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Ofwat
Centre City Tower
7 Hill Street
Birmingham B5 4UA

6 October 2009

Dear Sir/Madam

DWI Response to Ofwat’s Draft Determinations for Price Limits for 2010-15

Thank you for the opportunity to comment on the Draft Determinations. This response aims to make observations on generic matters, as we are in continuing dialogue with Ofwat on individual company details.

Context

In contributing to the PR09 process, DWI has sought to implement the guidance provided by Defra and the Welsh Assembly Government on drinking water quality matters, as well as the guidance that we issued to stakeholders during the process.  We have had regard to the views of consumers as established by the jointly sponsored national consumer research programme. We have also taken account of:

• the views of stakeholders involved in the quadripartite process and the Welsh Forum, where detailed discussions of the drinking water quality programmes have taken place in the context of the broader business planning process;
  
  
• the individual Strategic Direction Statements prepared by each water company to inform their business planning over short-, medium-, and long-term horizons; and
  
  
• The views of consumers as reflected by data returns from companies to DWI on customer contacts about drinking water quality.

Commentary on overall outcomes

We welcome the support of Ofwat in making, for the most part, financial provision for the statutory drinking water quality programme in Draft Determinations. However, we draw attention to on-going discussions about a number of matters below, and we look forward to a satisfactory resolution of these for Final Determinations.

Our main observations are:

• Due to the constraints of the Ofwat guidelines on quality programmes, many unacceptable residual risks to public health identified by water companies and supported by DWI as part of statutory drinking water risk assessment process have been excluded by companies from the drinking water quality programme. However, schemes for many of these risks were included in their business plans as maintenance items. Most are exceptional items not previously identified by companies, and DWI has in hand regulatory enforcement arrangements for delivery of these schemes to secure the safety of drinking water supplies. We ask that Ofwat pays due regard to all of these essential maintenance items in companies’ business plans;
  
  
• Regulation 27 risk assessments by companies have also identified significant shortfalls in companies’ management of risk to compliance with drinking water quality standards. These have been prioritised by companies to manage the impact of pace of delivery on affordability, in some cases extending solution delivery beyond the AMP5 period.  Again, DWI has in hand regulatory enforcement arrangements for delivery of these schemes, and we ask that Ofwat pays due regard to these maintenance items in companies’ business plans;
  
  
• We note that many companies have not included in their business plans for AMP5 programmes of work consistent with the levels of activity that they identified originally as being necessary for their medium and long-term maintenance needs as published in their Strategic Direction Statements. These 25 year plans were lauded by Ofwat and all industry stakeholders as a welcome and strategic approach to maintenance of assets in the water industry, and a departure from the short-term approach to asset maintenance previously followed. Whatever the reasons for this change, we are very disappointed that very little will be done in AMP5 to reduce consumer complaints of discolouration  with the result that many companies will face the prospect in AMP5 and beyond of increased failure of national drinking water standards to the detriment of consumers’ interests and expressed wishes. We ask Ofwat to pay due regard to this situation when it considers its views on the application of its Asset Maintenance Assessment [AMA] and Capital Expenditure Incentive Scheme [CIS] for each company.

Commentary on specific issues

Schemes without funding provision in Draft Determinations

Ofwat has advised DWI that financial provision has been made for all drinking water quality schemes supported by DWI with the exception of:

•  two schemes which have been referred for further submissions on costs; and
  
  
• one-sided adjustments made to the proposals made by a number of companies to address the public health risk of lead in drinking water supplies [see section below]. 

For a number of companies, it has been difficult to reconcile this position with information included in the individual company supplementary report (version for Regulators). DWI has written to Ofwat about individual scheme issues with a view to getting clarification on the uncertainties.

Lead

We recognise that Ofwat has made some provision for the activities identified and included in companies’ integrated package of measures to address risk to human health from exposure to lead from drinking water.  These measures include replacement of company-owned lead pipes in high risk areas, and some work to mitigate risk to vulnerable consumers in these same high risk areas (consumer education, investigations and monitoring, and work in tandem with other stake-holders i.e. local authorities). However, we note that Ofwat has excluded those elements of work relating to consumer-owned supply pipes and other activities in ‘non-high risk’ areas. Ofwat appears to have applied its policy to all lead proposals regardless of whether these particular elements were included in the package of measures proposed by water companies. We would welcome confirmation from Ofwat on the activities that have been included to address risks to public health for lead in the determinations for each individual company.
 
We are disappointed that provision was not made for consumer-owned lead pipe replacement where it is a documented public health issue, as this appears inconsistent with the flexibility accorded to companies when dealing with leakage issues.  DWI will continue to encourage companies to follow an integrated approach to addressing the risk relating to lead including opportunities to deal with consumer supply pipe replacement.  

We would welcome clarity on whether provision has been made for replacement of lead pipes on failure of the standard of 10µg/l which comes into force in 2013. Regulation 17(9) of the Water Supply (water Quality) Regulations 2000 (2001 in Wales) places a statutory requirement for water companies to modify or replace lead pipe when investigations confirm its presence. Additionally, the Company must advise the consumer of the situation and what he or she can do to minimise the risk to health from potential exposure to lead in the drinking water supply. This is a statutory requirement regardless of whether any other activities are likely or not to be carried out i.e. replacement of consumer-owned lead pipe replacement. Therefore, we expect Ofwat to ensure provision is made in Final Determination for replacement of company-owned lead pipes following detections of lead above 10µg/l. 

 Consumer acceptability

We note that Ofwat has transferred all consumer acceptability schemes to capital maintenance, with the exception of the trunk mains cleaning schemes proposed by 2 water companies, resulting in significant adjustments to the programmes proposed.  Schemes supported by us are based on confirmed evidence for the work to be carried out to reduce consumer complaints of discolouration and dirty water incidents. We consider these schemes are necessary for companies to meet their statutory obligations with respect to drinking water quality legislation and expect appropriate financial provision to be made for them.

We note the introduction by Ofwat of two new serviceability indicators for networks based on drinking water data provided by DWI. However, companies need to be funded to carry out the work (through the acceptability schemes) to enable them to meet the new serviceability indicators.    

DWI Process:

DWI has written to water companies setting out the regulatory action it intends to take to deliver all the drinking water quality schemes supported by us.  This regulatory action will occur regardless of Ofwat’s treatment of funding provision in the Draft Determinations. We are working to have the appropriate legal instruments in place by end of October 2009 for all PR09 schemes.  Our letters to companies have been copied to Ofwat, CCWater and Defra. Similar action is in hand for all regulation 27 risk assessment where action to mitigate unacceptable risk has been confirmed as necessary.

We would be happy to discuss any of the issues above as necessary.

Yours sincerely

Milo Purcell
Deputy Chief Inspector (Regulations)