Introduction

1.  In July 2005 we appointed a Sub-Committee to examine water management in England and Wales. Our report considered the legislative and regulatory framework; demand for water; water supply; water efficiency; and the interaction between water and the environment. The inquiry lasted for almost a year and we took evidence from over 60 organisations and individuals. We also undertook several fact-finding visits, both within this country and to Australia.

2.  Our report was published on 6 June 2006.[1] The Government, Ofwat and Water UK (the industry association representing water companies) subsequently provided formal written responses which are reprinted at the end of this report. A debate on the report was held in the House of Lords on 13 October 2006.[2]

3.  Notwithstanding our reservations about the three responses (outlined below) we are pleased by two developments that have occurred since our report was published, which may go some way to meeting our concerns about leakage and metering. First, Ofwat is reviewing the concept of an "economic level of leakage" (ELL), with a view to introducing something closer to the "sustainable level of leakage" called for in our report (pp 42-43 and 50-51). Second, the Government are to launch a consultation on compulsory water metering in areas of serious water stress,[3] which we expect to corroborate our finding that it should be "easier for water companies in water stressed areas to obtain water scarcity status and therefore impose compulsory metering".[4]

Government Response

4.  The quality of the Government response is in many ways disappointing. As in some other recent responses, it consists largely of a recital of what the Government are already doing (almost exclusively telling us what we already know and have in many cases already acknowledged in the report) rather than a direct response to the recommendations. Overall, in spite of some positive sections, the response appears unnecessarily defensive. We highlight below several areas where the response is particularly inadequate, as well as some more positive developments.

5.  The Government remain worryingly complacent about the high levels of unpaid bills and need to look again at the issue. In making the dubious claim that the increase in non-payment is "in part because of the general growth in consumer debt" (p 11), they are ignoring a problem which was made significantly worse by their decision to ban all full and partial disconnection of domestic water supply. As Ofwat remarked in its response, "the statutory ban on disconnection of domestic customers and partial disconnection has had a marked effect on the level of bad debt" (p 47). In contrast, we saw in Australia that the threat of partial disconnection was a powerful incentive for those customers who could afford to pay but might otherwise refuse to do so. Set against this, the Government's objections to reintroducing partial disconnection are unconvincing, and their reliance on companies seeking expensive and slow remedies through the courts insufficient. If the Government continue to refuse to contemplate partial disconnection, the onus must surely be on them, not just the water companies, to take a more active role in reducing the level of non-payment.

6.  The Government's response is equally inadequate on the crucial question of affordability. It refers to efforts to increase take-up of the Vulnerable Groups Regulations, yet fails even to acknowledge our concern over the excessively narrow eligibility—indeed, the analysis leading up to the recommendation on this point appears to have been ignored altogether. Defra Minister of State Lord Rooker, responding to the debate, also failed to address this question. The Government need at the very least to broaden the eligibility criteria of the Vulnerable Groups Regulations. Piloting a handful of initiatives in the south west of England is not sufficient to tackle the serious affordability issues facing pensioners and others groups.

7.  Turning to water efficiency, it is surprising that the Government feel that the "technical and legal feasibility" of introducing a mandatory labelling scheme for water-using products has "yet to be established"—particularly given that a highly successful mandatory energy efficiency labelling scheme is already in operation (p 30). We repeat our view that the mooted voluntary labelling scheme will be ineffective—only a robust mandatory scheme such as the Water Efficiency Labelling and Standards (WELS) programme in Australia will be effective. Lord Rooker's argument during the debate that securing the necessary EC Directive might be "complicated" and "may not be straightforward" was particularly defeatist.[5] We urge the Government to argue forcefully for such a scheme at the European level.

8.  The report's findings in relation to the Sustainable Communities Plan, underpinned by detailed analysis from Professor Adrian McDonald, clearly caused consternation within Government and further afield. Whilst we do not intend to continue an in-depth debate about the accuracy of the Government's projections for increasing water demand in this context, we draw attention to some follow-up comments drafted by Professor McDonald (reproduced in Appendix 4). These raise further questions about the reliability of the Government's figures.

9.  Nevertheless, despite the many deficiencies of the Government response—including a failure to respond at all to certain recommendations, such as our call for a universal statutory standard for sub-potable water intended for re-use—there are also some encouraging comments. For example:

• We are pleased that the Water Saving Group "is looking at providing incentives to developers to install water efficient devices, by for example linking the charges that developers pay to a water company for connection to the water infrastructure to the buildings' level of water efficiency" (p 29).
• We note that the Department for Communities and Local Government has "been in discussion with the Treasury on fiscal incentives" to encourage take-up of the Code for Sustainable Homes, and that the discussion "is still currently ongoing" (p 31). This discussion may have played its part in the Chancellor of the Exchequer's pledge, in his Pre-Budget Report, that "for a time-limited period the vast majority of new zero-carbon homes will be exempted from stamp duty".[6] We welcome this pledge, and look forward to the publication of a clear and comprehensive definition of "zero-carbon homes". Any such definition must take account of the carbon impacts of the treatment, distribution and consumption of water.
• Finally, we welcome the Government's assurance that they are "urgently considering ways to remove barriers to the wider use and adoption of sustainable drainage systems" (p 36). We shall keep progress in all these matters under review.

Ofwat Response

10.  Ofwat's response is more considered than the Government's, and shows a greater open-mindedness to suggestions and criticisms. It is particularly pleasing that Ofwat is reviewing the economic level of leakage (ELL) concept to ensure that "it reflects a sustainable level of leakage" and that the financial, social and environmental aspects are all "fully addressed" (pp 50-51). Even though Ofwat fails to acknowledge our concern that the concept of "serviceability" with regard to assets is storing up problems for the future, it is also encouraging that the regulator is planning to consult on the "overall methodology for assessing capital maintenance requirements" in 2007 (p 46).

11.  However, we are concerned that Ofwat has perhaps not fully grasped some of the Committee's key recommendations. Our concerns are set out below.

TRANSPARENCY

12.  Ofwat has still not appreciated the importance of increasing the level of transparency and openness in water management in England and Wales, in order to engage the public and enhance their confidence in the system. For example, it responds to the Committee's concerns about accountability by describing how it works with the Government, the Welsh Assembly Government and the Environment Agency, but makes no mention of consumers or even of the Consumer Council for Water (p 43). It is essential that the regulator, like the companies, should engage more directly with consumers.

LONG-TERM PLANNING

13.  The response recognises that Ofwat needs "to do more to encourage long-term planning both by the industry and in the way that we regulate the industry", but rejects our proposal to set indicative prices over 24 years. However, it does float the idea of 25 year "business plans" (p 44). Such plans would be welcome if Ofwat genuinely understands the central importance of long-term planning and ensures that the plans include the entire water cycle—not just the resource side.

SUSTAINABILITY

14.  Ofwat still appears to have an overly restrictive interpretation of its duty under the Water Act 2003 to work towards sustainable development. The regulator appears to favour the management of "costs" rather than delivering solutions that are sustainable or even cost-beneficial. There is little mention of a whole-life cost-based approach in the response, with only some mention of cost-benefit and occasional attempts to highlight "financial, environmental and social costs". There are few mentions of "sustainable" approaches. Ofwat seems to be less interested in value than cost.

RESISTANCE TO INNOVATION

15.  Ofwat continues to display a lack of interest in innovation in the water industry, and is failing to understand the realities of funding science. The response to our recommendation on research and development—that companies might pursue poor value schemes simply in order to ensure that they spend their allocation of money—is particularly unconvincing (p 46). Not only is it unlikely that companies would waste their money in such a manner, it would also be within Ofwat's power to veto unsuitable schemes where appropriate. Similarly, the response to our recommendation on smart water bills is factually incorrect and displays a marked lack of ambition (pp 53-54). Smart water bills could be effective even if customers' meters are read only once or twice each year, and the argument about start-up costs does not take into account whole-life costs.

Water UK Response

16.  Water UK responded to our report in a very positive manner—which perhaps partly reflects the fact that our recommendations are largely aimed at the Government and the regulators rather than the water companies themselves. In particular, we are pleased that the industry shares our concerns about the issue of affordability and our enthusiasm about the potential benefits of greywater recycling, increased levels of metering (including smart metering) and the use of "smart" water bills.

17.  However, there are two unsatisfactory passages in Water UK's response. First, perhaps unsurprisingly, the response displays an unduly conservative approach to extending competition in the water industry and fails to accept any responsibility for the "disappointing" rate of progress in this area highlighted by Ofwat (p 63). Second, the response neglects properly to address the issue of an industry which is losing touch with its research and development (R&D) base (p 62). We draw attention in this regard to the remarks made by Lord Oxburgh during the debate on 13 October.[7]

Conclusion

18.  Overall, we are pleased both with the level of public attention which our report received, and with the spirit in which it was greeted by most stakeholders, in particular at an event organised by the Foundation for Science and Technology to coincide with the report's publication on 6 June.[8] Our aim was to conduct an inquiry which was both very broad and as deep as possible, and we trust that our recommendations will continue to have an impact over the coming years. Indeed, action is already being taken in some key areas.

19.  We reiterate our disappointment with the Government's response and encourage them to think again about our main recommendations as their water management policies evolve. Ofwat has shown a greater willingness to engage with the issues and we look forward to seeing how their interpretation of the sustainability duty and their understanding of the need for transparency develop.

20.  Our report addresses issues of enormous long-term importance to us all. It is essential therefore that parliamentary scrutiny of Government, regulators and the industry should be maintained. We look forward to playing our part in this ongoing scrutiny in the years to come.

2   HL Deb., cols. 480-524. Back

3   See http://www.defra.gov.uk/news/2006/061120b.htm. Back

4   Paragraph 6.54. Back

5   HL Deb., col.520. Back

6   HC Deb., 6 December 2006, col. 309. Back

7   HL Deb., cols. 505-507. Back

8   For a note of this meeting see http://www.foundation.org.uk/.  Back