APPENDIX 11
Letter to the Clerk of the Committee from
Richard Ackroyd, Director of Regulation and Investment, Yorkshire
Water
I am writing to you in response to the notice
published on your website on 5 February. We wish to respond to
two of the Committee's specific interests:
— The extent of the environmental achievements
delivered as a result of the 1999 periodic review;
— What should be the key components
of the environmental programme allowed for in Ofwat's price limits.
EXTENT OF
ENVIRONMENTAL ACHIEVEMENTS
DELIVERED TO
DATE
We recognise that a sustainable water and sewerage
business is dependent on environmentally sustainable operations.
We therefore remain committed, to integrating environmental best
practice, continuous improvement in environmental performance,
and driving environmental and customer value throughout our activities,
contractors and supply chain.
With this in mind, and as a result of the 1999
periodic review, we have invested almost £1 million a day
in reducing our impact on the environment and improving our service
to customers. Our rivers and bathing waters are cleaner now than
at any time since the industrial revolution.
Given the substantial improvements to the environment
already delivered by the water industry, cost benefit analysis
shows that further investment may be subject to the law of diminishing
returns. It is likely that investment by other sectors impacting
on watercourses may provide better value for money environmental
improvements. The Environment Agency has estimated that the cost
of all environmental damage from water related activities is between
£1.2 and £2.6 billion per annum (equivalent to a capitalised
value of £15-33 billion over 25 years), approximately half
of which is attributed, by the Environment Agency, to the activities
of water companies.[6]
The EA further estimate the benefits of the PR04 investment programme
across England and Wales at between £0.3 and £0.9 billion
per annum (£4.5 to 11 billion). These figures do not compare
favourably with the costs of the PR04 environmental programme
which would have to be paid by water company customers, broadly
estimated at £12.7 billion over AMP4 if Reference Pan B were
supported. It should be noted that Reference Plan B is roughly
double Reference Plan A.
FUTURE ENVIRONMENTAL
PROGRAMMES
Yorkshire Water's PR04 Draft Business Plan,
both the Company Preferred Plan and Reference Plan A, which already
provided for substantial environmental quality enhancements costing
circa £250 million. These are largely to ensure compliance
with legal obligations and are summarised in the attached annex.
The overall impact on customer bills of the environmental, drinking
water quality and other cost drivers, such as changes in taxation,
provided for in the Draft Business Plan was 3.6% pa increases
for five years ie bills increasing by almost 20% by 2010. However
there are some further issues where Government is required to
make judgements and choices.
1. Freshwater Fish Directive
Since our Draft Business Plan was submitted,
the Environment Agency have confirmed that a number of new additional
investment requirements associated with the Freshwater Fisheries
Directive (FFD) will now also need to be delivered in AMP4. I
am concerned that the new FFD designations at many locations will
require investment which is disproportionately high in relation
to the environmental benefits. As an example, I would like to
draw to your attention the case of Huddersfield STW. Huddersfield
is only one of several medium-sized towns in Yorkshire. The STW
there serves a population equivalent of approximately 350,000.
We have recently improved Huddersfield STW very substantially
by constructing three additional treatment plants between 1995
and 2000, at a total cost of over £50 million, in order to
comply with the Urban Waste Water Treatment Directive (UWWTD).
The key consent parameter driving further investment at this site
is ammonia and Huddersfield already achieves the very high standard
of 8 mg/l of ammonia on a 95%ile basis and the River Colne already
supports an active coarse fishery. The 75% designation under FFD
will require circa a further £20 million of investment in
new treatment processes in order to make a relatively small improvement
in the quality of the continuous discharge to meet a 5 mg/l ammonia
consent. It is unlikely there will be any visible improvement
in the river as a result. We regard this investment as highly
questionable in terms of value for money.
As noted above, our Draft Business Plan indicated
that water and sewerage charges would need to rise by 3.6% pa.
above inflation for five years before any allowance is made for
the cost of compliance with the Freshwater Fish Directive or other
new obligations. Once an allowance for the cost of the new FFD
designations is made then prices would need to rise by an additional
1% per annum for five years.
2. Humber Estuary Designation
With regard to the outstanding issue of whether
the Humber Estuary should or should not be designated as a sensitive
water under the Urban Waste Water Treatment Directive (UWWTD)
in consequence of the reasoned opinion issued against the UK in
March 2001. The company has over the past three years been supporting
Defra in making its case against the reasoned opinion issued against
the UK as outlined in the Commission's COM (2001)685*1, dated
21 November 2001. This reasoned opinion asserted that the Humber
Estuary should have been designated as a Sensitive Area (Nutrients)
under the terms of the UWWTD. This matter is currently unresolved.
If this matter goes against the UK, additional nutrient removal
investment of circa £600 million (adding a further 10% to
customer's bills) will be required at our waste water treatment
works, with further investments required at those of Severn Trent
and Anglian Water. The nature of the investment required to meet
FFD requirements is entirely different from that required to reduce
nutrient levels in our waste water discharges, as would be required
by a Sensitive Area designation. Again to implement the FFD investment
requirements before we fully understand the outcome of the Sensitive
Area issue could lead to abortive investments being made, or for
premature nutrient friendly solutions to be provided during this
period, at additional cost to our customers of circa £40
million.
AFFORDABILITY
We are also concerned about the socio economic
impact of the environmental improvements we may be asked to make
in terms of the impact on our customers, many of whom are on low
incomes. Given the background of rising costs elsewhere eg council
tax, energy costs etc, we believe that many of our customers will
simply be unable to afford the increases in water prices that
further environmental improvements would drive.
We have undertaken a substantial piece of research
canvassing our customers' willingness to pay for current and future
levels of service, including environmental improvements. This
work has been described as "state of the art" and "setting
the standard for other studies to emulate" by leading international
experts. Our results show that maintenance of current standards
is accorded high priority and that, whilst significant willingness
to pay for further environmental improvements exists, the benefits
are outweighed by the costs of the requisite investments.
In addition to the question of value for money
of further investment in Freshwater Fisheries initiatives, it
is vital that we are able to structure and phase our investment
programme in order to minimise the risks of making abortive and
wasteful investments, thereby ensuring the most cost effective
achievement of environmental benefits. The requirements of the
Freshwater Fish Directive are likely to lead to wasted investment,
if tighter standards are subsequently imposed after 2009 by the
Water Framework Directive (WFD) or if the Humber Estuary is designated
as a sensitive water under the Urban Wastewater Treatment Directive.
We put forward an alternative proposition to
Defra at the end of last year, to phase compliance with FFD over
a longer period of time, requiring full compliance by the end
of 2012 rather than 2010. The advantages of such a longer timescale
can be summarised as follows:
— It minimises the risk of abortive
investment as it allows time to see the effect of other factors
improving river quality and allows time for clarification of improvements
required by other legal requirements.
— It reduces the impact on customer
bills.
— The phasing we have proposed ensures
that the sites with greater certainty and greatest benefit are
addressed first ensuring that over two-thirds of the sites are
improved and FFD compliance at those sites is achieved prior to
identification of the requirements of the WFD in 2009.
In summary, we believe that the AMP4 program
should be limited to those investments required by law, phased
over an appropriate and affordable timescale, with any further
investments challenged on the grounds of costs vs. benefits, and
affordability. Similarly, investments should be spread over AMP4
and AMP5, and only made where they do not risk being abortive
due to pending legislation.
Our reason for this view is twofold. Firstly
benefits cannot be shown to exceed costs for most further environmental
improvements and secondly we doubt the ability of many customers
to afford the consequent water bills.
We would urge your Committee to consider the
proposed investment program in light of the very considerable
achievements of the water industry to date, and excellent value
we have offered to both the environment and our customers. Further
environmental improvements, should be provided for only where
justified by robust cost/benefit analysis and the value they offer
to customers can very clearly be demonstrated.
Please do not hesitate to contact me should
you wish to discuss any of the points I have raised.
March 2004
Annex
| Company Preferred Plan £m
CapexOpex*
| Reference Plan A £m
CapexOpex*
|
AMP3 overhang (infra) | 43
| 0.0 | 43 | 0.0
|
| AMP3 overhang (non-infra excl WID) | 27
| 4.9 | 27 | 4.9
|
| UWWTD (excl U1 o'hang & U5b) | 15
| 0.3 | 15 | 0.3
|
| Intermittent discharges | 106
| 0.4 | 106 | 0.4
|
| Disposal of sewage sludge | 12
| 0.3 | 12 | 0.3
|
| Bathing Waters Directive | <1
| 0.0 | <1 | 0.0
|
| Chemicals | 0 | 0.0
| 0 | 0.0 |
| Dangerous Substances Directive | 0
| 0.0 | 0 | 0.0
|
| Infiltration | 0 | 0.0
| 5 | 0.0 |
| First Time Sewerage | <1
| 0.0 | <1 | 0.0
|
| Freshwater Fisheries Directive | 11
| 0.3 | 11 | 0.3
|
| Groundwater Directive | 20 |
0.3 | 21 | 0.3 |
| Nature Conservation | <1
| 0.0 | 8 | 0.1
|
| River Quality Objectives | 0
| 0.0 | 0 | 0.0
|
| Waste Incineration Directive | 9
| 0.1 | 9 | 0.1
|
| Water Framework Directive | 1
| 0.0 | 1 | 0.0
|
Total | 244 |
6.6 | 252 | 6.4
|
| |
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APPENDIX 12
Further supplementary evidence from The Environment
Agency
INTRODUCTION
1. This note provides a response to additional question
raised by the Environmental Audit Committee on the Environment
Agency's evidence to the Inquiry into Water: The Periodic Review
and the Environment Programme. It explains the process by which
water companies, Ofwat and other stakeholders were involved in
the development and application of the Agency's cost benefit assessment
methodology.
This information provides supplementary information to Annex
B of the Agency's Memorandum of Evidence (see Ev 7).
HOW THE
AGENCY DEVELOPED
THE COST
BENEFIT ASSESSMENT
METHODS
2. The development of the Agency's methodology for assessing
benefits and its application was undertaken in consultation with
key stakeholders in the 2004 Periodic Review Process.
3. The Regulators Group (chaired by Defra) established
a working group, the Appraisal Group, to manage the development
and application of the economic appraisal methods that would be
used by the Agency for the environment programme. The Appraisal
Group was chaired by Defra, and included the Welsh Assembly Government,
Agency, Ofwat, English Nature and DWI.
4. In order to develop the cost benefit methods, the
Agency established a project steering group to manage the contracts
with consultant economists to develop the methodology. The steering
group included representatives from Ofwat, Defra, English Nature
and the Agency and two experts to peer review the work (a leading
academic economist and a water company economist, the latter acting
as an expert but not representing the industry).
5. The Agency held two workshops for stakeholders during
the development of the methodology. The first workshop was undertaken
before work on the methodology was complete, to seek views of
stakeholders on the Agency's approach. [7]
Participants included representatives of the organisations on
the project steering group, together with water economists from
academia, consultant water economists, Water UK, representatives
from water companies, WaterVoice and RSPB. One of the issues raised
by the water industry at this workshop was that the Agency should
do more to take account of the costs to the environment of schemes,
for example carbon dioxide emissions from additional sewage treatment.
In response, the Agency developed a methodology to allow companies
to make this assessment to be set against environmental benefits.
However, only one water company carried out the assessment. The
workshop also suggested the need for an in-depth review of the
available techniques for monetary valuation.
6. The Agency then held a second workshop before it finalised
its methodology for assessing benefits. This two-day workshop
reviewed the monetary valuations used in the benefits assessment
methodology. [8] The workshop
identified the main limitations of the available valuations and
determined how to overcome them in deriving appropriate valuations
to use for the benefits assessments for PR04. Participants in
this workshop included most of the leading academics and researchers
and representatives of Ofwat, Water UK and WaterVoice. As a result
of the workshop, the Agency made the agreed revisions to the methodology,
and published the revised guidance.
7. The Agency completed benefits assessments using the
revised methodology. Ofwat provided data on costs from companies'
draft business plans. We provided the full results to Ofwat, Defra,
water companies, and WaterVoice. A number of companies queried
the results of the assessment, to which we responded, and where
appropriate amended the results.
8. The process described above explains why the Agency
is confident that it has developed and applied a sound, peer-reviewed
methodology, which represent the best currently available techniques
to assess the benefits of environmental improvements for the 2004
Periodic Review. The work has been done in full consultation with
all key stakeholders in the Periodic Review. Throughout the process
we have worked closely with Defra's economists to ensure that
the methodology and information provided would be in a form which
Ministers would expect in making their decisions. Indeed, the
Secretary of State's Principal Guidance[9]
welcomed the appraisal work undertaken to inform her decisions.
March 2004
6
Economic Appraisal and Assessment of the Benefits in the PR04
Environment Programme, Findings of an Environment Agency seminar,
January 2003. Back
7
Report available on our web site http://www.environment-agency.gov.uk/business/444304/444643/425378/425401/425411/563114/?lang=__e. Back
8
Environment Agency (2003) Review of Non-use Values for Water Quality
and Water Resources and Values for Bathing Water Improvements.
Report of an Expert Workshop in Peterborough, May 2003. Back
9
Principal guidance from the Secretary of State to the Director
General of Water Services, 2004 periodic review of water price
limits. Defra, March 2004.
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