Memorandum submitted by the Chartered
Institution of Water and Environmental Management (CIWEM)
INQUIRY INTO
WATER PRICING
1. The Chartered Institution of Water and
Environmental Management (CIWEM) is the leading professional and
qualifying body for those who are responsible for the stewardship
of environmental assets. The Institution provides independent
comment, within a multi-disciplinary framework, on the wide range
of issues related to water and environmental management and sustainable
development.
2. CIWEM welcomes the opportunity to comment
on this inquiry. The Institution is an interested, informed observer
rather than a directly affected stakeholder. Our principal points
may be summarised as:
— CIWEM cautiously welcomes the draft
determination but qualifies this with a consideration that undue
limitations to proposed price rises now are likely only to store
up further significant rises for the future when they will be
equally politically unattractive.
— CIWEM considers that the investment
planning period should be longer (eg 20 or 30 years). The current
period fosters short-termism.
— Long-run planning must pay greater
attention to the impacts of variables such as climate change and
environmental legislation such as the Water Framework Directive.
— The drive for value for money may
result in under-investment, particularly in addressing risks which
might seem remote at the moment (eg droughts).
REACTION OF
STAKEHOLDERS TO
THE DRAFT
PRICE LIMITS
3. CIWEM understands that environmental
stakeholders have signalled general satisfaction with the determination
although there is some disappointment that some major schemes
may not go ahead.
4. We believe it is likely that Water Company
stakeholders will argue that their investment plans have been
trimmed too far, to the potential detriment of asset maintenance
and renewal, and the ability to meet level of service targets
in the future. Water Companies asked for K increases (over inflation)
of 29% over five years; customer surveys indicated that they wanted
to see the increase (of 29%) cut by at least a third; whereas
Ofwat's draft determination cuts the requested increase by around
a half. Inevitably, Water Companies will object, and will point
out the asset management, customer service and environmental protection
consequences of reduced funding in their respective areas.
5. CIWEM has encouraged Ofwat to allow the
proposed price increases and the full programme of environmental
measures proposed by the water companies as we consider that these
will be necessary to deliver the requirements of various European
Directives. We therefore register our concern that some important
schemes will be impossible with the proposed limits. In addition
the determination does not give customers the appropriate price
signal for what is becoming an increasingly scarce resource with
both high customer and environmental value.
6. CIWEM considers that water is a most
precious resource which remains too readily taken for granted.
The way in which the management of water is becoming increasingly
integrated through the implementation of framework policies is
an indicator of growing recognition of its value. Despite this
it is likely that many waters will fail to meet standards required
by European legislation in coming years as a consequence of failure
to invest sufficiently in the necessary improvements. There must
be concern that deferring expenditure on, for example, the Water
Framework Directive, is storing up future price rises which themselves
may be seen as politically sensitive at the next periodic review.
7. The recent pollution incidents in the
Thames in August are a demonstration of how the current storm
sewerage system is in places insufficient to deal with extreme
rainfall events that widely accepted climate change models predict
will become increasingly commonplace. Furthermore, pressure on
water resources is set to increase markedly, particularly in the
South East of England where hundreds of thousands of new homes
are planned as part of the Office of the Deputy Prime Minister's
Sustainable Housing Initiative, and where the likely impacts of
climate change will be hardest felt.
8. In this context we are also concerned
about the lack of support by Ofwat for the funding of water efficiency
investigations proposed by water companies. It is essential that
robust information is obtained by companies on the costs and savings
to customers of water efficiency and water conservation initiatives
so they can be compared with resource augmentation proposals.
The ODPM has set a target of between 25 to 30% reduction of water
consumption in new builds compared with existing households in
the south and east of England. The affected companies should be
given incentive and funding to address this.
9. It is likely that the UK will experience
a sustained period of increasing utility bills as the reality
of the preciousness of natural resources becomes more accurately
reflected. We do not consider that an inability of some customers
to pay for such resources should be a reason for constraining
necessary price increases across the board. We consider that genuine
inability to pay is a social issue and assistance should be provided
where legitimately required. CIWEM is pleased that the Government
recognises global environmental issues however we consider that
the rate of delivery of environmental improvement remains insufficient.
COMMENTS ON
HOW THE
PERIODIC REVIEW
HAS BEEN
CONDUCTED, PARTICULARLY
LOOKING AT
HOW IT
HAS TAKEN—OR
SHOULD TAKE—INTO
ACCOUNT LONG-TERM
PLANNING FOR
CLIMATE CHANGE
AND ENVIRONMENTAL
IMPROVEMENTS
10. CIWEM considers that the price determination
process has always suffered from a number of problems, in particular:
— short-termism ( we believe that five
years is too short as a planning horizon);
— lumpiness/cyclicity (the five-year
period induces peaks, troughs and back-end loading into investment
spending, with adverse impacts on efficiency and delivery of spend,
and on the interests of the supply chain (consultants, contractors));
— range bidding whereby the Water Companies
over-pitch and the regulator under-cuts.
CIWEM considers that the attempt to smooth out
the lumpiness by introducing an early review and approval of year
1 expenditure appears to have had limited impact and benefit.
11. The Institution considers that the investment
planning period needs to be 20 or 30 years (as per the period
for demand forecasting and water resource planning, and as per
the timescale required for engineering scheme planning and delivery).
The present process carries the risk of five-year myopia—a
long run perspective is taken as a starting point, but the process
drags attention onto the first phase, to the detriment of efficient
long run planning, as the knock on effects of the five-year determination
ripple through the long run plan.
12. CIWEM suggests that long run planning
requires explicit attention to the effects of present or potential
variables such as:
— the Water Framework Directive and
other nature conservation legislation;
— the potential impacts of climate
change upon:
— water resources availability (security
of supply), as the frequency and depths of droughts change, and
as the volatility of the climate increases. This requires attention
to storage and distribution capacity and flexibility;
— urban sewer flooding (in the sewer
systems and treatment works for which the water companies are
responsible). There is a prospect of systems designed for design
storm magnitudes based on historically-judged frequencies being
overloaded/swamped by higher magnitude events of the same design
frequency and more frequent occurrence of events of the same magnitude;
and
— the environment—in respect
of the quantity and quality of water in the environment.
13. Long term planning for these effects
has been taken into account in various ways, as per guidance issued
by government and regulators (eg in headroom for water resources).
However, CIWEM considers that there is a clear risk, as we filter
planning for future risks through the lens of value for money
to today's customers, of under-investing. For example, there may
not have been a drought for some time now, and consequently it
is easy to become complacent, however it is certain that droughts
will occur sometime in the future.
14. A particular concern to CIWEM is that
Water Companies were specifically requested by OFWAT and the Environment
Agency to exclude the potential effects of the EU Habitats Directive
and other nature conservation legislation in the water supply-demand
analysis unless the impacts were clear and certain. Furthermore,
Water Companies were prevented from including these substantial
issues in the uncertainty analysis (through calculation of the
"target headroom"). As a result the biggest water resources
issue over the AMP4 and AMP5 periods could not be included in
Water Resources Plans and Business Plans. This is contrary to
the preparation of robust long-term water resource plans and in
CIWEM's consideration, potentially puts the adequacy of water
supplies and the environment at risk. It is essential that such
calculations are incorporated fully into planning.
15. CIWEM would suggest that funds should
be made available to companies to enable them to secure the least
cost, most environmentally sensitive solution to delivering sufficient
water to areas of the country that are under pressure, via water
resources and water efficiency studies in co-operation with all
stakeholders. A final suggestion is that water companies should
be required to produce their water resources plans in tandem with
a national water resources strategy by the Environment Agency.
23 September 2004
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