Scots face EU fines over minimal water investment programme

The environment looks like being the big loser in the political battle over Scottish Water's investment priorities for 2006-10. The Scottish Executive announced in February that keeping water charges stable and ensuring the provision of water and sewerage capacity to accommodate new development were its major priorities - and set out slimmed-down environmental objectives despite being warned that it risked heavy fines for breaching EU legislation.

The Executive's announcement was the latest step in a process which will see Scottish Water's charges and investment programme for 2006-10 determined by the new Water Industry Commission in December.

The process kicked off last summer when the Executive consulted on the Quality and Standards III (Q&SIII) programme, which runs for 2006-14. It identified a potential need for Scottish Water to invest at least £6.3 billion, including £2.5 billion on the environment and £1.27 billion on drinking water (ENDS Report 355, pp 49-50 ).

The Water Industry Commissioner responded by claiming that Scottish Water could not manage an investment programme of more than about £2 billion over the 2006-10 period - and suggested that this could be achieved while customers' bills increased below the rate of inflation.

The WIC's response caused alarm at the Scottish Environment Protection Agency (SEPA), which pointed out that "severe prioritisation" had already been needed to whittle down the environmental programme to £2.5 billion over eight years. Cuts below this level, it warned, would "fundamentally threaten environmental, social and economic benefits, as well as preventing compliance with European legislation" (ENDS Report 359, pp 56-57 ). Yet that is the course which has now been taken.

On 9 February, the Executive issued two documents: a statement of its investment objectives for Scottish Water for 2006-14, and a statement of charging principles for 2006-10. In June, the WIC will consult on detailed proposals for charges for 2006-10 in the light of this framework.

Addressing the Scottish Parliament, Deputy Environment Minister Lewis Macdonald claimed that Scottish Water's investment programme "bears comparison with the most ambitious programmes yet undertaken south of the border." The size of the programme is unknown but if, as seems likely, it is little more than £2 billion over four years, the claim is seriously exaggerated.

Mr Macdonald added: "While average charges in England and Wales will rise by more than 20% in real terms between now and 2010, average charges in Scotland will not rise in real terms at all." In fact, the real terms increase south of the border over the 2005-10 period will be 18.8% - certainly a marked contrast to Scotland, though the price will be that Scotland will drop further behind on both service and environmental standards.

  • Charges: One of the main reasons for this is the Executive's strong emphasis on maintaining stability and "affordability" in water charges.

    Indeed, while average household charges for 2006-10 will remain constant in real terms, some households will do even better - as will most businesses.

    Businesses will benefit because of the Executive's decision to eliminate the cross-subsidy they currently pay to the domestic sector for water services. According to a study by consultants Stone & Webster, this amounts to £44 million per year.

    The Executive has asked the WIC to phase out the cross-subsidy over four years after being assured that this can be done without increasing average household charges in real terms - a decision which put more pressure on environmental and other expenditure.

    Stone & Webster was unable to establish whether cross-subsidies are paid for sewerage services. Decisions on that issue have been deferred until 2010 - as have the introduction of water metering for all non-household premises and more "cost-reflective" charges for surface water drainage.

    In the domestic sector, the Executive's emphasis on affordability will especially benefit low-income households. It has not only withdrawn a proposal to scrap the existing 25% discount on water bills for single adult households, but announced a new 25% discount for households with two or more adults on council tax benefit.

  • Accommodating development: A major concern for local authorities and property developers in recent years has been Scottish Water's inability to provide water and sewerage infrastructure in step with new development projects. The Executive has made a big effort to respond - though again at the price of squeezing out environmental spending.

    Projections prepared for the review came up with a central case in which 120,000 new homes and commercial development of 4,050 hectares will need to be accommodated in 2006-14. The Executive wants Scottish Water to plan for sufficient strategic sewage treatment and water supply capacity to cater for half this demand during 2006-10, and half in the subsequent four years.

    The minimum cost to Scottish Water is estimated at £340 million over eight years. New regulations will be introduced shortly to require developers to pay for lesser, "non-strategic" assets.

  • Environment: A complex prioritisation exercise was carried out to inform Ministers' decisions on which environmental investments to sanction. There were four scenarios - "status quo", "essential", "important" and "discretionary" - with the "essential" scenario being divided into eight sub-scenarios.

    These labels were accurate in describing the content of the scenarios. In particular, the "essential" scenario included all investments required in order to meet standards by deadlines specified by national or EU law.

    In the event, however, Ministers substituted their own nomenclature. Environmental investments were classed as either "essential" or "desirable" - but what Ministers decided was "essential" was much less than what their advisers judged to be legally essential.

    Under the Executive's advice to the WIC, "essential" projects will have to go ahead. However, "desirable" schemes "will only be included in a final investment programme if they are found to be deliverable efficiently and within a stable prices regime." In other words, they will proceed only if the WIC can find room for them - leaving many in severe doubt.

    The "essential" projects sanctioned by Ministers for 2006-10 are close to the cheapest scenario modelled by their advisers. They seem unlikely to cost much more than £400 million per year.

    If only these investments prove affordable, Scotland would fall well short of EU requirements. The shortfall is especially apparent in relation to the 1991 EU Directive on urban wastewater treatment.

    According to SEPA, 1,113 kilometres of river are subject to eutrophication as a result of nutrient discharges from sewage works. Some 488 kilometres are also affected by discharges of raw sewage from combined sewer outfalls (CSOs). Under the 1991 Directive these discharges were mostly due to be improved by this year at the latest, though in some cases the deadline falls shortly after the 2006-10 investment period.

    Against these requirements, the Executive has decided that nutrient controls are "essential" on sewage discharges affecting just 39 kilometres, while only 83 kilometres would be upgraded as a result of improvements to CSO discharges.

    "Desirable" projects would not improve this situation much, since the WIC has been asked to accommodate further reductions in nutrient and CSO discharges affecting just 12 and 48 kilometres, respectively, during the 2006-10 period if they can be paid for without breaking the charges ceiling.

    There will be some small additional improvements to shellfish, bathing and freshwater fish waters and aquatic wildlife habitats. But the bulk of environmental investments seem set to be deferred until after 2010 - though even then some EU statutory requirements have only been classed as "desirable".

    Remarkably, Ministers took these decisions despite being cautioned that fines of £300-400 million could be imposed by the European Court of Justice unless the full "essential" scenario modelled by their advisers was implemented.

  • Sewage odours: Scottish Water recently began recording complaints about sewage odours and has listed 80 sites so far. Rough estimates suggest that it needs to invest £223 million to achieve the "desired customer experience" at these premises - but the Executive has sanctioned work on only the 35 worst sewage works.

    This programme - the first of its kind in Scotland - is likely to cost around £150 million. Odour control work will begin at a "minimum" of 14 of the 35 sites during 2006-10. Priorities will be determined by a forum of local and central stakeholder bodies.

  • Drinking water: Scotland's drinking water regulator is based within the Executive, and his proximity to the decision-making process may help to explain why drinking water got a better deal than SEPA managed to get for the environment.

    In particular, the programme sanctioned by Ministers appears more consistent with Scottish Water's obligations under EU and domestic law.

    Important schemes during 2006-10 will include upgrading of supplies to 1.5 million people to reduce breaches of the standard for trihalomethanes, improved controls on disinfection of supplies to four million people to reduce taste and odour complaints, and compliance with directions issued to Scottish Water two years ago to tighten controls on the pathogenic organism cryptosporidium.

    Implementation of non-statutory items sought by the regulator will proceed more slowly. For instance, water safety plans of the kind advocated by the World Health Organization will be prepared for only half of Scotland's water supplies during 2006-10.

    Likewise, the regulator's recommendation following recent drinking water contamination incidents that cross-connections between water mains and sewers be eliminated is being pursued at a sedate pace, with half of the estimated 11,000 connections slated for elimination in 2006-10 and the remainder over the subsequent four years.

  • Water resources: The next four years will see the first investments in water resource management driven by the EU water framework Directive. Ministers have sanctioned measures to reduce abstractions and provide increased compensation flows at all drinking water sources in 78 water resource zones, including early action to protect habitats designated under EU law which are affected by over-abstraction.

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