Select Committee on Environmental Audit Minutes of Evidence


The price profile

  Paragraph 128. The Committee believes that roller coaster prices confuse consumers as to whether their valuable water resources are being carefully managed by the industry and how far they themselves should be bothering about water efficiency. As metering becomes more widespread, there will be an increasing price incentive to be water-efficient and clear pricing signals will be needed.

  29.  The evidence and the response to this report from Ofwat addresses the reasons for adopting particular price profiles. The immediate cut in prices was a reflection of past efficiency savings, and customers were already long overdue a direct financial benefit. Ofwat also points to companies having taken advantage of previous gradual price profiles to retain and distribute unsustainable profits and dividends, and that the companies' current criticism of "short-term" decisions needs to be seen in that context.

  30.  The Government shares the Committee's view that water pricing can offer important signals to efficient water use and the conservation of water resources. As the Committee rightly points out, this will become increasingly true as the proportion of household metering rises. However the Government is not convinced that the price profile of the Periodic Review will have a major effect in altering price signals for promoting water efficiency. Metered customers are encouraged to economise by the marginal price of water, not by its average price. A £100 measured water bill that fell to £80 and then rose back to £90 over the following four years would have altered the marginal cost of water very little. More important will be continuing incentive to use water efficiently to save marginal costs on bills.

Size and nature of the environment programme

  Paragraph 139. The Director should seek to ensure that the Final Determinations document makes clear how far changes in key factors such as the cost of capital have influenced the final outcome during the review process.

  31.  The respective roles of DETR and Ofwat in the iterative processes leading to the final determinations have been made clear in evidence, in the report and in the Government's response. The role of the Department in providing general guidance on policy and the quality programme is addressed under the recommendations in paragraphs 68 and 69 above. As that account explains, there was close collaboration between DETR and Ofwat in the costing of the quality programme and the modelling of its effect on prices. This included taking full account, in Ministers' final decisions on the components of the quality programme, of the best information on all matters at that time. There was not, as was suggested to the Committee, unused slack in the size of the investment package available.

  32.  The detailed attribution of one element of the package to a change in another for a given company is not a simple matter. The price determinations for each company are the unique outputs of iterative calculations based on many variables. It would nearly always be misleading to attribute a particular change in the outcome to a change in one variable in the model.

  33.  The Government takes very seriously its overall responsibility to those paying water bills. So, in considering particular schemes for the discretionary part of the environment programme, the Government seeks to ensure that these not only address priority areas for action, but also that the investment proposed will produce a cost-effective solution. The overall programme will therefore depend not only on the indicative size of the investment package agreed by Ministers, but also on the number of well-developed schemes which can be demonstrated to provide value-for-money. In some cases, further work on the options for tackling a particular problem may be needed.

New obligations

  Paragraph 142. The 1999 Periodic Review provides a satisfactory outcome for the environment but there is no room for complacency as we face new, future quality obligations and uncertain water resource constraints.

  34.  The 1999 Periodic Review provides for unprecedented environmental investment and gives a good deal for the customer. But we are not complacent. The Government will continue to follow a robust approach to assessing and meeting new quality obligations and managing water resources. It will want to be sure that the scale and incidence of costs and benefits are carefully examined and decisions are fully consistent with the principles of sustainable development.

  Paragraph 151. The Committee is concerned that there is an apparent lack of clarity in the present arrangements for dealing with the timely introduction of those environmental schemes which were approved within the National Environment Programme for 2000-05 but which are currently subject to re-evaluation and not included in the price limits. The Committee recommends that Ofwat reviews this process before the next Periodic Review.

  35.  The Government agrees with Ofwat that there is no lack of clarity about the schemes to improve river quality which were not included in the agreed investment programme for the Periodic Review. The costs and benefits of these schemes are being reappraised before decisions are taken on whether and when they should proceed. DETR has asked the Environment Agency, in conjunction with water companies, the Department and Ofwat, to explore in more detail the benefits of the schemes and set them out in a way which would allow a judgement to be made against improved information on costs. The assessment of these schemes will provide a useful test-bed for the new appraisal techniques mentioned under the recommendations in paragraph 90 above.

Tackling diffuse sources of pollution and ensuring the polluter pays

  Paragraph 159. The Periodic Review is an effective mechanism for dealing with point source environmental problems caused by water companies. However, the Committee is concerned that the DETR and the Environment Agency are disproportionately relying on the Periodic Review mechanism and the water companies as the key means to achieve compliance with water quality and environmental protection objectives and not sufficient tackling pollution from diffuse sources.

  Paragraph 160. The Committee welcomes the DETR's intention to encourage the Environment Agency to focus more regulatory effort on diffuse sources. The Committee recommends that the Department acts swiftly to ensure that the Agency can demonstrate an overarching enforcement strategy for dealing with diffuse sources of pollution.

  36.  The Government accepts that, until now, regulatory effort has been concentrated more on point sources of water pollution than diffuse ones. This reflects the fact that historically point sources have created more of an environmental problem, and technologically they are usually easier to address. It is past success in tackling point sources of pollution, including from sewage discharges, that has led to the effects of diffuse pollution being now both more visible and more important for securing further environmental improvements.

  37.  The Government agrees with the Committee that increased effort is required to identify and tackle diffuse sources of water pollution. We have agreed with the Environment Agency that they will devote increased resources to investigating and addressing diffuse sources which are impeding progress towards meeting targets for bathing water and river quality. Action to be taken will include improving both the provision of advice and guidance and, where relevant, the enforcement of legislation. The Department will track this commitment through the Agency's Corporate Planning process. The results should become evident as progress is monitored against published quality targets, including the analysis of shortfalls against these targets. Further action will be necessary in the future to meet the broader requirements of the recently agreed EC Water Framework Directive.

Water Quality Programme

  Paragraph 163. The Committee would welcome a report on the progress of the DWI's review of its procedures and on the adequacy of its resources.

  38.  DWI addresses this issue in its own response submitted to the Committee on 10 January.

Interfacing with planning process

  Paragraph 171. The Committee believes that the Director's statement in Appendix E was inappropriate and his remit in this area, or lack of it, should have been made clear.

  Paragraph 172. Overall, the Committee is satisfied that there is a suitable framework in place which should provide the necessary interface between the planning system and the required outcomes provided for by the Periodic Review. However, this framework is not being utilised as it should be in all cases.

  39.  It is, in the first instance, for the local planning authority determining a planning application to decide what matters it may be relevant to consider, and what weight to attach to a particular material consideration. Disappointed applicants have a right of appeal to the Secretary of State. We share the Committee's concern that the planning framework should be used effectively, and would urge local planning authorities and water companies to enter into proactive discussions, both when identifying sites for new waste water treatment plants when development plans are being drawn up and when planning applications are made.

  Paragraph 173. The Committee is concerned that evidence indicates that local planning authorities (LPAs) do not always seem to recognise the importance of the statutory obligations faced by the water companies and the extent of the National Environmental Programme which needs to be delivered with their co-operation. The Committee recommends that the Government provides the LPAs with clearer guidance which is also relevant to the Government's international commitments.

  40.  We accept this recommendation. When a suitable opportunity arises we will provide local planning authorities with further general guidance to assist their decision making in relation to waste water treatment plants. In the meantime, we will draw this response to the attention of authorities and ask them to have regard to it.

Long term planning

  Paragraph 179. The Committee believes that the current Periodic Review Process, operated by Ofwat, provides a fair and open system for determining water price limits and thus provides valuable incentives for water companies to reduce operating costs and to search for innovative ways of designing and operating new schemes. However, we recommend that the DETR, companies and the regulators ensure that the five year investment programmes of the Periodic Review are set in a comprehensive, clear framework of longer term, policies and goals including those relating to water resources and environmental quality and serviceability goals. In turn, these five year programmes should be seen as contributing to the achievement of these goals.

  Paragraph 180. The Committee believes that the DETR should take the lead in setting out the policy framework and environmental future at the outset of the Periodic Review process as recommended in paragraph 93.

  41.  The Committee's view that there should be initial policy guidance from the Government is dealt with under recommendations above (especially paragraph 94). The Government will continue to examine the scope and timing of Government guidance on the policy framework for future reviews.

  42.  The Government agrees that long term planning will be helped if it produces strategic policy framework documents to inform all stakeholders' preparations for future Periodic Reviews. DETR is therefore working with the Environment Agency with the aim of publishing a strategy document on the environmental quality of water. This will assess key pressures on the water environment, the extent to which existing policies and programmes will enable quality objectives and targets to be met, and likely future action needed. The strategy will need to look ahead to 2015, when new quality targets required by the recent EC Water Framework Directive must be met.

  43.  The Government has already acted to provide a long-term framework for water resources planning. The Environment Agency required each water company to work to prepare and agree, by April 1999, a water resources plan, showing how an adequate balance between water supply and demand would be maintained throughout the next 25 years. The Environment Agency reported[11] to the Secretary of State in June 1999 on the outcome of that process. These plans are to be kept under annual review. These water resources plans, updated as appropriate in the light of annual reviews, should form the basis for each water company's submission on supply/demand balance issues to the Director General's Periodic Reviews of water prices. The Environment Agency is also preparing a 25 year water resources strategy for the whole of England and Wales. To be published in March 2001, it will reflect the agreed contents of water company water resources plans and consider demands from industry, agriculture and other uses of water together with the need to protect the water environment.

Ofwat's "no detrioration" approach

  Paragraph 198. The Committee accepts that ultimately this option is open to the companies to avoid licence breaches. However, efforts should be made to ensure that Ofwat's methodologies for determining funding levels incorporate more forward-looking elements.

Developing a new approach

  Paragraph 208. Water companies need to manage and renew their sewers and water mains in order to develop appropriate levels of service to their customers on a sustainable basis. The Committee is not satisfied that Ofwat's "no deterioration" approach to the maintenance and renewal of underground assets (sewers and water mains) is a logical or acceptable means of assessing the amount of investment which water companies need to meet these requirements. The Committee believes that this approach has amounted to intellectual neglect of this important problem.

  Paragraph 209. The Committee therefore very much supports the initiative of the DETR, and the agreement by Ofwat, to develop a new approach. This approach should be forward-looking and should enable companies to adequately prepare to renew and repair the cohorts of sewers and mains which will come up for renewal/rehabilitation simultaneously as a result of historical peaks in building activity.

  Paragraph 210. It is imperative that the new approach is in place in time for the next Periodic Review, with water industry support and assistance. The Committee acknowledges Water UK's recent initiative to develop an agenda for assessing capital maintenance needs. This is a key area of responsibility for water companies and the Committee hopes that the industry will now continue to make a pro-active and positive contribution to developing new methodologies.

  Paragraph 211. The Committee recommends that the DETR moves rapidly to commission work in this area and examines the suggestions put forward by Water UK and OXERA regarding the necessary elements of new methodologies. It is imperative that water companies and Reporters are fully engaged in the processes of developing and implementing any new approach and that the latter receive appropriate training.

  Paragraph 212. In future Ofwat must make clear exactly what data and analysis it expects the companies to provide with respect to their capital maintenance needs.

  44.  The Government wants to see a strategic approach to capital maintenance, as set out in Raising the Quality. This should build on Ofwat's existing serviceability approach, and should not be linked to current asset condition alone. Asset age and condition do not, on their own, provide a guide to the appropriate level of expenditure or the most efficient allocation of resources. The Government considers an economic framework, related to current and likely future asset performance (serviceability), is likely to provide the best way forward.

  45.  The Government is committed to working with Ofwat, the quality regulators and the water industry to consider how best to take discussions on asset maintenance forward, before the next Periodic Review. This work should examine all the issues and options put forward, including those by Water UK and others. As the Committee recommends, it will be important for this work to investigate the practicability of approaches that are forward-looking, taking account of the risk of asset failure (probability and impact) as well as past historical trends. Useful discussions have already started, in which DETR is playing a full part. A joint study by Ofwat an DWI is also already under way, and is described in the Inspectorate's response to recommendation 209. The government looks forward to seeing the outcome of this work and will work with Ofwat and both quality regulators to agree the best way forward.


Setting the right framework

  Paragraph 220. The Director General of Ofwat should be directly accountable for ensuring that Ofwat makes a positive contribution to the Government's sustainability agenda. The Committee recommends that, in line with the Government's own commitment, the Director General should have a specific duty to have regard to sustainable document.

  46.  The Government is committed to ensuring that our water supplies are managed as sustainably, reliably and efficiently as possible. Investing in protecting the environment is crucial for all of us—both as citizens and as consumers. The Government is also committed to ensuring that its social objectives are considered alongside environmental and economic considerations. This is in line with the principles of sustainable development.

  47.  The Government is therefore proposing, in the draft Water Bill, published in November 2000 (Cm 4908) to introduce new powers to enable the Secretary of State to issue social and environmental guidance to the Director General of Water Services. This is in line with the provisions in the Utilities Act 2000 for the other utility regulators. This will give Ministers the necessary powers to issue guidance to ensure that Ofwat takes proper account of the Government's policies on sustainable development.

  48.  We will also consider, in the light of responses to public consultation on the draft Water Bill, which closes on 31 January 2001, whether to amend the existing clauses to give the Director General a specific duty to have regard to sustainable development, as the Committee recommends.

Water efficiency

  Paragraph 225. The Committee acknowledges and welcomes the number of water efficiency initiatives being undertaken by the water industry. We believe that companies do not have significant incentives to promote water efficiency and that there would be merit in investigating the feasibility of setting company-specific targets for domestic water use, once a robust methodology for efficiency measurement has been agreed. This would help to focus efficiency efforts and drive the markets for water efficiency and innovation.

  49.  The Government agrees that the regulatory system should ensure there are sufficient incentives for water efficiency. This is essential to the "twin track" approach, in which future requirements for water are met by demand management as well as resource development. The regulation of water companies' duty to promote the efficient use of water amongst their customers is undertaken by Ofwat.

  50.  The Committee rightly acknowledges that that there would need to be a robust methodology for measuring improved water efficiency. The method would need to exclude external influences that affect water usage, such as the weather, and overcome the problem of calculating compliance with targets in the absence of universal metering. However, it might be considered unreasonable to hold water companies accountable for activities outside their direct control, for example how customers choose to use water. The recent National Audit Office report on leakage and water efficiency makes a number of other recommendations to improve the regulation of this duty, which Ofwat is currently considering.


  Paragraph 230. The Committee looks to this new study to clarify how water companies are to investigate the ELL taking account of both economic and environmental costs and exactly what information in this regard needs to be provided to Ofwat.

  Paragraph 231. The Government should spell out its long term aims for leakage reduction in the context of water resource policy and clarify in particular whether it wants companies to reduce leakage below their economic levels. If it does, it should explain its reasons.

  Paragraph 232. Ofwat should make clear what information it requires to assess where each company stands at present in relation to its economic level of leakage.

  51.  The Department, the Environment Agency and Ofwat commissioned the Tripartite Leakage Study into leakage last summer. It is due to report later this year. The study will incorporate an evaluation of the economic and environmental rationale that should drive future levels of leakage. The information that is required to analyse water companies' levels of leakage will also form part of study's consideration. The Government's long-term aims for leakage will need to be reconsidered in the light of conclusions of this study. The Government recognises that the significant improvements have made by most companies in reducing their leakage rates since the Water Summit in May 1997. Furthermore, the Government does expect further reductions in leakage will play their role in water resource plans.

January 2001

11   Planning public water suipplies-the Environment Agency's report on water company water resources plans to the Secretary of State for the Environment, Transport and the Regions and the Secretary of State for Wales Environment Agencyc, Bristol, June 1999. Back

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