Beckett dampens hopes of water environment improvements

Environment Secretary Margaret Beckett has lowered expectations about water companies' spending on environmental improvements over their next asset management period from 2005-10. In guidance to water regulator Ofwat, she has stressed that any improvements will have to pass rigorous cost-benefit analysis tests where they are not required by EU laws.1

The guidance is the Government's first formal involvement in the process which will determine water industry investments and prices in England for 2005-10. It will inform the draft business plans which water companies will now prepare before they are challenged by Ofwat.

Once the costs and benefits of potential expenditures over the five-year period are better understood and Mrs Beckett has received advice from the drinking water, environment and nature conservation regulators, she will issue more definitive guidance on her priorities in January 2004. This will be fine-tuned in September 2004 before Ofwat takes final decisions on investments and prices.

In 1998, when the investment programme for 2000-05 was being formulated, the then Ministerial team of John Prescott and Michael Meacher made it clear to Ofwat that they wanted an "ambitious" environmental programme which went beyond the mandatory requirements of EU legislation. A programme costing some £9 billion was eventually agreed at the same time as average water bills were cut by 12% in 2000.

Under the new Ministerial team of Mrs Beckett and Elliott Morley, the tone this time is very different. The Government's expectation, she said in a written Commons statement, will be to see past improvements "maintained and, where possible, further improvements to be made."

The statement reinforces that signal by identifying three themes which will be of increased importance for 2005-10. One will be greater attention to managing the existing water and sewerage system. Second will be "some" further improvements in the water environment, "based on sound information." Thirdly, policy choices will need to give "due weight to the economic and social effects of water policies, especially on those who are most vulnerable."

Ministers are holding back from identifying their investment priorities at this stage where these are not required by EU legislation. The guidance expressly "leaves open a large number of alternative possible requirements" in many policy areas pending cost-benefit assessment.

As foreshadowed in the long-term water strategy published by the Environment Department last November (ENDS Report 334, pp 40-41 ), the guidance also acknowledges that full application of the "polluter pays" principle to diffuse pollution is some years off.

The Government has promised to consult on ways to tackle diffuse pollution from agriculture later this year, and will also receive shortly a report on sustainable urban drainage systems. Pollution from both sources can be important to water consumers, both because it increases water treatment costs and because water companies are being required to reduce their own nutrient discharges to offset uncontrolled inputs from agriculture.

However, the guidance says that "full policy integration" between what water companies are required to do and what is expected of diffuse polluters "will be achieved only beyond...2005-10."

The Government has also declined to change its approach to the EU water framework Directive, despite recent criticisms of its intention to delay implementation until the latest possible dates from the water industry and other groups (ENDS Report 335, pp 40-41 ).

According to the guidance, water companies "may choose" to conduct some preparatory work on implementation of the Directive "in the latter part of 2005-10." "Some" substantial schemes to improve the aquatic environment may need to start then, it concedes, and others may need to take account of the Directive to avoid costly amendments at a later stage. It is not much of a steer.

  • Supply and demand: The Government sets out again its twin-track approach to managing water resources. Companies are urged "to look first at the full range of possibilities for reducing demand for water," and only when this is "clearly insufficient or unjustified in terms of cost should they look to the development of new resources."

    Spending in this area is not expected to be a "major pressure" in 2005-10. However, the guidance makes it clear that the Government wants some improvements in demand management from the water companies.

    For one, increased water efficiency "will be necessary." The Government wants companies' plans for promoting efficiency among customers to "shift in focus from the level of activity to projected water savings."

    The document is also critical of the patchwork of local efficiency trials, which have not produced meaningful cost-efficiency data to enable the best initiatives to be incorporated in companies' water resource plans. It urges them to develop robust data through greater collaboration and sharing of results.

    On leakage, which still leads to the loss of some 20% of the water put into supply, the Government contends that the economics of leakage control will change over time to make more of it justifiable. It wants companies to act on the conclusions of a recent study on target-setting for leakage (ENDS Report 331, pp 10-11 ) - and also calls for an end to the "wide variation" in activity across the industry in programmes for free or subsidised replacement of leaking supply pipes.

  • Damaging abstractions: Some of the clearest specifications in the guidance relate to the protection of designated wildlife habitats and other environmental resources from over-abstraction. There is, though, a clear hierarchy of priorities.

    The greatest likelihood of funding will be for sites forming part of the EU-wide Natura 2000 network and for Sites of Special Scientific Interest where, following investigations, the Environment Agency and English Nature conclude that damaging abstractions must be varied or revoked. Here, the Government says it "expects funding to be made available" for both investigations and corrective schemes. The work needs to be completed by 2010.

    Where the two regulators conclude that abstractions need to be "curtailed" in order to meet a habitat or species target under the UK's Biodiversity Action Plan, then the Government also "expects funding to be made available" - "where the costs and benefits are acceptable."

    Bottom of the hierarchy are schemes to correct low flows in rivers. Here, the guidance says that "consideration needs to be given" to a "reasonable" programme to "mitigate the effects of" over-abstraction.

    Water companies and their customers will also bear most of the cost of compensation paid by the Agency to other abstractors for curtailing their licences to protect designated wildlife sites, again by 2010. The Agency has estimated that the cost could be around £200 million.

  • Discharges and wildlife: There is also a hierarchy to prioritise investment for protecting wildlife. Where there is a proven link between a water company discharge and damage to Natura 2000 sites or SSSIs, the discharge must cease or be modified.

    However, where a discharge has been proven to be hampering the achievement of a Biodiversity Action Plan target, the Government says that any improvement scheme will have to be "informed by a full cost-benefit analysis." Its approach may call into question its commitment to the plan.

  • Drinking water: The Government foresees no substantial changes in standards in this area up to 2010. Investment requirements may arise, however, from deteriorations in raw water quality, particularly from rising levels of nitrate, which the Government does not expect to be curbed in the short term by controls on agriculture.

    The guidance also urges water companies to adopt "a more proactive and strategic approach" to dealing with odour, taste and discolouration problems in drinking water, "with a view to substantially reducing the number of consumer complaints."

    Companies will also face costs from the tightening EU standard for lead in drinking water up to 2013. They will be expected to have "clear strategies" to comply, and ensure a "broadly even profile" of lead pipe replacement over the next ten years.

  • Water quality: Outside the biodiversity arena, the guidance is at its vaguest on environmental quality. In pretty well every area - such as upgrading of designated bathing, freshwater fish and shellfish waters, achievement of river quality objectives, and a possible need to modify sewage treatment processes to tackle discharges of endocrine-disrupting substances - Ministers intend to await cost-benefit analyses before deciding on their objectives unless there is an EU legislative driver.

    Another environmental issue treated in similar vein is controls on odour emissions from sewage works, on which the Government has just consulted (see pp 44-45 ).

    A notable omission is any reference to recreational waters used for surfing and other water sports. The Government has professed an intention to protect users from microbiological pollution, but there is nothing in the guidance to back this up.

    Elsewhere, a cost driver will be dealing with sewer flooding, where Ministers want to see an increased rate of rectification.

    The guidance also stresses the need for improved data on the condition of the industry's assets so that maintenance plans can be placed on a sound footing. For now, it sees "no unambiguous evidence of general or increasing failures of assets" - but stresses that recent improvements in water treatment and distribution systems in particular must not be compromised by inadequate maintenance.

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