Regulators talk tough over water review

Regulators have reviewed water companies’ draft business plans and come up with an environmental wish list for the industry’s fifth asset management planning period.

The water industry’s fifth price review is entering a crucial stage with the economic regulator Ofwat due to scrutinise water companies’ draft business plans in the coming months. Water companies submitted the plans in August, calling for price rises averaging 9% above inflation (ENDS Report 403, p 10 ).

The review will culminate in Ofwat setting companies’ prices and investment programmes for 2010-15, the industry’s fifth asset management period (AMP 5). Draft limits will be set in July 2009 with the final determinations confirmed in November.

The water industry’s regulators are talking tough at this stage in the review. Ofwat chief executive Regina Finn said in a statement in October that companies were "on notice" to justify spending.

Ofwat’s analysis of draft plans shows the forecast increases in capital spending are due to a reassessment of asset standards needed to maintain services, increased spending on infrastructure renewal and maintenance of the large number of assets installed since privatisation in the 1990s. Increases in operating expenditure are principally due to the cost of energy and pension provisions.1 The Environment Agency is also finalising the programme of improvement works it wants water companies to deliver in AMP 5. It produced a draft version of the list, known as the National Environment Programme (NEP), in April and will finalise this in December (ENDS Report 399, p 39 ).

The Agency says 95% of its draft NEP was included in business plans, but warns it wants to everything included and will be adding new schemes in its final version.2 Other themes picked up by the Agency include:

  • Climate change: The Agency would like business plans to show climate change impacts have been factored into companies’ supply and demand calculations. Companies also need to show that sewerage infrastructure and other operations take future climate risks into account.

    Companies have made progress, the Agency says, in addressing the issue since the 2004 review, but all have areas to improve.

    Most companies have calculated the carbon dioxide and other greenhouse gas emissions produced by their plans, the Agency notes. Firms have also correctly applied the government’s shadow price of carbon and some have set voluntary carbon-reduction targets in line with government aspirations. The Agency wants the rest to follow suit in their final business plans.

  • Water resources: The Agency repeats its familiar refrain for water companies to manage water demand better. It argues this will make water supplies more resilient to climate change and reduce energy use and abstraction pressure on the environment.
  • Flooding: The Agency finds most companies have highlighted the issue of flooding following the Pitt review, but few propose action on flooding resulting from sewer system overloads after intense rain. Even where companies propose measures, these focus on "modelling or planning rather than delivery". It hopes for greater commitment to assisting the delivery of surface water management plans in final business plans.
  • Catchment management:
    Land-use changes and river channel modifications can improve raw water quality for drinking water abstraction, reduce treatment costs and deliver environmental benefits, the Agency argues. It believes catchment improvements can aid water resources management, help with climate change adaptation and mitigation, improve environmental water quality and boost biodiversity.
  • The Agency welcomes "a substantial increase" in such proposals over previous price reviews, with "around two thirds of companies proposing action". It promises to help companies and other stakeholders develop and refine proposals for inclusion in final business plans.

    The Drinking Water Inspectorate has also commented on these catchment management proposals, dividing them into "short/mid-term" and "mid/long-term" timescales.3 The DWI says it will support schemes in the former group for inclusion in the price review, subject to their showing benefit and need for support. But it finds the latter group "do not sit comfortably within the criteria" for drinking water quality schemes.

    But it does believe "a prudent company will have a need for some such schemes" as part of sustainable management of water supplies. It reveals that discussions with Ofwat, the Agency and Natural England have agreed to classify the more long-term schemes as "investigative or pilot trials".

    Where schemes protect water supplies or prevent water quality deterioration, they will be included in the Agency’s NEP. Where water quality improvements will avoid the need for expensive treatment or reduce expenditure on treatment, schemes may be included in the drinking water improvement programme.

    However, the DWI will require such schemes be put in the form of a legal instrument. A water company will therefore need to provide clear objectives for the proposal, specify how progress will be reported and key delivery dates; and detail how it will prove the outputs have been delivered.

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