Regulations for the water and sewerage industry in England and Wales

This article summarises regulation policies on areas of water supply and demand set for England and Wales.  Based on the policies set by OFWAT The Water Services Regulation Authority), the guidelines ensure that companies provide household and business customers with a good quality service and value for money.

Content Table

• Regulations for the water and sewerage industry in England and Wales
  • Water Efficiency Targets
    • Two-part Targets
    • BSWE
    • SELWE
    • Targets for water supply licensees and inset appointees
    • Incentives and penalties
• Leakage
  • • Leakage Review
    • Considering whether the costs of reducing leakage are temporary or permanent.
    • Comparing the cost savings from allowing leakage to rise with the costs of bringing it back down again.
    • Recognising links with other areas of company activity.
    • Considering the value of leakage control as a more flexible option in an uncertain world.
    • Taking account of the scope for future efficiency improvements.
    • Integrating leakage control more fully into the supply/demand appraisal.
  • Metering
    • High-level assessment of selective metering
    • Company-level assessment
  • Climate Change
  • Resources
  • Links
  • Related Articles

Water Efficiency Targets

BSWE

The BSWE target represents the minimum activity that companies are expected to carry out. It is made up of three elements:
• an annual target to make an assumed saving of one litre of water per property per day, on average, through water efficiency activity;
• a requirement to provide information to consumers on how to use water more wisely; and
• a requirement that each company actively improves the evidence base for water efficiency.

It is considered reasonable for each company to have an equivalent base level target because each company has the same statutory duty to promote water to its consumers. A target of one litre per property per day represents a 40% increase in estimated savings from water efficiency activity, compared with the average over the past three years on a like for like basis, excluding savings
from supply pipe leakage. It will prove stretching for many companies, but several have previously demonstrated that it is achievable. companies with very low average per capita consumption (PCC) should be set a lower target. For companies that report PCC below 130 litres on average over the previous three years, the litres per property per day target will be reduced to half a litre. This currently only affects Tendring Hundred Water.

companies are expected to meet their targets on a three-year rolling average basis with a carry-forward provision. This will allow them to schedule their water efficiency optimally, with larger programmes in some years than in others.Companies will deliver assumed savings unevenly, and that they might carry out more activity early in the reporting cycle.  Companies that carry out water efficiency activity too early, qill not be penalized so  companies that exceed their targets in a single year can carry forward any excess assumed savings into subsequent years.

Companies may need to do more to achieve these targets. If this involves additional expenditure, they will effectively be compensating their consumers for having done little in the past. They will also
no longer benefit from an unmerited, favourable effect on their relative opexefficiency.

 BSWE target will be implemented on a trial basis during 2009-10.

SELWE

Under SELWE,  companies are required to consider additional water efficiency activity, above the base level. They are expected to plan for such activity if it forms part of a sustainable, economic approach to balancing supply and demand. companies are encouraged to consider the value of water efficiency as part of a portfolio of measures, helping to minimise overall risk. Companies will be
responsible for determining their SELWE as part of an economic appraisal of the options to balance supply and demand.

Targets for water supply licensees and inset appointees

Since 2005, the duty to promote water efficiency has applied to new entrants to the water supply market. In deciding whether targets should apply to new entrants,  regulation must be proportionate to the issue it addresses. Therefore, any supplier that serves fewer than 50,000 properties should not be subject to water efficiency targets. However, all companies, whatever their size, should provide
information to consumers on how to use water more wisely.

Incentives and penalties

Companies would have the following incentives to meet or exceed their targets:
• The revenue corrected price cap will compensate companies for any revenue shortfall relative to expectations, but companies will get to keep the cost saving within the 2010-15 period from supplying less water.
• the best performing companies will be ‘named and acclaimed’ .

Where a company failed to meet its targets, there will be a penalty. This will depend on the extent and circumstances of its failure and could include:
• naming and shaming failing companies in annual reports on security of supply issues;
• requiring an action plan from companies explaining how they would return to required target levels and make up previous shortfalls.

Reporters would comment on these action plans,
• requiring interim reports (between June returns) on progress on restoring required activity levels – again with Reporters comments;
• making a shortfall adjustment in subsequent price limits; and/or
• stipulating under s93B(2) of the Water Industry Act 1991 (WIA91) that
any subsequent failure to achieve the targets will constitute a breach of s93A WIA91, which is enforceable under s18 WIA91.

Leakage

Leakage Review

In July 2006 OFWAT launched a review of their approach to setting leakage targets. They asked for stakeholder views on what the review should
include, and as a result commissioned three specific pieces of work. 

The recent review of leakage issues is complete, and the basic methodology that companies should apply in calculating their leakage targets is now settled. However, there are  improvements, many of which companies can do now to improve the way that they implement the current methodology.
Issues that companies should consider when preparing their final water resource plans and final business plans include:

Considering whether the costs of reducing leakage are temporary or permanent.

There is evidence that, within reasonable bounds, some of the costs of maintaining a given level of leakage may not depend on whether that level is relatively high or low. If some of the costs of reducing leakage are one-off, the SELL might be lower than companies previously thought. On the same basis, companies operating below their current SELL estimate might find that some of the cost savings from allowing leakage to rise are one-off, perhaps suggesting that it is more economic not to allow leakage to rise.

Comparing the cost savings from allowing leakage to rise with the costs of bringing it back down again.

Companies with a significant supply/demand surplus may have no clear need to maintain leakage at existing levels, but if there is a reasonable prospect that they will need additional capacity in the future, they might find that the cost savings from allowing leakage to rise in the short run are outweighed by the greater costs and risks of bringing it back down in the long run.

Recognising links with other areas of company activity.

In particular, if some mains are deteriorating to such an extent that they might need to be replaced or relined in the foreseeable future, there may be a case for bringing that work forward in order to secure combined leakage and serviceability benefits at lower overall costs. Similarly, companies should consider the benefits that arise when more customers have meters, making supply pipe leakage easier to detect.

Considering the value of leakage control as a more flexible option in an uncertain world.

The magnitude of the effects on supply and demand of climate change, population growth and changes in PCC areall uncertain. Committing significant capital investment to deal with these uncertain effects carries a risk because some of that investment might prove to be unnecessary. Once the investment is in place, it can be difficult or impossible to reverse it. Leakage control is generally a more flexible option, allowing companies to take smaller incremental steps to balance supply and demand. This can have a substantial value, allowing companies to defer large capital schemes until better evidence shows whether or not they need to invest in such schemes.

Taking account of the scope for future efficiency improvements.

If there is greater scope for companies to become more efficient at controlling leakage, relative to the potential for efficiency improvements in other activities, this would make additional leakage control more favourable when compared with other supply/demand options.

Integrating leakage control more fully into the supply/demand appraisal.

In many cases, companies calculate their SELL in a separate modelling process, which is more limited than the full supply/demand appraisal. They then use the resulting SELL as an input
in the supply/demand appraisal, allowing leakage to vary little (or not at all) from this initial value. We think that companies with supply/demand deficits should calculate their SELL as part of the same appraisal that determines the rest of their preferred solution for balancing supply and demand. Our view is that this integrated approach is the correct interpretation of current water resource planning guidance, and companies should act now to integrate leakage control fully into their appraisal process. We also intend to move this forward after PR09 as part of a review of the existing guidance on "The Economics of Balancing Supply and Demand."

Metering

Most companies that plan to meter their customers compulsorily have preselected particular levels of metering in their draft water resource management plans (WRMPs) and draft business plans. In our formal representations on the WRMPs, and in our discussions on their draft business plans, we have explained to companies that they must only include optional metering in their baseline supply/demand balance projections. They should choose the pace of any further selective metering (including planned metering) by comparing its costs and benefits with those of other options to

High-level assessment of selective metering

Some companies have said they would not be able to justify selective or planned metering programmes on economic grounds.  Some
simple calculations suggest that, at the industry level, the gap between the quantifiable costs and benefits of near-universal metering could be quite small. It was calculated that the average household bill would have to increase by about £13 to cover the cost of metering 12 million households (using £200 unit capex, £8 unit opex, a 5% discount rate and an average asset life of 20 years, but ignoring financeability adjustments). This would increase meter penetration to 90%. To calculate the benefits, it was assumed that metering would reduce previously unmetered customers’ demand by 10%, and that 75% of the new meters would be installed externally – yielding supply pipe savings of 242Ml/d. These savings were valued by applying the industry
average unit cost of water, which was 86p in 2005-06. This gave an average saving of £11 per customer.

It is not unreasonable to suppose that wider benefits could bridge the gap between this simple assessment of costs and benefits. For example:
• reducing demand will generate environmental benefits, which are likely to outweigh the environmental costs of installing and operating meters;
• customers would have heated some of the water saved, so there are energy cost savings too;
• it is fairer to charge customers according to how much water they use rather than according to the rateable value of their property; and
• metering opens up the possibility of even more cost-reflective charges through new measured tariffs, providing greater flexibility for managing demand in the future.

Company-level assessment

companies may not apply the same simplistic assumptions that is adopted in the high-level assessment. Each company will have its own unit cost assumptions, and will be best placed to consider any unit cost benefits from installing meters on a planned rather than ad hoc basis. Each company will also be able to work out the value of the savings much more accurately by calculating the value of deferring, reducing or avoiding capital investment.  companies are encouraged to expose all of the wider costs and benefits of metering, providing a qualitative assessment of factors that are not easily quantified.

When assessing the case for selective metering, it is important that companies take into account the present value of future costs that they would otherwise have incurred for installing more optional meters. (To avoid double counting, companies should also net off the present value of any future savings from optional metering.)

Climate Change

Several companies are planning significant investment in AMP5 in order to address the perceived effects of climate change on the supply/demand balance. Climate change is an important issue, and it is vital that companies plan carefully to mitigate and adapt to its impact. However, this will be a longterm challenge, requiring a response appropriate for the long-term. As set out in the guidance for water resource planning, it is equally important to make sure that there is a robust evidence base for significant investment decisions that companies cannot reverse and that will have a permanent impact on customers’ bills.

Companies will need to provide robust evidence for any step changes to the estimates of existing supply capacity (for example, deployable output) and demand that they use in their investment planning for the 2010-15 period, whether those changes are related to new information on climate change or to other factors. In preparing their evidence, companies should take account of
their experience during the 2005-06 drought, which tested supply capacity and demand.

The Environment Agency (EA) requires companies to assess the impact of climate change on water supply and demand, and it provides guidance on how to do this. The EA’s guidance describes a number of approaches that differ in their sophistication. Most companies have followed the least sophisticated approach, which satisfies the EA’s minimum requirement. We share the EA’s view that companies need to provide more robust evidence to justify significant investment. And even where a company has followed a more sophisticated approach, it still needs to demonstrate that it has estimated the impact of climate change under the particular circumstances that apply within its region.

The climate change scenarios on which companies have based their modelling work to date are now up to six years old and due to be superseded shortly by UKCIP08.  Companies proposing significant
supply/demand investment, driven by the impact of climate change on the estimates of supply capacity and demand used for planning,  are expected to update their assessment in the light of these latest scenarios.

Resources

The material in this article has been adapted from the Good Practice Register by OFWAT. To find out more about the diffeernt  policies in the areas of water supply and demand, please visit their website at: www.ofwat.gov.uk

Links

Information about OFWAT targets
WATER EFFICIENCY INITIATIVES - GOOD PRACTICE REGISTER Water and Sewerage Companies (England and Wales) - 2007

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