Philip-Fletcher-CBE,-Chairman

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					Protecting consumers, promoting value and safeguarding the future Centre City Tower 7 Hill Street Birmingham B5 4UA

Dawn Instone Department of Environment, Food and Rural Affairs Water Supply and Regulation Division Area 2C Ergon House Horseferry Road London SW1P 2AL

25 July 2008

Dear Dawn NORTHUMBRIAN WATER LIMITED DRAFT WATER RESOURCES MANAGEMENT PLAN FEEDBACK Northumbrian Water published its draft Water Resources Management Plan (DWRMP) on 2 May. This letter summarises our preliminary views, while the attached annex provides more information. We will explore these issues in more detail over the coming months, both with the company and with other stakeholders, including the Environment Agency. We will look closely at the links between Northumbrian Water's DWRMP and its draft Business Plan for the period 2010-11 to 2014-15, which it will submit to Ofwat in August 2008. We have summarised our preliminary views below.  Northumbrian Water's plan is shorter than for most companies, with little expenditure planned to maintain a secure balance between supply and demand. This is not overly surprising, given the comfortable resource position in the Kielder zone. However, we agree with the Environment Agency that the company does need to consider more carefully the security of supplies in local areas within the Berwick and Fowberry zone. We understand from Atkins, the company's Reporter, that Northumbrian Water is carrying out feasibility studies on required infrastructure improvements to improve connectivity between Berwick and Fowberry. We would expect the company to provide more information on this and how it will improve its resilience of supply in the Final WRMP. While the company does not have a supply demand deficit, it should consider the impact of climate change in more detail in its plan. The company provides …/…
Paul Hope, Head of Water Resource Economics Direct line: 0121 625 3612 paul.hope@ofwat.gsi.gov.uk Website: www.ofwat.gov.uk

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little evidence to support its conclusion that climate change has little or no impact on the supply of and demand for water. We expect the company to investigate the impact of climate change in more detail in its Final Water Resources Plan.  We expect the company to refer to the final East of England Plan1 and the final Regional Spatial Strategy for the North East2 (where available) for its population/property assumptions in the Final Water Resources Plan. The company should factor into its final plan the base service water efficiency targets that we will set in the Autumn of 2008. We are concerned that, despite government initiatives to promote water efficiency, Northumbrian Water expects per capita consumption to remain constant. We would expect the company to take account of water efficiency initiatives in its final plan.

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I am copying this letter to Roger Sawdon at Atkins for his information. Yours sincerely

Paul Hope

Enc

Paul Hope, Head of Water Resource Economics Direct line: 0121 625 3612 paul.hope@ofwat.gsi.gov.uk Website: www.ofwat.gov.uk

Annex 1 Detailed findings of Ofwat's review of Northumbrian's Draft Water Resources Management Plan 1. 1.1 Supply We agree with the Environment Agency that the company does need to consider more carefully the security of supplies in local areas within the Berwick and Fowberry zone. We understand from Atkins, the company's Reporter, that Northumbrian Water is carrying out feasibility studies on required infrastructure improvements to improve connectivity between Berwick and Fowberry. We would expect the company to provide more information on this and how it will improve its resilience of supply in the Final WRMP The company has reassessed its Deployable Output in line with the EA WRMP Guidelines. It is clear that the change in Deployable Output over the planning period is due to better application of the methodology, better understanding of operational issues and constraints. We agree with Atkins that the company has a greater understanding and confidence in the current figures compared with WRP04. Northumbrian Water has not included an allowance for the potential impact of flooding for each resource zone in its outage assessment. We expect the company to consider this in its final plan. Demand Atkins considers that the company's general approach to demand forecasts is robust. The company's population and household forecasts refer to the draft East of England Plan1 and the draft Regional Spatial Strategy for the North East2. We expect the company to refer to the final East of England Plan1 and the final Regional Spatial Strategy for the North East2, ie the latest information available, for the Final Water Resources Plan. Atkins has highlighted a key issue relating to the accuracy of ONS data used as a basis for the 'Experian' forecasts for base year population forecasts. Northumbrian Water opted to continue using the 2004 Experian derived figures rather than the 2008 Experian forecast to inform the Draft WRMP. We expect the company to do more work in this area to resolve the issue on population data uncertainty in time for the Final WRMP. As Northumbrian Water recognises, we would expect the company to develop the demand forecast for non-households further to address the issue relating to the 'SIC 2003 category'. For the final WRMP, we expect the company to disaggregate non-household demand forecasts at the resource zone level to comply with EA guidelines. Northumbrian Water does not need to pursue a more active approach to metering in order to address an imbalance between supply and demand.

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1.3

2. 2.1

2.2

2.3

2.4

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However, the company acknowledges that metering "is still seen as important to minimise consumption for the carbon emissions that are saved." We think that the company should quantify the costs and benefits of additional metering in order to determine an appropriate metering strategy. 2.5 Northumbrian Water has assumed that per capita consumption remains stable at around 150l/p/d. We would expect to see a more detailed explanation of how the company has taken into account water efficiency targets, which we will publish this autumn, and government initiatives such as the Code for Sustainable Homes. The company should show the impact these initiatives will have on per capita consumption. We understand that the company has not incorporated the possible impacts of the proposed water efficiency in new homes because the Government has not finalised the requirements. We expect the company to take account of the latest information on this for its final plan. Climate Change Atkins states that Northumbrian Water has considered the impact of Climate Change on baseline supply and baseline demand at resource zone level for the Kielder Zone. But the company has not commented on Climate Change with respect to the Berwick and Fowberry zone. We would expect the company to address this in its final WRP. Atkins notes that Northumbrian Water has concluded that climate change has little or no effect throughout the planning period of this draft WRMP, and has not carried out further investigations or analysis. The company also states that climate change does not impact on the supply demand surplus over the planning horizon. While the company does not have a supply demand deficit, it should consider carefully the impact of climate change in its plan at the resource zone level. The company provided little evidence to support its conclusion that climate change has little or no impact on the supply of and demand for water. We would expect the company to investigate the impact of climate change in more detail for the Final Water Resources Plan. As the company has recognised, we expect it to include in the final WRMP the effects of climate change, using UKCIP02 data, in an update of the 'I-Think' model which will amend reservoir curves where necessary. We are concerned that the company has not clearly justified its demand scenario choices. We would expect the company to provide more information on the demand scenario choices in its final WRP. We expect the company to consider the impact of climate change on nonhousehold demand in more detail for the final WRP.

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Target Headroom Atkins confirms that Northumbrian Water has applied the methodology contained in the 1998 UKWIR document 'A Practical Method for Converting Uncertainty into Headroom' to generate the target headroom figures for each of the resource zones. The updated 2002 methodology allows companies to use the less rigorous 1998 approach if 'Available Headroom at level of service source outputs during the critical period is > 25% of demand', as it is in Northumbrian Water's case. Options appraisal The company does not expect to experience a supply demand deficit throughout the planning period. As such, Northumbrian Water has not considered an option appraisal process. We broadly agree, but the company still needs to consider whether or not the benefits of additional demand management would outweigh the costs, taking into account all of the financial, social and environmental costs and benefits.

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Ofwat 25 July 2008

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