Water framework Directive raises sensitive issues about water prices

Two major questions remain about the Government's approach to implementing the Directive: is transposition really complete? And will implementation on the ground begin early enough to ensure that "good" status is achieved by 2015?

On the first question, DEFRA's position was set out in a transposition note published alongside the regulations. The note acknowledges that "some existing rules will need to be re-orientated, or perhaps supplemented, in order to deliver the Directive's environmental objectives.

"In many cases, it necessarily follows from the Directive that the nature of such changes cannot be identified in detail until earlier, preparatory implementation steps have been completed. The regulations therefore cannot provide the whole legislative scheme for the management of all water resources up to and then beyond 2015."

That may be so in some cases - but the European Commission may feel that the UK has taken this approach too far.

One example is the absence of any new powers to control diffuse pollution, which will be needed in particular to reduce nutrient inputs from agriculture. DEFRA had been intending to introduce the powers in the current regulations but performed a somersault in the third consultation paper, which promised only a consultation on the subject during 2004.

Similarly, additional powers will almost certainly be needed to ensure that activities such as river engineering, construction and dredging do not compromise the achievement of the hydromorphological criteria for "good" status. DEFRA now says that it will be considering the need for such powers next year.

Another earlier promise which has slipped was that the regulations would spell out which bodies would be under a duty to exercise their functions so as to give effect to the Directive - with planning authorities, DEFRA made clear, being prime candidates for this duty.

In the event, however, the regulations do not do this. Instead, DEFRA says it will consider next year whether the regulations need to be amended to include particular public bodies under the duty - suggesting that it may have an unfinished argument on the point with the Office of the Deputy Prime Minister.

This was among the omissions which led the Royal Society for the Protection of Birds to criticise the regulations as "minimalist and bare-boned". In failing to set out how river basin management plans will be integrated with other local and regional plans, the new rules "may have no bite and be ignored," the RSPB warned.

Transposition is also incomplete in relation to cross-border river basins. A second set of regulations laid before Parliament in December clarifies the administrative arrangements that will apply to the cross-border Northumbria river basin, but similar regulations are still awaited in respect of the Dee, Esk and Tweed, where cross-border co-ordination will be more difficult.

Doubts also remain about whether the Directive has been properly transposed in respect of other issues such as recovery of the costs of water services, its requirements for periodic reviews of abstraction and discharge permits, and clauses requiring there to be no deterioration in the status of surface and groundwaters. DEFRA's general retort is that any gaps in the legislation can be made good at a later date.

As far as the speed of implementation on the ground is concerned, DEFRA's view - set out in a revised regulatory impact assessment (RIA) - appears to be that no significant expenditure driven by the Directive will be incurred until after 2008. Its previous RIA assumed that the bulk of expenditure would occur by 2010.

Deferring improvements in water quality and abstraction practices until after 2008 may still leave adequate time for water companies and industrial dischargers to complete investments by the 2015 deadline for achieving good status. But it is most unlikely to secure the necessary reduction in impacts from agricultural pollution, which will often take many years to reverse.

The Government's approach makes it almost certain that it will need extensive derogations from the requirement to achieve good status by 2015 - running the risk of conflict with the European Commission.

That said, the revised RIA strikes an upbeat note, pointing to a "very significant reduction" in the gap between current water quality and expectations of what good status will require since the first RIA was completed by consultants WRc in 1999.

WRc estimated that, on a business as usual basis, 61-63% of river lengths in England and Wales would fall in the top two quality classes, RE1 and RE2, by 2010. However, these expectations had already been surpassed by 2002, when 66% of rivers fell in these classes (see table). Further reductions in the gap will be achieved over the next few years, in particular as a result of the water industry's AMP4 programme to 2005, which is expected to bring another 2,400 kilometres of river into good status.

That positive picture comes with an important qualification. As DEFRA acknowledges, RE2 is a "very crude approximation" of good status under the Directive. Moreover, good status has yet to be fully defined at EU level, and there is every possibility that it will prove more demanding than currently perceived (see pp 22-25 ).

The revised RIA puts the benefits of the Directive at £560 million per year and the annual costs at £420 million, with a further £30-210 million to agriculture. Although these are significantly different from WRc's estimates, the main reasons stem less from any radical new insights than from a change in the discount rate from 6% to 3.5%, a deferral in the timing of expenditure from the present decade to 2008 and beyond, and an upgrading of WRc's figures for five years of inflation.

The new RIA remains incomplete, since many potential benefits and costs remain unquantified, and no provision was made for possible derogations. "Complete certainty" about costs will not be possible until 2009, says DEFRA, when the Agency finalises the programmes of measures which will apply in each river basin district.

One of the first pieces of work under the Directive is an economic analysis of water use, which has to be completed by the end of 2004.

Member States are to "have regard to" this analysis when "taking account of" the principle of the recovery of costs of water services, including environmental and resource costs. Specifically, they must ensure by 2010 that water pricing policies provide "adequate incentives" for efficient water use, and that different water users make "an adequate contribution" to recovery of the costs of water services. However, they also have some discretion about how far to pursue these requirements.

Formally, the Government's position, set out again in the transposition note, is that water users "already meet the full costs of water services", and that "those costs are effectively apportioned between different water uses."

However, a scoping study for the economic analysis prepared for DEFRA by consultants WS Atkins paints a rather different picture.¹ It reveals that lawyers in the Cabinet Office are reviewing the Directive's requirements on cost recovery, underlining the high political sensitivity of possible changes to established charging practices.

A major issue for this review is how far the environmental and resource costs of water use should be factored into cost recovery arrangements. Environmental costs are the costs of damage to the environment from water use, while resource costs are the opportunity costs which potential users suffer when water resources are depleted below their natural recharge rate.

Atkins' discussions with stakeholders revealed deep divisions on the issue. One group, mainly Government bodies and agencies, argued that the Directive allows "a significant amount of leeway" over the extent to which these costs must be included in water prices. Environmental organisations, on the other hand, contended that their inclusion in prices was "most definitely a fundamental principle of the Directive."

A related question is whether environmental costs should include only costs to the aquatic environment, or to other media as well. The Atkins study notes that including only the former might give rise to perverse effects, since improvements to the water environment might give rise to impacts on other media - for example, through the use of energy-intensive processes by the water industry. The Cabinet Office legal review is expected to tackle this issue as well.

Parting company with DEFRA's assertions that costs are already fully recovered and properly apportioned between water users, the study says that few existing reports provide comprehensive data on the "causality" of costs from different water uses. It underlines the need for further work in this area - "in particular" the costs to water suppliers of dealing with the consequences of diffuse pollution.