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Water industry regulator Ofwat has written to Environment Minister Phil Woolas expressing its concerns about issues that have emerged from the consultation on water companies' draft water resource management plans. Ofwat has told the minister that the companies' latest draft plans reveal some progress compared with their 2004 plans, with more attention in particular being given to environmental and social costs, and to the effects of climate change.
Overall, however, the regulator said that there is still room for further improvement and that in most cases, it has been unable to say whether a company's plan represents the best value for its customers. Suggested reasons for this include cases where companies have:
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Failed to demonstrate that the underlying 'baseline' forecasts of demand from customers and supply in the future from existing water resources are robust.
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Pre-selected certain schemes to balance future supply and demand without appraising them.
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Failed to explain clearly the process for selecting preferred schemes.
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Justified schemes on the grounds that they have customer support, but failed to provide robust evidence of that support.
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•Taken too narrow a view of the costs and benefits of different options.
According to Ofwat, companies' forecasts of changes in per capita consumption (pcc) differ markedly and there is a lack of clarity in companies' assumptions about how pcc might change as a result of factors like climate change, occupancy etc. With regard to companies’ planned levels of service, in many cases companies have not demonstrated that their customers are willing to pay for the level of service they have targeted in their plans. Ofwat thinks that some companies may have taken too conservative an approach, accepting only very low levels of risk but doing so at too great a cost to their customers.
The water resource planning guidance requires companies to base their demand forecasts on official population and housing projections. Ofwat believes that companies may now need to revise their assumptions in both their final water resource plans and final business plans for the periodic review of prices in 2009 to take account of the likely effects of the credit crunch on the property market over the next few years.
With regard to the impact of climate change on the companies’ baseline forecasts of supply and demand, Ofwat has told the Minister that the quality of companies' investigations into the impacts of climate change varies across the industry. Ofwat has asked the companies to carry out further work on the likely impact of climate change and said that it believes that
“In general…. Companies have not carried out sufficiently robust investigations or provided firm enough evidence at this stage to support the investment that they propose to tackle the impact of climate change.”
Ofwat has also questioned the companies’ approach to balancing supply and demand, where it expects a twin-track approach to be adopted and all options considered on a level playing field. The regulator said that it is not clear whether companies have done that in their draft plans, with most companies pre-selecting particular levels of metering and leakage control, contrary to the planning guidance. In Ofwat’s view it is currently
“not clear whether the assumptions that companies have made would lead them to invest too much or too little in metering and leakage – it is impossible to tell without a proper comparison of the costs and benefits”.
Ofwat believes the companies need to take into account the wider costs and benefits of metering, water efficiency and leakage control, as well as the narrow financial impacts, for example, the potential for metering and water efficiency to reduce energy use, as well as reducing the energy required to treat and pump water.
It also makes the case for offering a more flexible response to changes in the supply/demand balance where companies' investment plans are driven by factors that are subject to a high degree of uncertainty e.g. climate change. The regulator suggested that committing to large capital schemes with sunk costs might result in significant over-capacity at customers' expense. While Ofwat does not believe that “large schemes are necessarily inappropriate”, it does think that the existing draft plans have taken too little account of the value of flexibility. Ofwat also drew attention to the fact that in general, companies have not explained any assumptions they have made about the scope for future efficiency improvements. The regulator has pointed out that the scope for future efficiencies is critical to the assumptions it makes when setting price limits. Ofwat has submitted separately to Defra its representations on each of the water resource management plans for the water companies. This month the water companies' responses to all stakeholders' representations will be published. The regulator’s separate consultation on targets for companies to promote water efficiency has just closed – its intention is to publish its conclusions to allow time for companies to incorporate the new targets into their final plans.
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