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Water e-briefing: UK: The Water Bill - the key points to consider

    • Energy and infrastructure - Water

    16-07-2013

    Introduction

    The Draft Water Bill was published on 10 July 2012, followed almost 12 months to the day by the Water Bill, which had its first reading in the House of Commons on 27 June 2013.

    The Draft Bill consists of 34 clauses and 7 schedules, the Bill of 57 clauses and 10 schedules. The Department for Environment Food & Rural Affairs (Defra) describes the Bill as improved and strengthened, albeit with a simplified approach to market reform. It states that Government is pursuing an ambitious agenda for a sustainable, resilient and customer-focused water sector, as well as delivering substantial improvements to rivers. Defra also claims that it has taken on board points raised on the Draft Bill, to which it has made changes in order to focus on growth and resilience as well as improving the market reform proposals.

    Two key questions then - what is in the Bill, and (for those who studied the Draft Bill) what has changed.

    What does the Bill contain?

    The Bill is divided into 6 Parts; of these, Parts 2 to 6 deal respectively with water resources, environmental regulation, flood insurance, miscellaneous, and general and final.

    However, it is Part 1, entitled “Water Industry”, that contains the provisions which will create greatest impact on the water sector. This note therefore focuses principally on Part 1.

    Part 1 is itself divided, into 4 Chapters, entitled, “Water Supply Licences and Sewerage Licences”, “Water and Sewerage Undertakers”, “Regulation of the Water Industry”, and “Supplementary”.

    Chapter 1 - Water Supply Licences and Sewerage Licences

    The Bill creates 2 new types of water supply licence and 3 new types of sewerage licence.

    In England, a water supply licence may be a retail licence or a wholesale licence (for Wales, a restricted retail licence or a supplementary licence). The key point to note is that by comparison with existing legislation, the wholesale licence does not require the licensee to also provide retail services. In Wales, the restricted retail and supplementary licences are equivalent to the current retail and combined licences.

    As with the existing licensing regime, a water undertaker cannot also be a licensee, and household premises are not eligible to be supplied by a licensee. Before a water supply licence is granted, Ofwat must consult with DWI. The definition of an undertaker’s supply system is widened, to include reservoirs and treatment works as well as pipes, allowing a wholesale licensee to have access to upstream assets as well as the network.

    The Bill gives power to the Secretary of State to remove the threshold requirement, i.e. to reduce it to zero.

    A sewerage licence in England may be a retail, wholesale or disposal licence. A sewerage undertaker cannot hold a retail or wholesale sewerage licence. The EA must be consulted before grant of a licence. Household premises are not eligible to be supplied by a licensee. A wholesale licence, allowing the licensee to remove matter from an undertaker’s sewerage system for treatment and disposal, does not require the licensee to provide retail services. A disposal licence allows the licensee to remove matter from the sewerage system for treatment, disposal or re-use. The intention with this licence is to create a new market for alternative sources of water or sewage sludge.

    In order to create a single retail market across England, Wales and Scotland, the Secretary of State will be empowered to make regulations allowing an application to WICS for a licence to be treated also as an application to Ofwat. The regime in Scotland does not include wholesale services (which are provided by Scottish Water); the cross-border provisions therefore apply only to retail services. Equivalent changes will be made to Scottish legislation to effect a mirror provision.

    Provisions that were included in the Draft Bill but have disappeared from the Bill include the retail infrastructure and network infrastructure licences, in relation to both water supply and sewerage – Defra states that it has listened to concerns about asset stranding.

    Chapter 2 – Water and Sewerage Undertakers

    Existing provisions in the Water Industry Act 1991 dealing with bulk supplies (sections 40 and 40A) and main connections to sewerage systems (section 110A) are to be replaced, with new but similar provisions. Ofwat may produce procedural codes and charges rules for each service (a new power, not in the Draft Bill).

    The existing, much-maligned provisions on self-lay and adoption of water mains are to be replaced. Ofwat are given powers to produce procedural codes and charges rules here also. The much older (and less controversial) provisions governing adoption of sewers (section 104 agreements) are also to be changed, Ofwat again being empowered to issue codes and rules.

    In relation to any proposals by Ofwat to revise a code, the Secretary of State may make provision for an appeal to the Competition and Markets Authority. This is also a new power, not in the Draft Bill. He may also issue guidance to Ofwat on rules about charges.

    The Bill introduces new provisions for water undertakers to take water from other parties, in relation to which the Secretary of State will be given power to disapply the ability of Ofwat or the CMA to exercise competition enforcement powers.

    With regard to inset appointment applications, DWI will become a statutory consultee.

    The water sector special merger regime will be revised, by allowing the CMA to decide not to make a merger reference if it considers that the merger will not prejudice Ofwat’s ability to make comparisons between water companies, or that any such prejudice is outweighed by customer benefits, or if the CMA decides to accept undertakings from the merger parties in lieu of a merger reference. In addition, the CMA will be required to keep under review the existing merger reference threshold of £10 million, and advise the Secretary of State if the threshold should be changed.

    Current provisions governing water company charges schemes are to alter. Ofwat approval of a scheme will no longer be required, but a scheme must be prepared in accordance with rules to be issued by Ofwat. Ofwat is also to issue rules on charges for connections to water mains and sewers, provision of mains or sewers under requisitions, and diversion of pipes under section 185.

    Sewerage undertakers are to be allowed to build and operate drainage systems which reduce the volume or flow rate of surface water entering the public sewers network.

    Chapter 3 – Regulation of the Water Industry

    Ofwat is to be given a new primary statutory duty, to further the resilience objective. This objective is defined to mean securing the long-term resilience of water undertakers’ supply systems and sewerage undertakers’ sewerage systems against environmental pressures, population growth and changes in consumer behaviour. Ofwat must also ensure that undertakers take steps to secure long-term service provision, through measures such as long-term planning and investment.

    A further new duty is to be imposed on Ofwat, alongside its existing secondary duty to ensure that no undue preference or discrimination is shown in the fixing of charges; the new duty will require that Ofwat secures that no undue preference or discrimination is shown in the provision of services. This is a new clause, not in the Draft Bill.

    The strategic policy statement that Defra has previously issued for Ofwat is to be put onto a statutory footing, thereby increasing its relevance and importance. 

    Defra had stated in the response to the EFRA Committee’s pre-legislative scrutiny of the Draft Bill that it would limit the degree of Ofwat’s discretion. For example, the Secretary of State may issue guidance to Ofwat about the principles to be applied by Ofwat when making rules about charges.

    The limitation period when Ofwat is seeking to impose a financial penalty on a water or sewerage company will be extended to 5 years, rather than the current 12 months. This clause will apply only to contraventions which occur after the provision comes into force.

    The period between drought plan reviews is to increase from its current 3 years to 5 years.

    The existing provisions governing standards of performance by water and sewerage undertakers (under which the Customer Service Standards Regulations are made) are to be extended to apply also to licensees.

    Ofwat currently has a determination function in relation to various specified matters, to resolve disputes between companies and customers. The Secretary of State will be able to provide for this function to be exercised by another body. This will allow expert input to be provided, and increase flexibility on timescales for dispute resolution.

    The power of DWI to charge fees for exercising its functions will be added to the Water Industry Act (it currently sits in the Public Bodies Act 2011 and is time limited).

    Chapter 4 – Supplementary

    In order to implement the new regulatory provisions, Ofwat is to be given the right for a 2 year period to modify water company licences where it is necessary or expedient in Ofwat’s view to do so. Ofwat must consult the Secretary of State before doing so; the Secretary of State may give directions to Ofwat and may veto a proposed modification.

    Conclusions

    Will the Bill achieve Defra’s objectives of securing a sustainable, resilient and customer-focused water sector? Defra has stated that the Bill takes forward those areas where legislative change is needed, by reforming the water industry to improve resilience, drive growth, give businesses more choice and flexibility, whilst protecting the environment.

    Defra is also seeking to get the balance right between the roles of Government and regulator.

    These are ambitious claims. On the latter, a number of the Bill’s provisions are clearly geared to create a more sharply defined division of responsibilities between Government and Ofwat. On the former, there is an obvious mood around the sector that change is needed, that it can operate to the benefit of all stakeholders, and there is a high level of engagement to deliver it. Certain key pieces of information are not yet available, not least the pricing rules around network access and bulk supply provision. Without these, it is difficult to predict the degree of take-up to be expected when the market opens to full business retail competition.

    Moody’s has described the Bill as credit negative for water companies, so not everybody sees it as positive news for the industry.

    In terms of timescales, Defra expects the Bill to achieve Royal Assent by April 2014, and the retail market to open in 2017.

    The implementation of associated changes (such as the repeal of the costs principle) might not occur on Royal Assent, if the High Level Group is of the view that phasing of market reform provisions would be more disruptive than a single implementation date.

    Finally, in relation to separation of water companies’ retail functions, whether on a mandatory or voluntary basis, Defra is firmly of the view that this is undesirable. In its response to the EFRA Committee’s pre-legislative scrutiny of the Draft Bill, Defra states, “We remain concerned that allowing an exit route from the retail market for some water companies would leave it open to a competition authority to impose separation on the sector.” Defra points to existing arrangements entered into by some water companies to voluntarily outsource their retail functions as evidence that options are available to companies that choose to distance themselves from the retail market. Defra is clear however that the companies’ licences will remain vertically integrated.

    The Bill may of course change as it makes its way through Parliament (and Defra has further detail to add in relation to the flood insurance provisions in Part 4). Its progression over coming months will be of great interest to all water sector stakeholder groups, heralding the most significant changes to the water sector since 1989.

    For more information contact

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