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PR09/20

 16 December 2008

TO ALL WATER INDUSTRY
STAKEHOLDERS



Water supply and demand policy

Over the past two years, we have been developing our overall policy on water supply and demand balance. In the lead up to final business plans and water resource plans, we set out in the
attached paper our position on key aspects of water supply and demand policy. The paper covers the following issues:

1. Water efficiency targets

We summarise our conclusions following the recent consultation (
appendix 1 provides our conclusions in full).

We have retained the headline base service water efficiency target of one litre per property per day, although we will halve the target for companies with average per capita consumption below 130 litres per property per day (l/p/d). The lower target will only affect Tendring Hundred Water in the immediate future. The targets will demonstrate that water companies are committed to helping their customers waste as little water as possible.

We will not make any additional allowance in price limits for expenditure to achieve the targets. Some companies already provide a level of service sufficient to meet the base level target we have set, although other companies will need to do more to achieve their targets.

2. Leakage

As companies help their customers to minimise waste, they must also show that they do not waste water in providing their services. That means achieving leakage targets that deliver the best value for customers and the environment.

Over the past two years we have comprehensively reviewed the way in which regulate leakage. We have identified a number of improvements and adopted a broader approach, which is reflected in the sustainable, economic level of leakage (SELL). We provide a final update on our review, and we have attached at appendix 2 the final version of the consultant's
report and guidance on incorporating environmental and social costs into the SELL.

We confirm that we do not intend to do further work on the frontier approach to target setting because it has not been possible to develop a sound empirical basis for this. Furthermore, we doubt whether it would provide the right incentives for companies to improve their efficiency across their whole business. As part of our Forward Programme, we are planning to review in 2010-11 the whole package of regulatory incentives. We will consider the incentives for companies to become more efficient in different aspects of their business, including leakage control activity, as part of that review.

The framework for setting leakage targets at PR09 is settled, but we identify a number of areas in which we think that companies can improve their analysis.

3. Metering

The metering section explains that companies should assess the case for selective or planned metering, taking into account all of the costs and benefits, including those that are difficult to quantify. It suggests some of the factors that companies should take into account when making such an assessment.

We will include selective or planned metering proposals in our baseline assumptions for PR09, as long as each company can show that the benefits are likely to outweigh the costs as part of a long-term strategy. We accept that the quantified costs might exceed the quantified benefits, but we will make allowance for selective metering as long as there is a reasonable prospect that unquantified net benefits can bridge that gap.

4. Climate change

Some companies are planning significant investment to deal with the expected impact of climate change on water supply and demand. Climate change is an important issue, and it is vital that companies plan carefully to mitigate and adapt to its impact. However, we think it is equally important that companies provide robust evidence of the need for expenditure before they commit to investment that will have a significant impact on customers' bills. The paper explains what this will mean in terms of how we will assess companies' business plans.

Yours sincerely


Paul Hope
Head of Water Resource Economics

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