to be granted by Government or the
Regulator. These new forms of licence should be constructed so
enable new entry or extended entry
by existing undertakers to all or part of the water and wastewater
service chains but with;
appropriate legislative and regulatory
safeguards to ensure public health and the integrity of the infrastructure
involved is not compromised.
These licences should bring with them less than
full Appointed Water Supply Undertaker status, rights and obligations
where appropriate, and could be available (without enforced restructuring
for all) for the effective regulation of those wishing to engage
in part only of the supply chain. Effective safeguards on drinking
water quality and customer service can best be provided and enforced
within such a regulated framework.
2.4 Economic Instruments. More work
is needed on the ways in which economic instruments, such as trading
in abstraction licences, can credibly and effectively facilitate
competition. The Government's current proposals on reform of the
abstraction licensing system currently focus largely on changes
to ensure environmental sustainability, avoiding over abstraction,
low flow rivers and depleted wetlands. This is of course essential,
and to a large extent can be supported. However, the proposals
do not address the way in which trading in licences or trading
in water which, by the very nature of supply and demand variation
becomes surplus from time to time, could be used to facilitate
competition and increased choice/security of supply for customers.
For example increased trading in surplus winter
water could be a means of reducing groundwater abstraction in
adjacent areas where summer demand peaks are known to strain security
of supply or the environmenteffectively leaving water "in
the bank" for summer use. Such an approach could be a better
economic solution than development of new local resources or the
limitation of economic growth in the area. Such trading will only
be possible if the new licensing regime explicitly acknowledges
the role and value of market led commercial trading. This would
require new licences to be framed with sufficient flexibility
to allow, subject to sustainability, significant variability in
abstraction ratesbeyond the current daily and annual maximum
limits set in current conventional abstraction licences.
One way of achieving a balance between security
of supply and environmental sustainability might be to encourage
the introduction of water trading as described in the previous
paragraph. In conjunction with a requirement on the Agency to
take all stakeholder interests into account this could provide
a new abstraction licensing process which both safeguards essential
public supply and benefits the environment.
2.5 Enforced major structural change to
the industry is not necessary for competition to be taken forward,
and competition in the market can co-exist with competition for
the market. In cases where companies do take the decision to formally
restructure by transferring the ownership and operation of assets
into different legal entities, the licensing regimes should accommodate
this, and there should be an early and transparent process for
the competitive tendering of services.
2.6 We would urge the Government to establish
a firm position on the maintenance of regional average pricing,
primarily in the interests of disadvantaged and rural customers,
and on the establishment of a competitive market place which properly
balances the needs of existing domestic customers with the more
powerful industrial and commercial companies.
2.7 In view of the potential difficulties
of introducing full competition into the small domestic market,
it is worth considering whether the legislation should recognise
that there are two distinct potential marketsdomestic and
commercialand whether their needs would be better served
by treating each separately, for example in a staged approach
2.8 The power to limit resale sale prices
(paragraphs 76-81) should be restricted to where customers have,
in effect, no choice. It would be inappropriate for the same constraints
to be applied in a competitive market place, where choice can
be exercised and margins ought to be reflective of the market