Our response to Ofwat’s consultation on promoting water efficiency in wholesale charges for business customers

Both charging structures identified can serve to structure costs to end users in a way which better reflect the costs of providing their services. However, there are also challenges and potential consequences associated with each approach.

In the case of Alternative Structure 1 (AS1), this can recognise the lower costs associated with non-household customers taking bulk supplies direct from undertakers’ mains without use of local distribution networks. Applying a discount through fixed charges rather than a discounted volumetric rate on higher usage levels helps avoid the risk of undermining messages about the importance of water efficiency.

A consideration for AS1 is the extent to which the cost of maintaining local distribution networks is reflected in fixed costs, and therefore how discounting standing charges would impact wider cost reflectivity and the risk of cross subsidy between different types of customers, across both non-households and households.

Alternative Structure 2 (AS2) might be deployed to better reflect the long run marginal costs imposed by high levels of water use in the context of current and future water resource pressures. At the same time, it has potential to incentivise the efficient use of water and provide customers with greater control of their bills.

This is important as the Environment Agency estimates that England’s public water supply could be short by 5 billion litres a day by 2055 without urgent action to futureproof resources. And CCW’s research has found that less than half of non-household customers in England and Wales (43%) are currently engaging in water-saving activities. We must therefore make end users aware of the pressures on our water supply and the need to use it wisely. We also want to see retailers and wholesalers working together to achieve this outcome.

We have welcomed companies trialling alternative tariff structures, including household rising block tariffs, and are monitoring the emerging findings which we believe should be used to help inform future choices on charging structures.

However, challenges do exist in terms of utilising rising block tariff structures in charging non-household consumers. Specifically, the wide variation in the water use needs of businesses and organisations, linked to both scale and nature of the operations, mean that such tariffs could be seen as a blunt instrument in terms of identifying and rewarding water efficiency. A highly water efficient steel manufacturer may still use large volumes of water, but an inefficient grocery store may use relatively little water.

An alternative approach, in the case of non-household customers, would be for certain larger users to be assessed in terms of the water efficiency of their operations and equipment, and for charging structures or credits to be used to reward good practice, such as rainwater harvesting, or water recycling by data centres.

This approach (point 9 above) also has the advantage of avoiding the potential conflict between charges that recognise lower costs imposed by larger users in certain circumstances and tariffs that encourage water efficiency, allowing the potential for both to operate in tandem. We would welcome Ofwat including this approach in its consideration of alternative charging structures. We would not want companies to be restricted to only AS1 or AS2 as charging methods, they should still be able to propose charging structures that reflect their region’s resource position and non-household customer profile.

The balance between long-run marginal costs, in terms of the demand on water resources and cost of developing new resources, and the fairness of applying lower charges in recognition of lower costs associated with supply, must be considered in the context of climate change and the wider picture on water resources.

As previously noted, some non-households necessarily use large volumes of water due to the nature and scale of their operations, however, as we highlighted (in point 10 above), there are better ways than bulk supply discounts to recognise lower costs associated with large users that are using water efficiently.

Effective engagement with non-household customers is vital in terms of understanding their circumstances and the impact of any changes. There is a need for water companies and retailers to work together to do this, as retailers have the direct relationship with end users. This engagement must inform the approach taken in overcoming the water resource challenges which companies need to address.

Where bulk supply discounts are withdrawn, this should be carefully managed, and appropriate mitigations put in place. Clear messaging and guidance to help customers reduce bills through increased water efficiency will be essential. And where they improve water efficiency or already operate to a high standard, there is potential to use charging structures or credits to recognise that, helping to partially or fully mitigate the loss of bulk supply savings.

We believe discounts should only be available to those able to demonstrate a high level of water efficiency in their operations. It is important that targets for business water consumption are not compromised by discounts that reduce the marginal cost of water for high-consuming business users.

We consider that is vital that steps are taken to align incentives for companies and retailers. In our evidence to the Independent Water Commission review we called for greater collaborative working between water companies and retailers to help users save water. We noted that under the current regulatory framework, there is no incentive to collaboratively achieve this aim. Currently water companies have the target and funds through ODIs to reduce water demand by non-households, yet they do not have the direct customer relationship. This sits with the retailer.

It is worth noting that, as things stand, water companies would be reliant on retailers passing through tariff structures aimed at incentivising water efficiency from end users. In theory retailers could simply average cost distribution across all their customers. We would not want to see this happen as it would undermine efforts to address water resource challenges. It would be useful for Ofwat to consider whether guidance is needed to address this.

We welcome the work that Ofwat, the business retail market Strategic Panel, MOSL and industry are undertaking to explore how more open data can help deliver greater water efficiency insights and innovation.

It is worth noting that, as things stand, water companies would be reliant on retailers passing through tariff structures aimed at incentivising water efficiency from end users. In theory retailers could simply average cost distribution across all their customers. We would not want to see this happen as it would undermine efforts to address water resource challenges. It would be useful for Ofwat to consider whether guidance is needed to address this.

We welcome the work that Ofwat, the business retail market Strategic Panel, MOSL and industry are undertaking to explore how more open data can help deliver greater water efficiency insights and innovation.

Question 5: What are your views on the options we have highlighted for amending our WCR? Are there others?

Question 6: What are your views on our observations on the different options for amending our WCR?

On balance we feel that, in terms of potential amendments to the Wholesale Charging Rules, Option 2 provides the most appropriate approach given this is likely to provide greater flexibility in driving changes in charging structures.

Considering the water resource challenges facing England and Wales, recognised in the recommendation from the Independent Water Commission review (pdf) that tariff structures should be changed to incentivise water efficiency, we agree that the ‘Do Nothing’ approach (Option 1) is not tenable.

We consider that Option 4b would be most appropriate to apply alongside Option 2. We feel it is important to create a new water efficiency requirement, rather than just enabling water efficiency via an amended version of Rule 16, as with Option 4a. It also has the advantage over Option 4C of avoiding the risk of being perceived as signalling that differential pricing based on different costs associated with different physical characteristics is not permitted. Companies need to be able to have a clear understanding of the expectations placed on them by the charging rules, which we would like to see Ofwat ensure are free from unnecessary ambiguity or complexity.