Reform of water industry still under discussion

Photo source Paul Hipwell: Axbridge reservoir 

The Coalition Government has confirmed a white paper will be published in June 2011 on reform of the water industry to ensure more efficient use of water and to protect poorer households. It is seeking to enhance competition and improve conservation in the water industry.

As part of the major structural reform of Government underway Defra has published its departmental priorities aimed at reducing costs and achieving the reforms set out in the Coalition Agreement. The objectives include:

·          Help to enhance the environment and biodiversity to improve quality of life.

·          Support a strong and sustainable green economy, resilient to climate change

Having clear objectives is good business practice and Defra should be applauded for making its vision clear. The question now is now quickly will these high level objectives translate into action on the ground?

The debate on competition in the water sector at the recent market reform meeting chaired by Defra focused on a paper from Ofwat on the issues surrounding separating out retail from water operations and asset management. There was no mention of water conservation, efficient use of water or how to support poorer households. To be fair this paper would have been produced before Defra’s new objectives had been published.  It will be fascinating to observe but equally very important for the future of the industry to see whether in light of these new objectives from Defra the approach towards competition radically changes as the new high level objectives imply.

Thames Tunnel goes to IPC

Photo source: Thames Water

The decision announced this week that the Thames Tunnel will be referred to The Infrastructure Planning Commission (IPC) is perhaps surprising. The 2008 Planning Act does not list sewers as nationally significant infrastructure projects so it has needed a decision by a Minister to ensure its covered.

Referring the planning application to the IPC has obvious benefits to the Government as it provides a fast track way of making decisions and keeps Ministers one step removed. It will require the National Policy Statement for wastewater, (due to be issued in draft this autumn) to be revised to provide guidance for sewer projects.

The involvement of the IPC may not make it any easier for Thames Water to gain planning permission. The 2008 Planning Act requires applicants to demonstrate that they have considered and consulted on alternatives. It also gives power to local councils to judge whether the applicants consultation process has been adequate.

This is likely to prove controversial as many local councils are opposed to the huge cost of the tunnel scheme and are already saying that Thames Water has not adequately looked at alternatives. So the involvement of the IPC may actually slow down the tunnel project and lead to considerable further debate on the best way forward.   

Brown flag condemns blue flag beaches

Photo source: Surfers against sewage

Clean water campaigners Surfers Against Sewage are celebrating after Keep Britain Tidy committed to installing warning systems informing the public after sewage discharges at blue flag beaches. This comes after sustained publicity in the National Press and BBC Panamora about the impact of Combined Sewer Overflows on bathing water quality and SAS planting brown flags on failing blue flag beaches.

The decision does clearly illustrate the power of publicity. When next year the public start seeing warning signs about sewage spills at some of Britain’s most popular and picturesque beaches its inevitable that there will be a further outcry.

Combined sewer overflows have long been a contentious issue and a legacy from our decaying and overloaded sewerage infrastructure. It is an issue on which the water companies cannot win. If nothing is done they will be castigated but tackling the issue will require further massive investment and lead to higher bills.

There has been million's spent on improvements but public concern has only increased. The publicity campaign that Thames Water are starting on the tideway tunnel may ironically only increase the pressure.  There is no easy answer but putting off investment will only make matters worse. The Ofwat final determination does allow some expenditure but less than water companies had asked for and much less than will be required to tackle all the blue flag beaches. Its inevitable that the public pressure will eventually lead to increased investment it would be better to act now and put the industry in a better light.

River water quality at highest ever level

Photo source: www.sewta.org

At first sight the figures released by Defra showing that English river water quality is at an all time high level of 73% meeting the good standard should be welcomed. Certainly there has been major improvement over the last 20 years – as there should be given the massive capital investment by the water companies.

Over the next five years the water industry in England and Wales will invest a further 4 billion pounds in raising river water quality. But can we be confident that this will make a difference?

Over the last five years or so there has been virtually no change in river water quality according to Defra despite the huge investment. Under the Water Frame Work Directive new monitoring schemes are now in place. The first 2009 results on “Good Environmental Status (GES)“ will be published next month.

A target has been set by Defra of all rivers meeting the GES target by 2015. Given that only 25% meet the standard in 2008 this sounds highly ambitious. The key will be to ensure the planned £4 billion investment is carefully focused on schemes that will make a real difference – not just squandered on more studies. 

Environment Secretary Caroline Spelman supports Thames tunnel plans

Photo source: Thames Water Vauxhall combined sewer overflow

Environment Secretary Caroline Spelman has this week given her support to Thames Water’s plans for a tunnel to reduce the huge amount of raw sewage discharged into the River Thames. Thames Water estimates that the proposed tunnel will cost £3.6bn which could result in bill increases of around £60-£65 per year for Thames Water customers.

Getting planning approval may not be as easy or straightforward as Thames Water might hope. With the 2008 Planning Act a new ‘fast track’ process was introduced for all major infrastructure projects with approval by the Infrastructure Planning Commission. The Government has announced that the IPC will be replaced with a new Major Infrastructure Planning Unit but this wont happen until late 2011 at the earliest as new legislation is required and the approval process is likely to remain very similar with the exception that Ministers will have the final say.

The legislation requires extensive public consultation with local authorities being given the say on whether they think consultation has been adequate. The experience in the South West with the Hinkley nucleur project is interesting. There initially all the local councils welcomed EDF’s plans as they saw the new nucleur reactor bringing many jobs and significant ‘planning gain’. Now as the consultation by EDF comes to a close they have managed to loose the support of local councils as the forecast planning gains have become derisory – just £1m from a £10 billon plus project and the disruption to local communities more evident.

Thames Water will have a more difficult job. Local councils are opposed to the tunnel from the outset and local residents are unlikely to be supportive of a big increase in bills when most will see no obvious benefit. It will require very careful management of the consultation process if support for the plans is to be won.  

Water utilities successfully raise finance

Thames Water has this week raised another £300 million of debt on the bond market. This follows the £550 million it raised in mid-July. The issue attracted a lot of interest and was placed at 250 basis points over the 4% 2022 Gilt. Some had their allocations cut back. The aggregate proceeds are nearly 10% of Thames regulatory capital value and push the net debt to RCV value close to the 85% maximum stipulated by rating agencies.

United Utilities has also announced that Legal and General plc have upped their sharing holding to 4.23%. This news confirms that despite early fears over the “tough” Ofwat Final Determination actually the water sector remains highly attractive to investors. 

Gray review of Ofwat

Photo source: Defra

The announcement that Defra has appointed David Gray to review whether Ofwat is continuing to offer value for money should be welcomed.

Its clear given the monopolistic structure of the water industry that some form of regulation is essential and Ofwat has certainly played an essential role in the transformation of the water industry since privatisation. But is it really necessary to have almost identical separate regulators in Scotland and Northern Ireland or is this dictated by national politics?

There is overlap between the functions of Ofgem and Ofwat and many would argue that Ofwat is getting excessively complicated. There is a question over whether Ofwat, with its insistence on a five year regulatory cycle’ is neglecting the damage being done to the supplier base by the peaks and troughs in workload. The chance to stand back and review whether Ofwat could be more efficient is absolutely essential otherwise quangos just keep growing to satisfy their own agendas.