Introduction
1. The Director of the Office of Water Services (Ofwat)
or Regulator sets price limits on water companies every five years
at the conclusion of a process known as the Periodic Review. The
most recent Review (PR04) started in October 2002. Ofwat will
be announcing price limits in November 2004, which will come into
effect in April 2005.
2. The period from privatisation to the 1999 Periodic
Review (PR99) saw a large increase in the profits for water companies
due to unexpected efficiency gains within the industry, despite
substantial spending on capital investment and environmental improvements.
Water prices rose significantly in the same period. This changed
with the 1999 Periodic Review. The then Director, Sir Ian Byatt,
determined that efficiency gains within the industry would result
in £60 per customer per year savings in the period 2000-05,
£30 of which were to be passed onto customers as lower bills
and £30 of which were to finance improvements in drinking
water and environmental quality.
3. Following the conclusion of PR99 our predecessor
Committee carried out an inquiry into the extent to which the
process and outcome of the Review contributed to environmental
protection and sustainable development, resulting in the publication
of the report Water Prices and the Environment.[1]
This Report concluded that "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". The Report also made
a series of recommendations as to how the Review process could
be improved. In addition, more recently, the Environment, Food
and Rural Affairs Committee published a report on the current
Periodic Review (PR04) in December 2003.[2]
4. The present inquiry was launched as a follow-up
to our predecessor Committee's inquiry, on 5 February 2004. This
was following the delay in the publication of the principal guidance,
setting out the Secretary of State's main decisions on environmental
and drinking water quality policy requirements, which was due
to be published by DEFRA at the end of January 2004 and in the
light of reports that this delay was due to pressures on the Department
to reduce spending on the environmental programme.[3]
The Committee decided to examine what should be the extent of
the environmental programme allowed for in Ofwat's price limits;
the adequacy of Environment Agency and DEFRA guidance given to
date on the size and scope of the environmental programme; and
the pressures and various options faced by Ofwat in the setting
of price levels against the background of the environmental achievements
delivered as a result of the 1999 Periodic Review.
5. In the course of the inquiry we received 19 memoranda,
for which we are grateful. We also took evidence on three occasions.
We heard evidence from Elliot Morley MP, Minister for Environment
and Agri-Environment, Department for Environment, Food and Rural
Affairs; from Ofwat; from the Environment Agency; and from other
environmental bodies and representatives from the water companies.
Changes since PR99
6. In Water Prices and the Environment our
predecessor Committee made a number of recommendations on the
how the review process might be improved, some of which have
been taken up and implemented in the current Review. The Committee
concluded that the large number of contradictory customer surveys
were not constructive and recommended that in future a comprehensive
and independent customer survey should be commissioned following
agreement about its contents amongst all the parties involved
in the process. This recommendation was implemented. From the
evidence submitted to the Committee this appears to have greatly
improved the Review process.
7. Our predecessor Committee also found there was
a need for better cost-benefit analysis by the Environment Agency
of the schemes put forward by them for inclusion in the environmental
programme. We heard evidence from the Agency as to how the methodology
used to carry out the cost-benefit analysis for schemes put forward
for inclusion in PR04 was subject to extensive peer review and
was agreed following consultation with DEFRA, Ofwat and the water
companies. The rigorous analysis resulted in a halving in the
number of proposed schemes put forward by the Agency compared
to those originally considered.[4]
We welcome this rigorous approach.
8. A further recommendation of our predecessor Committee
was that "the Regulator should be directly accountable for
ensuring that Ofwat makes a positive contribution to the Government's
sustainability agenda". We therefore welcome the requirement
under the Water Act 2003 that the new Authority, which will replace
the Director in 2005, will have to exercise powers and perform
duties in "a manner which they consider is best calculated
to contribute to the achievement of sustainable development".
We also welcome the Regulator's assertion that he is already
taking into account sustainable development in carrying out his
duties.[5] However we are
concerned about the compatibility of this new duty with the other
duties of the Regulator as they currently stand and will be examining
the issue further in this report.
9. We welcome the improvements to the Review process
following our predecessor Committee's report, in particular the
joint customer survey, the improved cost-benefit analysis of the
environmental programme and the new sustainable development duty
of the Regulator. However there has been little progress in other
areas, in particular that of diffuse pollution, for which the
Government has yet to put any significant measures in place.
1 Seventh Report of Session 1999-2000 HC 597. Back
2
EFRA Committee First Report of Session 2003-04 HC121. Back
3
Independent on Sunday, 'Blair to cut water clean-up plan', 25
January 2004, p2. Back
4
Q12. Back
5
Q141. Back
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