Beckett slashes environmental spend to limit rises in water bills

Environment Secretary Margaret Beckett issued belated guidance to Ofwat in March on what should be included in water companies' business plans for 2005-2010.1 The guidance slices a third off the Environment Agency's preferred environmental programme but, given Cabinet pressure to limit bill increases before the next election, the Agency is relieved that at least all schemes required to meet statutory obligations will be funded.

The 2004 periodic review of water prices will reach a climax in November when Ofwat will set the prices that water companies will be able to charge during the fourth asset management planning period (AMP4) from 2005-2010.

In September, water companies set out their preferred investment plans which carried a provisional price tag of £21 billion. The plans would mean an average increase of 30% in water and sewerage bills by 2010, adding £73 to the average annual household bill (ENDS Report 344, pp 11-13 ).

The size of the plans caused alarm in Government, particularly because bills will fall on doormats next spring in the run-up to a likely general election.

The ministerial guidance to Ofwat on the content of the investment plans, released on 11 March, had been scheduled for the end of January. The delay appears to reflect a dispute between Ministers.

Press reports have suggested that Mrs Beckett had to battle to ensure that companies' environmental programmes, provisionally costed at some £7-8 billion, were not sacrificed.

Environmental investment is one of three major items in water companies' plans. The largest single item is for asset maintenance, at £8.5 billion, and a further £4 billion is for expanding the infrastructure to allow for growth.

Environmental programmes are sometimes seen as a soft target. They include improvements to sewage treatment works to protect wildlife habitats and freshwater fisheries and to meet river quality targets. There are also plans to reduce and relocate environmentally damaging abstractions and to reduce pollution from storm sewer overflows.

Nonetheless, much of the environmental work is mandated under EU law, with failure to fund the schemes likely to result in infraction proceedings at the European Court. Failure to continue investing in improved water quality will also store up problems in achieving "good ecological status" in all waters by 2015 - a requirement of the water framework Directive.

The Environment Agency set out its stall in November last year, outlining a national environmental programme which comprised two-thirds "must do" statutory schemes and one-third "choices to be made" schemes (ENDS Report 346, pp 14-15 ). The latter were chosen on the basis of exhaustive cost-benefit analysis.

The discretionary schemes recommended by the Agency were chosen because they represented good value, delivering environmental benefits that exceeded their costs by a factor of at least 1.2. Water companies costed the Agency's discretionary package at £519 million, while it would deliver benefits of £1.2 billion - the latter figure being produced using methodologies agreed by Ofwat and the Environment Department (DEFRA).

The result of the ministerial guidance is that this discretionary programme will be almost completely deleted, knocking some £500 million off the total environmental programme. A statement from the Agency put a brave face on the outcome by emphasising that AMP4 would "deliver major improvements". But it also "expressed regret" that the Government had not funded further investment.

The Agency's AMP4 project manager, Catherine Wright, told ENDS: "We are very pleased about the commitment to the core statutory programme and the other schemes we have managed to get through, but that is tinged with disappointment."

Axed schemes include plans to fit alarms to protect bathing waters and shellfish beds when emergency and storm sewer overflows are in operation, and schemes designed to improve compliance of English bathing waters in line with tougher EU guideline microbiological standards.

However, Welsh schemes to improve bathing waters will proceed following decisions by Environment Minister Carwyn Jones.

Refinements to sewage treatment works to improve river quality in line with the Agency's long-standing river quality objectives have also been shelved.

Among the schemes which will be included are statutory programmes to deal with abstractions and discharges affecting wildlife sites, sewage treatment improvements such as nutrient stripping and storm sewer overflows to meet the requirements of the urban wastewater treatment Directive, and improvements to sewage treatment to improve ammonia levels in line with the freshwater fisheries Directive.

However, the Agency is pleased that a few of its discretionary schemes also got the green light. These include plans to remove phosphate nutrients from sewage discharges to Windermere and a research programme to address the oestrogenic effects of sewage effluents.

Many of the Agency's ambitions for AMP4 were thwarted by Ministers' concern to keep water bills low in the run-up to the election. Former Ofwat director general Ian Byatt's decision to lower bills in 1999 was also a factor in that it made it politically difficult to raise bills quickly enough for a new round of environmental investment.

A further factor was manoeuvring by the current Ofwat chief, Philip Fletcher. His advice to Ministers in December mooted limiting the investment programme to £15 billion, which would limit price rises to around 5% per year.2 Although apparently purely illustrative, the proposal became amplified into a "constrained programme" in a speech made by Mr Fletcher at a Water UK event aimed at City institutions.

Fearing a cut in the environmental programme, the House of Commons Environmental Audit Committee called an inquiry at short notice. In its evidence to the Committee, the Agency said that the constrained programme "would reduce funding of the environment programme to a level significantly below that required for the minimum statutory environmental obligations".

Agency chief executive Barbara Young told MPs that the Agency believed its own programme "was pretty damned constrained". "We think...constraining it further was knocking the legs out from under our abilities to deliver for the environment at all."

Another key strand of the Agency's evidence was that it feared that the Government would decide to cut the environmental programme on the basis of industry costs which companies might have inflated. It expressed particular concern over the size of programmes submitted by United Utilities and Southern Water. It also expressed concern about South West Water's plan to introduce price increases, mainly for non-environmental reasons, and suggested that this should also be subjected to scrutiny.