Agency sets out environmental case for AMP4

The Environment Agency has set out its case for a programme of environmental improvements which it wants the water industry to complete in 2005-2010.1 It believes that water companies can deliver the programme for less than the estimated benefits of £3.5-7.0 billion, while strongly criticising the inadequacies in their own proposals.

Water companies have submitted draft investment plans for their fourth asset management period (AMP4) which are currently being considered by the industry's regulators and the Environment Department. The companies have said that their preferred investment plans would require price rises averaging 30% over the five years (ENDS Report 344, pp 11-13 ).

The latest contributions to the process have come from the Environment Agency and Ofwat. The Agency has published advice to Ministers on what environmental schemes it believes are needed to meet obligations facing the industry,1 while Ofwat has provided an initial overview of companies' draft plans.2 The Agency has reviewed all of the potential schemes facing the industry prior to 2010. Many it regards as essential to meet EU or national legislation. But there are also discretionary or so-called "choices to be made" schemes for which the Agency has recommended a go-ahead or deferral.

The experience from previous price reviews is that extreme pressure on costs can force out many environmental schemes. As well as urging Ofwat to challenge the industry's costings of the environmental programme, the Agency will be pulling out all the stops to persuade Ministers that priority improvement schemes are, if not mandatory, then highly beneficial in terms of their cost benefit ratios.

The Agency has analysed the benefits of the "choices to be made" schemes for comparison with industry costings. In doing so it has used environmental economics methods approved by a steering group which included representatives of Ofwat and DEFRA.

Benefits include improved fishing, recreation and natural habitats, better water quality and flows. Reductions in the incidence of disease from cleaner bathing waters have been included, but benefits to local economies from development associated with better water quality have been omitted.

The result is a prioritisation of the discretionary schemes into six categories based largely on the cost-benefit ratio. The Agency recommends that those in the top three categories should be implemented - broadly those schemes given high local importance and regional priority, or where the benefits are estimated to exceed the costs by at least a factor of 1.2.

The Agency's preferred plan includes some 273 "choices to be made" schemes - 59% of the total - and has a price tag of £519 million. It puts the benefits of the selected discretionary schemes at £1.2 billion and claims that these will deliver 78% of the potential environmental benefits at only 31% of the total costs.

The complete plan preferred by the Agency - two-thirds of which is made up of essential statutory schemes - involves some 4,700 actions and will improve 5,000 kilometres of river and 2,200 square kilometres of wetlands, lakes and coastal waters.

The plan will produce benefits estimated at £3.5-7.0 billion, the Agency says, and companies will, it believes, "be able to deliver the programme, and maintain security of supply, at a cost that is less than these benefits."

For comparison, water companies' own cost estimates for the basic and preferred environmental programmes total £4.8 billion and £10 billion, respectively.

The Agency is not releasing an estimate of the cost of its own plan, which must be based at some level on data provided by companies. At this stage, it is keeping its views on costs - and where these appear to have been inflated - close to its chest.

The Agency has also reviewed water companies' investment plans and found them wanting. Key issues for the Agency are whether companies have included all of the schemes necessary under the environmental programme and whether they have factored in the need to reduce pollution and invest in reducing leakage and demand management.

Many companies' plans are "inadequate", according to the Agency, because they do not include details of how pollution incidents will be cut. The industry's performance on serious pollution incidents has deteriorated recently. Water companies caused 150 serious incidents in 2002, an increase of 23% on 2000 (ENDS Report 343, pp 5-6 ).

Some companies are also planning not to comply with their discharge consents, the Agency surmises, presumably because they have not scheduled improvements to remedy discharges which it already regards as unsatisfactory.

On water resources, a major issue is that some companies have failed to make any allowances for implementing water resource schemes likely to be required when investigations into the environmental impact of their abstractions are complete. These will certainly be finished before 2010, and the Agency wants to see remedial action taken in the AMP4 period.

Another question is whether companies have followed the Agency's guidelines on sustainable abstractions - allowing for sufficient water to be returned to the environment in cases where there remains some doubt about the impacts of abstractions.

In some cases, water companies have taken the view that water resource schemes will be dropped because of "overriding public interest". "Such matters are for Ministers", the Agency notes.

The end result is that, of the water and sewerage companies, only Northumbrian and United Utilities gain approval from the Agency for their preferred plans on both water quality and water resources. However, the Agency gives United a black mark because of the "disproportionate impact" of its plan on customers' bills. The company has proposed a 71% price increase over the course of AMP4 (ENDS Report 344, pp 11-13 ).

Other general criticisms are that some companies are not putting in place adequate plans to control pollution from sub-standard combined sewer overflows and leaking sewers. The Agency also wants to see more investment in replacing water mains to help reverse recent increases in leakage (see pp 13-14 ).

The Agency warns Ministers that investigations on the impacts of discharges and abstractions on conservation sites covered by the EU habitats Directive are continuing. Water companies' obligations are currently not clear but will become so during AMP4.

Measures to meet these obligations should not be delayed until after 2010, the Agency says, meaning that companies will have to "log up" the expenditure and be reimbursed at the next price review. However, companies are not certain of getting all the investment returned and have to bear the financing costs until the end of the review period.

The Agency recognises that the logging up provisions are unattractive to companies and encourages them to delay environmental investment. It wants new provision made to allow them to aggregate such costs for consideration in an interim price determination, enabling improvement works to continue without delay.

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