The Royal Society for the Protection of Birds welcomes this opportunity to present evidence on the 1999 Periodic Review of water prices (AMP 3).

  The periodic review was a major opportunity to deliver much needed improvements to the aquatic environment and to reverse the legacy of damage from water abstraction and pollution. We welcome the investment in the environment projected over the next five years, but believe that more could have been achieved and that the shortcomings of AMP 3 will lead to continuing unnecessary environmental degradation.

  The RSPB is the largest wildlife conservation organisation in Europe with over one million members. We have been heavily involved in the AMP 3 process. We organised the "What cost water" conference in March 1998 with the Environment Minister, Ian Byatt the Environment Agency and water companies in attendance. We also conducted an analysis of the price review in the "False Economies won't hold water" document, produced jointly with Forum for the Future (RSPB, 1999).

  Our evidence follows the structure set out in the Inquiry's terms of reference:

1.  "Quadripartite" regulation and its failure to achieve sustainable management of water resources.

2.  The Environmental obligations funded and the failure of Ofwat to fulfil its duty to further nature conservation.

3.  Monitoring delivery of the national environment programme.

4.  The capacity of the system to accommodate new schemes after investigation.

MAIN CONCLUSIONS

  We believe that Ofwat entered into the AMP 3 process with a mindset dominated by price reductions above all other considerations. In our view such a stance failed to address legitimate environmental concerns. Ofwat relied on inadequate public opinion data and a Customer Service Committee structure were supposedly independent Chairs were appointed by Ofwat and consistently repeated the Ofwat policy line—refusing all approaches to take a more environmentally responsible view. These Committees certainly didn't reflect public opinion on environmental issues as demonstrated by opinion poll work carried out by the Environment Agency and the RSPB.

1.   Quadripartite regulation

  1.1  The current system of water regulation stifles creative thinking and imposes a "boom-bust" mentality within the water companies. It does little to reward efficient and creative uses of water, acting against the sustainable management of the water cycle.

  The Periodic Review focuses on "end-of-pipe" solutions—closing a borehole or building a new sewer. It tackles the consequences of the problems rather than the under-lying problems themselves—Society's inefficient use of water. By doing this it prevents the adoption of innovative solutions to water resource and management issues—deterring water companies from the flexible responses needed to cope with future challenges, of which climate change looms large. Such measures could include promotion of grey-water recycling systems, restoration and creation of wetlands within floodplains (benefiting biodiversity and water management), and the promotion of low-input farming systems to reduce the high cost of treating drinking water contaminated with pesticide and nitrates—estimated at over £100 million per year (Pesticides Trust, 1999). The price review dissuades water companies from participating in projects that could contribute to a more sustainable approach to management of the water cycle.

  1.2  The regulatory process needs to be open and transparent. The Regulator started the AMP 3 process by stating that there would be price cuts, putting consumer interests above the environment before any consultation or evidence had been presented. This inevitably meant that Ofwat attempted to defend this position against the environmental regulators, rather than taking an unbiased approach. This bias towards price cuts is illustrated with the use of polling statistics. Ofwat's National Consumer Council carried out a survey of 48 low-income households which concluded that they wanted price cuts rather than an improvement in services. Ofwat used this, among other similarly small sample surveys, to conclude that this was what customers in general wanted, despite evidence from three separate surveys from the Environment Agency, DETR and Water UK (the water industry's trade association) which suggested the opposite. The Environment Agency's survey, for example, found that 69 per cent of respondents were willing to pay more for cleaner rivers, coastal waters and an adequate supply of water. All this research suggested that customers were not looking for the maximum possible reduction in water prices.

2.   The Environmental Obligations and Ofwat's failure

  2.1  In 1998 a programme of schemes to deliver a clean and healthy water environment for the 21st century was drawn up by the Environment Agency, after consultation with English Nature and a number of voluntary conservation bodies (including the RSPB). It included the actions needed to ensure compliance with national and international obligations.

  International obligations included measures to comply with eight European directives. For the RSPB the most important were obligations to maintain and enhance sites designated under the European Habitats and Birds Directives.

  2.2  Other Statutory obligations include measures to reduce damage to Sites of Special Scientific Interest (SSSIs), in addition there are non-statutory obligations to achieve River Quality Objectives (RQOs). SSSIs are areas of land notified by English Nature and the Countryside Council for Wales under the Wildlife and Countryside Act (1981) as being of special interest for the conservation of wildlife habitats, geological features and landforms. Water quality objectives for rivers were agreed by the Government in 1989 when the water industry was privatised, and include statements on achieving good water quality for fisheries, recreation, wildlife and water resources.

  2.3  Government Ministers publicly endorsed a programme of £8 billion (£500 million less than the Agency's programme) in March 1999 and agreed that the costs and time-frame were reasonable and realistic. Shortly after this decision was made, Ofwat lowered the cost of capital (the minimum return providers of capital require to induce them to lend or invest in a business) from 5.25 per cent to 4.75 per cent—effectively lowering the cost of the programme by £500 million. Had Ministers known of this before making their final decision, then the full programme (as presented by the Environment Agency) could have been delivered with no overall increase in cost. River quality objectives and unsatisfactory combined sewer outfall schemes were therefore axed as a consequence.

  2.4  In July 1999 Ian Byatt, Ofwat's Director General, published the draft price determinations. These would reduce water prices from April 2000 by an average of 13.7 per cent, and reduce the environment programme by a further £240 million. The schemes cut in this £240 million reduction included:

—  61 schemes to improve river water quality;

—  Eight schemes to investigate and deal with problems of over-abstraction of water from four rivers and four internationally important wildlife sites; and

—  schemes to address 4,000 intermittent discharges from combined sewer outfalls.

CASE STUDY—DORSET AND WILTSHIRE RIVERS SCHEME

  A £150 million plan to reduce damaging abstractions from the Upper Avon, Wylye and Piddle rivers in Dorset and Wiltshire was removed from the National Environment Programme at the draft determination stage. These chalk rivers have been designated candidate Special Areas of Conservation for their internationally important aquatic vegetation and invertebrates. All of the organisations involved, including Wessex Water and DETR, endorsed the planned scheme. We understand that an independent Ofwat consultant also expressed his support for the scheme. Despite these endorsements, the scheme was dropped. However, the abstractions are in breach of the Habitats Regulations and the Environment Agency will be obliged to revoke the abstraction licences and pay Wessex Water substantial compensation. Effectively DETR, and thus the taxpayer, will have to pay the price for Ofwat's decision.

  2.5  After consultation the final determinations, announced in November 1999, reinstated £170 million of projects (three of the abstraction schemes in the list above) but left the rest cut out.

  2.6  Ofwat's final price determinations mean that 300 km of river and beaches will remain at poor quality and that up to 4,000 "Victorian" sewers will continue to overflow in heavy rain—polluting watercourses and flooding homes. Water companies have been discouraged from contributing to the UK Biodiversity Action Plan targets and other environmental initiatives.

  2.7  Implementation of the Water Industry Act will be detrimentally affected by these price determinations. The Act gave customers the right to a free water meter—a move of great benefit to water efficiency and reducing demand for water. Unfortunately Ofwat has allowed water companies to budget for no more than a 10 per cent growth in the number of metered households for the next five years. This is well short of industry predictions (closer to 20 per cent) and is against the spirit of the legislation. This short-term thinking fails to recognise the benefits of greater metering in terms of reduced demand and increased security of supply.

  2.8  The determinations allow for a pipe replacement rate of just 1 per cent per year—an average replacement rate of once per hundred years. This, combined with the loss of thousands of trained personnel since the announcement of the price limits in November threatens the long-term sustainability of the water infrastructure network. A central tenet of the national water resource strategy—reducing the loss of potable water through leakage, is therefore threatened.

  2.9  The Director of Water Services has a positive duty to further nature conservation (Water Industry Act 1991 and the Environment Act 1995), which relates directly to all sites of importance for conservation and requires that remedial action is taken on sites suffering from the impacts of water company activities (Water and Sewerage (Conservation, Access and Recreation) (Codes of Practice) Order 1989 (SI 1989 No 1152)). In the course of AMP 3 the Director failed in this duty, by making decisions outside his area of expertise, in omitting schemes from funding, he ignored the advice of the environmental regulator and of Government Ministers. As AMP 3 proceeded a perceived conflict between consumer interests and the environment developed. We believe that this stemmed from the Director's personal view, which was demonstrated by his failure to strike an appropriate balance between price cuts and the environment programme. The opportunity for an outcome good for both the consumer and the environment was lost, with important and long-overdue environmental improvements postponed for the sake of a one-off price cut that is unlikely to be sustained—prices are predicted to be at or above 1999 levels by 2005-06.

3.   Monitoring

  3.1  Ofwat appears to have delayed the implementation of £440 million of schemes to the last nine months of 2005. This effectively moves these schemes from this price review into the next review period (April 2005-10)—despite the works being necessary within the period 2000-05.

  3.2  We are concerned that there is still no clear and transparent reporting process for the National Environment Programme. There appears to be continuing confusion over whether Ofwat or the Environment Agency has the responsibility to monitor the delivery of the Environment Programme—this needs to be resolved quickly. Ofwat has failed to provide a timetable it expects water companies to meet when delivering schemes and we fear that without this the programme will be allowed to slip. This could mean continued and increasing damage to wildlife sites already suffering from over abstraction or pollution.

4.   "System Capacity"

  4.1  A number of environmental schemes are in the programme for investigation only. On completion of this research these schemes could identify the need for capital works to remedy their problems. We are not satisfied that the option of using interim price decisions to "log-on" such schemes is the appropriate mechanism for ensuring that funding is provided. There is a clear risk of these schemes being deferred until the next price review period.

5.   Government action needed to address problems highlighted in this evidence

  Ensure that Ofwat and the Environment Agency report annually on progress taken by the water companies in delivering the Environment Programme.

  Clarify the system for financing those schemes in the programme for investigation only, but which may need capital investment in due course.

  Ensure that water meters are available to all customers who require them (as required under the Water Industry Act 1999) and that no cap is placed on the rate of customer uptake.

  Reform the regulatory process to ensure that the next periodic review (2005-10) places sustainable management of the water environment at the heart of the industry.

May 2000