1. At the hearing by the Committee held
on 5 November, the Environment Agency gave evidence that draft
business plans of water companies fell short of meeting environmental
expectations. The Committee expressed interest in receiving further
detail.
2. Since providing its written and oral evidence
to the Committee, the Agency has submitted two documents to Ministers
to inform decisions on the 2004 Periodic Review. These documents
provide:
— The joint views of the Environment
Agency, English Nature and Countryside Council for Wales[20],
on the environmental priorities for the water industry;
— The Environment Agency's advice to Ministers
on the draft water resources plans submitted by water companies
as part of the 2004 Periodic Review. [21]
3. Both reports are available on the Agency's
website. The supplementary evidence in this paper is drawn from
those reports.
2. COMMENTARY
ON DRAFT
BUSINESS PLANS
4. Water companies submitted their plans to Ofwat
in August 2003. Included in their plans were costs for the delivery
of the a programme of environmental improvements specified by
the Environment Agency, in partnership with English Nature on
nature conservation issues.
5. Ofwat published its overview of draft business
plans in October.[22]
We submitted our advice to the Secretary of State on the Environmental
Priorities for the 2004 Periodic Review. In that advice we set
out the results of our review of the draft business plans.
6. In their draft business plans, the water and
sewerage companies, and largest water only companies, have provided
information on bills for three scenarios:
— company preferred strategy—setting
out the company's view of what should be delivered;
— Reference Plan A—a specified list
of planning assumptions, which includes the "statutory"
elements of the environment programme;
— Reference Plan B—a specified list
of planning assumptions, which includes the "statutory"
elements of the environment programme and those parts of the environment
programme for which Ministers have choices.
7. Table 1 shows the Agency's assessment of the
companies' preferred strategies in relation to delivery of their
environmental obligations, and for the water and sewerage companies,
our assessment of the impact of the environment programme on bills.
Table 1a
WATER AND SEWERAGE COMPANIES— SUMMARY
OF PREFERRED STRATEGIES IN DRAFT BUSINESS PLANS
Company
|
Environment Programme fully addressed in company preferred strategies
Improvements to water qualityImprovements to restore sustainable abstractions
| Disproportionate impact of environment programme on bills (see paragraph 8)
|
| Anglian Water | Y | N
| |
| Welsh Water | N | N
| |
| United Utilities | Y | Y
| N |
| Southern Water[23]
| N | Y | N |
| Severn Trent | N | N
| |
| South West Water | N | No environment programme required
| |
| Thames Water | N | Environment programme excluded
| |
| Wessex Water | N | N
| |
| Yorkshire Water | N | N
| |
| | |
|
Y = Minimum statutory environment programme fully addressed in
company preferred strategy.
N = Minimum statutory environment programme not fully addressed
in company preferred strategy.
Table 1b
WATER ONLY COMPANIES
Environment programme excluded
Portsmouth Water
| Environment programme partially included in full
Folkestone and Dover
Portsmouth Water
South East Water
Cambridge
Essex and Suffolk Water (Northumbrian Water)
Tendring Hundred
|
Environment programme partially included
Bournemouth and West Hampshire Water
Mid-Kent Water
South Staffordshire Water
Three Valleys
Dee Valley
| Companies with no environment programme required
Cholderton and District Water
Sutton and East Surrey Water
Bristol Water (has no statutory schemes)
|
| |
General comments
8. There are two water and sewerage companies, United
Utilities and Southern Water, for which, although they have significant
environment programmes, the share of the increase in price allocated
to environment improvements in the company's public summary looks
disproportionate to the size of the programme. This may arise
for a number of reasons:
— exaggerated estimate of capital costs of the environment
programme;
— schemes not completed in 2000 to 2005, which must
now be delivered in 2005 to 2010.
It is also possible that the company's financial modelling has
allocated other costs to the environment programme, for example,
any extra financing costs, in a manner that is disproportionate,
to the part of the bills dealing with environmental improvements.
Water quality
9. Companies have challenged legal and policy obligations
in their company-preferred strategies. Table 1 shows that only
three water and sewerage companies included all of the sewerage
improvements identified by ministers as "essential and clear"
in their preferred strategies.
10. Some companies have included environmental schemes in
their preferred strategies, which are not sought by the Agency,
apparently taking preference over some "essential and clear"
schemes.
11. We have also used our experience of regulating the water
industry and of previous Periodic Reviews to provide an overview
of the cost-effectiveness of companies' draft business plans.
We have identified that a number of companies have over-stated
the costs of some schemes, and in one case, many schemes in the
environment programme. Examples of these additional costs include:
— Costing full improvement schemes for sites where an
investigation only is required, for example for Habitats Directive
requirements; Schemes where high unit costs, significantly above
industry standards, have been used; for example, schemes to remove
sewage debris from storm sewage discharges, small works which
need improved treatment to meet Urban Waste Water Treatment Directive
(UWWTD) standards, and schemes to improve microbiological quality
of shellfish waters;
— One company proposed an alternative sludge strategy
at significant additional cost and allocated full costs to environmental
schemes to protect water quality.
12. We have been liaising with Ofwat to address these concerns.
Water resources
13. Many companies have excluded schemes that deal with the
impact of abstractions on sites covered by the Habitats Directive
or Sites of Special Scientific Interest. Even where schemes are
included, they are programmed to be implemented after 2010, beyond
the agreed timescales for the Habitats Directive or to meet the
Government's PSA target for action at SSSIs. As noted in the Agency's
Memorandum, the delay on work at Habitats Directives sites increases
the risk of infraction legal challenge
14. As a result of the mismatch in timetables for PR04, the
review of consents process required under the Habitats Regulations,
and the delivery of many investigations funded under the last
review (AMP3), there is uncertainty over the final size of the
water resources programme. With the exception of a small number
of schemes the actions required to restore and protect sites will
not become clear until the results of investigations become available.
Many investigations will not be completed in time for the costing
of implementation of solutions to be included in the Final Determinations
of prices. Definitive costing cannot be carried out until investigations
have been completed.
15. The Environment Agency developed a method for estimating
the water that would need to be remedied to help companies to
estimate the potential costs. Not all companies used this approach.
Some companies made insufficient allowance for environmental improvements.
These issues may have resulted in companies under-estimating the
cost of this element of environmental improvements.
16. The lack of clarity of cost information provided by companies
in their draft business plans for water resources is disappointing.
17. We are concerned that some companies have taken the view
that certain schemes will be subject to claims of over-riding
public interest (OPI) and have excluded them from company preferred
plans on this basis. Matters such as OPI are for Ministers. Other
companies have not made any allowance to implement any of the
results for any of investigations for statutory schemes in their
preferred strategies.
3 December 2003
20
Periodic Review of Water Industry Prices-2004. Environmental Priorities
for the Water Industry. An update of advice to ministers from
the Environment Agency, English Nature and the Countryside Council
for Wales on priorities for England and Wales, November 2003.
http://www.environment¸agency.gov.uk/business/444304/444643/425378/425401/425415/?lang=
e.- Back
21
Securing water supply. The Environment Agency's advice to Ministers
on the draft water resources plans submitted by water companies
as part of the 2004 periodic review. November 2003 http://www.environment-agency.gov.uk/subjects/waterres/590165/?version=1&lang=
e. Back
22
Setting water and sewerage price limits for 2005-10: Overview
of companies' draft business plans, Ofwat, October 2003. Back
23
For Southern Water and water resources schemes the information
was extracted from the draft water resources plans. Back
