Select Committee reports on water industry regulation

In May 2018, the Environment, Food and Rural Affairs Select Committee (“EFRASC”) launched an inquiry into the regulation of the water industry. EFRASC’s conclusions from the inquiry were published in a report (the “Report”) on 9 October. The Report may indicate the direction of water policy over the coming years. In this article, we consider the key findings in the Report and their potential impact for water businesses.

Background

Each government department is held to account by a House of Commons Select Committee, comprising a representative sample of eleven MPs. Select committees’ main instrument of scrutiny is the inquiry, an in-depth investigation into a specific policy area in the course of which they can require industry experts to provide written and/or oral evidence. Following an inquiry, committees publish a report to which the government must respond.

EFRASC examines the policies of the Department for the Environment, Food and Rural Affairs (“DEFRA”), which is responsible for both legislation and strategic priority statements for the water industry. It launched its inquiry into the effectiveness of water regulation following the recent impacts of both hot and cold weather on water networks. Evidence was presented by a number of water companies and industry bodies along with Ofwat and the Environment Agency. The Report builds upon the conclusions of the National Infrastructure Commission’s April 2018 paper Preparing for a drier future: Engand’s water infrastructure needs (the “NIC Drought Report”), which sketched out a roadmap for saving the necessary four billion litres of water a day by 2030.

The Report

The Report does not aim to have the final word on the issues it addresses: indeed, it suggests that the government should commission a more comprehensive independent review of water industry regulation in time for the 2024 price review. EFRASC has, however, made some specific recommendations:

• Assessment by DEFRA and Environment Agency of the need for further powers to constrain water abstraction – The committee heard mixed evidence on the sufficiency of current arrangements, under which licensees simply voluntarily agree to reduce abstraction at times of low water levels. The Report calls for government expressly to consider the need for legislative reform in its next update on its Water Abstraction Plan, expected in May 2019.
• Assessment by DEFRA and Ofwat to confirm a long-term target for the sale of water between undertakings – EFRASC was persuaded (in accordance with the NIC Drought Report) of the potential of water transfers as a tool to help water undertakings manage their long-term resource management and expressed concern that the PR19 incentives in this regard are insufficient.
• Introduction by Ofwat of a target to reduce leakage by 50% by 2040 – This is a more onerous target than the 2050 deadline for halving leakage recommended in the NIC Drought Report.
• Introduction by government of a long-term per-capita water consumption target – EFRASC relied in particular on evidence from Ofwat that water companies demand-reduction commitments are “really lacking in ambition”.
• Introduction by DEFRA of powers for all water companies (rather than just those in water-stressed areas) to require customers to have smart meters installed – EFRASC considered that “there is strong evidence that metering helps to reduce water use and to detect leaks”.
• Investigation by Ofwat of harmonised methods to streamline customer complaints processes – EFRASC’s suggestions include automatic fixed sum payments where complaints are not resolved within fifteen days.
• New powers for Ofwat to include restrictions on financial engineering and executive bonuses in licence conditions – Ofwat’s principles for the governance of water undertakings are currently only voluntary.

Next steps

In line with ordinary parliamentary procedure, the government is due to respond to the Report within the next week. The findings in the Report may shape the government’s next strategic priority statement for Ofwat, and may even form the basis for future legislation. In the meantime, water undertakings will need to assess their business plans for AMP6 and beyond, and in particular their abstraction needs and their strategies to reduce leakage and demand, in light of the conclusions of the Report.