The price profile
Paragraph 128. The Committee believes that
roller coaster prices confuse consumers as to whether their valuable
water resources are being carefully managed by the industry and
how far they themselves should be bothering about water efficiency.
As metering becomes more widespread, there will be an increasing
price incentive to be water-efficient and clear pricing signals
will be needed.
29. The evidence and the response to this
report from Ofwat addresses the reasons for adopting particular
price profiles. The immediate cut in prices was a reflection of
past efficiency savings, and customers were already long overdue
a direct financial benefit. Ofwat also points to companies having
taken advantage of previous gradual price profiles to retain and
distribute unsustainable profits and dividends, and that the companies'
current criticism of "short-term" decisions needs to
be seen in that context.
30. The Government shares the Committee's
view that water pricing can offer important signals to efficient
water use and the conservation of water resources. As the Committee
rightly points out, this will become increasingly true as the
proportion of household metering rises. However the Government
is not convinced that the price profile of the Periodic Review
will have a major effect in altering price signals for promoting
water efficiency. Metered customers are encouraged to economise
by the marginal price of water, not by its average price. A £100
measured water bill that fell to £80 and then rose back to
£90 over the following four years would have altered the
marginal cost of water very little. More important will be continuing
incentive to use water efficiently to save marginal costs on bills.
Size and nature of the environment programme
Paragraph 139. The Director should seek to
ensure that the Final Determinations document makes clear how
far changes in key factors such as the cost of capital have influenced
the final outcome during the review process.
31. The respective roles of DETR and Ofwat
in the iterative processes leading to the final determinations
have been made clear in evidence, in the report and in the Government's
response. The role of the Department in providing general guidance
on policy and the quality programme is addressed under the recommendations
in paragraphs 68 and 69 above. As that account explains, there
was close collaboration between DETR and Ofwat in the costing
of the quality programme and the modelling of its effect on prices.
This included taking full account, in Ministers' final decisions
on the components of the quality programme, of the best information
on all matters at that time. There was not, as was suggested to
the Committee, unused slack in the size of the investment package
32. The detailed attribution of one element
of the package to a change in another for a given company is not
a simple matter. The price determinations for each company are
the unique outputs of iterative calculations based on many variables.
It would nearly always be misleading to attribute a particular
change in the outcome to a change in one variable in the model.
33. The Government takes very seriously
its overall responsibility to those paying water bills. So, in
considering particular schemes for the discretionary part of the
environment programme, the Government seeks to ensure that these
not only address priority areas for action, but also that the
investment proposed will produce a cost-effective solution. The
overall programme will therefore depend not only on the indicative
size of the investment package agreed by Ministers, but also on
the number of well-developed schemes which can be demonstrated
to provide value-for-money. In some cases, further work on the
options for tackling a particular problem may be needed.
Paragraph 142. The 1999 Periodic Review provides
a satisfactory outcome for the environment but there is no room
for complacency as we face new, future quality obligations and
uncertain water resource constraints.
34. The 1999 Periodic Review provides for
unprecedented environmental investment and gives a good deal for
the customer. But we are not complacent. The Government will continue
to follow a robust approach to assessing and meeting new quality
obligations and managing water resources. It will want to be sure
that the scale and incidence of costs and benefits are carefully
examined and decisions are fully consistent with the principles
of sustainable development.
Paragraph 151. The Committee is concerned
that there is an apparent lack of clarity in the present arrangements
for dealing with the timely introduction of those environmental
schemes which were approved within the National Environment Programme
for 2000-05 but which are currently subject to re-evaluation and
not included in the price limits. The Committee recommends that
Ofwat reviews this process before the next Periodic Review.
35. The Government agrees with Ofwat that
there is no lack of clarity about the schemes to improve river
quality which were not included in the agreed investment programme
for the Periodic Review. The costs and benefits of these schemes
are being reappraised before decisions are taken on whether and
when they should proceed. DETR has asked the Environment Agency,
in conjunction with water companies, the Department and Ofwat,
to explore in more detail the benefits of the schemes and set
them out in a way which would allow a judgement to be made against
improved information on costs. The assessment of these schemes
will provide a useful test-bed for the new appraisal techniques
mentioned under the recommendations in paragraph 90 above.
Tackling diffuse sources of pollution and ensuring
the polluter pays
Paragraph 159. The Periodic Review is an
effective mechanism for dealing with point source environmental
problems caused by water companies. However, the Committee is
concerned that the DETR and the Environment Agency are disproportionately
relying on the Periodic Review mechanism and the water companies
as the key means to achieve compliance with water quality and
environmental protection objectives and not sufficient tackling
pollution from diffuse sources.
Paragraph 160. The Committee welcomes the
DETR's intention to encourage the Environment Agency to focus
more regulatory effort on diffuse sources. The Committee recommends
that the Department acts swiftly to ensure that the Agency can
demonstrate an overarching enforcement strategy for dealing with
diffuse sources of pollution.
36. The Government accepts that, until now,
regulatory effort has been concentrated more on point sources
of water pollution than diffuse ones. This reflects the fact that
historically point sources have created more of an environmental
problem, and technologically they are usually easier to address.
It is past success in tackling point sources of pollution, including
from sewage discharges, that has led to the effects of diffuse
pollution being now both more visible and more important for securing
further environmental improvements.
37. The Government agrees with the Committee
that increased effort is required to identify and tackle diffuse
sources of water pollution. We have agreed with the Environment
Agency that they will devote increased resources to investigating
and addressing diffuse sources which are impeding progress towards
meeting targets for bathing water and river quality. Action to
be taken will include improving both the provision of advice and
guidance and, where relevant, the enforcement of legislation.
The Department will track this commitment through the Agency's
Corporate Planning process. The results should become evident
as progress is monitored against published quality targets, including
the analysis of shortfalls against these targets. Further action
will be necessary in the future to meet the broader requirements
of the recently agreed EC Water Framework Directive.
Water Quality Programme
Paragraph 163. The Committee would welcome
a report on the progress of the DWI's review of its procedures
and on the adequacy of its resources.
38. DWI addresses this issue in its own
response submitted to the Committee on 10 January.
Interfacing with planning process
Paragraph 171. The Committee believes that
the Director's statement in Appendix E was inappropriate and his
remit in this area, or lack of it, should have been made clear.
Paragraph 172. Overall, the Committee is
satisfied that there is a suitable framework in place which should
provide the necessary interface between the planning system and
the required outcomes provided for by the Periodic Review. However,
this framework is not being utilised as it should be in all cases.
39. It is, in the first instance, for the
local planning authority determining a planning application to
decide what matters it may be relevant to consider, and what weight
to attach to a particular material consideration. Disappointed
applicants have a right of appeal to the Secretary of State. We
share the Committee's concern that the planning framework should
be used effectively, and would urge local planning authorities
and water companies to enter into proactive discussions, both
when identifying sites for new waste water treatment plants when
development plans are being drawn up and when planning applications
Paragraph 173. The Committee is concerned
that evidence indicates that local planning authorities (LPAs)
do not always seem to recognise the importance of the statutory
obligations faced by the water companies and the extent of the
National Environmental Programme which needs to be delivered with
their co-operation. The Committee recommends that the Government
provides the LPAs with clearer guidance which is also relevant
to the Government's international commitments.
40. We accept this recommendation. When
a suitable opportunity arises we will provide local planning authorities
with further general guidance to assist their decision making
in relation to waste water treatment plants. In the meantime,
we will draw this response to the attention of authorities and
ask them to have regard to it.
Long term planning
Paragraph 179. The Committee believes that
the current Periodic Review Process, operated by Ofwat, provides
a fair and open system for determining water price limits and
thus provides valuable incentives for water companies to reduce
operating costs and to search for innovative ways of designing
and operating new schemes. However, we recommend that the DETR,
companies and the regulators ensure that the five year investment
programmes of the Periodic Review are set in a comprehensive,
clear framework of longer term, policies and goals including those
relating to water resources and environmental quality and serviceability
goals. In turn, these five year programmes should be seen as contributing
to the achievement of these goals.
Paragraph 180. The Committee believes that
the DETR should take the lead in setting out the policy framework
and environmental future at the outset of the Periodic Review
process as recommended in paragraph 93.
41. The Committee's view that there should
be initial policy guidance from the Government is dealt with under
recommendations above (especially paragraph 94). The Government
will continue to examine the scope and timing of Government guidance
on the policy framework for future reviews.
42. The Government agrees that long term
planning will be helped if it produces strategic policy framework
documents to inform all stakeholders' preparations for future
Periodic Reviews. DETR is therefore working with the Environment
Agency with the aim of publishing a strategy document on the environmental
quality of water. This will assess key pressures on the water
environment, the extent to which existing policies and programmes
will enable quality objectives and targets to be met, and likely
future action needed. The strategy will need to look ahead to
2015, when new quality targets required by the recent EC Water
Framework Directive must be met.
43. The Government has already acted to
provide a long-term framework for water resources planning. The
Environment Agency required each water company to work to prepare
and agree, by April 1999, a water resources plan, showing how
an adequate balance between water supply and demand would be maintained
throughout the next 25 years. The Environment Agency reported
to the Secretary of State in June 1999 on the outcome of that
process. These plans are to be kept under annual review. These
water resources plans, updated as appropriate in the light of
annual reviews, should form the basis for each water company's
submission on supply/demand balance issues to the Director General's
Periodic Reviews of water prices. The Environment Agency is also
preparing a 25 year water resources strategy for the whole of
England and Wales. To be published in March 2001, it will reflect
the agreed contents of water company water resources plans and
consider demands from industry, agriculture and other uses of
water together with the need to protect the water environment.
Ofwat's "no detrioration" approach
Paragraph 198. The Committee accepts that
ultimately this option is open to the companies to avoid licence
breaches. However, efforts should be made to ensure that Ofwat's
methodologies for determining funding levels incorporate more
Developing a new approach
Paragraph 208. Water companies need to manage
and renew their sewers and water mains in order to develop appropriate
levels of service to their customers on a sustainable basis. The
Committee is not satisfied that Ofwat's "no deterioration"
approach to the maintenance and renewal of underground assets
(sewers and water mains) is a logical or acceptable means of assessing
the amount of investment which water companies need to meet these
requirements. The Committee believes that this approach has amounted
to intellectual neglect of this important problem.
Paragraph 209. The Committee therefore very
much supports the initiative of the DETR, and the agreement by
Ofwat, to develop a new approach. This approach should be forward-looking
and should enable companies to adequately prepare to renew and
repair the cohorts of sewers and mains which will come up for
renewal/rehabilitation simultaneously as a result of historical
peaks in building activity.
Paragraph 210. It is imperative that the
new approach is in place in time for the next Periodic Review,
with water industry support and assistance. The Committee acknowledges
Water UK's recent initiative to develop an agenda for assessing
capital maintenance needs. This is a key area of responsibility
for water companies and the Committee hopes that the industry
will now continue to make a pro-active and positive contribution
to developing new methodologies.
Paragraph 211. The Committee recommends that
the DETR moves rapidly to commission work in this area and examines
the suggestions put forward by Water UK and OXERA regarding the
necessary elements of new methodologies. It is imperative that
water companies and Reporters are fully engaged in the processes
of developing and implementing any new approach and that the latter
receive appropriate training.
Paragraph 212. In future Ofwat must make
clear exactly what data and analysis it expects the companies
to provide with respect to their capital maintenance needs.
44. The Government wants to see a strategic
approach to capital maintenance, as set out in Raising the Quality.
This should build on Ofwat's existing serviceability approach,
and should not be linked to current asset condition alone. Asset
age and condition do not, on their own, provide a guide to the
appropriate level of expenditure or the most efficient allocation
of resources. The Government considers an economic framework,
related to current and likely future asset performance (serviceability),
is likely to provide the best way forward.
45. The Government is committed to working
with Ofwat, the quality regulators and the water industry to consider
how best to take discussions on asset maintenance forward, before
the next Periodic Review. This work should examine all the issues
and options put forward, including those by Water UK and others.
As the Committee recommends, it will be important for this work
to investigate the practicability of approaches that are forward-looking,
taking account of the risk of asset failure (probability and impact)
as well as past historical trends. Useful discussions have already
started, in which DETR is playing a full part. A joint study by
Ofwat an DWI is also already under way, and is described in the
Inspectorate's response to recommendation 209. The government
looks forward to seeing the outcome of this work and will work
with Ofwat and both quality regulators to agree the best way forward.
Setting the right framework
Paragraph 220. The Director General of Ofwat
should be directly accountable for ensuring that Ofwat makes a
positive contribution to the Government's sustainability agenda.
The Committee recommends that, in line with the Government's own
commitment, the Director General should have a specific duty to
have regard to sustainable document.
46. The Government is committed to ensuring
that our water supplies are managed as sustainably, reliably and
efficiently as possible. Investing in protecting the environment
is crucial for all of usboth as citizens and as consumers.
The Government is also committed to ensuring that its social objectives
are considered alongside environmental and economic considerations.
This is in line with the principles of sustainable development.
47. The Government is therefore proposing,
in the draft Water Bill, published in November 2000 (Cm 4908)
to introduce new powers to enable the Secretary of State to issue
social and environmental guidance to the Director General of Water
Services. This is in line with the provisions in the Utilities
Act 2000 for the other utility regulators. This will give Ministers
the necessary powers to issue guidance to ensure that Ofwat takes
proper account of the Government's policies on sustainable development.
48. We will also consider, in the light
of responses to public consultation on the draft Water Bill, which
closes on 31 January 2001, whether to amend the existing clauses
to give the Director General a specific duty to have regard to
sustainable development, as the Committee recommends.
Paragraph 225. The Committee acknowledges
and welcomes the number of water efficiency initiatives being
undertaken by the water industry. We believe that companies do
not have significant incentives to promote water efficiency and
that there would be merit in investigating the feasibility of
setting company-specific targets for domestic water use, once
a robust methodology for efficiency measurement has been agreed.
This would help to focus efficiency efforts and drive the markets
for water efficiency and innovation.
49. The Government agrees that the regulatory
system should ensure there are sufficient incentives for water
efficiency. This is essential to the "twin track" approach,
in which future requirements for water are met by demand management
as well as resource development. The regulation of water companies'
duty to promote the efficient use of water amongst their customers
is undertaken by Ofwat.
50. The Committee rightly acknowledges that
that there would need to be a robust methodology for measuring
improved water efficiency. The method would need to exclude external
influences that affect water usage, such as the weather, and overcome
the problem of calculating compliance with targets in the absence
of universal metering. However, it might be considered unreasonable
to hold water companies accountable for activities outside their
direct control, for example how customers choose to use water.
The recent National Audit Office report on leakage and water efficiency
makes a number of other recommendations to improve the regulation
of this duty, which Ofwat is currently considering.
Paragraph 230. The Committee looks to this
new study to clarify how water companies are to investigate the
ELL taking account of both economic and environmental costs and
exactly what information in this regard needs to be provided to
Paragraph 231. The Government should spell
out its long term aims for leakage reduction in the context of
water resource policy and clarify in particular whether it wants
companies to reduce leakage below their economic levels. If it
does, it should explain its reasons.
Paragraph 232. Ofwat should make clear what
information it requires to assess where each company stands at
present in relation to its economic level of leakage.
51. The Department, the Environment Agency
and Ofwat commissioned the Tripartite Leakage Study into leakage
last summer. It is due to report later this year. The study will
incorporate an evaluation of the economic and environmental rationale
that should drive future levels of leakage. The information that
is required to analyse water companies' levels of leakage will
also form part of study's consideration. The Government's long-term
aims for leakage will need to be reconsidered in the light of
conclusions of this study. The Government recognises that the
significant improvements have made by most companies in reducing
their leakage rates since the Water Summit in May 1997. Furthermore,
the Government does expect further reductions in leakage will
play their role in water resource plans.
11 Planning public water suipplies-the Environment
Agency's report on water company water resources plans to the
Secretary of State for the Environment, Transport and the Regions
and the Secretary of State for Wales Environment Agencyc, Bristol,
June 1999. Back