Investment delays to dog implementation of water framework Directive

Water companies may have to pay for investments to meet the water framework Directive’s targets out of their own pockets, Ofwat has warned. The development will encourage firms to delay investment, threatening compliance with the 2015 deadline.

The Directive requires UK waters to meet ‘good ecological status’ by 2015 but there is a mismatch between the Directive’s timetable and the industry’s asset management planning, which sets companies’ investment programmes for years ahead.

River basin liaison panels will start establishing what improvements are needed to meet the Directive’s goal in 2008. But by this time water companies will already have submitted draft spending plans for 2010-2015 to the industry regulator Ofwat.

Companies’ final plans, used to set customer price limits, may have to be submitted before the Environment Agency finalises programmes of improvement measures for each river basin.

Speaking at a conference on the 2009 periodic review organised by the Chartered Institution of Water and Environmental Management, Ofwat’s head of capital maintenance George Day predicted the timing mismatch would force companies to "log up" extra costs for the price-setting round in 2014.

Alternatively, companies might have to return to Ofwat to ask for more money through an ‘interim determination’ - but the procedure applies only where substantial sums are involved.

"We’d rather do that than expect customers to pay [in advance] for things that don’t come to pass," Mr Day explained.

However, water companies dislike logging up because they believe they often end up out of pocket. They also run the risk of having refunds for past investment rejected at the next review. Interim determinations are also unpopular with firms because of the administration costs and the uncertainty.

"We think it would be better if all the decisions were taken together," responded Frank Grimshaw, economic regulation manager at Severn Trent Water. "If you take one issue separately you can’t always strike the right balance."

He suggests Severn Trent is likely to take a cautious approach to investments where their cost-effectiveness is in doubt, deferring them to the next price-setting round to enable more research.

This delay will frustrate the Agency and means water quality will not meet good status by 2015. Even if water companies agree to proceed, they are likely to delay investment as long as possible to reduce borrowing costs.

Ofwat consulted on the timing and frequency of its price reviews last summer. Some respondents suggested they be aligned with the six-year cycle of river basin management plans set out under the Directive (ENDS Report 377, pp 41-42 ).

However, these voices were in the minority and the regulator decided to stick with its existing five-year cycle because it strikes "an appropriate balance between stability and incentives".1

Steve Ntifo, environment and science advisor at industry association Water UK, thinks this is the right decision. "We don’t consider ourselves to be the [Directive’s] key deliverer," he argues, also pointing out the Directive is only one aspect of the price review.

The water industry will only agree to "no regrets investments" that it is convinced are necessary, he says. But this would not rule out non-engineered less capital-intensive, solutions, such as integrated catchment management schemes, he insists, despite the greater degree of uncertainty usually associated with such projects.

Mr Ntifo says the initial risk assessment research carried out by the Agency indicates that point source pollution - including sewage effluents -represents only a small risk.

But Agency figures show that 22% of rivers and 16% of lakes are at risk from some form of point source pollution - albeit including other sources such as industrial discharges and fish farms.

The Environment Department (DEFRA) is currently estimating the investment required to meet the Directive’s targets and the likely burden on different sectors. This is due to be finished in June but the department says that the Agency’s lateness in providing data and a freeze on departmental research budgets suggests delays are inevitable.

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