Guess what?

Some basic information is lacking in the water sector, such as how much water people use, or how much is lost in leakage. Megan Darby examines some of the industry's known unknowns

Imagine Tesco finding it had 18 per cent less bread in the warehouse than it thought it had and having to contemplate rationing sales. Or Shell charging you for petrol based on the size of your car. Then imagine them taking decisions on whether to invest in a new warehouse or buy more petrol on the back of those estimates. It’s ridiculous. Yet relying on approximations to manage its core commodity is the norm for the water sector.

As water companies prepare their business plans for the 2014 price review, they have more freedom than ever to set their own agenda, in consultation with customers. The industry has a real opportunity to get a firm grip on how much of the blue stuff it has and where it goes.

While most business customers are subject to measured charges, fewer than four in ten households in England and Wales have a meter. Water companies make ever more sophisticated estimates of the consumption of the remaining 60 per cent, for the purposes of demand forecasting.

The latest research from WRc shows with pinpoint precision how much water a range of household devices – or “microcomponents” in the industry parlance – use. It finds that all toilets are not created equal, with a huge disparity between the highest and lowest water users (see infographic, overleaf). Demand forecasters must pick a value somewhere in the middle for companies to base their investment plans on.

These consumption estimates are in turn factored into leakage estimates. “Leakage is such a big unknown, because it’s based on assumptions,” says WRc business development manager Anna Bujnowicz.

There are two main ways to calculate leakage and both are approximate. On the continent, where most people are metered, they tend to take a top-down approach. This involves putting a figure on each element of water usage and subtracting it from the volume put into supply. In the UK, where the figures for demand are shaky, it is more common to assess leakage at night, when legitimate usage is presumed to be low. Flows into district metered areas are measured in the early hours, a small amount is deducted for consumption, and the rest is taken to be leakage. The picture can be distorted if an area houses a lot of shift workers showering at odd hours, say, or by a large Muslim population celebrating Ramadan.

There is a trade-off between the allowance made for household consumption and leakage. “Data can be looked at in so many different ways,” says Carmen Snowdon, who worked on WRc’s microcomponent analysis. “There are so many different pressures on companies: they need to show per capita consumption coming down, they need to show leakage coming down… at any one time, one is going to be more pressing than the other.”

The vaguest element of all is customer-side leakage, estimated at between 30 and 50 per cent of overall leakage. “It is a component that can never really be proven,” says Snowdon.

Ofwat sets leakage targets for water companies and can hit them in the wallet if they fail. The drivers to cut customer consumption are less compelling. The government’s stated aspiration is to bring personal consumption down to 130 litres a day – a goal even water minister Richard Benyon has admitted is “weak”.

“It is a very strange situation where you have very large margins of error for the estimates of leakage and consumption, and one has a target and the other does not,” says Jacob Tompkins, managing director of Waterwise. “There is a lot of uncertainty and you have greater regulatory and fiscal drivers for some numbers than others.”

Ofwat issues guidance to companies on how to estimate consumption and leakage, and validates their figures. Severn Trent was slapped with a £2 million fine in 2008 for misreporting leakage, following an extensive investigation by the Serious Fraud Office. That aside, there is no suggestion the industry does not comply, but is the guidance adequate?

It is difficult to say, according to Tompkins. “They [Ofwat] are very hot on the minutiae and miss the big picture.” There is a shortage of academic study of these issues in the UK, he adds. “We have a very, very complex analysis based on uncertain hydrological data. There is precision without accuracy.”

One way to sidestep the reliance on questionable data would be to target companies to bring down the amount of water they put into supply. That figure is easier to verify than leakage. If it is to tackle the data deficiency head on, however, the sector must embrace metering.

A 2011 Ofwat report on the economics of metering concluded that it would be most cost-effective for the industry to roll out meters by 2030. On current trends, the industry would get to 90 per cent coverage – the effective maximum – by 2040. However, when the economists allowed 50p-worth of environmental benefits for every cubic metre of avoided abstraction, as suggested by the 2009 Walker Review of charging for water, they found it made sense to complete the rollout by 2020.

The first hurdle to metering is bureaucratic. By law, water companies may only introduce compulsory metering if their region is classified as seriously water-stressed by the environment secretary. If so classified, they are obliged to consider such a move. Waterwise petitioned, unsuccessfully, for that restriction to be lifted as part of government’s Red Tape Challenge last year.

In a review of water stress assessments last year, the Environment Agency proposed putting four more water companies into the “serious” bracket, taking the total to more than half. However, nine regions were classified as only moderately stressed. And the Environment Agency’s alarming message will strain the credulity of the general public, as they stare out of the window at the rain. Must the UK be a parched husk before we can contemplate measuring the use of its most vital commodity?

If its region is judged suitably arid, a water company must next justify the impact on people’s bills. There are installation and administration costs to spread across everyone. Then there are winners and losers in the transition from billing by rateable value to measured use. Those with heavy water use in low-value properties will be hardest hit. Benyon has defended the government’s inertia on the grounds that compulsory metering would push some households into water poverty.

David Lloyd Owen, a prolific author and consultant on global water and sewerage markets, gives that argument short shrift. There is metering in the slums of Manila, in the Philippines, and Phnom Penh, Cambodia, he says: “I would be surprised if people in poor areas in the UK are poorer than poor people in those countries.”

Lloyd Owen thinks the costs of metering are exaggerated for political reasons. “The numbers being bandied around about the cost of metering don’t seem to bear any relation to the real costs in other countries,” he says. He would like to see the industry go one better and introduce smart meters, which supply real-time data and make it easier to get a grip on leakage as well as manage demand. At the moment, he says, “it’s dumb meters for dumb politicians and dumb regulators”.

There are signs of change. As competition starts to come into parts of the sector, accurate data becomes increasingly important. When the non-domestic market opened in Scotland, incumbent retailer Business Stream made it a top priority to get all customers on smart meters. The technology underpins all the other services the company offers. English water companies will need to clean up their data on business customers in preparation for the market expanding south in 2017.

Market forces may also drive a greater focus on the figures upstream. Tompkins says: “Now that we are starting to talk about upstream competition and look at the economics around abstraction, we need to look a lot more forensically at different elements that go into the demand-supply balance.”

However, Ofwat does not expect to implement the upstream reform measures of the draft Water Bill until 2020. Overhaul of the abstraction regime is due to take even longer, the present government having deferred legislation to the next Parliament.

On the domestic front, a handful of companies in water-stressed areas are starting to get serious on metering (see box). Notably, Southern Water has taken on an ambitious plan for full metering by 2015. Companies in wetter parts of the country might not feel such urgency, but they will be watching the results unfold with interest.

A mishmash of metering policies

Affinity Water Southeast

Folkestone & Dover Water, as it then was, applied for its area to be classified as water-scarce in 2005. This enabled it to roll out compulsory metering to households. Now, 92 per cent of its 69,000 domestic customers are metered and consumption is around 130 litres per person per day.

Anglian Water

Anglian Water has devised a strategy combining the efficiency of a universal rollout with customer choice. It is installing 183,000 meters street by street between 2010 and 2015, but does not immediately compel customers to switch to metered billing. When a property changes hands, the new resident gets a measured bill.

Southern Water

In the most ambitious UK universal metering programme to date, Southern Water is covering its entire region by 2015. Between leakage alarms and behaviour change, the company reckons the move will save more than 30 litres per person per day.

Some consumers have faced big bill rises, but with a concerted marketing operation and mitigation measures, Southern has managed to avoid a backlash. It offers a changeover tariff to those whose bills are expected to go up, phasing the rise over three years. Plus, it puts vulnerable customers in touch with advice on maximising benefits and conserving water. Save water; save energy; save money is the watchword.

South East Water

Southern is not the only firm with a full metering plan. South East Water aims to achieve the same by 2020. Its marketing is more modest: it does not claim the move will save people money but simply promotes it as a fairer way of charging people for water.

This article first appeared in Utility Week’s print edition of 1st March 2013.

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