A Conservative Vision for the Water Industry

Speech to the Waterwise Conference

Introduction: One year on

I'd like to start by thanking Waterwise for inviting me to speak at this conference.

Exactly a year ago today I gave a speech at the European Policy Forum in London, outlining my initial thoughts on the water industry, what I saw as the greatest challenges it was facing, and the potential solutions to those challenges.

While I believe that the big questions remain the same today, the policy landscape a year ago was remarkably different.

The reviews that were ongoing or had only just begun were still unpublished; climate change predictions were yet to be released; we were awaiting publication of the Flood and Water Management Bill; and the price review was ongoing.

The reports have now published, the Bill is shortly expected to get Royal Assent and the Price Review has, to the relief of many, finally concluded.

In that speech a year ago I set out the four main questions which I think we need to address to ensure the water industry delivers in the future:

1. Is the industry sensitive enough to consumer demands?

2. Are there real incentives for water conservation?

3. How do we improve environmental standards, without new burdens on consumers?

4. How do we ensure supply continues to meet demand?

I think these were necessary questions a year ago, and they have become more so in the intervening period. So now I'd like to take this opportunity to revisit these questions, discuss what has changed, and where further solutions might be found.

Is the industry sensitive enough to consumer demands?

First, I'd like to discuss the relationship between the industry and the consumer, asking if the industry is sensitive enough to consumer demands.

This is a complex relationship, with a number of players beyond simply the company and the customer. The regulator has an involvement, as does the Consumer Council for Water, but there is also a significant role for government in setting a framework and monitoring the relationship. But in the last year we've also seen a clear example of what happens when problems creep into the system and when the regulator, government and industry fail to meet consumer expectations. That was the problem with charging for surface water drainage which I think provides a lesson in a number of areas.

Water companies, many of whom had been operating sensible tariffs, felt compelled to make changes by the regulator. These changes were then implemented by some companies in a manner which exposed their customers to unacceptably high bill rises, and the Government seemed unwilling to step in. The lessons here were that companies must become more consumer focused, the regulator must be flexible and government should show leadership and drive change.

As water bills increase, affordability concerns rise and people expect a better standard of service from other utilities, so too will water companies come under pressure to become more customer focused. And if we are to introduce greater flexibility in terms of tariffs then customers' interests will have to be central in the minds of companies.

It is not just the current financial crisis that has led to concerns about affordability. Over the last few years, as I observed in my speech a year ago, bills have been steadily tracking up which is why, last year, I called for a price review settlement that recognised the concerns of customers. I warned that companies themselves would run into more problems if they continued to press for ever higher bills, and so I was pleased that the final determination from Ofwat keeps bills broadly flat over the next five years. Even with this settlement we need to be vigilant to ensure that water remains affordable and that low income households in particular are protected.

We also recognise the specific concern of customers in the South West about the size of their bills - by far the highest in the country. We must address these concerns. Clearly there is an issue when only 3 per cent of the country's population are bearing the burden of maintaining water quality for 30 per cent of the coastline.

A year ago I discussed the benefits of retail competition for business customers, which as experience in Scotland suggests could deliver considerable benefits in terms of customer service and exposing information about the value chain in the industry.

Competition at this end of the market can be done relatively simply, and I am therefore sympathetic to the final recommendations of the Cave Review to remove the threshold for business companies wishing to change provider as a first step towards greater competition in the industry.

A competitive retail market and greater corporate social responsibility by companies will lead to a better deal for customers, but the regulator also has a role to play.

When the surface water charging problems that I referred to became apparent it was clear that at least part of the problem was a lack of regulatory flexibility and pragmatism.

Economic levers must be used to protect customers - that is, after all, the focus of the price review - but we need to look beyond pure economics, and the regulator needs to explore other ways it can protect customers' interests - for example, many social tariffs will include elements of cross-subsidy. As long as these tariffs are constructed sensibly then they could be of great benefit to customers. Ofwat needs to be aware of this and, working with companies and the Consumer Council for Water, need to incentivise the right, socially responsible, behaviour.

Of course, the regulator cannot be expected to set social policy; nor should companies be expected to deliver it unaided. Government's role is to set the framework that will enable the industry to change and to innovate while protecting the consumer interest.

So, I believe that the approach that we set out to the problems of changes in charging for surface water drainage encapsulated these three areas of necessary change: at the company, regulatory and governmental level. The Government needed to lead; Ofwat needed the flexibility to be more pragmatic and needed to show a willingness to be flexible; and companies needed to implement the changes in a socially responsible way.

Are there real incentives for water conservation?

The second question I asked a year ago is perhaps the most relevant for this conference: are there real incentives for water conservation?

We are all now well aware of the challenges facing the UK in terms of pressure on our water supply. Climate change altering our weather patterns will mean unpredictable rainfall and longer, drier summers. When population growth which will see an extra half-a-million people each year for the next 20 years or so is added, water stress is only going to increase. As a result we need to make sure that we are making the most efficient use of what is going to become an increasingly scarce commodity.

The solution most often reached for to reduce water consumption is metering, but focusing on consumer demand-side measures alone is not the right approach. The increase in metering which we have already seen, largely on a voluntary basis, has also presented problems in itself. As the Walker review has highlighted, with metering expected to reach up to 80 per cent in some areas over the next few years, we are already facing some considerable challenges to ensure that those who choose not to move to a meter are protected from ever rising bills.

Where customers do make a positive choice to change their water use we need to make sure that they are given all the support they need to do so. Currently it is very difficult to assess the water use of products from dishwashers to showers and washing machines to taps. There are various voluntary labelling schemes in place, but we need to make sure that there is far more consistency and a joined up, easy to understand rating system that crosses all products that use water.

I know that this is of great interest to Waterwise, as well as others, and a future Conservative government would work with you, and the industry, to create a voluntary scheme which is robust.

Despite the role for customers in reducing their consumption it is clear that the greatest gains in terms of conserving water lie in incentivising water companies themselves to change their behaviour. The work recently begun by Ofwat into delivering sustainable water will be important in this area and it is essential that water conservation becomes a central part of the regulatory regime. It is also key that we explore the options presented by the Cave review to see how market forces might improve our use of resources.

As competition and trading is introduced - incrementally and with care to ensure that investors and consumers are protected alike - water will gain a value which better reflects its importance and scarcity. Without a true value being understood real efficiency will never be achieved and companies will only ever aim to meet the minimum standards set by the regulator. But with a clear economic incentive on the industry, innovation and efficiency will increase. For instance, we could expect water companies to make a very different assessment of the importance of ensuring that water is not lost through leaks.

How do we improve environmental standards without impacting on customers?

The third question I posed was: how do we improve environmental standards without impacting on customers?

There are continuing challenges in maintaining and improving our environment, and much of the focus currently is on the condition of our rivers and streams and ensuring that we have the right policies in place to help them cope with climate change.

These important improvements, mostly driven by the Water Framework Directive, come with a high price tag and we need to clear that these costs are proportionate and that the burdens are falling on the right people.

We need to be more imaginative in our response to the environmental challenge, and focus not on constraint alone, but on liberation of new approaches. Yesterday's environmental solutions were largely about stopping damaging things from happening through regulation and controls, but tomorrow's approach must be about starting the right changes in behaviour with a greater focus on incentives and innovation.

This becomes even more relevant when the traditional methods we have relied on to improve water quality end up increasing carbon emissions, thereby damaging the environment.

I talked a year ago about the importance of encouraging farmers to take steps to avoid diffuse pollution which causes so much damage to our rivers. Rather than simply instructing land users to stop an activity, or penalising them for doing it, we should be encouraging better behaviour which in the long run will save customers money. I am pleased that Ofwat have allowed more projects of this nature through PR09. The work being done by some companies, such as Yorkshire and Anglian, is yielding interesting results and I think it should be encouraged.

Similarly, abstraction trading could represent a way of ending the most damaging abstraction and ensuring that the environment is protected. With potential reductions in river flows in the South of up to 80 per cent at certain times of the year our chalk streams risk serious over-abstraction. I would like to commend WWF's ‘Rivers on the Edge' campaign which has drawn attention to the lasting ecological damage which this might cause. But WWF have also been working positively on market-based solutions to prevent the problem in the future.

How do we ensure supply continues to meet demand?

The final question I asked was how we ensure that supply continues to meet demand.

It's hard, when we've just had a wet year, to remind ourselves that not so many summers ago we faced a drought. We cannot become complacent about supply problems. As I have said, there will be less water in the future and more people to use it, so we need to make sure that we are putting into place measures now which will ensure that supplies are secured in the long-term.

Demand measures and abstraction trading will go some way to ensuring that more water is available in the right places, but we also need to do far more to encourage co-operation between companies. We know that even the water-stressed South East has actually enough water to meet the demands of the region, but that the water is not in the hands of the right companies. So last summer I outlined the idea of creating a virtual water grid, where bulk trading of treated water would be incentivised between companies as a way of ensuring water is available in the right places and that capital intensive projects can be avoided wherever possible.

Rather than a real, physical grid which would be expensive, carbon intensive and environmentally damaging, this virtual grid relies on small interconnections between companies at strategic points to facilitate trading.

If, rather than being encouraged to build up their asset base, companies were actually encouraged to source water at the cheapest cost a natural market would develop between them. If we carefully craft a mechanism that incentivises this behaviour then we could contribute to changing the way water resources are managed to the benefit of customers and the environment.

Conclusion

There have been a number of disparate reports and initiatives affecting the water industry over the past year, and frankly the Government has failed to draw them together. Unnecessary uncertainty has been created, and I appreciate that this is inevitably compounded in an election year with an uncertainty about the outcome. But certainty is important for business, and particularly in the water sector which relies on securing access to capital.

Water privatisation has largely been a success story over the past two decades, enabling significant investment in the water industry without the cost falling on the taxpayer - although, as I have said, concerns about affordability are real.

The next government needs to ensure that this industry delivers successfully in future. This will require a holistic approach which incorporates all the elements I have discussed and brings them together to meet the challenges of protecting customers, companies and the environment alike.

So, we're committed, if we win the General Election, to introducing a White Paper early in our first year of government which would provide that holistic approach and give clarity and certainty to the industry going forward.

Such a White Paper would be a clear statement of our intention, but I hope that we can continue to work with all stakeholders, both in its development and its implementation, to make sure that we have the most considered, robust and ambitious vision for the future of the water industry possible.

Thank you.

Document type

Speeches

Published

23 March 2010

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