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Letters to Regulatory Directors
RD 11/06 31 July 2006 Dear Regulatory Director Setting leakage targets – review of 'Future approaches to leakage target setting for water companies in England and Wales' (2002) In March 2002 we published, jointly with DEFRA and the Environment Agency, a report on our investigation into future approaches to leakage target setting for water companies in England and Wales (colloquially known as the 'tripartite leakage study'). The report included a recommendation that companies should use the economic level of leakage (ELL) as a basis for setting targets. It set out best practice for calculating an ELL. The ELL is the level at which it would cost more to make further reductions than to increase supply or reduce demand by other means, taking account of environmental and social costs as well as financial ones. The report also suggested a suite of key performance indicators (KPIs) for leakage management. Since then all water companies in England and Wales have undertaken an analysis of leakage economics that was robust enough to support their 2004 Periodic Review water resource planning and to produce a profile of annual company level leakage targets for 2005-10. Separately, the KPIs have also been tested and developed by the Water UK leakage group on an anonymised basis. Good regulatory practice requires that we keep our methodologies under review to ensure they remain fit for purpose. Earlier this year discussions with colleagues at the EA and DEFRA identified some areas where it might be worthwhile to review leakage management practice and target setting in the light of new information and better data. Since then the continuing drought in the south and east of England has highlighted customer concern at leakage levels at a time when consumers are subject to restrictions on their water use. We have already said that we consider that it is for companies to make extra efforts to conserve water in a drought, including through leakage control. This is both because of the enhanced value of water in a drought, and to show consumers a lead when all users are being asked to reduce consumption. Concerns are clearly demonstrated in the House of Lords Science and Technology Committee report on Water Management. The committee said that the economic level of leakage '… appears to pay insufficient attention to the environmental impact that the development of new resources might have' and called for us to work towards a 'sustainable level of leakage'. In its evidence to the committee the Environment Agency said that it thought that there 'should be more confidence about the prospective impact of technological innovation on leakage'. In their evidence, the Consumer Council for Water thought that there was 'a need to review the basis of leakage targets in water scarce areas'. Accordingly, we have agreed with colleagues from DEFRA, the Environment Agency, CCWater and the Water UK leakage group, that we should begin a joint review of the principles set out in 2002 for establishing appropriate leakage targets. Our discussions with tripartite partners and the industry have identified the following specific items for inclusion in the review:
A key objective of the review is to produce requirements for leakage target setting that is easily understood and supported by all. Next steps In order to help us shape the review of ELL, we would like you to reflect on the current methodology for leakage target setting that we published jointly with Defra and the Environment Agency in 2002. We would like to receive your preliminary views on the issues identified above for inclusion and any others that you think should be included in the review. We would also like your views on how we can all improve our presentation and the understanding of issues surrounding leakage control. We will, once we have gathered stakeholder views, produce a paper summarising the issues for examination and putting forward options to address them. This may include commissioning consultants. It is important to us that any advice or conclusions is available to stakeholders in time to begin planning for the next price review and the preparation of Statutory Water Resource plans. Please send your views to Ian Stephens (ian.stephens@ofwat.gsi.gov.uk) to arrive by 25 August 2006. If you would like to discuss any aspects please telephone Ian (0121 625 1371) or Mark Hann (0121 625 1437). This tight deadline is necessary in order to make progress in time to allow the recommendations of the review to be reflected in the updated water resource planning guidelines for PR09. Please rest assured that we are committed to undertaking this review in an open and inclusive manner and, as such, there will be further opportunities to provide your input throughout the review. I am also writing to the Consumer Council for Water, The Environment Agency, DEFRA and the Welsh Assembly Government to request their views. Yours sincerely Dr Melinda Acutt Director of Network Regulation  |
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