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Written evidence submitted by Anglian Water Services Ltd.
Anglian Water serves the largest, flattest and driest water company region in England and Wales with one of the fastest rates of new housing growth. We are the water and water recycling provider for over 6 million customers in the east of England, covering the area between the Humber and Thames estuaries including around a fifth of the English coastline. Our region is particularly vulnerable to the impacts of climate change, most notably from drought and flooding, and is critical to UK agriculture and the food supply (containing half of England’s Grade One agricultural land). Our Business Plan proposes investment to support 200,000 new homes to be built in our region by 2025, and in addition to this, the prospect of a million or more homes by 2050 as the plans for the Oxford-Cambridge Arc come to fruition.
Since privatisation in 1989, the system of incentive-based economic regulation has delivered a step change in the performance of the water sector in England and Wales. After decades of underinvestment and neglect, the current regulatory framework has brought forward over £150 billion in private sector investment to improve services to customers, enhance environmental outcomes, and improve resilience to the risks of drought and flood, all at no cost to the taxpayer. Productivity gains by the water industry have far outstripped other sectors, leakage has reduced by over a third, and there have been substantial improvements to drinking water quality, the reliability of water supplies, and the ecological health of the water environment.
Whilst water bills had to rise in the 1990s to pay for the substantial additional investment that was necessary, bills have fallen in real terms since 2000 and are set to fall further by 2025. For Anglian Water specifically, we have the lowest leakage in the country, are the top-ranked company for customer service, lead the sector on carbon-reduction, and were recognised as Responsible Business of the Year by Business in the Community in 2017. In 2019 we were awarded Utility of the Year and named by Glassdoor as the UK’s Best Place to Work. Our bills will fall slightly during AMP7, despite planning a 30% increase in investment to address the challenges of resilience, growth and environmental protection. This follows a 10% bill reduction in AMP6 that was the biggest in the sector, and twice the industry average.
Despite these past successes, there is no room for complacency. The government, regulators and the regulated companies must continue to work together to ensure private ownership of essential infrastructure delivers outcomes for customers. We believe further changes are needed to build on the success of incentive-based economic regulation to date and replicate best practice to:
- Ensure that regulators consider consumer outcomes in the broadest context. This would provide the best value for both current and future customers. For the water sector, this means enabling efficient and timely investment that allows resilience to be built into infrastructure plans, including price reviews and Water Resource Management Plans, rather than relying on costly reactive measures during a drought scenario experienced in other parts of the world, such as the Millennium Drought. The NIC’s Preparing for a Drier Future report outlined the significant cost benefits of taking action now, so as to deliver long term value to the consumer (fig.2, p.9 – see below):
- Create a more stable long-term regulatory framework for enhancement expenditure over multiple price control periods. This could serve to insulate customers, regulators and companies from short-term political pressures that can hamper the delivery of the long-term, sustained investment needed to tackle climate change and growth pressures. Each periodic review would rightly focus on the efficiency of base expenditure (‘botex’), but provide a lighter touch update on enhancement expenditure[1] (both ‘capex’ and ‘opex’ relating to enhancement expenditure), essentially reviewing progress on the already agreed long-term price path and testing for efficient delivery. Past periodic reviews in the water sector have led to stop-start investment, with companies being asked to switch focus from one period to the next. This requires considerable effort being expended by both regulators and companies and is a drag on the efficiency of delivery against long-term investment needs.
Additionally, moving to a long term framework of this type would significantly simplify the process, and reduce the time and cost burden for water companies and regulators (and, in turn, costs for customers). Presently, two and a half years of every five year Asset Management Plan (AMP) is spent planning for the next five period. A more stable trajectory would reduce this commitment, allow for management focus to be less on the regulatory process and more on delivering for customers and the environment, and allow for the savings realised to be passed on to customers.
- Recognise that economic regulation must be flexible and adaptable to the differing challenges within their sector. A one size fits all approach to regulation is unsuited to the water sector where there are significant differences in the pressures facing each region. For example, growth and water scarcity challenges are not uniform across the country. As such, regulators need appropriate freedom to enable different challenges to be prioritised in the different regions they regulate. In the water sector, PR19 should be about ensuring efficient delivery of long term resilience, rather than uniform cuts in bills.
- Recognise the importance and value of robust customer and stakeholder consultation in sector planning. Business plans must be co-created and supported by customers, and regulatory frameworks should take account of this. They must not be the decided solely by an econometrician’s “lowest cost” calculation. For example, if customers willingly show a preference for investing now to underpin long-term resilience, there should be a regulatory duty to reflect these wishes in their determination. The approach developed by the Water Industry Commission for Scotland, where Scottish Water has been encouraged to develop a negotiated settlement model with customers is worthy of further consideration: even if stopping short of negotiated settlements, a stronger recognition of the customer preference within regulatory decision-making would be desirable.
- Make the regulators themselves more accountable for the decisions they take. Regulators should report to Parliament at the end of each periodic review to explain how they have acted in accordance with the government’s stated policy aims. This would entail Ofwat reporting to Parliament early in 2020 on how PR19 will deliver against the objectives within Defra’s Strategic Policy Statement of 2017 (and other relevant reports such as the National Infrastructure Commission’s Preparing for a Drier Future). Whilst Defra’s SPS calls for increasing long-term investment to tackle the pressures of climate change and growth, we are concerned that a continuing focus on ‘lowest cost’ rather than long-term ‘best value’ in Ofwat’s initial assessment of business plans. The role of regulators should be to determine the ‘right’ level of long-term investment to meet the needs of customers today and in the future, and to deliver the government’s stated policy aims, not to reduce expenditure to the lowest acceptable level. This should be tested through effective and timely parliamentary scrutiny.
- Focus on outcomes delivered for the consumers, rather than overly prescriptive metrics, when communicating regulatory performance. Of course, there is a need to ensure adequate metrics are in place to ensure regulatory performance and compliance. Nevertheless, over-prescription in this area can create targets that stifle performance. For example, water companies should not be focussing on the number of customers in vulnerable circumstances they have helped. Focus should instead be the outcomes delivered to improve the lives of said customers.
- Clarify the respective roles of the economic and quality regulators to avoid contradiction and duplication of effort. Water companies have to meet the needs of three separate regulators, and can sometimes be caught in the middle when regulators’ priorities differ on the trade-offs between the quality of regulatory outcomes and costs of achieving them. We propose that once outcomes and investment needs have been agreed with the quality regulators (in our case, for example, through our Water Resources Management Plan), the economic regulator should focus solely on the efficiency of delivering that investment and achieving the agreed outcomes, rather than question whether the investment is necessary.
- Maintain the Competition and Markets Authority (CMA) as the independent route for regulatory appeals. A recent suggestion by Lord Tyrie[2] that the CMA should transfer responsibility for regulatory appeals to the courts would, we believe, be wholly inappropriate given the complex economic judgements that are at the heart of utility price reviews. Given their specific expertise, impartiality, and track record of rigorous analysis, it is critically important to maintain the CMA as the trusted, independent route for appeals. We believe this helps to ensure that regulators strive to do their best when conducting price reviews, and is a key part of the stability of the UK system of economic regulation that helps to attract global capital to invest here in the UK rather than elsewhere. Retaining this stability, particularly at a time when wider issues may be making the UK less appealing as a destination for investment, is in the best interests of consumers, investors and the long-term sustainability of the sector.
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