Memorandum submitted by the Environment
Agency
SUMMARY
The water industry periodic review is the country's
single biggest programme for enhancing the quality of the environment.
It has delivered huge improvements. It has enabled the UK to meet
its environmental obligations, providing social and economic benefits
by improving recreation, tourism, nature conservation, and regeneration.
It has enhanced the portfolio of the British water industry in
international markets. But there is more to be done.
The water industry relies on the environment
for its raw material and for the disposal of treated waste water.
New environmental standards and the need to cater for new housing
have pushed up prices, and will continue to do so. The temporary
cut in prices after the last periodic review in 1999 gave the
wrong signal. The cut could not be sustained. The legacy is putting
pressure on prices in the present review.
For the present review we have set out a programme
of improvements that will require action at 4,000 sites. The benefits
are equivalent to a capital sum in a range from £5 to £8
billion. We calculate that companies can deliver the programme
at a cost that is less than these benefits, based on an analysis
of the costs of delivering schemes in the last price review.
We estimate that the programme will contribute
a modest portion of the average household bill for water and sewerage
by 2010—no more than 50p per week. In making this statement,
we acknowledge that there may be substantial variations between
companies.
However, in their preferred strategies, water
companies have outlined programmes that for this money would only
deliver some of the environmental programme, with some statutory
obligations delayed to beyond 2010.
The Agency is of the view that there is significant
scope for challenge of the costs that some companies have put
forward for the environment programme.
If there was no environment programme, we calculate
from water companies preferred strategies that average bills would
still have to rise from £234 in 2005 to £280 in 2010.
There will continue to be regional variations
in the timing and size of environmental obligations and the effect
of this on bills. Increasingly we have situations where meeting
common environmental standards is impacting customer bills differently
in different parts of the country. This is due to the differences
in the size of programmes and the business and financial structures
of the companies.
The water industry is not the only sector that
affects the water environment. Government has recognised the need
to tackle diffuse pollution, which will be needed to meet the
needs of the Water Framework Directive. Our programme for
PR04 only recommends action by the water industry to address problems
caused by the industry.
Water companies need to maintain a secure water
supply for customers, taking account of the environment. But companies'
plans show that they do not plan to control demand and that leakage
will rise. The plans show a lack of commitment to addressing abstractions
that damage our most valuable sites of nature conservation.
Meeting customer expectations is not only about
price. It is also about the services customers get for their money.
Customers want to see environmental improvements, but need to
be told clearly how much they are costing them. The Agency is
concerned about the inconsistent way companies have costed the
environment programme and presented its impact on bills.
1. INTRODUCTION
1. Since privatisation in 1989, limits on
water industry prices have been determined in reviews conducted
by the Office of Water Services (Ofwat In November 2004), Ofwat
will set limits on prices for the 2004 Periodic Review (PR04).
It covers prices from 2005 to 2010.
2. We are the main environmental regulator
of the water industry. One of our jobs is to safeguard rivers,
estuaries, underground waters and coastal waters from pollution
and other damage. We also have a statutory duty to make sure water
resources are used wisely and to ensure that there is enough water
for everyone and the environment.
3. Our role in the periodic reviews is to
advise the Secretary of State on the environmental aspects. For
nature conservation we do this in conjunction with English Nature.
4. Our advice covers:
— environmental obligations and priorities;
— the balance between water supplies
and the demand for water, and plans for the development and use
of water resources; and
— other proposals by water companies
that have an impact on the environment.
5. We prepare a programme of actions, taking
account of costs and benefits. The proposal for the present review
is described later in this memorandum. Once prices have been set
by Ofwat, we monitor action by the companies to deliver the agreed
actions and their water resources plans, issuing the appropriate
discharge consents and abstraction licences.
2. WHAT PREVIOUS
REVIEWS HAVE
ACHIEVED
6. The actions of water companies can have
a big impact on the environment and wildlife, and on people who
enjoy or depend on water. Every day, water companies supply 15
billion litres of water, taken from rivers and underground sources.
After suitable treatment, they discharge most of this into rivers
or the sea.
7. In doing this, companies must protect
the environment, promote the efficient use of water, and meet
legal requirements. What they have to do to improve the environment
is decided by ministers as part of the periodic reviews.
8. Previous periodic reviews have delivered
big improvements. They have reversed the environmental impact
of under-investment. They have enabled the UK to meet its environmental
obligations and they have provided significant social and economic
benefits by improving recreation, tourism, nature conservation,
and regeneration. They have enhanced the portfolio of the British
water industry in international markets.
9. Bathing waters and rivers are at their
highest recorded quality. Salmon now migrate up the River Trent,
and tri-athletes at last year's commonwealth games swam safely
in Salford Quays.
10. But more needs doing. Nearly 99% of
bathing waters meet minimum standards, but only 78% meet "Guideline"
standards. Rivers have improved since 1990, but 1 in 19 are still
of "poor" or "bad" quality. This is 1 in 8
for urban rivers. 54% of rivers have high levels of phosphorus.
[1]Water
companies are responsible for 1 in 6 of serious pollution incidents
to water.
11. We have identified 2,000 intermittent
(storm) discharges (around 10% of the national total) that are
still unsatisfactory—they are causing pollution by sewage
debris, and companies are continuing to find more. 160 protected
freshwater and wetland sites (fens, bogs and grazing marsh) are
at risk from licensed abstractions by water companies. The recent
reversal, for some companies, of the downward trend in leakage
is of concern.
12. The Water Framework Directive requires
that water bodies achieve "good status" by 2015, unless
a derogation is applied. [2]Plans
must be in place by 2009 and operational by 2012. Thereafter,
objectives will be reviewed every six years. Action for the directive
will influence the outcomes of the periodic reviews. The present
review covers 2005 to 2010. The next would cover 2010 to 2015.
If progress is not made to address unsatisfactory water bodies,
then there will be a backlog of problems, which will be more problematic
and impact even more on bills in the next price round.
3. ENVIRONMENTAL
PRIORITIES FOR
THE 2004 PERIODIC
REVIEW
13. An investment programme must give good
value for money. Customers must be able to afford it and it must
provide a reasonable return to investors. We want to help ensure
that:
— assets like pipelines, pumps, sewers
and treatment works are kept in good order and operated so that
their environmental performance is good and past improvements
are maintained;
— companies plan to provide enough
water for customers, in a way that does not prejudice the needs
of other water users and the environment;
— the impact of abstractions and discharges
on the environment is reduced;
— all legal obligations are met; and,
— companies complete necessary improvements
at lowest cost, whilst demonstrating that they are taking appropriate
account of the long term needs of the environment and society;
and,
— the industry gets ready for the Water
Framework Directive.
14. The drivers for improvements stem from
European and domestic legal obligations, and Government policies.
They are listed in Defra's memorandum to the EFRA inquiry, and
in Annex 2 (not printed here).
15. The Agency, English Nature and Countryside
Council for Wales have set out a programme that will require over
5,000 actions at around 4,000 sites from 2005 to 2010. The programme
includes 3,200 main actions to improve sewage treatment works,
abstractions and unsatisfactory storm discharges. In addition,
there are 900 investigations, and about 1,000 small schemes for
monitoring discharges.
16. The proposals were published in "A
Good Deal for Water". All actions have been assessed
to confirm the need and to help seek the most cost-effective option
for companies to cost. They will benefit 6,500 kilometres of river
and over 2,000 square kilometres of wetlands, still waters and
coastal waters, equivalent to a monetary benefit in the range
from £5 to £8 billion. Based on an analysis of the costs
of the last review, by the Agency and Ofwat, the Agency believes
that the companies will be able deliver the programme at a cost
that is less than these benefits. The programme covers:
17. Discharges: action to reduce pollution
further must be taken to meet the requirements of the Directives
on Freshwater Fish, Habitats, Urban Waste Water Treatment and
Bathing Waters, and the Countryside and Rights of Way Act. This
will improve 3,500 kilometres of river and over 300 square kilometres
of still or coastal water. Further action that will improve more
than 3,000 kilometres of river and 1,900 square kilometres of
still or coastal water is also proposed where justified by an
assessment of the relative costs and benefits.
18. Abstractions: changes in the way water
is abstracted are necessary to meet the requirements of the Habitats
Directive and the Countryside and Rights of Way Act. These actions
will ensure that more than 800 kilometres of river, and 28 wetlands
have enough water to support the wildlife habitats. Other nature
conservation schemes are proposed where justified by an assessment
of costs and benefits.
BENEFITS OF
THE ENVIRONMENT
PROGRAMME
19. Our estimates of benefits (£5 to
£8 billion) include the value for current and future generations
of improvements to recreation, fishing, and nature conservation.
They include reductions in illness (for example, stomach upsets)
from improvements to bathing waters. The biggest benefits are
for reductions in the risks to ecosystems and natural habitats.
20. We estimate that the environmental damage
costs, taking account of improvements to be delivered in AMP3
(by 2005) from all discharges and abstractions is £1.2 to
£1.9 billion per annum. The water industry is responsible
for half. Our programme will reduce the damage costs caused by
water companies by half, and take a step towards resolving issues
under the Water Framework Directive. Details of how we developed
the programme are in Annex 1.
21. We believe the benefits quoted above
are an under-estimate. We have been unable to include the monetary
value of some benefits for improvements to migratory fish in upstream
stretches, reductions in local aesthetic impact from discharges
in coastal waters, and economic development and regeneration associated
with better water quality. The developments we have in mind are
housing or commercial development in urban areas, once waterways
are cleaner and more attractive.
22. A further benefit lies in meeting increasing
expectations for good water quality and the security of water
supplies. Good quality, with thriving wildlife, reduces risks
and increases confidence that water resources are safe. The programme
will provide increased safeguards at a time of uncertainty in
planning for climate change.
23. We have published on our web site reports
on the scope of the programme, the environmental benefits, and
action required by other sectors for each operational Area of
the Agency.
4. HOW THIS
PERIODIC REVIEW
DIFFERS FROM
OTHERS
24. We welcome moves to improve transparency.
A Regulators Liaison Group represents Ofwat, Defra, Welsh Assembly
Government, the Environment Agency, English Nature and Drinking
Water Inspectorate. These, and Water UK, WaterVoice, the Wildlife
and Countryside Link and Welsh Assembly Government are working
jointly on market research to get the most efficient and authoritative
estimate of public opinion. The results of the first stage have
been placed in the public domain. Further research is underway
and will be published in December.
25. Water companies have published summaries
of their draft business plans. The Agency has reviewed draft business
plans (section 5.0) and is concerned about inconsistencies, which
means that information is not transparent for stakeholders.
5. DRAFT BUSINESS
PLANS
Water companies submitted their plans in August
2003. Ofwat published its overview of draft business plans in
October[3].
We are reviewing the draft business plans and will advise ministers
in November. Figure 1 shows the pressures on bills, as set out
in Ofwat's paper.
26. Our preliminary view follows.
27. We calculate that even if there were
no environment programme, overall bills would still need to rise
substantially. With no environment programme, based on the companies'
preferred strategies, the average household bill would rise from
£236 to £280.
28. The information about the impact on
prices of elements of the business is not presented consistently.
29. A key factor for many companies is maintaining
their financial attractiveness to investors. These financial costs
put pressure on bills, and capital investment needed to deliver
environmental improvements. These financial costs are spread across
the different elements of the companies' business, but not all
companies have done so in the same way. Apart from taxation, the
impact of financial costs on prices is not transparent, in either
companies draft business plans or Ofwat's paper.
30. A number of companies have challenged
legal and policy obligations. These include ones identified by
ministers as "essential and clear". Several companies
propose delaying until beyond 2010, all improvements under the
Habitats Directive. This would increase the risk of infraction
by the European Commission.
31. A comparison of the costs published
by companies, with estimates by the Agency and Ofwat, suggest
that some companies have significantly over-stated costs.
32. The plans divide the companies' activities
into sectors. There is a risk that this, in the demanding timetable
for PR04, means that companies will not look across their business
to find the most cost-effective solutions.
REGIONAL VARIATIONS
33. The South West has 3% of water customers
but 30% of the national coastline. Bills here have risen fastest
because of requirements to improve bathing waters and provide
treatment for crude sewage discharges to the sea. In the present
review, United Utilities, Yorkshire Water and Severn Trent will
be most affected by new requirements to improve freshwater fisheries.
34. Initial scrutiny of company draft business
plans shows evidence that because of differences in company customer
bases and financial structures, similar environmental programmes
in different parts of the country could have a different impact
on customer bills.
35. Table 1 shows how the water and sewerage
companies in England say the environment programme would affect
their customers' bills in 2010. This information is taken from
their published draft business plan summaries, as presented in
Ofwat's paper (see footnote 16). These figures need to
be treated with caution as companies have made different assumptions
in the allocation of financing costs across the environment and
the rest of their business.
36. In this price review, some companies
with small capital programmes are quoting large price rises for
2005 to 2010. Although South West Water has a modest environment
programme (see Table 1), it says prices for its customers need
to rise by 22% by 2010. Some companies have costed programmes
and solutions that go significantly beyond the Agency's recommended
programme.
Table 1
WATER AND SEWERAGE COMPANIES' ASSESSMENT OF THE IMPACT
OF THE ENVIRONMENT PROGRAMME ON BILLS[4]
| Company | Price increase for the environment by 2010
|
| Plan A[5]
| Plan B |
| Anglian Water | £15 |
£27 |
| Northumbrian Water | £5
| £11 |
| Severn Trent Water | £3
| £9 |
| South West Water | £8 |
£16 |
| Southern Water | £73 |
£118 |
| Thames Water | £5 |
£9 |
| United Utilities | £94
| £165 |
| Wessex Water | £14 |
£22 |
| Yorkshire Water | £10 |
£54 |
| | |
6. WATER RESOURCES
PLANS
37. We are reviewing draft plans. These were submitted
with the draft business plans. We will report to ministers in
November. Our preliminary view follows.
38. The quality varies. Many require a lot of additional
work before the final submission in early April 2004.
39. Many companies have not followed agreed best practice
and the guidance of the Agency and ministers. This includes demand
forecasts, leakage, the environment programme, and choosing options.
40. Some companies propose a rise in leakage. This is
contrary to Government policy. Most propose that leakage volumes
will not reduce by 2030. We believe that advances in leakage control,
and pressure on scarce water resources will drive down the economic
level of leakage[6].
41. Most companies believe that per capita consumption
will rise and that they cannot do anything about it. There is
little evidence of commitment to demand management. There is an
emphasis on resource development, with proposals for the construction
of several new reservoirs. (The "twin track" approach
intends a more balanced look at resource development and demand
management).
42. Many companies have excluded schemes that deal with
the impact on sites covered by the Habitats Directive or Sites
of Special Scientific Interest. Even where they are included,
they are programmed after 2010, beyond the agreed timescales.
As noted above, this increases the risk of infraction.
7. BEYOND THE
2004 PERIODIC REVIEW
At the last periodic review, investment continued, but with
a cut in prices (Figure 2). The price cut was a result of operating
efficiencies, a reduction in implied profit levels, and out-performance
of the delivery of AMP2. We believe the cut in price sent the
wrong signal about the need for long-term investment, and the
cost of water.
43. The Agency questions whether it might have been possible
to have more investment at the last review. The industry has questioned
whether the financial assumptions were sustainable. The price
cut at the last review means that there is a greater pressure
on prices for this price review.
44. Figure 2 also shows the impact of the companies'
preferred strategies on average household bills by 2010, and the
contribution of the environment programme to the price rise. The
environment programme is only one element of the price rise, and
the Agency is of the view that there is scope for further challenge
of the price implications of companies' preferred strategies.
45. Big issues like the Water Framework Directive,
climate change, and the provision of resources for new development
like the Thames Gateway, means continued investment. The industry
needs a long-term view of the environmental pressures, and a sustainable
financial structure for the future that will allow adequate investment
in the long term.
46. The Agency is of the view that the pressures on bills
cannot be solved by simply delaying environmental improvements.
Annexes
Annex 1: Development of the Environment Programme
Annex 2: A Good Deal for Water [not printed here]
21 October 2003
Annex 1: Development of the Environment Programme
We examined the risk of breaches of statutory requirements
and the risk of environmental impacts. We looked at causes, and
at the options for tackling the issues. This resulted in environmental
requirements for each scheme, for example, limits on discharge
quality. Where we were uncertain about the measures, we proposed
investigations.
All schemes have been assigned "drivers"[7].
These define the obligations the scheme would deliver. The requirements
for each scheme have been identified according to national guidance
developed by the Agency, with English Nature for nature conservation,
and have been subject to rigorous quality assurance. The guidance
has been provided to water companies and other regulators.
The drivers for environmental improvements are summarised
below:
WASTE WATER
TREATMENT AND
STORM DISCHARGES
The Directive on Urban Waste Water Treatment imposes
minimum treatment requirements on sewage effluents. The level
of treatment depends on the size of the discharge and on the type
of water to which it is discharged. The outcome is better water
quality, particularly for rivers and coastal waters thought to
be at risk from eutrophication. It also covers improvements to
intermittent (storm) discharges of sewage, so reducing sewage
litter in rivers and on beaches. The Directive on Integrated
Pollution Prevention and Control controls activities at sewage
works receiving certain discharges from industry via sewers, or
where sludge is incinerated.
WILDLIFE AND
HABITATS
The Habitats and Birds Directives safeguard sites
and threatened species that are important at the European level.
The sites, Special Protection Areas and Special Areas of Conservation,
form a network known as Natura 2000. Sites designated under the
Convention on Wetlands of International Importance, especially
as Waterfowl Habitat (Ramsar sites), are afforded the same protection
as sites designated under these Directives.
English Nature and the Countryside Council for Wales notify
Sites of Special Scientific Interest (SSSIs). These form the network
of protected sites of national importance for conservation. Although
water companies have always had a duty to conserve SSSIs, the
Countryside and Rights of Way Act 2000 puts additional duties
on public bodies, including Ofwat, the Agency and water companies,
to further the conservation and enhancement of SSSIs.
The Biodiversity Action Plan is a commitment through the
Government's signing of the Convention on Biological Diversity.
The Government has stated that it will meet its duties to conserve
biological diversity under the Countryside and Rights of Way Act
through the England Biodiversity Strategy. This sets out work
for the next five years.
FISH AND
RIVERS
The directive on Freshwater Fish protects and improves the
quality of waters for fish. Some 20,000 kilometres of river are
covered and Defra and the National Assembly for Wales are currently
consulting on the designation of a further 11,000 kilometres of
additional stretches of river and canals and 90 still waters (equivalent
to an area of over 14,000 hectares). Also, 40,000 kilometres of
river have River Quality Objectives. These define the water quality
needed to protect fish, the use of the river for recreation and
to ensure water quality for abstractions for water supplies, industry
and agriculture.
DIRECTIVE ON
BATHING WATERS
Sets water quality standards to protect public health and
the environment.
DIRECTIVE FOR
SHELLFISH WATERS
Lays down standards for waters designated as shellfisheries
and so protects shellfish and improves the marine environment.
The Shellfish Hygiene Directive, sets conditions for the production
and marketing of shellfish intended for human consumption.
GROUNDWATER
The Groundwater Regulations control the entry of certain
substances into underground water and so protects these waters
and the water supplies and rivers that depend on them. There are
also cases where the abstraction of underground water may have
too much impact on water quality and companies may need to develop
an alternative source for drinking water. There are also cases
where companies act to control the spread of historic pollution
caused by others.
SEWAGE SLUDGE
REGULATIONS
In most cases the best option for sludge is recycling to
agricultural land. This is regulated through the Sludge Regulations.
Further sewage treatment could increase sludge volumes. Restrictions
could be placed on sludge disposal on agricultural land as a consequence
of the Nitrate Directive, the Landfill Directive and
the Groundwater Regulations.
CHEMICALS
Schemes for the Directives on Dangerous Substances cover
extra treatment needed to deal with diffuse inputs of pollution
to sewers and so reduce the amounts of chemicals entering the
water environment. The Agency has also presented research on the
feminisation of fish by chemicals in effluent. We recommend a
programme with the water industry to establish the basis for any
future changes needed in sewage treatment.
LOCAL ACTIONS
This covers improvements that are not required under other
headings, but have local support and will bring environmental
improvements that will not be achieved in any other way.
WATER FRAMEWORK
DIRECTIVE
Action taken through the above will form a cost effective
and adequate preparation for this Directive. This heading covers
additional action, specific to the Directive, where this would
be more efficient in the long run, for example stopping a discharge
to groundwater that will be banned rather than spending money
on treating it.
ASSESSMENT OF
BENEFITS
We made a systematic assessment of the benefits, in accordance
with ministerial guidance. The aim is to:
— provide customers and stakeholders with justification
for our proposals; and,
— inform decisions by ministers for schemes where
there are choices about what should be done.
These assessments are based on a review of the available
studies and inputs from the leading experts. The underlying methodology
has been peer reviewed, and agreed by Defra, Welsh Assembly Government
and Ofwat.
For each scheme classified by ministers under "choices
to be made" we have combined our assessment of the benefits
with the companies' estimates of the costs from draft business
plans, as reviewed by Ofwat. We will submit to Defra a ranking
of these schemes based on the ratio of benefit to cost, and other,
non-monetised, factors.
We have also assessed the environmental benefits of the overall
environment programme for each company. This includes qualitative
and quantitative benefits and monetary values where appropriate
and possible. We will also identify where action is required in
other sectors to deliver the environmental outcome.
COSTS
We have, with Ofwat, also carried out an assessment of the
costs of our proposals using data from the last periodic review
and other information.
We have used this, with an analysis of Ofwat's Final Determination
of the 1999 Periodic Review, to assess the impact on bills. By
2010, the programme we propose would contribute to the average
bill no more than the 50p per household per week. In making this
statement, we acknowledge that there may be substantial variations
between companies.
We also sought advice from OXERA on the relationship between
water industry investment and prices.
1
Phosphorus is an essential nutrient for plants but in excess
it leads to an imbalance. Eventually freshwater habitats can be
dominated by algae, with loss of higher plants and their associated
animals. Back
2
The Water Framework Directive will be transposed into
UK Law in 2003 and through River Basin Plans will require
actions by water companies and others to meet new environmental
objectives. Back
3
Setting water and sewerage price limits for 2005-10: Overview
of companies' draft business plans, Ofwat, October 2003. Back
4
Table complied from "Setting water and sewerage price
limits for 2005-10: Overview of companies" draft business
plans, Ofwat, October 2003. Back
5
Plan A and Plan B are the reference plans contained in draft
business plan. They are based on common assumptions provided by
Ofwat. For the environment programme, Plan A includes schemes
for drivers, which ministers have said are "essential and
clear". Plan B includes additional schemes for drivers which
ministers have identified as "choices will be made"
or "essential when clarified". Back
6
The economic level of leakage is the level of leakage at which
it would cost more to make further reductions than to produce
the water from another source. Back
7
Environmental Drivers for PR04, version 3, April 2003. Back
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