Strategic policy statement update highlights Government water sector expectations

The Government’s strategic policy statement setting out its priorities for Ofwat’s regulation of the water sector in England came into force this week on 22 November 2017. Resilience, flood risk, natural capital, customer bills, investor confidence, competition, affordability, bad debt, leakage and transparency are all on the agenda.

The statement, which replaces the previous SPS which was published in March 2013, is intended to complement Ofwat’s existing duties.  Ofwat is required to keep the priorities under review and report on the steps they have taken in response to the Government steer, which places emphasis on areas where it expects Ofwat to lead a shift in the water industry’s strategic direction.

The Government’s priorities for Ofwat are three-fold – securing long-term resilience, protecting customers and promoting markets to drive innovation and unlock efficiencies.

The SPS says that climate change, population growth and changes in consumer behaviour are putting increasing pressure on the water sector in England and that both the sector and the regulatory framework need to adapt.

On resilience, where Ofwat does not have assurance that companies are planning and investing appropriately as part of a strategy to achieve long-term resilience, the regulator will be expected to intervene to ensure that the needs of current and future customers will be met efficiently.

The SPS says that historically, there has been insufficient investment to secure long-term resilience in some regions and that Ofwat should further a reduction in the long-term risk to water supply resilience from drought and other factors, including through new supply solutions, demand management and increased water trading.

The Government expects the regulator to keep the impact of its regulatory framework on the progress of nationally significant water supply infrastructure projects under review and to have regard to National Infrastructure Commission recommendations that the government endorses.

Resilience against flooding and wider risks

The SPS goes on to say that risks to resilience run much wider than the long-term pressures from climate change, population growth and changes in consumer behaviour. The water sector also needs to be able to protect itself from and respond effectively to the range of hazards and threats that in the short-term could impact on service provision, such as flooding of water and wastewater infrastructure, burst water mains or other infrastructure failures, or physical and cyber-attacks.

Ofwat should challenge water companies to make sure that they assess the resilience of their system and infrastructure against the full range of potential hazards and threats and take proportionate steps to improve resilience where required.

Referring to work in the National Flood Resilience Review on the potential for ‘black swan’ rainfall events , the SPS said this had revealed that existing rainfall records could be exceeded by 20-30%.

The Government wants Ofwat to secure assurance that water companies assess the extent to which their major water treatment works and sewage treatment plants are appropriately resilient against extreme flood events.

Government expects water to cut leakage further

On leakage, the SPS says the Government expects companies to cut leakage, flagging up the fact that customers in England and Wales used 139 litres of water per person per day in 2015-16, in contrast with 121 litres of water per person per day that customers use in Germany.

“We expect Ofwat to promote ambitious action to reduce leakage and per capita consumption, where this represents best value for money over the long term, including exploring setting targets in future.”

Greater collaboration needed to meet future water supply needs

The Government is looking to Ofwat to promote greater collaboration to enable a variety of options for meeting future water supply needs to be taken forward. However, the SPS points out that many are complex, requiring coordination across water companies, regulators and even sectors.

In many cases, the SPS says, there are cultural and other barriers to water trading across company boundaries (including cascades involving multiple companies, regional cooperation and development of new interconnections or connected water grids), and to the development of shared water resources and effluent reuse schemes.

More transparency needed on long-term wastewater plans

The Government also expects Ofwat to challenge water companies to improve planning and investment to meet the wastewater needs of current and future customers.

According to the SPS, in contrast with the public water supply, the companies are not required to plan their long-term wastewater needs transparently, commenting:

“ Partly as a result, we do not have assurance that companies are planning and investing strategically in a way that will manage pressures from climate change, population growth, changes in consumer behaviour and ageing infrastructure, with risks of pollution, flooding or spikes in future bills.”

“In some areas, the wastewater network is already underachieving. In 2015, there were 1,734 pollution incidents caused by unexpected failures and 4,344 properties which suffered sewage flooding within the home.”

In the Government’s view the lack of transparent, integrated planning means that customers are less engaged in decision-making and that opportunities to work with partners who use or have an impact on wastewater systems (such as local authorities) can be missed.

The expectation is that Ofwat will continue to challenge and incentivise the companies to develop an innovative and strategic mix of solutions, which could include promoting, adopting or maintaining sustainable drainage systems or co-investing in flood risk management, working creatively with partners “upstream” as a means of effectively draining their area and delivering multiple benefits where possible.

Ofwat should encourage use of natural capital to strengthen ecosystem resilience

The Government also wants Ofwat to challenge companies to further the resilience of ecosystems that underpin water and wastewater systems, by encouraging the sustainable use of natural capital.

This includes considering options where water and wastewater systems could be used to provide wider benefits to the economy, society and the environment without having adverse impacts on costs or services, for example by using reservoirs to help alleviate flood risks where appropriate.

On the need to accelerate housebuilding,  the Government says Ofwat should keep under review what it can do to make sure that company planning and delivery keeps pace with housebuilding and supports development across the country.  The water companies are expected to contribute by “achieving timely connections of new developments to water and wastewater systems…so that this does not hold up getting homes built.”

Water companies must “significantly reduce bad debt”

Commenting on customer bills, the SPS says it is a priority for Ofwat to challenge the water sector to go further to identify and meet the needs of customers who are struggling to afford their charges. However, the Government is also expecting the companies to take steps to “significantly reduce bad debt”, saying  that Ofwat’s regulatory framework should incentivise this.

The cost of uncollected charges has risen from £1.9 billion in 2010 to £2.2 billion in 2014.

“Bad debt – unrecovered customer debt pushes up the level of all customer bills and causes distress to those customers that fall behind on their bill payments because of affordability problems, “ the SPS says.

SMEs vulnerable in new retail market

Commenting on the new retail business sector, the SPS says experience in the energy market has shown that small business customers can be vulnerable users of utilities. The Government expects Ofwat to promote an enhanced focus by water companies on the needs of small business customers that may struggle to access the best deals.

“As the market develops and Ofwat gains insight into how competition is working, it should explore whether to give small businesses further protections, for example to protect them from mis-selling, ensure more transparent prices and to make switching supplier easier.” the SPS says.

The Government expects Ofwat to explore the full range of ways it can bring competitive pressures to bear in the water market to further the long-term resilience of water and wastewater systems and services, as well as protecting vulnerable customers.

At the same, Ofwat will also be expected to sustain long-term investor confidence in the sector, in line with its duties, including protecting the interests of current and future consumers.

The regulator will have to set out how activity across its forward work programme and business plans will achieve the Government’s strategic priorities and objectives, together with explaining clearly what information it will use to measure its success and how major decisions will support this achievement.