MD 129 

TO ALL MANAGING DIRECTORS OF

WATER AND SEWERAGE COMPANIES AND

WATER ONLY COMPANIES

22 May 1997 
ANNUAL MANDATORY LEAKAGE TARGETS

I announced at the Water Summit on 19 May 1997 that I will set mandatory leakage targets for 1998-99. I will expect to see a substantial reduction in leakage overall. These targets will relate to total leakage and will be rolled forward each year.

The targets will build upon company progress in meeting the mandatory targets already in place for this year, which were published in Leakage of Water in England and Wales (May 1996). In this report I said that I expected to see considerable progress in leakage savings within the run up to a Periodic Review in 1999. In MD124, I said that at the Periodic Review, companies will be expected to demonstrate that they understand their economic level of leakage and are working towards it and that new leakage targets should be based upon an assessment of companies' progress on reaching economic levels.

Mandatory leakage targets will be set for total leakage, which includes leakage from both company and customer pipes. Targets for total leakage are necessary to reflect the ability of companies to influence leakage from customer supply pipes through policies on supply pipe leakage detection and repair. In Table 10 of the 1997 July Return, companies will provide forecasts for total leakage in 1998-99. I will base leakage targets for 1998-99 on these forecasts and the accompanying water balance information provided in the 1997 July Return. If I do not consider these forecasts to be sufficiently challenging or do not consider your water balance assumptions to be robust, I will adjust your proposals. I would expect, as a minimum, targets to be no less rigorous than those in your 1994 Strategic Business Plan for distribution losses plus allowance for supply pipe leakage, and in many cases I will expect these to be significantly more challenging. I will expect Reporters to comment on your 1997 July Return forecast for 1998-99 as a basis for your proposed targets.

I will send my proposals to companies for comment during September 1997 before announcing any targets. I will be working closely with the Environment Agency, the Department of the Environment and the Welsh Office in setting these targets and will discuss our proposals with them. Given the important regional dimensions, I will be expecting companies to explain their policies to their Customer Service Committee.

Leakage targets for 1998-99 will be mandatory. Performance against these targets will be closely monitored and will be published. Companies which fail to meet their targets will be asked for detailed explanations. Where I am not satisfied with the explanation, I will judge that the company has failed in its duty to maintain an efficient and economical system of water supply and will take enforcement action under Section 18 of the Water Industry Act. Companies failing to meet mandatory leakage targets will need to agree action to achieve lower leakage. I will seek the Reporter's opinion on company progress against these targets and will involve the Reporter when deciding on appropriate action to be taken by the company. In an extreme case, failure to comply with enforcement requirements would lead me to seek a special administration order.

A similar process will be followed in successive years. Leakage targets should be consistent with the work companies are doing and will need to continue to do in assessing an economic level of leakage.

In preparation for the next Periodic Review I will be asking companies to provide me with an assessment of their economic level of leakage in 2002-03, which will be the base year for the 2004 price review. These assessments will be considered alongside other information from the companies on the cost of new resources, including environmental issues. Annual figures for leakage will then be derived for the years up to 2002-03. They should form the basis for the targets in 2000-01, 2001-02 and 2002-03. These will be reviewed annually and progress against these will be published. Where leakage for any company is above its economic level, I will not make allowance in price limits for new resources until such time as this gap is removed. Where resources are tight there is an increasing incentive to reduce leakage.

I believe some companies have been too complacent about taking forward work on the economics of leakage and have been placing too much store on the report expected from Yorkshire Water at the end of the month. I am currently in discussion with Yorkshire Water about its publication. This report will offer one view of economic levels of leakage but will not be a template for the industry.

If you require any further clarification on issues in this paper please contact Fiona Pethick, Head of Comparative Efficiency (0121-625-1344).

 I C R BYATT