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We shall now hear oral evidence from the Blueprint for Water coalition and the Chartered Institution of Water and Environmental Management. Would the new witnesses please identify themselves for the Committee?
I have been asking the other witnesses this morning and this afternoon about clause 22 of the Bill, which requires Ofwat to have a primary duty to increase the resilience in upstream sewerage water supply. Do you believe that such a duty should take precedence over Ofwat’s secondary duty, which is sustainability?
Colin Fenn: I will kick off and I am sure the others will be interested as well. Yes, absolutely. One of our concerns in the institution is to attain the balance that Mr Bishop talked about, between the trilogy of people, business and the environment. If there is a primary duty with the economic regulator to balance two, but not the environment as a third, inevitably at the point of trade-off, the balance between those trade-offs will not be sufficiently protective of the environment, in our view. So we would like to see the environment brought into the same position on the negotiating table as affordability for customers and financeability to discharge functions for water companies.
Rob Cunningham: Absolutely. We would very much like to see resilience and sustainability on an equal primary footing. I think resilience has a lot of merits in terms of providing a framework to analyse the industry: so is it resilient to shock? But it is very different from sustainability and at some point, particularly in the very narrow framing of the Bill—where resilience is framed in terms of ability to provide supplies to customers and maintain sewerage services—one potential way of maintaining security of supply is to take more water from the environment at the cost of sustainability. They do need to be on an equal footing so that we can understand those trade-offs more explicitly.
Dr O'Neill: In the last price review there are a few examples of why there is a clear need for the sustainable development duty to be raised to a primary level. We saw examples in Hertfordshire where the water company put forward a number of metering and leakage schemes. Ofwat actually forced the company to remove that from their plan because they deemed the area to be in sort of water surplus, even though that surplus is just an illusion based on the abstraction licences that are really out of date and need to be reformed.
We think that there is a case already, and with the new powers that are in the Bill, specifically around upstream competition and clause 41, which means that Ofwat will have a yay or nay veto on compensation on the abstraction scheme, we think it is even more important.
Rob Cunningham: There is an enormous amount of literature out there on resilience. It is kind of both blessed and damned by the fact that it means everything to all people—a bit like “sustainability”—so there is a need to frame it in some way so that we understand what we are talking about. When you think about resilience and what the industry is about, you could absolutely consider the fact that the industry, through its operations—tackling pollution, managing demand, managing river flows—can contribute to the resilience of the natural environment to shocks like climate change.
You could broaden resilience to think about how the industry contributes to the resilience of the natural environment. You could also think about how resilient the industry is to financial shocks. There is a lot of interest in the press about the financing of these companies—the cost of debt and the levels of debt—so resilience is a concept that could be applied equally to the financial situation of the companies.
Colin Fenn: The environmental resilience is important to that. The wording of the clause currently has the ability to be resilient as providing security of supply to people and business against environmental constraints, or pressures I think was the word. That, to me, does not place the environmental on an equal footing with the needs of people and business, and all three ought to be entailed and included in the definition of resilience. It is about resilience to the greater volatility, which the challenges of population growth, climate change and lifestyle change inevitably bring towards us.
One area that the Bill does not cover is the installation of universal metering. As you know, that only occurs in water-stressed areas at the designation of the Secretary of State. Do you agree with the Government’s view that the best way forward, upon ensuring the availability of water meters, would be at discussions through consumers and the water companies themselves, or do you see an alternative?
Colin Fenn: I believe that demand management and using ways that demonstrate the relative scarcity and value of water to people in households, business and to us all as a society is absolutely imperative to give us the necessary signals and incentives to be able to be careful in the use of water generally speaking, but particularly where and when water is scarce. It is not so much meters—meters are simply devices to count how much water is used—it is tariffs that really do the counting.
In our view, we need to introduce a basket of tariffs that take care of the legitimate needs of those members of society who are vulnerable and need protection, whilst making sure that the cost of water for essential uses is kept affordable for all, but sends us those signals and gives us the wherewithal to respond to changes in availability while also providing disincentives to wasteful use of high levels of discretionary water use.
Dr O'Neill: We urgently need to see more on demand management. It is such a disappointment that this is a water Bill and it does not really have anything in there to address the demand issues. We have the latest set of water resource management plans from the companies, which aim to get to 145 litres per person by 2020. We think that this is incredibly unambitious, and it shows that more needs to be done on the demand side. Metering is the tool to address demand. Not only does it provide customers with a financial incentive, it also allows you to target households that are using large amounts of water and provide water efficiency support. It allows you to find out where all the leaks are, especially on the customer side and on the supply pipes. Metering really is fundamental.
As a minimum, we would like to see the Bill allowing water companies—in consultation with their customers through the water resource planning process—to select metering as an option where it brings clear benefits, regardless of where they are and whether or not they are water stressed. Above and beyond that, we would like to see more Government leadership, saying that metering should be part of a resilient and sustainable water industry.
On the point about managing demand, does Blueprint for Water have views on the retail competition proposals? If so, what is the basis of those views?
Rob Cunningham: One of the things about which some of us certainly might have concerns is driving behaviours among domestic customers and creating a sense of place, ownership and location. It is about the relationship between yourself and your local environment, which is quite important in thinking about the link between your water use and driving down water use. There could be some risks for personal behaviours if you bought “easy water”. If you break the geographic link with where you are, why should you actually care? We saw this after privatisation in the 1995 drought. There was a blip of anti-efficiency behaviours, because people thought, “I pay my bill and these are private companies”. Thankfully that has dropped off, but that geographical link for domestic customers could well be very important.
We had some exchanges this morning when I commented on a sense that people are not as well educated about water as a finite resource—perhaps not scarce, but finite—as they are about how they use energy. There was evidence from the panel that this was true. Do you think that is a fair assessment? If you do, what can the ever-charming Minister, Ofwat or indeed anybody else do to encourage greater understanding of the finite nature of this resource?
Rob Cunningham: When I attended a water industry customer care conference—fascinating as it was—there was a lot of discussion about the fact that most companies have an aspiration to be the silent service, and to operate under the radar without people being aware of them. Interestingly, there is a recognition that that is no longer the way to go, because water companies need to be more engaged around water use, reducing demand and changing behaviours.
It is not only about reducing demand. It is also about all of those human behaviour issues such as what people put down their toilets, causing blockages and sewer flooding. It is about becoming much more engaged with the customer base. I think part of it has stemmed from what is perhaps an understandable sense that, “Well, we are successful if no one talks to us,” which is now turning into, “We are successful if we talk to people and we can change their behaviours.”
Colin Fenn: We would be very keen to see a greater connection and understanding by people about the consequence of taking more water, perhaps more than is needed. There is an effect, and the more we take the less is left in the environment. In certain places and at certain times, that brings the potential of damage to the environment, to aquatic species and species living alongside rivers and elsewhere in catchment areas. We welcome activity by companies—which exists and should be supported—but the pressures upon water resources are increasing and will increase. If we are to move towards sustainability and resilience, and being able to provide water without creating damage, we need to have a greater understanding of the place of water and we need to put a value on it. Anything that helps us to do that through education, awareness, tariffs and metering is to be welcomed.
Unsurprisingly, this group of NGOs is very concerned about the sustainability duty. As am I. I am chairman of the all-party angling group. It is very important to me that we have water flowing down our rivers and we do not have it flowing down our rivers in too many places. There may be a little bit of a red herring here about the sustainability duty. It seems to me that the resilience duty and sustainability duty, as long as the Environment Agency is clearly involved in the process of setting this up, are very closely allied. We have just heard from the Environment Agency. It will have control over bulk transfer licences. It will have control over a change of use of water. It will be fully inputted in the sleeper licence reactivation issues. The financial compensation has been removed from the extraction changes.
We also have the Government document from May of this year and the strategic policy statement of Ofwat, incorporating a social and an environmental guidance. Sections 3.6 to 3.9 make it absolutely clear that sustainability must be part of what goes on. Are we basically all saying the same thing? Are not most of the bits of the jigsaw already in place to make this right rather than having to elevate sustainability to a primary duty which ultimately will create a very difficult position for Ofwat? It will be pulled in two different directions and be pretty much unable to resolve pricing for customers and pricing for the long-term resilience of the system.
Colin Fenn: Unless that primary duty is there to safeguard the environment, the nature of the pull will act against the environment and will require it to take advantage of the secondary safeguards that exist. If we are convinced that sustainability as well as resilience matters are being attended to effectively already, it seems to me that there is no extra cost involved in raising the duty to a primary level as opposed to leaving it at a secondary one.
Rob Cunningham: My understanding of the Bill, and my understanding of the bulk supply protection that was discussed in a paper from DEFRA in November, which talks about the Government amendments, the specific protections for bulk supply apply to bulk supply orders made by Ofwat. My understanding—I am not a lawyer—is that those orders will be made where companies cannot agree a bulk supply between them. So it is very specific circumstances. If the system works well, Ofwat should not have to get involved. If Ofwat does not get involved, under the system and under the amendments that are made here, the Environment Agency will not be consulted on those bulk supplies. So that particular safeguard will operate only where two companies do not agree.
Rob Cunningham: It does. I noted that. That is worth looking into. The Water Resources Acts of 1963 and 1991 gave authorities wide powers to revoke licences with compensation to amend, to redistribute and all of these wonderful things, which they have hardly ever, if ever, used. On paper the Environment Agency could do a whole bunch of things, but the Water White Paper showed us and the evidence underpinning that from the Environment Agency and the abstraction reform advisory group work show that those systems have not worked and will not work. I do not have any great faith that that phalanx of historical legislation that is yet to work after 50 years will somehow spring into action in this new dynamic trading system. So I do not have great confidence myself.
Dr O'Neill: There is also the issue of clause 41. Effectively what clause 41 does is end the compensation for water companies and puts it into the price review. That is welcome because we have heard that the current mechanism for funding compensation was not working. It pretty much gives power to Ofwat to decide whether these abstraction licences should be reduced through their price determination. It is really important that they consider the sustainability as well as just the short-term cost to customers when they are making that decision.
I am interested in the issues around the duties on Ofwat, which we are discussing here. First, Mr Fenn, your concerns seem to be around how resilience is interpreted. Returning to what Mr Cunningham was saying and the discussion I had with a previous witness, would it be possible in your view to take resilience into account in such a way that it takes account of environmental resilience as well as the other two elements that we are talking about here: the economy and—
Coming back to colleagues from Blueprint, I am interested in the evidence that we were given about what is in place at the moment—you feel it has not yet delivered the results that it had the potential to deliver. A lot of this will be around abstraction reform, which is something we were talking about and, as you are aware, on which we will soon be consulting. Would simply having a sustainable development duty on the face of the Bill necessarily mean that the behaviours you want to happen would happen? Would we merely be ticking the box that says, “Sustainable development, job done,” without necessarily delivering some of the outcomes that you want to see? My worry is that we could just be saying, “Great, we’ve done it,” but unless we are serious about what we do on the ground, then it will not change anything.
Rob Cunningham: That is the key thing. There you have the power to do or not to do something, in this case pay compensation, and the duty which provides interpretation in terms of how Ofwat then responds to that signal. I would not sleep well at night if we cut everything out and just gave Ofwat a sustainable development duty. I would not expect that suddenly to lead to a transformation. How the measure works in concert with other parts of the Bill will help to shape the way in which Ofwat acts and responds to those signals that are in the Bill.
Bearing in mind your earlier caveats about the things you would like to see in the Bill which have a long track record in terms of abstraction reform, those are the areas we need to get right in order to deliver the outcomes that you want to see. Just putting a sustainable development duty on Ofwat is not necessarily going to be the silver bullet that will deliver everything.