Leakage matters

Leakage is probably the indicator of water companies’ performance that gets the highest profile with customers. Quite rightly, customers see excessive leakage as a waste of a precious resource that is scarce in many areas of the country. This means that companies’ performance on leakage has far-reaching implications for customers’ trust and confidence in the water sector beyond the simple cost of the water lost. The interest shown in the series of recent water bursts in London demonstrates that leakage is a topic which the sector as a whole ignores at its peril.

While leakage has particular resonance with customers, at Ofwat we know that to deal with it effectively, we cannot view it in isolation. Leakage is part of a much wider context, particularly with regards to water efficiency, resilience, customer legitimacy and the environment.

It is worth reminding ourselves of the scale of the challenges facing the water sector over the next few decades: Population growth, combined with climate change, appear likely to result in pressures on both clean and wastewater systems. At the same time, the focus on resilience is demonstrating a shift in attitudes to risk tolerance.

What we are now starting to see is a clear consensus that managing down our demands and creating some headroom in the system represents a key adaptation action. This is why a renewed focus on leakage is more important than ever. Leakage reduction is part of ‘good housekeeping’ which needs to be delivered by the sector before we start to look at less sustainable infrastructure options.

Leakage mattersGood progress has already been made to manage leakage down over the last two decades, but we know that customers expect further improvement in companies’ leakage performance. As the economic regulator, it is our role to make sure that what we do informs, enables and incentivises companies to do what their customers want, at a price they are willing to pay. We use a range of tools to do this. For example, based on experiences in Scotland, the new retail market for business customers in England, opening in April, should help drive improvements in leakage management as retailers compete by offering additional value-added services in water efficiency. And the Discover Water portal (www.discoverwater.co.uk) in which we partner with the sector, shines a new light on companies’ performance on a whole variety of areas, including leakage, so that customers and other stakeholders can better hold companies to account directly.

Companies are currently delivering on the performance commitments they made to customers at our 2014 price review (PR14). At PR14 and, for the first time, companies “put their money where their mouth is” with automatic rewards and penalties for their leakage performance, engaged extensively with their customers on their leakage commitments and were subject to challenge on the quality of their customer engagement and leakage proposals from their customer challenge groups.

Leakage matters
Figure 1: Commitment to reduce leakage over 2015-20

Companies’ commitments to reduce leakage ranged from no reduction to a 14 per cent reduction from 2015-16 to 2019-2020 (Figure 1). This variation reflected the company’s existing leakage and the scale (or not) of pressure on water resources in the area they serve.

 

 

Leakage matters
Figure 2: Actual reduction in leakage

All companies, bar one, outperformed their leakage performance commitments for 2015-16, some by a considerable amount (Figure 2). This does raise questions about the level at which companies set their performance commitments and whether they are stretching enough to drive and deliver substantial progress through innovation and efficiency in leakage management.

So, looking ahead to the next set of performance commitments companies make, in November 2016 we published our consultation on the outcomes framework for our next price review in 2019 (PR19). This takes a definite step further in incentivising companies to deliver more for customers and the environment. We are clear that we expect companies to do more on leakage reduction in the future. We expect them to do more in a way that is really efficient, takes a long-term view, innovates and is affordable for customers. In order to achieve this we have proposed that companies will need to do nine things:

Ofwat proposals for PR19

1.       Leakage should be reported on a consistent basis in Ml/d based on financial years.

2.       The consistency of data underlying leakage should be improved.

3.       Companies will report the sustainable economic level of leakage (SELL) but      importantly, this should include an assessment on future innovation rather than just currently available practice.

4.       Companies should take into account their long-term expectations of the future value of water, the scope for water trading and the resilience of their supplies when considering their leakage commitment levels.

5.       If a company is not committing to a downward trend in leakage, then it will need to provide robust evidence for why this is the case.

6.       Companies should explicitly state their performance commitments are consistent with their water resources management plans (WRMP) or explain any differences.

7.       Companies should consider comparative information on leakage/property/day and leakage/km of main/day and explain why their leakage commitment level is appropriate in this context.

8.       Ofwat will expect companies to provide a long-term projection for leakage levels – consistent with our policy on long-term performance commitments. The projection would need to be the same as in the WRMP or the company would need to explain any differences.

9.       Companies will need to justify why they have adopted a whole-company commitment level or regional commitment levels for leakage.

 

We are looking forward to the responses to this consultation and hope they will reflect the full range of stakeholder views and recognise the need to deliver more for customers and the environment.

We want individual companies, and the sector as a whole, to have an effective approach that improves resilience in the long term for the benefit of customers and the environment. We know delivering leakage outcomes on the ground is hard work and that the lower you go, the harder it gets. But customers want and expect their companies to go that extra mile – leakage reduction really does matter to customers, and if it matters to customers, it matters to us.

www.ofwat.gov.uk

Note (Feb 2017): Trevor Bishop is on assignment from the Environment Agency.