Select Committee on Environment, Transport and Regional Affairs Memoranda


Memorandum by United Utilities PLC (DWB 25)

  I am submitting this memorandum to the committee's inquiry as Chief Executive of United Utilities, parent company of North West Water, of which I am also Chief Executive. As the only remaining UK water company in the FTSE 100 and the company with the largest programme of environmental improvement over the next five years, we believe we have an important perspective on the issues raised by the Draft Bill.

  We therefore welcome the opportunity to submit our views to the committee. In this letter I would like to set out the key issues for North West Water that arise from the Government's consultation. These are:

    —  Competition.

    —  Changes to the abstraction regime and drought planning.

    —  Better regulation.

    —  The social and environmental agenda.

COMPETITION

  There is little doubt that competition in water supply is coming. Indeed, for the larger customers it is already here.

  We believe that the lesson from the extension of choice in other markets is that, sooner or later, a clear steer is needed from government to make competition happen. This does not mean mandating a specific outcome but rather creating a clear framework within which regulators, companies and customers can work together

  We are aware that a government statement on water competition is due soon. We hope that, following that statement, the Bill can be amended to set out the necessary framework for competition to be introduced on an effective basis; protecting the interests of all customers; safeguarding water quality, security of supply and the environment; and recognising the need to ensure that the capital markets will continue to fund necessary investment. At a minimum, legislation is needed.

    (1)  To provide for the separate licensing of the activities currently undertaken by the water and sewerage companies (including the operation of treatment facilities owned by others);

    (2)  To set out the responsibilities of the different categories of licensee;

    (3)  To ensure that water quality requirements and environmental safeguards are maintained and can be applied to all licensees;

    (4)  To provide for security of supply;

    (5)  To make supplier of last resort provisions;

    (6)  To provide for supplier default; and

    (7)  To ensure that competition works for the benefit of all customers, not just those deemed commercially attractive by new entrants.

CHANGES TO THE ABSTRACTION REGIME AND DROUGHT PLANNING

  We welcome many of the changes to the abstraction regime proposed in the consultation. Our concerns relate to the potential impact of new revocation provision and the introduction of a wide-ranging right to sue for damages.

  The water industry has a uniquely long planning horizon and asset lives amongst the network industries. Prudent planning of water resources, to enable supplies to be maintained in emergencies or drought conditions requires us to keep available some water sources that may be used only once in ten years or more. We are, therefore, concerned that the proposed provisions of the Bill could make it more difficult for us to manage the balance between supply and demand.

  We also have to invest to keep resources available and our charges reflect the long-life expected from our assets. Again, we would be concerned if the revocation of abstraction licences led to the "stranding"of pipelines and treatment facilities. Where such stranding takes place, the Regulator should be under an obligation to ensure companies can continue to recover legitimately incurred costs through the price-setting process.

  Of equal concern is the proposal to remove the present defence from civil action resulting from abstraction activities. We believe that this could create a charter for vexatious litigation. The DETR's earlier consultation (The Review of the Water Abstraction Licensing System in England and Wales) highlighted the considerable technical difficulties associated with this proposal. We are not aware that these technical problems have yet been satisfactorily addressed. We therefore urge reconsideration of this proposal.

  The Bill's proposals on drought planning cause us some concern. We already produce a drought contingency plan, as would any well-managed company, and that plan has been accepted by the Environment Agency. Whilst we acknowledge government's concern to ensure the proper management of a vital resource during situations or extreme shortage, we believe that, unless a company has acted negligently, we should be able to recover additional costs we incur as a result of complying with Government directions.

BETTER REGULATION

  We support many of the proposals in the draft Bill designed to improve regulation. We agree with the proposal to create a more independent consumer body, to require the regulator to consult on and publish his forward work programme, and to require reasons to be given for key decisions.

  In considering changes to the statutory framework for regulation, we have had regard to the principles, set out by the Better Regulation Task Force, that regulation should be transparent, accountable, targeted, consistent, and proportionate. We believe that in significant respects the present regulatory system fails to meet these principles.

  The Bill contains provisions for the regulator to have the benefit of a statutory advisory panel. This contrasts with the situation in the energy, post and communications markets where collegiate regulation has been introduced or is proposed. The position of the water industry is no different from these other industries in this regard and we, therefore, advocate the creation of a collegiate regulatory system for water. We believe this will improve the quality of decision-making and provide for greater continuity through time.

  The Bill proposes a penalty system under which companies could be fined up to 10 per cent of their turnover with no right of appeal, other than on narrow procedural grounds. Whatever the merits of the proposed penalty regime, we recommend a clear appeal process, perhaps to the Competition Commission, on the substance of any proposed penalty decision.

  As we have already said, we endorse the creation of the Consumer Council for Water. However, we have concerns about the potential costs, both direct and indirect, of this change, and more generally, of the mounting costs of regulatory compliance. In some cases we are unclear of the purposes for which information is needed. We think it would be helpful if the regulator could be put under an obligation to carry out a Regulatory Impact Assessment (RIA) for major changes to the regulatory regime, new licence conditions and standards of performance, for example. As RIAs are already required for government legislation, including the Water Bill itself, for example, this would extend regulatory best practice to utility regulation.

THE SOCIAL AND ENVIRONMENTAL AGENDA

  The water industry has become uniquely experienced in delivering water quality and environmental objectives set by government in an economic framework determined by the regulator. Whilst there is scope to improve the process further, for the most part it has worked well. In A Fair Deal for Consumers the government acknowledged the precedent for guidance operating hand in hand with the Periodic Review process. We are therefore supportive of the extension of the guidance procedure to the social field, provided that the costs to companies of guidance can be reflected in the price setting process, and that obligations with significant financial implications are the subject of specific legislation.

  We hope that the Committee will find our comments constructive and helpful to its inquiry, and I would be pleased to answer any questions the Committee has arising from this memorandum.

January 2001


 
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