Memorandum submitted by Natural England
(Ofwat 07)
OFWAT'S PRICE REVIEW 2009
1. INTRODUCTION
1.1 Natural England was established as a
non-departmental body under the Natural Environment and Rural
Communities Act 2006.
1.2 It is charged with the responsibility to
ensure that England's unique natural environment including its
flora and fauna, land and seascapes, geology and soils are protected
and improved.
1.3 Natural England's purpose as outlined in
the Act is to ensure that the natural environment is conserved,
enhanced, and managed for the benefit of present and future generations,
thereby contributing to sustainable development.
1.4 It has responsibility for ensuring that
landowners and public bodies (including water companies) deliver
objectives for European protected sites (Natura 2000 sites) and
the requirements for achieving and maintaining favourable or recovering
condition on Sites of Special Scientific Interest (SSSI). Natural
England also, in partnership with others, seeks to ensure delivery
of the Government's wider Biodiversity Action Plan (BAP) commitments.
2. SUMMARY OF
NATURAL ENGLAND'S
COMMENTS
2.1 Natural England's role in PR09 is to
ensure that water company investment delivers the necessary requirements
for protecting and enhancing natural environment. Natural England
has worked closely with Government, Ofwat and other Regulators
to inform the development of advice and guidance on PR09. The
timely production of Government guidance and the development of
key partnerships both at a national and regional level between
the regulators during PR09 has helped develop a programme of investment
in the environment on which there is a wide measure of agreement.
This has particularly supported the development of investment
in longer term sustainable catchment proposals, many of which
will deliver multiple objectives for consumers and the environment.
2.2 Natural England has worked particularly closely
with the Environment Agency and water companies at a national
and regional level to produce a well-evidenced and targeted programme
of investment in the environment, enabling water companies to
deliver their statutory obligations.
2.3 Natural England welcomes the steps to
bring a 25 year planning horizon into the process for PR09 but
believes this has only had a limited impact on the process because
of the way companies are in practice constrained within the 5
year periodic review.
2.3 There continues to be a mismatch in
timing between periodic reviews and the reporting framework for
other major water policy drivers, particularly the Water Framework
Directive (WFD). We believe the time is now right for changes
to be made to fully align the price review process with the WFD
so that long term investment in environmental improvement can
be optimised.
2.4 Natural England has worked jointly with
other regulators on two stages of consumer research into PR09.
The results that have emerged from this research show, as did
similar research during the previous PR04 process, that consumers
have very limited awareness of the extent of work that water companies
carry out. The more informed consumers are, the more they find
the company proposals in the draft business plans acceptable.
We believe that an important lesson learned from PR09 is that
regulators and water companies should be working together to improve
the level of consumer awareness to help inform the next periodic
review.
2.5 We believe it is important to understand
that current investment labelled as "environmental improvements"
are focused on preventing and remedying environment damage caused
by past unsustainable activities. Natural England believes it
is the responsibility of the water industry to plan long term
investment around climate change and the needs of the environment.
To do this the industry needs support for innovation and Natural
England would like to see this recognised in the recommendations
of the Cave Review.
2.6 Supplying water costs society far more
than is reflected in the current price of water. Securing the
funding for priority investments concerning climate change and
the needs of the environment will continue to be problematic unless
this discrepancy is addressed. The economic cost of water supply
and the scarcity of water need to be signalled to consumers (both
commercial and domestic) through prices that they pay. Whilst
it is important that water is affordable, the Government needs
to ensure that mechanisms exist outside of the price review to
ensure that vulnerable customers are protected and that this issue
does not constrain the needs for meeting environmental obligations.
2.7 We expect opportunities to arise through
the Cave and Walker Reviews and the Floods and Water Bill to improve
future periodic reviews. We believe that the price review should
provide the mechanism for ensuring water companies continue to
invest in delivery of their statutory obligations, in the most
cost effective way for both consumers and the environment.
3. CONDUCT OF
THE REVIEW
3.1 Natural England's Role
3.1.1 Natural England's role in PR09 is
to ensure that statutory requirements for protection and enhancement
of the natural environment are met and that there is adequate
opportunity for water companies to develop more sustainable solutions
to tackling water resource and water quality issues. Protection
and enhancement of the natural environment including biodiversity
depend critically on water companies delivering improved, integrated
and sustainable land and water management.
3.1.2 Natural England has provided advice to
Government and to the other Regulators on the investment programme
needed to deliver the necessary requirements for the natural environment.
We are a member of both the regulators Chief Executive Group (CEO)
and the Senior Coordinators Group for PR09. We have been involved
in the development of Defra's Statement of Obligations to water
companies and their Social and Environmental Guidance to Ofwat.
We have been engaged in the development of further guidance and
advice to water companies from Ofwat, the Drinking Water Inspectorate
and the Environment Agency. We have worked closely with Ofwat
and the Environment Agency to jointly brief Ministers on draft
business plans and are planning a similar briefing on final business
plans.
3.1.3 We are part of the national Steering Group
that has designed, commissioned and provided funding for two stages
of consumer research into customer priorities PR09.
3.1.4 At a regional level Natural England
also sits on the quadripartite groups with each water company.
Originally set up between four organisations (the water company,
the Consumer Council for Water, the Environment Agency and the
Drinking Water Inspectorate), Natural England's representation
makes this a 5-way stakeholder group, which has proved an invaluable
forum for agreeing investment priorities.
3.2 Water company investment in the natural
environment
3.2.1 The health and well-being of society
is dependent on a healthy natural environment, and both society
and the environment depend on water. Rivers, lakes and terrestrial
wetlands (such as fens, bogs and wet grasslands) rely on a natural
supply of water, in the both the right quantity and quality. Drainage
and abstraction are drying out many wetland habitats particularly
in lowland England. Most freshwaters in England as well as extensive
areas of coastal waters are also affected by problems with water
quality, primarily nutrient enrichment.
3.2.2 As at February 2009, 358 SSSIs were failing
the Government PSA target for 95% of SSSIs to be in a favourable
or recovering condition by 2010, as a result of abstraction, inappropriate
water levels and/or pollution from point source discharges. The
2005 Biodiversity Action Plan assessment for England indicated
declining trends for wetland biodiversity.
3.2.3 Natural England has been working closely
with the Environment Agency and water companies to develop a well-evidenced
environmental programme for PR09. This includes schemes and investigations
to address the condition of SSSIs and Natura 2000 sites and key
Biodiversity Action Plan habitats and species alongside requirements
for the Water Framework Directive. The information to support
proposals has been taken from Natural England's remedies database,
the outcomes of the Environment Agency Review of Consents process
and the outcomes of investigations funded through PR04. As a result
water companies have been able to carefully target their investment
proposals and Natural England expects PR09 to make a considerable
contribution towards addressing environmental requirements.
3.2.4 Natural England has encouraged water
companies to invest in more sustainable and cost effective approaches
in PR09, particularly building on the lessons learned from catchment
schemes in PR04. The number of catchment proposals submitted in
draft business plans was a very encouraging response from companies.
We believe these represent the new, innovative and enlightened
way to cut pollution at source and address issues around water
resources, drinking water quality, the sustainable use of natural
resources and climate change adaptation. These proposals are in
the long term interests of consumers, companies and the environment
and there are now around 100 proposals likely to be included in
final business plans.
3.3 The PR09 planning framework
3.3.1 We believe the 25 year planning framework
introduced in PR09 has only had limited impact because the current
process of economic analysis of 5 year business plans is still
not consistent with this longer term 25 year planning and restricts
the ability for companies to secure any longer term obligations.
A few companies are now proposing investment over a number of
AMP periods, but it is not easy for them to do so. Many environmental
targets may be best achieved over the long term and some water
companies need to make clear obligations over the long term (such
as under the Water Framework Directive).
3.3.2 We welcome the wider focus on a 25 year
planning process, but we believe it must be used to enable water
companies to adopt strategic approaches towards sustainable development
and climate change, and to innovate in their approach to these
issues.
3.3.3 During PR09, partnership work between
regulators has helped focus advice and guidance and supported
the development of longer term proposals with companies. The timely
production of Government guidance (the Statement of Obligations
and the Social and Environmental Guidance to Ofwat) was important
in providing guidance to companies and regulators about statutory
and policy obligations relevant to the process.
3.3.4 We particularly welcome the approach
taken by Ofwat to work more positively and closely with other
regulators during this periodic review which we believe has made
a significant contribution towards the development of sustainable
catchment proposals. A number of these proposals will deliver
multiple objectives, with other stakeholders, in a more cost effective
way, addressing around drinking water quality, biodiversity, carbon
management and diffuse pollution.
3.3.5 We highlighted during PR04 the mismatch
in timing between PR09 and the reporting cycles for other major
drivers for water policy such as Water Framework Directive. Our
concerns continue as PR09 has not been fully aligned with the
production of River Basin Management Plans or the completion of
the Water Resource Management Plans (the latter subject to delays
from Defra and Welsh Assembly Government). The Water Framework
Directive (WFD), now being implemented by all countries across
the EU, will be the driver for water policy and investment in
the foreseeable future. It is imperative that the price review
is fully aligned to the WFD process so that long term investment
in environmental improvement can be optimised. The timing is now
right for changes on this scale to be explored in advance of future
reviews and we urge the Committee to consider such advice to Government.
3.3.6 Ofwat should be encouraged to engage
regulators in wider discussions beyond PR09 to help support the
implementation of future regulation and development of competition,
through the continuation of the CEO Regulators Group. Not only
would this enable consistency of communication, but also enable
regulators to align and integrate their work across the sector
that may affect future investment and the role and process of
future periodic reviews. We believe this issue has become of increasing
higher profile during PR09 given the two independent reviews running
parallel to PR09 (Cave Review and Walker Review) both of which
are likely to result in changes to future regulation of the industry.
3.3.7 We believe that regulators (led by
Ofwat and the Consumer Council for Water) should work together
to focus on improving the level of consumer awareness and understanding
about the work that water companies actually do. As evident in
the 25 year Strategic Direction Statements, not all companies
are good at awareness raising. Ofwat should be ensuring that companies
improve the level of information they provide customers and this
work should be an important precursor to support the next periodic
review.
3.3.8 This is demonstrated as a result of
our work with Ofwat and other partners on two stages of consumer
research into customer priorities for PR09. Key headline messages
from the research include: consumers currently have limited
awareness of the extent of work that water companies need to do
to both maintain the environment and improve environmental standards[26]
and customers that have a better understanding
and awareness of their company responsibilities found the draft
business plan more acceptable.[27]
A similar outcome arose from the customer research carried out
to support PR04 and we consider it important that regulators need
to act upon the outcomes of this research in preparation for the
next periodic review.
3.4 Cost Benefit Analysis
3.4.1 Investment in the environment is frequently
singled out for more scrutiny in a periodic review than other
areas of investment. However, we believe the PR09 process has
constrained the ability for regulators to fully understand the
costs and benefits of all proposals within the draft business
plans. Ofwat's guidance for PR09 gave water companies scope to
adopt different approaches for valuing the benefits of schemes
and for conducting their cost benefit analysis (CBA). This makes
it difficult not only to challenge investment proposals but also
to understand and compare the differences in costs and benefits
that might be gained from longer term, as opposed to shorter term,
investment in climate change and the environment. We would like
Ofwat to develop a common method for the valuation of benefits
and a process that provides a transparent and consistent approach
to analysis.
4. HOW LONG-TERM
PLANNING FOR
CLIMATE CHANGE
AND ENVIRONMENTAL
IMPROVEMENTS SHOULD
BE PAID
FOR
4.1 The majority of actions labelled as
"environmental improvements" in a Periodic Review prevent
and undo environmental damage caused by past unsustainable water
abstraction and discharge of sewage, and third party activities.
Water company investment, as well as meeting statutory obligations,
should be making a significant contribution to the Government's
PSA delivery agreements, particularly: PSA 18: promote better
health and wellbeing for all, PSA 27: lead the global effort
to avoid dangerous climate change, and PSA 28: secure a
healthy natural environment for today and the future.
4.2 It is important to also understand that wider
investment in capital maintenance and maintaining security of
supply will also make a significant contribution to delivery of
these PSA agreements.
4.3 Natural England believes it is the responsibility
of the water industry to plan long term investment around climate
change and necessary environmental management and improvement.
We believe water companies should be encouraged and supported
to innovate and develop sustainable and lower cost solutions which
will achieve multiple environmental targets.
4.4 We are particularly interested in the
creation of an industry that works across longer planning horizons.
We believe this would enable a shift from the expensive "end
of pipe" solutions (the primary choice of current investment)
to the development of water efficient, sustainable solutions.
Examples include:
— source protection schemes delivered
at a catchment scale that protect the quality of the water supply,
support climate change adaptation and sustainable use of natural
resources; and
— development of renewable energy,
such as anaerobic digesters.
4.5 Many of these solutions can be developed
and delivered in partnerships as they benefit a wide range of
sectors. We believe if companies are required to invest in this
way these solutions will be more cost effective for the water
consumer, as well as wider citizens, in the longer term.
4.6 In order to take this forward companies
need support to innovate and to be given opportunities to trial
and pilot alternative approaches. We welcome the positive progress
being made through PR09 to develop and support catchment proposals.
This is a step in the right direction, but regulators and Government
need to provide greater clarity and support to water companies
in doing this.
5. THE COST
OF WATER
AND AFFORDABILITY
5.1 To help address future investment in
climate change, the environment and sustainable use of water in
the future, we believe that the economic cost of water supply
and the scarcity of water need to be signalled to consumers through
prices. This will help inform their choices about where to locate
in the country, improve awareness of the amount of water that
they use, how they can manage their consumption and whether to
invest in measures to increase efficiency.
5.2 Pricing of water in England is currently
based only on direct costs of supply and administration. However,
supplying the water costs society more than this. The full economic
cost of water supply includes the externalities and user costs
of supplying the water as well as the direct costs of supply.
Natural England believes that this full cost and the scarcity
of water should be signalled to consumers (both domestic and commercial)
through the prices that they pay. Both of these differ between
regions in England. We also believe that better incentives should
be provided to companies to introduce metering as a priority in
areas of environmental stress and to help protect vulnerable customers.
5.3 Natural England recognises the need
to ensure that water is affordable and that vulnerable customers
are protected. We believe that water companies have a role to
play in developing tariff structures to protect vulnerable consumers,
but we believe the Government needs to ensure that mechanisms
exist outside of the price review to ensure that vulnerable customers
are protected and that this issue does not constrain the needs
for meeting environment obligations.
6. HOW THE
PRICING REVIEW
RELATES TO
THE CAVE
AND WALKER
REVIEWS AND
THE DRAFT
FLOODS AND
WATER BILL
6.1 The Cave and Walker Reviews need to
make recommendations that ensure the water industry delivers the
high standards that are required for sustainable management of
the water environment
6.2 The draft Floods and Water Bill will be the
enabling legislation for implementing the agreed recommendations
from the Cave and Walker Reviews.
6.3 The pricing review provides the mechanism
for ensuring water companies deliver their statutory obligations,
including under the Floods and Water Bill, and invest in the most
cost effective way for both consumers and the environment.
6.4 Natural England believes the following
opportunities should arise for the pricing review from the Cave
and Walker Reviews, and the subsequent Floods and Water Bill:
6.4.1 A framework for companies to innovate
and invest in research and development to help plan for longer
term investment.
6.4.2 Reform of the abstraction licensing
system (and where necessary the discharge consent system) that:
— signals the regional economic cost
of water supply;
— signals the regional scarcity of
the resource;
— provides sustainable management of
the water environment;
— provides the necessary assessment
and intervention to ensure provision of non-traded services provided
by water and to address externalities; and
— enables the water industry to meet
carbon reduction commitments.
6.4.3 Introduction of statutory water efficiency
targets for the water industry and other sectors, through to 2050,
to enable the Government to deliver its aspirations to improve
water efficiency and drive down per capita consumption. These
targets should be used to influence other sectors, including:
building regulations, spatial planning guidance, the manufacturing
industry, agriculture, the design and purchase of water efficient
goods and services, household certification of water efficiency
and improvements to the provision of consumer information.
6.4.4 Better understanding of the full cost
and scarcity of water, ensuring this is signalled to consumers
through pricing and accelerating the introduction of metering
in priority areas. This will ensure in the long term a better
and more equitable balance between what customers pay for their
water services and the impact of their demands on the natural
environment.
Natural England
February 2009
26 Deliberative Research concerning Consumers' Priorities
for PR09, Corr Willbourn Research, 2008. Back
27
Understanding customers' views-PR09 Quantitative Research into
customer priorities, MVA/BMG, 2009 Back
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