Memorandum from the Environment Agency
1. INTRODUCTION
1.1 The Environment Agency welcomes the
opportunity to give evidence to the Select Committee on the recently
completed Periodic Review of Water Prices by the Office of Water
Services (Ofwat). In doing so, this evidence outlines the respective
roles of the main participants, explains how the two relevant
programmes requiring investment by the Water Companies were developed
and outlines how the programmes of work will be implemented and
monitored.
1.2 The two relevant programmes of work
are the National Environment Programme (NEP), which addresses
known environment problems caused by Water Company activities
and Water Resources Plans, which are intended to secure the reliability
of public water supply for the next 25 years.
1.3 We believe the Review has resulted in
a large well prioritised programme of environmental improvements,
which reflects the advice given to Ministers by the Agency.
2. ROLES OF
THE MAIN
ORGANISATIONS
2.1 The Environment Agency has a wide range
of statutory duties under the Environment Act 1995 and related
legislation. The most relevant to the Price Review are:
— Prevent or minimise or remedy and
mitigate the effects of pollution of the environment.
— Secure the proper use of water resources.
— Promote conservation and water related
recreation.
2.2 In the Price Review the Agency's role
was to identify the environmental problems caused by Water Companies
and advise Ministers on the relative priority of solving the problems.
It has also led work to ensure that the security of public water
supply is adequately addressed in the Price Review.
2.3 The Government, in the form of the Secretary
of State for the Environment, Transport and the Regions and, the
Secretary of State for Wales, for the initial part of the review
and subsequently, the First Secretary to the National Assembly
for Wales, is responsible for setting the environment policy framework
within which the Agency operates.
2.4 The Secretaries of State received advice
from the Environment Agency on the need for environmental improvements
and from English Nature on the need for increased protection of
nature conservation sites. In parallel, Ofwat provided advice
on the implications for prices of the investment required to achieve
these environmental improvements.
2.5 The Drinking Water Inspectorate (DWI)
of Department of the Environment, Transport and the Regions (DETR)
provided advice on issues relating to drinking water quality.
2.6 Once the Secretaries of State had considered
all the advice and the likely balance between environmental improvement,
security of water supply, improved quality of drinking water and
the implications for prices, they issued guidance to the Agency
(and DWI) on the scale and pace of implementation. The Environment
Agency's role is then to implement that agreed National Environment
Programme to timetable.
2.7 Ofwat's duty, as the economic regulator
of the Water Companies, is to ensure that they can finance the
proper carrying out of their functions. Those functions include
the reliable supply of water and compliance with all the relevant
environmental standards, both existing and those new or enhanced
ones approved by the Secretary of State.
2.8 An important part of the price review
process was to ensure that the necessary information was available
to those responsible for taking decisions at the right time and
to the right quality. Arrangements to facilitate this requirement
were provided through a quadripartite group, comprising the DETR,
who chaired the group, Ofwat, the Agency and the Water Companies.
Importantly, it was agreed at the outset that the quadripartite
group would not, in general, be a decision making body and that
interested parties may have wanted to approach the Secretaries
of State or the Director General outside of this group. Its prime
function was to see that proper processes were followed and that
proper information was being made available. This arrangement
met the Agency's requirements to strictly observe the statutory
process for setting the environmental improvement programme within
which the Agency is accountable only to the Secretaries of State,
who are responsible for the environmental policy framework.
2.9 Given the separate and distinctive roles
of the main organisations, the quadripartite meetings, supported
by smaller meetings, served an important communication role. However,
the Agency believes there would have been no benefit from placing
it on a more formal basis as this could have led to confusion
of statutory roles. There were a series of other meetings between
for instance, Ofwat and the Agency, DETR and the Agency, Water
UK and the Agency, Ofwat, DETR and the Agency. Such an array of
discussion and liaison meetings was inevitable given the scale
and complexity of the Periodic Review.
3. THE NATIONAL
ENVIRONMENT PROGRAMME
3.1 Experience of the previous price review
had shown the importance of establishing early clear guidance
on all the separate and different reasons investment might be
required to achieve an improved environmental quality. Thus, in
1997, Guidelines were developed in consultation with Water UK,
DETR and Ofwat specifying how each cause of environmental concern
should be defined and assessed. These were formally issued in
November 1997 to all participants by Ofwat. Periodically these
guidelines were updated, modified and then reissued.
3.2 By December 1997, regional staff in
the Agency, working with each Water Company, had developed listings
of all known problem locations. These lists indicated the nature
of the problem at each location and, where appropriate, the various
reasons for improvement in ascending order.
3.3 The detailed listings were then the
subject of continued refinement and discussion with each Water
Company over much of the following two years. Intentionally, the
Agency encouraged the development of integrated solutions at each
site where there were several reasons for improvement and raised
awareness of the benefits of considering integrated solutions
where several problem locations affected the same river or area
of coastal waters.
3.4 In April 1998, Ofwat submitted advice
to the Secretaries of State on the Cost of Quality Improvements.
This was based upon the estimates of the capital and revenue implications
of the detailed listings of potential environmental improvements,
provided by the Agency in December 1997.
3.5 In May 1998, the Agency submitted and
published its advice on the National Environment Programme that
it recommended Ministers adopt. The Executive Summary of "A
Price Worth Paying" is attached as Annex 2. This clearly
lists all the main reasons investment might be required at problem
locations.
3.6 In "A Price Worth Paying"
we included lists of potentially damaged SSSI's and sites, designated
under the Habitats and Birds Directives, which were agreed with
English Nature and the Countryside Council for Wales. These are
sites thought to be adversely affected by over-abstraction and
were separated into three categories:
(i) Evident problems as a result of
a Water Company abstraction.
(ii) Evident problems of drying out, but
the precise relationship with a Water Company abstraction is currently
unclear.
(iii) Concern about the impact of abstraction,
but wildlife features not currently at high risk—further
investigations agreed between English Nature/Countryside Council
for Wales and the Environment Agency. If these show a serious
impact, a scheme may subsequently be prepared for implementation.
3.7 A list of non-SSSI sites apparently
affected by over-abstraction, in whole or part, by a Water Company
was also included and separately identified as either:
(i) Priority sites that require a solution
to be implemented or
(ii) Problem sites that require further investigation
to determine acceptable rates of abstraction for these affected
sources of supply.
3.8 The Agency has a duty to have regard
to an assessment of the likely cost and benefits in exercising
its powers. During the Review, some have suggested every environmental
improvement put forward by the Agency should have been subject
to a cost/benefit analysis. However, during the passage of the
Environment Bill in 1995, Robert Atkins (the then Minister) explained
that "The (cost/benefit) clause gives the agencies considerable
and necessary discretion . . . It does not require them to undertake
cost/benefit analysis in each case or to demonstrate a particular
balance before they act".
During the Bills' passage Ministers also
made clear that the Agency was expected to use such information
as exists and was not expected to generate cost estimates.
3.9 Of the NEP approved by Ministers, some
70 per cent (by cost) relates to EC Directive requirements or
SSSI protection. A further 20 per cent is caused by Government
policy decisions relating to sewage sludge applications to farm
land as well as increased volumes of sludge produced. The remaining
10 per cent of the programme relates to Government approved quality
objectives for rivers, non SSSI locations affected by over-abstraction
and those combined sewer overflows not required by EU Directives.
It is only to this portion of the programme that the duty relating
to likely costs and benefits applies. However, through discussion
with the Water Companies and Ofwat the Agency has at every location,
tried to ensure that the most cost effective solution is the one
being promoted.
3.10 The Agency has considerable experience
of formal cost/benefit analysis as applied to the capital investment
programme in flood defence. Six economists are employed by the
Agency, as well as five other staff who worked directly on likely
costs and benefits in this review programme of R&D was developed
to provide practical techniques for assessing the relative benefits
from improvements. There was, and indeed still is, no widely accepted
methodology for quantifying the benefits of environmental improvements.
For this reason the Agency has been seeking methods that have
greater acceptability as well as reliability in application.
3.11 Given the very large number of locations
requiring assessments (approximately 1,000) the Agency adopted
a multi-attribute technique (MAT) for assessing relative benefits
of river quality improvement schemes.
3.12 The MAT score system was subject to
external consultation and was developed using groups of informed
individuals drawn from a cross section of backgrounds external
to the Agency. The relative weightings to be applied to different
types of benefit were also discussed with the Regional Environmental
Protection Advisory Committee (REPAC) and Regional Fishery Ecology
and Recreation Advisory Committee (RFERAC) of the Agency regions.
The method wad made publicly available.
3.13 With a few exceptions, the information
on costs collected by Ofwat could not be disaggregated to individual
location costs. The Agency could only contrast the relative costs
and benefit of improvement at each location on the basis of the
information available from Ofwat and the Water Companies.
3.14 The information developed on MAT scores
was added to the detailed listings of improvements. This was used
in discussion with Water Companies and with DETR to develop a
prioritisation of those locations requiring investment for water
quality improvements apart from problem combined sewer overflows.
3.15 This prioritisation process also took
account of the needs of EU Directives and improved sewage sludge
disposal. Where the MAT score did not apply (see paragraph 3.9)
the condition of the Water Company asset, the benefit of integrated
solution of several problems at the same site and the linkage
between sites on the same river or length of coast were all considered
in determining the relative priority of works.
3.16 For problem combined sewer overflows
for which action was not required to achieve compliance with EU
standards or for river quality objectives, priorities were based
on the severity of aesthetic impact. High, medium and low categories
were used based upon impact, the ease of public access and amenity
value.
3.17 For over-abstraction locations a separate
method was used based upon previous experience at several locations.
This uses a benefit transfer approach and involves using values
or benefit estimates developed in earlier studies or policy decisions.
This method was subject to external consultation, then documented
and made publicly available.
3.18 The final prioritisation and timetabling
was a balance between achieving EU timetables, early significant
environmental improvement, achieving integrated solutions and
the practicality of delivery.
4. CONSULTATION
4.1 In 1997-98 a survey of public opinion
was conducted and the results published. A summary was included
in the advice to the Secretaries of State. Throughout the process
the REPAC's and RFERAC's were consulted on the Agency's approach,
priorities and on the benefits to be achieved.
5. MINISTERIAL
GUIDANCE
5.1 In September 1998 Ministerial Guidance
was issued in "Raising the Quality" and largely
accepted the Agency's advice on the need for environmental improvements.
This the Agency welcomes.
5.2 This guidance also provided the flexibility
necessary to enable the potential SSSI problems to be handled
sensibly. Where investigation confirms that a problem exists due
to Water Company activity, the Agency can progress the solution
without waiting for the next price review.
5.3 Subsequent to this guidance being received,
work continued in refining the detailed lists of locations requiring
action and the indicative future standards to be applied. These
were issued to the Water Companies in March 1999 with Ministerial
agreement.
5.4 In March 1999, Ofwat issued guidance
to Water Companies on the timing of investment to deal with specific
reasons for improvements. This guidance had been agreed with the
Environment Agency and DETR.
5.5 Following further detailed work on the
listings, and advice from Ofwat, the Minister for the Environment
gave final guidance on the scale of the National Environment Programme
for each Water Company on 24 November. In Wales the First Secretary
of the National Assembly for Wales gave guidance for Dwr Cymru
giving Ofwat some increased flexibility on the timing of improvements.
5.6 Following the receipt of the Ministerial
guidance in November 1999, discussions were held with each Water
Company to finalise the timing of delivery of each location's
specific improvement or investigation. These had to be reconciled
with the specific requirements of EU Directives and with the profile
of investment financed by the Final Price Determination. The detailed
timetabled schedules were then confirmed by DETR and NAW as being
consistent with the Ministerial guidance.
6. WATER RESOURCES
PLANS
6.1 Following the 1995 drought, DETR led
a review of the lessons to be learnt, involving the Agency, Ofwat
and the Water Companies. This resulted in the DETR publication
of "Water Resources and Supply; Agenda for Action"
which detailed the tasks to be undertaken by each organisation
and the required timetable.
6.2 The Agency has fulfilled all the tasks
to timetable to date. Through joint research with Water UK, methods
have been developed and, at the request of the Agency, implemented.
These methods have all been published.
6.3 The reliable water yield of all existing
water supply abstraction licences has been reassessed using standard
methodologies. These assessments have been incorporated into a
Water Resources Plan for each Water Company. These Plans were
available in draft form in Summer 1998.
6.4 In October 1998, following review of
the draft plan, the Agency publicly sought the advice of Ministers
on a range of issues. This was felt necessary because of the wide
disparity of assumptions being made by individual Water Companies.
6.5 Following receipt of published Ministerial
advice in January 1999, the Water Companies further developed
their Plans for approval by the Agency in Summer 1999. Ofwat were
consulted throughout the whole process and the Final Price Determination
included the investment needs arising from the Water Resources
Plans approved by the Agency in Summer 1999.
6.6 This is the first time that Water Resources
Plans have been available from all Water Companies for the next
25 years based upon consistent methods. An initial assessment
of the potential significance of climate change has also been
included.
6.7 The Plans have been either fully, partially
or conditionally approved. The differences reflect the adequacy
or otherwise of the explanation and justification provided to
support the underlying assumptions and predictions of these plans.
As a result a programme of work to review and improve the plans
annually has been initiated with the Companies.
6.8 The Plans detail all aspects of future
predictions for the demand for water, the impact of measures to
manage demand, the need for improvements to the flexibility of
use of existing sources of water and the potential need for, and
timing of, extra sources of water, as well as the impact of measures
in the NEP to restore a sustainable balance of abstraction where
SSSI's and other sites are adversely affected by abstraction.
6.9 The Planning Guidelines and discussions
with Water Companies have been used to remind the Companies of
their statutory duty to promote the efficient use of water by
their customers. The existing approved plans indicate a significant
improvement in the management of demand for water and set targets
for the future.
6.10 The Agency has also informed the Companies
that future new licences or modifications to existing licences
will only be agreed if the Company is delivering all the elements
of their approved Water Resources Plans for instance leakage reduction,
metering, water efficiency or extra treatment capacity.
7. IMPLEMENTATION
7.1 The Agency will implement the approved
NEP by issuing revised discharge consents and abstraction licences
to be effective from the agreed delivery date for improvement
at each specific location.
7.2 By the end of June 2000, the Agency
will publish a national overview of the NEP. This will have a
separate annex for each Water Company detailing the full location
specific list of improvements, with the underlying reasons for
inclusion and the timetable for delivery.
7.3 The Agency will monitor delivery at
each location and, where delay occurs for good reason, will accept
substitution of earlier delivery at another location.
7.4 These listings will also include all
those sites identified as causing existing environmental quality
problems which have not been included in the investment programmes
to 2005. The scale of this residual list is very modest (approximately
10 per cent of the total potential programme costed in this review).
7.5 Each year the Agency will publish a
progress report. This will include details of any such adjustments.
7.6 Given the scale of manpower reductions
announced by some Companies the Agency (by letter from the Chief
Executive to Managing Directors) has reminded Companies of their
obligations. Should there be evidence that a policy decision by
the senior management of a Company has led to a systematic failure
of legal standards then the Agency will consider prosecution of
individual senior managers.
7.7 The approach adopted throughout this
review has been to develop comprehensive lists of all locations
causing environmental concern because of Water Company activities.
The Agency has repeatedly informed the Water Companies, that any
new problems will be taken to be caused by either poor operation
or a failure to maintain an existing asset. As such, the Agency
will take immediate enforcement action as it does with any other
industry. This is based upon the assumption that Companies receive
funding for asset renewal and maintenance. However, some Water
Companies have expressed concern that the Ofwat serviceability
measure reflects asset failure.
7.8 Given the very large scale of the investment
programme to deliver the NEP and asset renewal, there is a need
for a change control protocol. Ofwat unilaterally published a
proposed method to achieve this in Annex E of the Final Price
Determination. There was no prior discussion with the Agency and
Annex E seeks to require agreement by Ofwat and others to any
change in environmental requirements. As explained in section
2 of this memorandum the roles of the respective organisations
is clear. It is for the Government to determine environment policy
based, where appropriate, on advice from the Agency. Any change
(and none is currently foreseen) will involve discussion with
all relevant parties as has been the case during this Periodic
Review.
7.9 The Agency is currently discussing an
appropriate protocol with DETR for handling any changes in the
environmental obligations faced by Water Companies.
8. OTHER ISSUES
8.1 Given the modest residual programme
required beyond 2005 to address existing environmental problems,
the next Price Review should address those rivers where the target
quality is low. These are usually urban rivers where a large population
would benefit. It is also important that attention focuses on
a sustainable level of asset renewal so that the substantial environmental
gains between 1989 and 2005 are not slowly lost because of inadequate
asset maintenance and renewal.
8.2 The concept of Water Saving Trust has
been suggested similar to that established for Energy. The Agency
supports this idea. However, promoting the efficient use of water
may need further thought. At present reduced sales of water to
a proportion of customers means reduced income for a Water Company.
There is a need for an informed debate about how to achieve water
efficiency in a way that provides incentives to both user and
provider.
9. CONCLUDING
COMMENT
9.1 The Periodic Review of Water Prices
in 1999 (and 1998) has been a far more open process that has enabled
the main organisations to fulfil their roles as intended by the
Water Act 1989. This has meant that both the objectives and the
outcome of the process have been clearer.
9.2 The Agency is delighted that Ministers
accepted its advice and have committed the largest programme of
environmental improvement this country has ever seen.
9.3 The Agency is committed to continue
to report openly on the progress of each company in delivering
the improvements to timetable.
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