MPs criticise Government, Ofwat over threats to water investment

A report by MPs on the water industry's periodic review has criticised the Government and water regulator Ofwat for turning the industry's environmental programme into a political football.1 Environmental improvements have come under threat, it warns, because of the Government's desire to hold water bills down.

Water companies estimate that bills will have to rise by an average of 29% over the next five years to fund increased spending on environmental improvements, asset maintenance and drinking water quality (see box ). The figures are putting Ministers under particular pressure because the first bills are likely to land on customers' doorsteps next April, in the run-up to a possible general election.

The House of Commons Environmental Audit Committee launched an inquiry into the current review, known as PR04, after press reports suggested that the Government was considering cutting the environmental programme to forestall price increases.

The five-yearly process of determining water companies' investment programmes and water prices has had a mixed record on delivering environmental objectives since its inception at privatisation in 1989.

In the first periodic review in 1994, Ofwat slashed environmental spending proposed by the former National Rivers Authority while allowing cash-rich water companies to give shareholders special dividends (ENDS Report 247, p 2 ).

Announcing publication of the report in May, Committee chairman Peter Ainsworth said: "It is deeply concerning that the environmental programme...has come under serious threat and been the focus of departmental wrangling, simply because that is the only way the Government can exert any direct influence over water prices."

  • Threat to environmental programme: The inquiry began in January when it became apparent that the Secretary of State's principal guidance on the review, due at the end of the month, would be seriously delayed.

    It was widely rumoured that the delay resulted from a Cabinet battle over the size of water bills and the perceived need to reduce them. The Environment Agency and English Nature raised concerns that the guidance, when finally delivered, would not encompass all statutory environmental protection requirements or many of the discretionary schemes recommended by the Agency.

    The Agency told the Committee of its concerns about a "constrained programme" put forward by Ofwat, which would have cut funding for environment improvements below the level required to meet minimum statutory obligations.

    The Committee concluded that Ofwat's proposals to curtail environmental investment "did not rest upon those principles of sustainable development which the regulator insists that he upholds."

    MPs also expressed concern that environmental spending is seen as the first option for cutting costs by some Government Departments and Ofwat. The Committee wants other parts of the capital expenditure programme to come under equal scrutiny.

    When the Secretary of State's principal guidance was eventually released in March, all of the statutory and some of the discretionary environmental programme was funded (ENDS Report 350, pp 46-47 ).

    However, the Committee expresses concern that the programme may come under renewed threat in September, when the Secretary of State issues her final guidance.

  • Confusion over obligations: The Committee rounds on the Government for giving water companies the impression that there might be some leeway on the need and timetable for meeting statutory environmental obligations.

    Guidance issued by the Secretary of State in January 2003 told companies that they would be required to meet national and EU statutory objectives. However, it continued: "There is still room to explore how best and on what timetable to meet even these."

    This was a "strong hint", the Committee believes, "that there might be leniency in the need and timing for achieving some targets." It suspects that this may have led all but two companies to exclude essential investment from their draft business plans.

    English Nature told MPs that only two companies - Northumbrian Water and United Utilities - included all statutory obligations in their preferred business plans.

    MPs also suggest that Ofwat took a similar tack in issuing its guidance to companies last December. The guidance spoke of choices to be made in deciding "to what timetable even statutory requirements are to be met."

  • Inflated investment estimates: All reviews so far have seen water companies under fire for inflating the size of the investment needed to meet environmental objectives. The Agency told the inquiry that it believed the £4.9 billion environmental programme could be cut back by £1 billion.

    The Committee seeks assurances that Ofwat will carefully pick over the industry's figures, and is "seriously concerned" that the first option examined by the regulator was to cut the environmental programme rather than scrutinise the industry's estimates.

    The report also expresses regret that more is not being done by the Government, Ofwat and companies to tackle diffuse pollution, customer debt and affordability to those on low incomes. Dealing with these, it said, would have a greater impact on bills than cutting the environmental programme.

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