Memorandum submitted by Yorkshire Water
SUMMARY
1. This submission is in response to the
Committee's press release dated 3 November, announcing the inquiry
to examine the work of the Environment Agency. The submission
has been structured to address the areas highlighted in the press
release and represents Yorkshire Water's view in specific areas
relating to the Agency's operation.
2. The response focuses on three key areas
of the Agency's operations:
— The Agency's duty to undertake and
adhere to the principles of cost benefit analysis and the failure
to do so effectively. This means that short term "end of
pipe" solutions rather than tackling the sources of diffuse
pollution tend to be sought. This approach results on higher costs
to society as a whole and does not reflect the principle of polluter
pays.
— The Agency's lack of internal processes
to control its own costs, which results in cross subsidies between
different aspects of its operation, with reference to the example
identified by a recent National Audit Office report. The opportunity
to make efficiencies in regulating environmental licences is also
reviewed.
— The final area relates to how interpretation
of policy defined by Defra, often results in driving additional
costs for the water industry as a result of the Agency's need
to provide technical guidance. This guidance does not take due
cognisance of costs and benefits, which results in increased bills
for our customers.
HOW SUCCESSFUL
THE ENVIRONMENT
AGENCY HAS
BEEN IN
ITS ROLE
AS ENFORCER
OF ENVIRONMENTAL
REGULATION AND
CONTROLS, AND
HOW WELL
IT MANAGES
ITS WIDE
RANGE OF
ACTIVITIES
3. Whilst the Environment Agency has been
successful in its primary role as enforcer of environmental regulation
and controls, it continues to struggle at times to consult in
a timely and or appropriate manner, and in particular to understand
and apply the Duties it has under the Environment Act 1995, Section
37, to undertake and adhere to the principles of cost benefit
analysis. This failure can lead to the Agency seeking water companies
to invest in assets which will not provide good value investments.
4. The failure is due to a number of factors,
which include the Agency's lack of resources to undertake robust
river modelling to understand the impact of particular discharges
and what might be achieved through tightening of the consent conditions
versus controls which could be applied to diffuse sources of pollution.
5. For example, in the lead up to the 2004
Periodic Review, the Environment Agency was pressing for additional
storm tank storage at our Knostrop Waste Water Treatment Works,
which would cost in the order of £75 million. It was modelling
by Yorkshire Water that showed that the expected improvements
in river quality arising from providing this additional investment
would not be achieved. Whilst the Agency was persuaded by the
argument, the fact that the proposed investment was ever considered
shows a lack of understanding in the balancing of costs versus
the benefits to the environment for this particular investment.
6. Similarly within the first year of this
five year investment programme, the Agency have withdrawn requirements
for us to make a number of significant investments under the Freshwater
Fish Directive, as investments had been requested at assets which
discharge to controlled waters with no such environmental requirements.
7. The Agency continues to be hamstrung
by poor legislation drafted in Europe. An example of this, which
is driving wide scale appeals on discharge consents, is the application
of the 1976 Dangerous Substances Directive. This Directive requires
the cessation of discharges which contain substances which are
ubiquitous in the sewage such as Cadmium which enters the sewerage
system, all be it at very low levels, in faeces. Poorly thought
through legislation not only diverts resources away from more
important matters, but drives unsustainable practices and investment
programs in industry. It is essential therefore that the Agency
intervene in a timely manner in Brussels and support Defra in
its endeavours to influence the legislative process early on to
make sure that our MEPs take the economic, social and holistic
environmental consequences of their decisions into account before
approving new legislation.
8. The Agency has on several occasions failed
to consult effectively on key issues such as changes to their
consenting policy arrangements that have the potential to drive
significant amounts of new investment by the water industry. This
issue has been discussed with the Agency nationally, who have
agreed to review not only the timeliness of their consultation
processes, but the way in which our trade association and key
customers such as water companies are informed of such changes
.
9. The regulatory framework in which the
water industry operates is governed by a five year investment
cycle. This framework can leads the Agency to be forced to seek
"end of pipe" solutions rather than more cost effective
longer term softer engineering solutions, which may be more cost
effective such as those to tackle diffuse pollution from agriculture.
This increases the pressure on water companies' customer's bills
rather than making the actual polluter pay. We hope that the Water
Framework Directive with its "cost beneficial" test
will be fairly and transparently enforced to ensure that the best
value solution to pollution challenges are enforced, and not those
which are politically expedient.
WHETHER THE
AGENCY OPERATES
EFFICIENTLY AND
PROVIDES GOOD
VALUE FOR
MONEY
10. There is a fundamental issue over value
for money that arises from the Agency's dual role as a regulator
and operator. The confusion between its regulatory role and its
operational role leads to cross subsidy.
11. This is no more apparent than in the
cross subsidy identified in the recent National Audit Office report
on Efficiency in Water Resource Management, [4]which
identified a cross subsidy between water resources and land drainage.
This is particularly relevant given the Agency's consultation
on their proposed water abstraction charges scheme. [5]
12. The approach taken by the Agency in
the consultation states that in order to recover costs to compensate
abstractors who no longer have access to a licensed abstraction,
monies must be found to compensate such users. In terms of the
water industry, which is responsible for the vast majority of
water abstracted, there are effective systems to raise the required
funds.
13. However, the proposed combination of
a regional abstraction charge and a national compensation charge
is inconsistent and illogical and does not take account of the
areas of inefficiency identified by the National Audit Office.
Indeed the national approach of compensation charging as recommended
is incongruent with the Water Framework Directive, which divides
the UK into River basins for the purpose of cost recovery and
the setting of investment obligations.
14. Requiring water companies to make new
investments in water resources is not new, with funding for such
schemes being paid for by the customers who benefit from such
investments, which is a parallel to the polluter pays principal.
Cross subsidising such investments outside water company boundaries
breaks this regulatory principal and is incongruent with the incentivised
regime set up in 1989.
15. Yorkshire Water pays an annual charge
of approximately £5 million which impacts on our customers
bills. There is a lack of transparency on what these monies are
used for by the Agency, which means that we are not able to challenge
charges adequately. The company interfaces with offices in York
Leeds, Birmingham and Bristol. We believe that with appropriate
rationalisation, regulating our activities in Yorkshire could
be done for significantly less than the current costs.
16. The lack of transparency is because
the Agency does not currently the have detailed management information
systems required to make any assessment of the scope for efficiencies.
This is a failing, highlighted in the NAO report, which is totally
unacceptable, and would not be tolerated in any normal business
and particularly the in water industry, where significant real
efficiencies in operating costs have been delivered over the past
10 years.
17. With respect to waste water discharges
the Environment Act 1995, Section 41, gives the Agency the power
to make charges to recover the costs of regulating environmental
licences.
18. The Environment Agency's published data[6]
on the activities related to consenting and monitoring discharges
and the proportion of the costs associated with each activity
are listed below:
(a) Consenting & Direct Administration 25%
(b) Discharge monitoring and control 11%
(c) Monitoring (chemical & bacteriological) 17%
(d) Biological monitoring
6%
19. Much of the monitoring and laboratory
analysis duplicates work carried out by Water and Sewerage companies,
who monitor the performance of their own operational sewage treatment
plant. This monitoring is required to facilitate optimisation
of the operation of the sewage treatment works and give early
warning of any potential risk of non-compliance with the discharge
consent.
20. By comparison the Drinking Water Inspectorate
monitor companies compliance with the Water Supply (Water Quality)
Regulations through an audited self monitoring process.
21. If companies are able to demonstrate
robust auditable processes for a product that is essential for
their customers, then a similar process should be more than adequate
for monitoring discharges to the environment.
22. In 2003-04 the total cost to the water
industry of charges for discharges was £44.5 million. [7]Based
on the break down of costs detailed above, the Agency's costs
could be reduced in the longer term by between 30-40%, which equates
to £13.4 million-£17.8 million.
23. This assessment assumes that if companies
carry out their own sampling and laboratory analysis, there would
be no need for the monitoring (17%), laboratory (13-17%) and administration
(up to 6%) costs within the Agency.
24. Whilst the companies would incur additional
costs associated with setting up and maintaining a quality controlled
process, these additional costs would be considerably less than
the estimated Agency savings because of the level of duplication
that can be eliminated, with net savings in the order of £6.9
million-£8.9 million per annum.
25. As a result of identifying this potential
saving as part of the Government's drive to reduce Red Tape, a
pilot project has been set up involving the Agency and the water
industry to test the potential for making these savings and develop
the process for self monitoring of waste water treatment works
discharges. This will report its findings in 2006.
26. With the introduction of the WFD, there
is the potential for moving towards whole catchment style consents
rather than individual discharge consents. This approach would
not only facilitate a company's ability to deliver required outputs
more effectively and efficiently, but also enable the Agency to
focus effectively on monitoring and control of the environment.
This concept is also being explored with the Agency.
THE STRUCTURE,
GOVERNANCE AND
ACCOUNTABILITY OF
THE AGENCY
27. The Environment Agency is a very large
organisation with responsibilities that overlap with Natural England.
There is often a conflict between its role as an advisor and as
a regulator, which is not clear and can cause confusion. In business
terms it is a conglomerate where the disbenefits outweigh the
synergies. Its various roles in relation to water, let alone other
sectors, are government policy adviser, regulator, operator and
public information provider. To drive efficiency and effectiveness
these roles should be clarified, rationalised and re-structured
to drive a more effective cost effective regulator.
28. From an accountability view point the
Agency needs to embrace the Better Regulation Task Force principle,
however the lack of transparency is often lacking.
ITS RELATIONSHIP
WITH DEFRA,
DEFRA SPONSORED
BODIES AND
THE REST
OF GOVERNMENT
29. Defra's role is to set environmental
policy, whilst the Agency's role is to enforce this policy. However
through the interpretation of that policy, the Agency continues
to effectively make policy by the issuing of technical guidance
as the primary legislation is broadly written and often not clearly
defined. For example with respect to the Water Framework Directive,
the Agency is designated as the competent authority and it will
make recommendations through the programme of measures which will
drive potentially very large costs for the water industry et
al.
30. It is the programme of measures which
drives investment not the policy, which calls into question how
Government adequately controls costs of both the Agency and industry
and has regard to costs and benefits which is the basis of so
much law written in the EU and applied in the United Kingdom.
31. It is also the lack of appropriate cost
benefit assessments that causes unnecessary tensions between the
economic regulator, Ofwat, and the Agency at the time of a periodic
review of prices in the water industry.
32. As a result of the above the Agency's
advice often lacks a holistic view, with a concentration on standards
rather than providing an assessment of the whole impact of solutions.
This calls into question the interpretation of sustainability
and the response to the national strategy in this area, with frequent
insufficient attention paid to who will pay.
Yorkshire Water
December 2005
4 National Audit Office, Environment Agency Efficiency
in resource management, June 2005. Back
5
Environment Agency, Review of the water abstraction charges scheme,
September 2005. Back
6
Environment Agency Annual Charges for Discharges to Controlled
Waters 2004-05. Back
7
Source Ofwat June Returns Table 22 Activity Costing Analysis-Sewerage
Service. Back
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