Memorandum submitted by the Royal Society
for the Protection of Birds (RSPB)
SUMMARY
— The RSPB supports the environment
programme of the Fourth Periodic Review of Water Prices (PRO4),
which will deliver great benefits for the ecological health of
our rivers, wetlands and coastal waters and bring real and significant
benefits, social, as well as environmental.
— We believe that the programme is
necessary and that projects have been scrutinised effectively
and thoroughly to establish their cost and effectiveness. There
is no further scope for cuts without running the risk of continuing
environmental damage and failure to meet legal targets.
— Ofwat's draft price determinations
have confirmed that there was scope for reducing costs of delivering
environmental improvements. This supports earlier RSPB evidence
to the Environmental Audit Committee, and we are relieved that
Ofwat took this approach, rather than making deep cuts to sections
of the environment programme, which at one time seemed likely.
— We are, however, disappointed that
cost savings have been made by excluding some important environmental
improvement schemes. Cutting out these schemes makes very little
difference to customers' bills but could have a substantial negative
impact on the quality of the environment in some areas. We are
urging that these schemes be reinstated.
— We believe that Ofwat's price determinations
paint a misleading picture of the environmental programme as a
significant driver for price rises.
— We believe that there has been a
much greater focus, by both Ofwat and WaterVoice, on scrutinising
the need and justification for the environment programme in PR04
than on other parts of companies' business plans. This suggests
that delivering environmental improvements is still not seen as
part of the core business of water companies, and if this view
prevails achieving truly sustainable water management will be
very difficult.
— While we recognise the need for Ofwat
to scrutinise the costs of delivering schemes, we are disappointed
that, for some important projects, this scrutiny has cut costs
so substantially that they are highly unlikely to achieve their
objectives.
INTRODUCTION
1. A good quality water environment is vital
to people's quality of life and economic well-being and investment
through the process of the water price review is a key component
of delivering environmental improvements. Previous water price
reviews helped to end the worst of gross sewerage pollution to
rivers and coastal waters, and provided many benefits for regeneration,
recreation, tourism and nature conservation. However, water companies
must do more to ensure they meet existing and new environmental
laws and standards and make their industry truly sustainable.
2. Although many rivers have improved since
1990, further work is required to bring them to an acceptable
standard. Over half of all rivers in England and Wales continue
to suffer from high levels of phosphorus, and recent characterisation
of water bodies by the Environment Agency suggests that over 90%
are at risk of failing new standards of water quality based on
ecological needs.
3. The Environment Agency (EA), with English
Nature (EN) and the Countryside Council for Wales (CCW) proposed
a programme of environmental improvements through the fourth periodic
review, which has been supported by a rigorous assessment of the
costs and benefits of delivering those improvements. The scope,
costs and benefits of the programme were all carefully scrutinised,
and the RSPB is convinced that what has been proposed is essential
if water companies are to meet their legal targets, and make their
contributions to Government commitments on environmental quality.
4. In their Principal Guidance in March
2004, Ministers set out their priorities for the environment programme.
They agreed that the entire EA/EN/CCW programme is required to
meet minimum legal obligations to protect the environment. This
programme will include actions to:
— Stop pollution from sewerage overflows
which discharge raw sewage into streams and rivers during storm
events.
— Protect our most important rivers
and wetlands from pollution and over-abstraction.
Ministers also gave advice on managing water
resources. This outlined their determination to see water companies
tackle and manage water demand before embarking on large-scale
resource development.
5. The Environment Agency has estimated
that this recommended environmental investment programme will
bring benefits in the range of £3.1 to £5.6 billion
to England and Wales over the next 25 years. These include the
value to current and future generations of improvements to recreation,
fishing, and nature conservation, but do not include other, unquantifiable
benefits in terms of quality of life and economic regeneration.
6. Market research commissioned jointly
by a group of stakeholders in 2003 (which used the inflated scheme
costs provided by water companies in their draft business plans)
showed that, in relation to the environment, 87% of bill payers
nationally believe it is important to maintain current services;
and over 70% believe it is important to improve services. The
research suggested that more people are definitely or probably
willing to pay for improvements than are not. No further research
has been done since the considerably lower costs and impacts on
bills emerged from water company final business plans and the
draft price determinations.
DRAFT DETERMINATIONS
7. Ofwat published its draft price determinations
on 5 August 2004. These radically reduced the costs of water company
investment proposals while maintaining most of the content of
the environment programme.
8. Just 20% (£3.2 billion) of the £15.7
billion capital programme allowed by Ofwat is for the environment.
As we predicted in our evidence to the Environmental Audit Committee
in February, the projected costs of achieving that programme have
been substantially reduced.
9. We are pleased that most of the statutory
and discretionary programme has been funded, including exciting
and innovative catchment management projects by United Utilities
and Northumbrian Water.
10. However, we are concerned about a number
of schemes that Ofwat has dropped. We are particularly worried
about the decision to remove vital schemes to protect the internationally
important Hampshire Avon—a chalk river suffering from phosphorous
pollution. We understand that Wessex Water has persuaded Ofwat
that investment in reducing phosphorous discharges from their
sewerage treatment works should not proceed until diffuse sources
of phosphorous from agriculture have been tackled. We believe
that this is unacceptable, and that efforts must be made in parallel
from both sectors if the site is to be brought into the favourable
condition required under the EC Habitats Directive. Other important
schemes that we understand have been dropped include action to
protect fisheries in the River Tame and the River Aire from the
effects of pollution from storm sewage discharges. Nor has any
provision been made for work to find a long-term solution to London's
storm overflow problem, the effects of which were so strikingly
demonstrated by the pollution incident on the Thames on 4 August
this year. However, we are frustrated that the exact details of
which schemes Ofwat has recommended for funding is a confidential
matter between Ofwat and the water companies. This has hindered
our ability to respond adequately to the consultation, and is
not the open and transparent approach we believe stakeholders,
and the wider public, should be able to expect.
11. We also have concerns about the budget
that Ofwat has allocated for the completion of some important
projects. For example, Ofwat has recommended a reduction in the
operating costs of the United Utilities catchment management project
in northern England of over 90%, which would make it impossible
to meet its objectives.
12. We are concerned that Ofwat appears
not to have followed ministerial guidance in the area of water
resource planning. The regulator has recommended substantial cuts
in funding to promote water efficiency and manage demand, while
effectively "rubber stamping" proposals for resource
development. While a lot more effort on water efficiency is needed
by the Government (in terms of establishing new building regulations
which incorporate water efficiency into new homes, and in setting
up a Water Savings Trust), there is still a significant and important
role for water companies. Ofwat needs to ensure that those companies
are given the resources to undertake that role satisfactorily.
THE PR04 PROCESS
13. Some elements of the PR04 process were
an improvement on the conduct of PR99. There was a joint market
research exercise with the main stakeholders in the review (including
Wildlife and Countryside Link, representing a coalition of NGOs),
and in the initial stages the regulators appeared to work closely
together. However, early optimism about the conduct of the review
faded as the final stages were reached. The process has become
adversarial, with Ofwat determined to minimise bill increases
with the result that it has become entrenched in a position of
criticising the environment programme. As the process has become
more adversarial, it has become more politicised and less transparent.
This lack of openness and transparency is reinforced by the opaque
nature of the draft determinations. The documents hold little
detail on the fate of individual projects in the quality programme,
not allowing stakeholders to make informed responses.
14. The regulators held an initial stakeholder
consultation on PR04 in the autumn of 2003 in order to get a better
understanding of priorities for investment. The results of that
consultation were not widely promoted or publicised, perhaps because
the responses, which were very supportive of further environmental
investment, did not reinforce Ofwat's view. We believe that the
way in which Ofwat responded to that consultation was symptomatic
of their approach to public opinion during this review.
15. Much of Ofwat's scrutiny of the periodic
review has fallen on the environment programme, even though it
accounts for only 20% of the capital programme. Despite this,
Ofwat has stated that environmental improvements are responsible
for £20 of the proposed £33 rise in customers' bills.
The regulator has unsuccessfully attempted to clarify these figures
in communications with us. We believe it is a matter of regret
that such misleading figures are used in a public document.
BEYOND THE
2004 PERIODIC REVIEW
16. PR04 has not provided adequate preparation
for the introduction of forthcoming environmental obligations
under the Water Framework Directive. Determined efforts by Ofwat
to restrict spending on the environment in this review will lead
to a need for greater investment under PR09 and PR14. At present
the price review process does not deliver the long-term planning
based upon environmental requirements and obligations that is
needed. Instead it promotes short-termism: demands to reduce investment
for perceived short-term price advantage, rather than the sustained
investment for the future required to deliver sustainable development
in the water sector.
17. Reflection will be needed after the
completion of PR04 to learn from the process and consider what
changes may be necessary to align the periodic review process
better with statutory river basin planning under the Water Framework
Directive, and to promote innovation rather than stifle it. The
RSPB and Water UK have commissioned Green Alliance to undertake
a review over the next few months which will look at ways of improving
the process. We hope that this will also help to stimulate debate
about the implementation of the regulatory changes to be established
under the Water Act—notably Ofwat's new sustainability duty.
23 September 2004
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