The Environment, Food and Rural Affairs (EFRA) Committee has held its first oral evidence session with relation to the Draft Water Bill, with issues such as upstream reform, resilience and the merger regime being discussed.

Four witnesses faced the Committee in Portcullis House yesterday (23 Oct): Colin Skellett, Executive Chairman of Wessex Water; Rob Wesley, Head of Policy at Water UK; Jean Spencer, Director of Regulation at Anglian Water; and Tony Ballance, Director of Strategy and Regulation at Severn Trent Water.

Chair of the Committee Anne McIntosh MP kicked off the session by asking if the witnesses were surprised by the direction of the Draft Water Bill. Colin Skellett replied the Water White Paper was much wider in scope than the Bill, which he said mainly focuses on retail competition. He believed the Bill was in danger of being a “lost opportunity” to tackle “bigger issues” facing the water industry.

Jean Spencer welcomed the Bill but said it was missing “clarity on resilience.” She said there may not be any need for legislation on the matter, but nonetheless there was little mention of it in the Bill. She added that perhaps a new national water resilience group could be set up to complement the National Drought Group.

Rob Wesley flagged up the absence in the Bill of directions to tackle bad debt and affordability, a growing problem facing the sector. He said water companies need to have access to benefit information so they can tailor social tariffs to their customers more effectively.

Tony Ballance focused on what the Bill said about competition and believed it could be strengthened by allowing companies the choice of whether to participate in the retail market or not by allowing companies to have separate licenses and letting them exit the retail market if desired.

Mr Skellett also flagged up that the Bill needed to look more holistically at how to deal with flooding. He criticised the Bill for not clearing up the “mish-mash” of current responsibilities for flooding and also emphasised the need for the proper management of sustainable drainage systems (SuDS).

Furthermore, Mr Skellett pointed out there was no mention of metering in the Bill. He said he was not in favour of compulsory metering, as it would alienate customers. “The industry needs to take its customers with it,” he said. However, he did say that the Draft Water Bill should “set a direction towards policy.” Mr Wesley suggested that by engaging their stakeholders, water companies can determine the best approach to metering in their area. He added that there was a widespread agreement that metering is “the direction of travel, it’s just a matter of pace.”

On the matter of reforming the special merger regime, the witnesses were in agreement with water regulator Ofwat’s response to the Government’s call for evidence on the matter earlier in the year. Jean Spencer said rather than having a set financial threshold, any mergers should be assessed with regard to the capability of Ofwat to make comparisons as well as any impact on the market.

Mr Skellett expressed the need for the Bill to encourage some merger activity - with appropriate safeguards - and he said merger activity would be a “good thing.” Tony Ballance argued the regulatory regime had “evolved substantially” since privatisation and the need for 20+ comparators is much less than in past years.

When asked on the balance between guidance and legislation in the Bill with regard to charging rules and market access codes, the witnesses were concerned that Ofwat was being given too much discretion. Colin Skellett said it was “surprising” how much control is being given to Ofwat in the Bill over access codes, and questioned why Government did not want more control. He warned that more burdens could be placed on customers and fundamental public policy issues were “being left to the regulator to deal with at a later date.”

Jean Spencer said a consequence of upstream reform is the likelihood of moving to deaveraged charging, which would have a considerable impact on rural customers, who would have to pay more for water. She added that if the move to deaveraged charging was not the intention, then it should be made explicit.

One component of upstream reform is increasing water trading, which Severn Trent Water is strongly in favour of. Another component is accepting new entrants into the upstream supply chain, which Mr Ballance said could lead to a deaveraging of tariffs and he wanted to avoid a situation where companies were compelled to do as such.

Mr Skellett was less comfortable with upstream reform and feared that it would have detrimental effects on resilience. He advocated the need to focus on resilience and said a company should be required to create grids in order to improve its water security.  Mr Ballance said this could extend to trans-boundary grids.  Both executives agreed that incentives were needed for companies to trade water.

The witnesses welcomed the setting up of the High Level Group (HLG), which was established by the Government to drive forward reforms in the water sector, but Mr Wesley called for a broader, working level implementation group to complement the HLG to take the practical step of delving into detail and maintain progress.

Mr Wesley and Mr Skellett repeatedly stressed throughout the session that any reforms to the water industry must not spook the investors – “There could be significant consequences for affordability if investor confidence is lost,” warned Mr Wesley. The sector is currently seen as a ‘safe haven’ by investors due to it being a regulated industry and prices being linked to inflation, therefore allowing water companies to borrow at very low rates.