Prepared jointly by Defra and DCLG

The Science and Technology Committee of the House of Lords published its Water Management Report on Tuesday 6 June, 2006. This report is the culmination of an inquiry on water management in England and Wales consisting of both written and oral evidence and fact finding visits.

The Government thanks the Committee for producing a wide-ranging report on this important issue and for its conclusions and recommendations on improving water management. They have been given careful consideration and the Government's response to them follows.

The responses are listed under the headings and numbering used for the Summary of Recommendations in Chapter 8 of the Report, and relevant paragraphs of the Report are shown in brackets. Where appropriate, a collective response has been provided to the Committee's conclusions and recommendations on particular issues with a similar focus (i.e. water reuse).

The Water Service Regulation Authority (Ofwat) is providing a separate response to the conclusions and recommendations in the Report specifically relating to its responsibilities.

Readers should note that since the Inquiry began, the Office of the Deputy Prime Minister (ODPM) has been replaced by a new Department for Communities and Local Government (DCLG). The DCLG remit is to promote community cohesion and equality, as well as responsibility for housing, urban regeneration, planning and local government. Hence, any references to ODPM in the Government's response refer to DCLG.

The Regulatory and Legislative Framework

Successes of the Regulatory Framework

8.3. We urge the Government to make certain that the Drinking Water Inspectorate's effectiveness will not be undermined by a merger with a larger national regulator before implementing any such measure.

The Government recognises that Drinking Water Inspectorate (DWI) has provided effective regulation of water quality for the water industry. The Government will consult of the future of DWI in the light of the Hampton Review recommendations and Defra's own objective, set out in its Five Year Strategy, to concentrate on its core policy functions. Consultation will take place this autumn on a range of options. The continued ability of the Chief Inspector to discharge his/her statutory functions effectively is of paramount importance to the Government.

Resource Development

8.7. We urge the Environment Agency to balance its understandable enthusiasm for demand management with a realistic approach towards the need for resource development. Given the Agency's responsibility for analysing water resources plans it is imperative that it lends its support to resource development schemes where necessary—particularly through appropriate advice to Government—and does not allow its environmental priorities to impact adversely upon the need to ensure security of supply.

The Environment Agency's principal objective, set out in section 4 of the Environment Act 1995, is to make a contribution towards sustainable development. Statutory guidance to the Environment Agency sets out, in relation to its water resources functions (section 6 of the same Act) that this means:

"To plan to secure the proper use of water resources by using strategic planning and effective resource management which takes into account environmental, social and economic considerations, and in particular: to ensure that the abstraction of water is sustainable, and provides the right amount of water for people, agriculture, commerce and industry and an improved water-related environment, and to develop and maintain a framework of integrated water resources planning for the Agency and water users".

The Agency also has a duty under section 15 of the Water Resources Act 1991 (as amended) to have particular regards to the statutory duties of water and sewerage undertakers in the exercise of its powers under this Act.

The Agency's advice to Ministers on the resource development proposals set out in water company water resources plans is therefore given in light of these duties and statutory guidance.

Water Bills and Affordability

8.12. It is clear that something concrete has to be done to address the very high level of unpaid bills, and experience in Melbourne suggests that partial disconnection may be both effective and publicly acceptable. We therefore recommend that the Government examine the evidence from Australia, with a view to introducing more effective strategies for reducing the number of people who can afford to pay their water bills but refuse to do so.

The Government is aware of the possibilities of restricting the flows of water to households as a means of enforcing payment. The Committee commended an example from Australia. This option was publicly discussed in England and Wales during the review of water charging in 1997-99.

At that time the Government concluded that

"We believe that the prohibition on domestic disconnection is vital to protect health and hygiene. Anyone who agrees with that statement must agree also that devices which reduce the flow of water available for use to such a small trickle that it can take up to a quarter of an hour to fill the kitchen sink to enable washing-up to be done should be banned, too."

The Government takes seriously the problems of customer debt and debt collection and we are keen to see debt well managed throughout the industry. At present there are big variations in debt levels in different companies.

It is true that the revenue owed to water companies has increased. This is in part because of the general growth in consumer debt, not just a water issue. There are options open to companies to re-coup debts. These include County Court Judgements and Garnishee orders.

In 2003 Ofwat, together with WaterVoice (now the Consumer Council for Water), published a joint research report Paying for Water, which focused on debt issues. Ofwat and the Consumer Council for Water are using the findings of this research to work with companies to ensure that their debt management and recovery approaches are tailored to collect outstanding revenue more effectively. It is clearly important that best practice is identified and then applied as widely as possible.

8.13. At the same time as non-payment is a growing problem, water affordability is also becoming a serious issue; the help currently available for low income households is grossly inadequate and at variance with the Government support available for other essential needs such as energy. We urge the Government to heed the repeated calls of CCWater and two House Commons Select Committees and to draw up plans to help the most vulnerable households with their water bills through the benefits and tax credits system. Providing even a fraction of the almost £2.5 billion that the Winter Fuel Payment cost in 2004-05 would be welcome.

The role of benefits and tax credits is to provide support and protection for people unable to work (either temporarily or permanently) or retired. Cost of living expenses within benefit rates take account of a wide spectrum of household outgoings, including water costs, and are increased annually by the rate of inflation.

The Government have made additional targeted provision in benefits for vulnerable groups such as pensioners and families with children. For people on the lowest benefit incomes who get into difficulty with household bills such as water and fuel, there is provision for payments to be made from benefit direct to the creditor through the DWP's Third Party Deduction scheme. This helps people to clear their arrears and get back on an even keel.

The Government has no plans to introduce a lump-sum payment for water costs for people on means-tested benefit. The Winter Fuel Payment is a special annual payment for people aged 60 and over to help with the costs of keeping warm in winter, and is not means-tested. It is primarily age-related rather than affordability-related. It provides reassurance to pensioners that they do not have to turn down their heating in winter, given the obvious risk to older people of doing so.

The Government does understand that there is a problem with water affordability, particularly in areas with low incomes and high bills, such as the South West. The Water Industry (Vulnerable Groups) Regulations were introduced on 1st April 2000 to help people who might otherwise be afraid to turn on their taps, possibly compromising their health and the health of others because of worries about paying their bill. Households are eligible for the vulnerable groups tariff if they are metered, in receipt of certain income-related benefits, and suffer either from medical conditions which cause substantial increase in use of water or have three or more dependent children under the age of 19. Defra, Ofwat, the Consumer Council for Water, and Water UK are working together to improve take-up of the tariff.

Defra is currently coordinating an affordability pilot in the South West to better understand how a variety of measures (increased uptake of benefits, metering and water efficiency devices) might help people with their water bills.

The Way Forward

8.15. We recommend that long term integrated water management plans be drawn up by regional boards—one for each River Basin District—comprised of local representatives of Ofwat, the Environment Agency and CC Water. These boards would have a statutory duty to draw up such plans and to advise Ofwat accordingly at the national level in advance of each periodic review process. They would also have a duty to advise Regional Assemblies on Regional Spatial Strategies.

8.16. This would enable all three components of sustainable development—economic, environmental and social—to be factored into the price-setting process far more effectively, whilst also ensuring that security of supply is maintained in a way that best suits the needs and pressures of each individual region.

Ofwat, as independent economic regulator, is solely responsible for setting water price limits at each periodic review. The Committee acknowledged this. This recommendation is concerned with how planning, advice and information reach Ofwat to inform their setting of price limits.

Ofwat uses information in a range of forms and from a range of stakeholders. This information enables Ofwat to make a judgement of the obligations that companies must meet within the 5 years price limits are set for. The stakeholders that provide such information include the Environment Agency, the Drinking Water Inspectorate, the Consumer Council for Water and Defra.

The Government recognises the importance of water stakeholders' consultation and working together to plan water management. By the time of the next periodic review, two new systems of planning water will be coming into effect, Water Resources Management Plans and River Basin Management plans. These will inform decision making by Ofwat.

Before each price review Ofwat consults on its proposed way forward, including how it will interact with stakeholders and companies. Ofwat has not yet consulted on its project plan for the next periodic review of water prices.

The Government is not persuaded at this time that an additional statutory board is the way to improve the flow of information. However, we shall await Ofwat's consultation before forming a firm view on how best to inform the periodic review process.

Through Defra's Water Framework Directive National Stakeholder Group, the Government is fully engaged with industry on the implementation of this Directive. In addition, on 13 December 2005 Defra and the Welsh Assembly Government launched a joint consultation on draft River Basin Planning guidance. This is draft guidance to the Environment Agency, setting out our expectations in terms of the principles and key steps for the river basin planning process.

The Environment Agency, as competent authority, is also developing further their stakeholder participation framework. This will include 'river basin district level' liaison panels, which will discuss and negotiate the content of the plans in order to advise the Agency. The Liaison panels will include representatives from three main areas: organisations representing sections of the public who will be affected by the WFD implementation; those responsible for delivering WFD measures; and the Regulators.

Economic considerations are also integral to the implementation of the WFD. The WFD explicitly requires economic considerations and social issues to be considered and taken into account when setting water management objectives. The Collaborative Research Programme (CRP) is developing methodologies for ensuring a balance between the environmental, social and economic concerns during river basin planning decisions.

Demand for Water

Housing and Planning

8.18 It is regrettable that the ODPM failed sufficiently to consult the water industry directly—or to give due consideration to the water management implications—when formulating the Sustainable Communities Plan and selecting the growth areas. We recommend that, in future, DCLG and Defra work together to ensure that such consultation is held at the earliest possible stage, rather than taking the supply of water for granted.

The Sustainable Communities Plan (SCP), launched in 2003, set out the Government's long term vision for thriving, sustainable communities in every English region. The Plan defined an ambitious programme to deliver a step change in housing supply, decent homes, urban renewal and countryside protection and it also signalled an unprecedented level of investment in our neighbourhood environments.

The Plan itself confirmed the broad areas for growth within the 4 growth areas: (a) Milton-Keynes; (b) Ashford; (c) London Stansted-Cambridge-Peterborough and (d) Thames Gateway. It did not specify the location of exact development within the growth areas but rather confirmed the Government's vision for increasing housing supply. The SCP set a national policy for where growth should be located, including an ambition to build an additional 200,000 dwellings over and above what was already in regional plans, and committed to a rigorous review process through the planning system where key stakeholders such as water companies would be able to participate in a robust debate.

As the Government said in the Sustainable Communities Plan (page 47)—

"Realising this additional growth potential will depend on the provision of infrastructure and a sustainable approach to growth, tested through the Regional Planning Guidance and Spatial Development Strategies review and plan process. The Government will work in partnership with region and local authorities and other stakeholders to help achieve this."

This is exactly what has happened. For example, in the South East, the Regional Planning Body (SEERA), the Environment Agency, English Nature, the water industry (8 water companies) and Ofwat have been working together under the umbrella of the Water Resources in the South East Group (WRSE). The WRSE was invited by SEERA to contribute to the development of the draft RSS from the outset, giving the Group an early opportunity to ensure that sound water policies are incorporated from the inception of the Plan.

Collaborative work to inform the draft RSS includes a number of studies (published in September 2004, April 2005 and May 2006) to inform the development of the South East Plan. In particular, the water supply-demand balance in the region has been modelled under a series of scenarios. These include demand and supply scenarios in terms of housing growth and distribution, water efficiency and demand management, and the development of new water resources. The work has informed the draft RSS of the implications of housing growth and mitigation measures and additional water resources required. The work has concluded that through careful management of new water resources together with greater water efficiency measures, the water needs of new housing in the draft RSS can be met.

Additional to any engagement and consultation by the Regional Planning Body before the draft is submitted to the Secretary of State, water service providers can make representations to the independent Panel when the draft RSS is examined for soundness. At the recent East of England Examination In Public both Anglian Water and Thames Water made representations to the Panel regarding water supply/demand issues and the analysis of the potential impact of additional house building. Furthermore the proposed changes stage follows the examination process and allows further consideration by the Secretary of State to what changes will be made to the draft RSS. This includes both the consideration of representations made on a draft RSS and the recommendations contained within the Panel Report.

The Government's announcement in December 2005 in response to Kate Barker's review of housing supply set out our ambition to increase the rate of new housing supply in England to 200,000 per year over the next decade, in order to provide: (a) A step on the housing ladder for future generations; (b) Quality and choice for those who rent; and (c) Mixed, sustainable communities.

On 20 June 2006 Government announced those towns and cities which had volunteered for sustainable growth and with which we are working to assess capacity and viability for additional housing. A key factor in the assessment of viability for growth is current and future assessment of water supply and water quality.

The Environment Agency and DEFRA, along with other Government departments and agencies, have considered all of the proposals received. During June 2006 DCLG officials chaired a series of regional meetings with the agencies to discuss each proposal and no insurmountable barriers to growth were identified at these locations.

In some locations there remain significant issues around water and we will continue to work closely with the Environment Agency, the water companies and local partners to identify solutions. We will make a further announcement in October 2006 detailing the successful new growth points, which will mark the start of a longer-term partnership for growth with Central Government.

All new growth point proposals will of course be subject to full consultation, testing and examination in public through the regional planning process, where the Environment Agency and the water companies will be able to present their views to the independent panel for their consideration.

8.19 Whilst we welcome the consultative role of the water companies and the Environment Agency in the formation of Regional Spatial Strategies and Local development Frameworks, it is important that they should be involved at the earliest possible stages of planning.

More effective community involvement was a key element of the Government's planning reforms and PPS 1 sets out the principles that the Government believes should underpin community involvement in the planning process. The document Community Involvement in Planning: The Government's Objectives expands on PPS1.

The principles of early community involvement are reflected under the new regional planning arrangements of PPS11, ensuring that future changes to the Regional Spatial Strategies (RSS) are produced on an inclusive basis of partnership working and community involvement.

As well as highlighting elements of community involvement required by legislation, Annex D of PPS11 on RSS provides a core of recommended measures to facilitate community involvement that Regional Planning Bodies (RPBs) are expected to follow. This is subject to RPBs using their good sense on how much of this is applicable where only minor revisions of RSS are being undertaken. But this is only a starting point and RPBs are encouraged to look beyond Annex D and develop innovative techniques for community involvement.

The RPB should establish at the earliest possible time which organisations need to be consulted about revisions to the RSS and ensure that they have an opportunity to play a role in the planning process. This process is supported by the requirement for the RPB to prepare and publish a statement of involvement.

Similarly, key to the success of the new local planning system is the early identification of all issues in the preparation of a development plan document.

B6 of Annex B of PPS12 on Local Development Frameworks (LDFs) states that consulting utility companies at the "information gathering stage of the preparation of a local development document is essential". It goes on to state at B7 of the same annex, that it is "essential that local authorities consult water companies and the Environment Agency at an early stage in the preparation of a local development document".

For example, Thames Water has identified Aylesbury LDF as a good practice example of how the planning process can involve the water industry from the outset. In Aylesbury, a delivery group that includes the water industry (Thames Water) meets every quarter to inform the LDF preparation process. The Group also cover other utilities such as electricity and is led by the LPA. Thames Water says that this utility focus provides the right environment to discuss the implications of the emerging LDF on water resources and to inform the plan preparation in an effective manner.

However, it is essential that anyone who has an interest in the planning of an area actively seeks to assist the local planning authority to shape the future of that area from the earliest stage, both at the core strategy level as well as at the detailed area action level. Those interested, including national organisations, Government agencies, regional organisations, developers, local organisations, local community groups and the community, must not wait for the authority to finalise their development plan document before getting involved. Local planning authorities should front load the preparation of development plan documents by facilitating early involvement and securing inputs from the local community and other stakeholders.

This can be seen as part of the background work for the emerging East Midlands Plan whereby a report was prepared by Ove Arup and Partners on Water Supply and Quality in the East Midlands. This was done under a combined Project Board, made up of the Environment Agency, the East Midlands Regional Assembly, Anglian Water and Severn Trent Water, in order to establish a better understanding of the impact of development in relation to water in proposed areas of new housing in the region.

Also, the Local Development Scheme database is available on the Planning Portal website through which Water companies and the Environment Agency would know well ahead the various stages of the preparation of local development frameworks by all local authorities. This will enable the Water companies and the Environment Agency to plan their involvement in the preparation of local development documents.

Furthermore local authorities are required to prepare a Statement of Community Involvement (SCI) which should set out a policy for involving the local community and other stakeholders in the preparation of local development documents.

8.20. We do not believe that it would be practical for water companies to be made statutory consultees on every individual planning application. However we recommend that the Government consider making water companies statutory consultees on applications for developments comprising a number of properties that exceeds a given threshold. It would also be desirable to make the Environment Agency a statutory consultee on water supply issues in these circumstances. However, the Environment Agency must receive adequate funding if its role in the planning system is to be expanded in this way.

The Government believes that consultation with water companies and the Environment Agency is best done at an earlier and higher level during the preparation of RSS and Local Development Frameworks (LDFs). If a local planning authority believes it needs confirmation that adequate water supply and sewerage infrastructure can be provided for any development, it remains open for them to consult informally. Similarly, it is always open to water companies and the Environment Agency to comment if they believe that large-scale developments (which they should, in any case, be aware of) are likely to put an unacceptable strain on the infrastructure.

Where the Agency comments upon water supply issues, the costs are attributable to its water resources functions and covered by abstraction charges.

8.21. Whilst we welcome the Government's belated attempts to consider the likely impact of increased housing growth upon water use, we are completely unconvinced by the figures produced. Not only is the methodology flawed, but the findings are produced in such a way that even the Minister with responsibility for water issues misinterpreted them. The Government must be more transparent about the fact that their housing growth plans will have a very significant impact on water use in south east England, and focus on ensuring that the necessary preparations are made.

The Government is committed to delivering a 'smart' housing supply by creating new, thriving, sustainable communities and reinvigorating existing ones. Central to the success of this is providing the right infrastructure and public services to support these communities at the right time.

Each of the Growth Areas had been identified as areas for future growth by RPG9 in 2001. But since confirmation of their designation as priority locations for growth in 2003 as part of the Sustainable Communities Plan, Government has been working hard to ensure that water companies are included in the detailed negotiations and planning for the future development of these important communities.

The combination of the water companies' long-term planning processes, combined with the development and review of RSS provides a robust framework for the consideration and resolution of water supply issues as part of the Government's ambitions for housing growth.

Housing growth is one of the key considerations that influences the demand for new water supply and, as part of the 2005-2010 review, Ofwat took into account nearly 1 million planned new connections, including around 700,000 new dwellings in England in the same period.

As part of the development of the Government's response to Kate Barker review of housing supply, DCLG and Defra jointly commissioned A Sustainability Impact Study of Additional Housing Scenarios in England to consider the environment, social and economic impacts of additional housing supply.

The Barker Review response was clear that demand for new water is projected to increase by 6.1% over a fifteen year period, as a result of a rising population and new homes. The Government looked at what additional water use would be needed to go further then the Sustainable Communities Plan and build additional homes in response to the Barker Review. Analysis using ENTEC's model found that building between 100,000 and 200,000 additional homes on top of current plans over the next 10 years would still only increase water use by around a further 0.1% more in 2016.

We believe that the Sustainability research represented an important advance in the analysis of the impact of housing supply policy and, along with the models produced as part of the projects, combined with further analysis within Government, provide a good basis on which to take decisions.

As part of the Government's response to this committee we asked ENTEC to look again at their analysis and they remain confident in the results, as are we. A separate response to the comments from Professor Adrian McDonald on the Government's projected water demands following the Barker Review of Housing Supply in Appendix 4 of the House of Lords Report is provided at Annex A.

8.22. It is worrying that the housing growth plans have not in many cases been factored in to the water companies' long term plans, due to the way in which Government have initiated the planning. We recommend that the Environment Agency works closely with water companies to ensure that this situation is rectified at the earliest opportunity, and further recommend that the companies be encouraged to consider the resource development that might be necessary beyond the timescale of the Regional Spatial Strategies.

The Government has instigated a series of measures, including further developments such as planning authorities becoming statutory consultees on the water company water resource management plans in April 2007, to ensure that the Environment Agency, water companies and other key stakeholders are fully engaged in planning for housing growth. These measures are set out below. The Government therefore believes that effective systems are in place to ensure that future housing growth plans leading to increased water demand are forecast and that the demand/supply balance is well managed.

Water companies are already planning new house building into their 25 year water resource management plans, using projections provided by DCLG and Local Authorities. These plans are revised as further information on numbers and locations becomes available. Water resource management plans are not intended to be static; they are responsive to the implications not only of climate change, but also to demographic change and increasing pressures for housing. The plans, which are currently voluntary, may include recommendations for the development of new resources, such as reservoirs or desalination plants, as necessary.

From April 2007, as a result of the Water Act 2003, water companies will be placed under a statutory duty to produce and maintain such plans. These draft plans will be sent to the Secretary of State for Environment, Food and Rural Affairs for consideration and will be the subject of consultation.

In addition, the Environment Agency review these water resource management plans annually and this plays an important role in complementing the Environment Agency strategies that describe how each company aims to achieve a sustainable supply-demand balance for the public water supply.

The Environment Agency and the water companies are statutory consultees on Regional Spatial Strategies and Local Development Frameworks, through this they play an important role in informing the relevant planning body and independent inquiries at key stages of the plan-making process to ensure that water issues are taken in to account at an early stage. For example, in the South East RSS process, the Environment Agency and water companies have provided detailed information on water supply and water quality issues to the South East England Regional Assembly in drafting the South East Plan. This included modelling water supply implications of alternative levels and distributions of housing growth.

To further support the planning process planning authorities will become statutory consultees on the water company water resource management when these plans are put on a statutory basis in April 2007. This will aid in ensuring that the water companies have the most up to date information on new build in their supply area. It is also worth noting that as part of the 2004 review (covering the period 2005-2010) Ofwat took into account nearly 1 million planned new connections, which included around 700,000 for new residential dwellings across England.

The Government continues to work hard to ensure that water companies are fully informed of changes of policy. On 7 March 2006 all the water companies in England, who were interested in gaining a better understanding of the policy initiatives launched as part of the Barker response, were invited to a specialised briefing. We were pleased with the high level of attendance at this forum and the interest shown by water companies in working with the Government more closely.

The Government understands that the planning for water resources is essential if we are to continue our development of truly sustainable communities. We recognise the benefits that come from identifying and resolving environmental problems at major sites at the earliest possible stage.

To this end a Concordat was agreed between DCLG and the Environment Agency, in August 2005, to act as an early warning system in flagging up areas of concern for Ministers and officials.

Through regular liaison meetings between the Environment Agency, DCLG, Defra and more recently Natural England, the discussions are set at a national strategic level so as to ensure that environmental impacts are properly managed and mitigated at an early stage of the process rather than at the last minute. In particular this forum identifies, as early as possible, any pressures that new build housing places on water supply, sewerage and waste water facilities in particular sites. It will be of interest to note that the water companies concerns around these particular sites are regularly communicated via the Environment Agency.

8.23. This process should be overseen by Defra and DCLG, both of which must take responsibility for the problems that their earlier lack of consultation has caused. Moreover, Defra must direct Ofwat to take a constructive and realistic approach towards allowing funding for the measures deemed to be necessary.

The Government does not accept that there was a lack of consultation. The majority of housing growth was signalled in 2001, in Regional Planning Guidance 9 (RPG9). There has been confusion of the vision as set out in the Sustainable Communities Plan (SCP) as a definitive plan with exact details of where new houses would be built. But this was never the case. The Plan itself confirmed that the broad areas for growth, including our ambition to increase housing supply, and committed to a rigorous review process through the planning system where key stakeholders such as water companies would be able to participate in a robust debate. The detail of precise locations is emerging through development of the Regional Spatial Strategies and Local Development Frameworks.

The water companies have generally included the best available information on the timing and location of new build, from sources such as RPG9 and the SCP and discussions with local authorities. The current water resource plans are reviewed annually and updated with whatever new information on timing and location of new build becomes available.

In the new regime that the Government will be introducing next year as part of the implementation of the Water Act 2003, whereby the long term planning is put on a statutory basis, the companies will formally consult local authorities, Regional Assemblies and other relevant bodies as a mechanism to obtain the best and most up-to-date information at the regional and local level on new developments.

This will complement the process whereby the water companies are statutory consultees on both Regional Spatial Strategies and Local Development Frameworks.

Water Supply

Climate Change

8.24. We have seen insufficient evidence to convince us that the potential consequences of climate change are being adequately factored into long term planning for water management, with due regard being paid to the inherent uncertainties. We therefore recommend that both Ofwat and the Environment Agency take steps to make the process whereby such issues are addressed within long-term planning more transparent and open to scrutiny.

The Government fully accepts the Committee's view that the impact of climate change should form an integral part of water companies' long-term planning and that the process should be transparent and open to scrutiny. The Government considers both objectives will be achieved when the preparation and maintenance of water resource management plans by water companies becomes a statutory requirement under the Water Act 2003.

A consultation on proposed Regulations relating to the process of producing water resources management plans ended in April 2006, and the responses received are being considered. We expect to put these water resource management plans on a statutory basis by April 2007.

It is also proposed to issue Directions to the water companies on matters to be considered in the plans and the Government anticipates that these will include the need to take account of climate change on future water resources.

The Environment Agency has already produced water resource planning guidelines that were used by water companies to provide the framework to prepare their current water resources plans submitted as part of the periodic review process. The guide lines, developed jointly with Ofwat and discussed with the industry and Water UK, include the treatment of climate change and its impact on water supplies and demand for water. The guidelines will be updated to ensure the company plans are informed by the latest indications of climate change impact. The application of climate change scenarios must be used sensibly, pragmatically and consistently, in the knowledge that research in this field will result in better and more reliable climate change predictions.

Statutory water resource management plans will be subject to public consultation, enabling customers and others to comment on how water companies propose to fulfil their duty to maintain a secure water supply over a 25 year period. Water companies will also be required to prepare a statement on the action it has taken in response to any representation received. The requirement for a public consultation on the water resource management plans should achieve the necessary degree of transparency and scrutiny of water companies' proposals to manage the potential consequences of climate change recommended by the Committee.

Reservoirs

8.25. We believe that the construction of new reservoirs and the enlargement of existing ones, for the purpose of public water supply are likely to be necessary in order to meet long-term water demand. However, the development of such new resources should be treated as only one part of the twin-track approach, and the required water must be supplied as sustainably as possible.

The Government agrees that new and enlarged reservoirs should be considered in terms of the twin-track approach. Each proposal must be fully justified and considered against other options, as indicated in Ministerial guidance on the 2004 review of water prices.

8.26. We recommend that the Government ensure that subsidies for the construction of winter storage reservoirs continue to be made available after the abolition of the Rural Enterprise Scheme.

The successor to the current England Rural Development Programme, which includes the Rural Enterprise Scheme, is being developed within the framework of the Rural Development Regulation (Council Reg. 1698/2005) adopted last year. Under Article 20(b)(v) of the Regulation, which covers the period from 2007 to 2013, support may be granted for infrastructure related to the development and adaptation of agriculture and forestry, including operations relating to water management.

Following consultation, the Government is currently developing a national strategy plan, which will be submitted to the European Commission and cover the main themes, priorities and challenges for the next Rural Development Programme for England as well as for the rest of the UK. The strategy will act as the reference framework for the detailed preparation of the programme, but within this framework there will be the flexibility to decide, at the regional level, how best to use the Programme in each area, taking account of regional and local needs. This flexibility will allow Regional Development Agencies, as deliverers of support under Article 20(b)(v), to decide whether and to what extent they contribute to the costs of constructing winter storage reservoirs as a priority for their area. It is expected that the need for contributing to such costs will vary from region to region.

Desalination

8.27. We believe that, until better desalination technologies become available, desalination plants should not be the preferred option for general resource development. We recommend that the Government consider whether additional funding is needed to boost research into desalination in the United Kingdom, particularly since more efficient technologies will become increasingly marketable around the world.

The Government recognises that there are potential environmental issues associated with desalination. As with reservoirs, proposals for desalination need to be fully justified and the merits of any individual scheme will need to be considered at the time it is proposed.

The Government does not believe that more centrally funded research is needed—the technology exists and it is for the water companies to adopt the most appropriate technology, though the industry may wish to commission further research itself.

Water Transfer

8.30. We have concluded that a national water grid is not currently feasible. However, we recommend that both Ofwat and the Environment Agency encourage and support greater connectivity between neighbouring water companies, particularly in the south and east of England. This would allow a more rapid and flexible response to localised supply/demand deficits.

The Government supports the Committee's view that the construction of a national water grid is not a feasible option at present. This was also the conclusion reached by representatives from across the water industry, including Ofwat, the Environment Agency and the Consumer Council for Water, who attended the water meeting held by the Secretary of State for Environment, Food and Rural Affairs and the Minister of State for Climate Change and the Environment on 1 June.

With regards to the Committee's recommendation for greater connectivity between neighbouring water companies, a considerable amount of water is already transferred within water companies' areas of operation to give individual companies greater flexibility to meet local shortages. Longer distance links have long been established between, for example, Wales and the West Midlands and South East Lancashire, the Lake District and Lancashire, and from the Fenland watercourses to Essex.

With the production and maintenance of water resources plans becoming a statutory requirement under the Water Act 2003, the Government intends to make water companies statutory consultees on the plans of any other water company with whom it has a bulk supply agreement or other transfer arrangement. This formal process will complement the work that is already undertaken through the Water Resources in the South East Group. This group, chaired by the Environment Agency, provides a forum for discussion, at both managing director and technical level, of the potential for greater connectivity in the south east.

There are, in addition, statutory powers that allow the Environment Agency, in consultation with Ofwat (the Water Services Regulation Authority), to propose to a water company that it enters into a bulk supply agreement with another water company, where it is necessary to secure the proper use of water resources.

Large-scale Re-use of Treated Wastewater

8.31. We recommend that the Government, the Environment Agency and Ofwat encourage and support schemes for the planned indirect re-use of treated wastewater by water companies, especially in the driest areas. We also believe that there is scope for greater industrial use of wastewater that has been treated to a sub-potable standard, and we recommend that the Government explore means by which such schemes could also be encouraged.

Local Treatment and Re-use of Wastewater

8.32. We believe that the largely untapped potential for local re-use of wastewater should be explored, and we therefore welcome the Government's intention to use greywater recycling at the Northstowe development. However, the current wariness of the public should be treated sensitively and, initially at least, this kind of recycled water should only be used for external purposes, not internal ones. We also recommend that the Government consider, as a priority, the feasibility of introducing a universal statutory standard for sub-potable water intended for re-use.

Rainwater Harvesting

8.33. We recommend that the Government make every effort to promote the development of rainwater harvesting techniques and to encourage the use of such systems in new developments for the provision of water for external purposes.

The Government intends to consult this summer on ways of making minimum standards of water efficiency mandatory in new homes, existing buildings and in respect of the domestic uses in non-household property. This will underpin the levels in the Code for Sustainable Homes, which sets higher standards for new homes to be rated against, in order to increase their environmental sustainability. It will not be possible to reach higher code levels unless the standards for water efficiency have been met. Greywater re-use and rainwater harvesting systems will have a role to play in meeting the higher levels of the Code.

Greywater harvesting systems are still largely regarded as a developing technology in the UK. Research conducted in this area has tended to conclude that these systems are not generally economic, except perhaps for larger users such as hotels and public buildings. The feasibility of installing greywater systems in households still needs to be established. As well as economic issues there are also public health concerns about the storage and use of water that has not been fully treated. These systems also need regular maintenance which if not carried out will affect performance and water quality.

Government is already encouraging the re-use of wastewater in industry through the Enhanced Capital Allowance (ECA) scheme for water efficient technologies. This scheme provides accelerated tax relief to businesses investing in designated sustainable water technologies, which includes efficient membrane filtration systems for the treatment of wastewater for on-site recovery and re-use.

It is more economic to install rainwater harvesting systems on new buildings as the costs of installing a separate pipe network and other associated equipment is considerably higher in existing buildings. The relatively low cost of water in England and Wales means that it can take a long time for cumulative savings made on water bills to justify the cost of installation on economic grounds, especially in areas of moderate annual rainfall. Viability in terms of water and cost savings is dependent on the factors encountered in each individual case. The Government supports the purchase of rainwater harvesting equipment by businesses through the ECA scheme for water efficient technologies.

The Government's Market Transformation Programme is looking at technologies that could potentially reduce overall water consumption by reusing rainwater and/or greywater (from baths/showers etc). A project has been started this year to develop the necessary evidence, economic case, feasibility, performance standards, policy action plan and impact scenarios to determine the best use of rainwater/greywater technology.

Water Efficiency

Promotion of water efficiency

8.34. Water companies need to be more energetic and imaginative in promoting water efficiency, and we urge Ofwat to look favourably upon the funding of such activities. However, there also needs to be an alternative, independent source of advice and support to both domestic and business consumers.

Since 1996, water companies have been under a duty to promote the efficient use of water by all their customers. The extent and range of measures that water companies take to promote efficient use of water varies, largely in relation to their water resource position. All companies undertake some measures to assist repair and replacement of supply pipes, provide and promote water saving devices and provide audits to identify opportunities for saving water. Ofwat is undertaking work within the Water Saving Group to identify best practice in, and develop incentives for, the promotion of water efficiency by water companies.

The Consumer Council for Water is undertaking work within the Water Saving Group on 'Understanding and changing customer perceptions and raising awareness'. As part of this work, CCWater has carried out a review of existing research on consumers' attitudes and behaviours and undertook the summer extensive research to address gaps identified to improve the understanding of consumer knowledge of water resources and their views on water efficiency and consumption. The Consumer Council for Water provides an independent source of advice to support both domestic and business customers.

For businesses there is also Envirowise, which is a programme run by Defra and the DTI to provide practical environmental advice to businesses on a range of issues, including water and waste minimisation and Environmental Management Systems. Businesses are supported through free publications, events, seminars, and collaborative work with industry bodies, tools and clubs.

8.35. We agree with the Government that a water saving trust is not on balance desirable at this time—as long as other bodies are mandated to take responsibility for promoting water efficiency. We therefore strongly recommend that the Government extend the remits of both the Energy Saving Trust and the Carbon Trust to cover water efficiency. We welcome the proposed establishment of Environment Direct, which will help to address the institutional fragmentation in the promotion of water efficiency, and look forward to rapid progress on this initiative.

The Government welcomes the Committee's view that a Water Saving Trust is not on balance desirable at this time. The Water Saving Group is working on how best to further promote water efficiency for households. We do not agree that the Energy Saving Trust or the Carbon Trust's remits should be expanded to include water efficiency, as we do not want to divert them from their key objective of reducing carbon emissions. However, where appropriate they do point or redirect stakeholders/customers to water efficiency help and support.

On Environment Direct, the Government aims to launch this initiative later this year with a new greener living franchise on the Government's Directgov online service. This will provide accurate and practical information for citizens on how to lead a more environmentally sustainable lifestyle and will include signposting to a range of government and other sources of information, services and transactions.

Public Awareness

8.36. In the long-term the educational system will be crucial in ingraining water efficient behaviour patterns in the minds of consumers. We urge the water companies to maximise their collaboration with schools in this regard. We also recommend that the Government make water efficiency—and the rationale behind it—a compulsory part of the citizenship syllabus.

As part of their work in promoting the efficient use of water, many water companies have established close links with schools to raise the awareness of children about their role in management of the water environment. Many water companies have established educational facilities within their visitors' centres to accommodate school visits which include topics on the importance of water conservation. Water companies provide a wide range of web based educational resources and have jointly funded the development of an educational website with an interactive game designed for school children to demonstrate the value of water conservation. Many water companies also work with schools to audit their water use and assist in measures to improve water efficiency and reduce water consumption. The value of opportunities for water companies to engage with schools to promote water conservation will considered as part of the best practice review being undertaken by Ofwat. (see paragraph 8.34)

Through the teaching of citizenship in the curriculum pupils receive education on sustainable development. Through developing pupils' skills in effective participation in the processes that affect the quality, structure and health of the environment and exploring values that determine people's sustainable actions within the environment.

More specifically, at Key Stages 1 and 2 of the citizenship curriculum, as part of being prepared to play an active role as citizens, pupils are taught about what improves and harms the natural environment and about some of the ways people look after it and consider environmental issues. They are also taught that resources can be allocated in different ways and that these economic choices affect individuals, communities and the sustainability of the environment.

At Key Stage 3 and 4, within the aim of acquiring the knowledge and understanding about becoming informed citizens, pupils are taught about the world as a global community (and its sustainable development) and the environmental and implications of it.

The issues of energy and water are doorways under the Government's sustainable schools framework and this is reflected in the teaching of other subjects in the curriculum:

In Geography, at Key stages 2 and 3 pupils are taught to recognise how and why people manage environments sustainably, and to identify opportunities for their own involvement. At Key stage 2 pupils are required to study an environmental issue, caused by a change in an environment (for example, drought), and attempts to manage that environment sustainable (for example, reducing water use). At Key stage 3 pupils are taught about weather and climate, the water cycle, resource issues and resource planning and management.

Moreover, the Secretary of State, Alan Johnson, launched on 15 May, a framework for action for schools to become models of sustainable development in their communities. A consultation on the framework ends on 1 September. The framework contains ideas for encouraging pupils to walk or ride to school, interesting ways of exploring sustainable development issues in the curriculum and incorporating environmental projects in their buildings and grounds. By 2020 the Government would like all schools to be models of energy efficiency and renewable energy, showcasing wind, solar and bio-fuel sources in their communities, and maximising their use of rainwater and wastewater resources.

8.37. The Government should also seek to use all forms of media to promote and nurture water efficient behaviour amongst the general public. We recommend that the Government study the ways in which the Government of Victoria has achieved such impressive results, with a view to emulating such a strategy in this country.

8.38. The general consensus amongst experts is that household metering is of value in reducing consumption, and we endorse this view. However, if metering is to make a long-term difference, it must be accompanied by a programme of awareness-raising about the importance of water efficiency.

Demographic and Social factors

8.17. We are concerned by the impact that population growth, decreasing average household size and increasing per capita water use will have upon domestic demand for water. The only one of these factors that can be directly addressed by the industry and regulators is the growth in per capita water use. It is vital that the growing emphasis on water efficiency amongst the key stakeholders is communicated effectively to the public at large as rapidly as possible.

The Government agrees that there is work to be done to increase the awareness of the value of water, and in particular that it is a finite resource. There are a number of organisations that contribute in promoting these messages including the Environment Agency, water companies, and the Consumer Council for Water.

As said above, the Consumer Council for Water is leading a workstream of the Water Saving Group on 'Understanding and changing customer perceptions and raising awareness'. This workstream includes undertaking research to better understand customer knowledge of water resources and their views on water efficiency and consumption. Based on the results of the research, which was undertaken this summer, the Consumer Council for Water will take the lead within the Group in updating and improving current sources of information and advice to customers. This is likely to include employing social marketing approaches to help engage consumers to change attitudes and behaviour.

Waterwise is leading the workstream of the Water Saving Group on 'Information needs: gaps, priorities and funding'. This workstream includes identifying where there are gaps that inhibit effective intervention, including assessing the economic case for water efficiency, define how needs are to be prioritised, make appropriate use of relevant international experience and consider if and how any extant or planned projects can contribute. The outputs from this work have led to prioritised proposals including well-targeted pilot studies being developed to fill the gaps identified.

Water metering will make a significant contribution to the management of demand in the long term. The Water Saving Group is looking at ways of further increasing metering in areas of water stress, building on the existing area of water scarcity provisions.

The introduction of water meters must have regard to the interests and concerns of customers. The Consumer Council for Water is looking to find the best methods of passing on advice about water efficiency as part of its work with the Water Saving Group, the Government is also looking at ways to improve the uptake of targeted assistance under the vulnerable groups regulations.

Metering

8.39. We draw the attention of the Government and Ofwat to the smart water bill reproduced in this report, and recommend that they consider the adoption of a design modelled on it for metered customers in England and Wales.

Water bills are clearly one important means of imparting information. Each company has its own billing system. Ofwat encourages best practice through companies' performance against level of service indicators. Ofwat looks at accuracy of bills for metered customers as one of these indicators. This forms part of its calculation of companies' overall performance which is used to compare companies' performance over a broad range of measures.

8.40. We urge the Government to consider rising block tariffs as part of their current study of tariff structures. We recommend that the use of such tariffs be made obligatory for companies granted permission to impose universal metering under the water scarcity status provisions.

The Government is looking at a wide range of tariffs as part of the follow up to the 2004 report on affordability. Defra is working closely with Ofwat, the Consumer Council for Water and water companies to undertake analysis of various measured and unmeasured tariffs on affordability. Within this project we are considering a number of different rising block tariffs.

8.41. We strongly recommend that the Government give priority to the consideration of smart meters by the Water Saving Group. More research is still needed, but we are sympathetic towards the idea of a gradual roll-out of smart meters as conventional meters reach the end of their useful life.

The Water Saving Group has considered the role of smart meters. The Government recognises the future importance of the correct tariffs as metering becomes more prevalent. Meters with particular capabilities would be more suitable for some tariffs and could also assist with the detection of leakage.

Government does not lead on the choice of types of water meter, which is a matter for water companies. Companies are best placed to design their charges and choose the technology to support them.

It is up to the individual companies to decide whether smart meters are the best way for their businesses and for them to justify the additional funding to Ofwat. At the last periodic review of water prices Ofwat allowed Mid Kent Water to continue their policy of installing smart meters. The remaining companies only submitted proposals for the installation of standard meters.

8.42. We recommend that the Government make it easier for water companies in water stressed areas to obtain water scarcity status and therefore impose compulsory metering, thus improving the current piecemeal approach and giving a significant boost to demand management efforts in the south and east of England. We suggest that this be achieved through revision of the Water Industry (Prescribed Conditions) Regulations 1999.

The Government agrees.

The Government believes that a compulsory change to universal metering is not justified on water resource grounds throughout England. It is necessary to define the areas where accelerated metering is warranted. The Environment Agency is developing a robust definition of water stressed areas, which is expected to include large parts of South East England and East Anglia.

The Water Saving Group has put forward a proposal for increasing metering in water stressed areas.

Within these areas, as part of their supply demand planning, companies should consider making an application for area of water scarcity status to allow compulsory metering.

The Water Saving Group's proposal is that the current provisions allowing compulsory metering in 'water scarce areas' under the Water Industry (Prescribed Conditions) Regulations 1999 should be incorporated into the water companies' resource management plans to be made statutory under the provisions of the Water Act 2003.

In water stressed areas, as defined by the Agency, companies would be expected to include in their draft water resource management plans a cost benefit analysis of the possible contribution to demand management from compulsory metering.

Water Efficient Fittings and Appliances

8.43. We recommend that the Government's Water Saving Group consider as a matter of urgency how higher-performance water efficient fittings and appliances can be developed, in order to increase their appeal to consumers and developers alike.

The Water Saving Group is working on several areas that should increase the market opportunities for water efficient products. An increased market would further increase the interest of producers and manufacturers in research on new products. These areas include:

Defra is leading on assessing the feasibility of a voluntary water product performance labelling scheme, to help identify water efficient fittings and appliances.

Defra and DCLG are also working on a joint consultation on ways of making minimum regulatory standards of water efficiency mandatory, covering new homes, existing homes and the domestic uses of non-household buildings. The new standards will underpin the more aspirational standards for new homes set in the levels of the Code for Sustainable Homes. Consultation will take place later in the year, and regulations will be made next year.

One of the challenges is to ensure that water efficient fittings and appliances perform as well as standard fittings, otherwise householders are unlikely to retain them. The Government's Market Transformation Programme includes work on the performance standards for water efficient products. Producers and manufacturers of water-using appliances and fittings have also invested in new products, which combine better water efficiency with good performance. For example, dual flush toilets with much reduced volumes of flush, or aerated showers.

Other members of the Water Saving Group are undertaking complementary work in this area. The work of the Consumer Council for Water on 'Understanding and changing customer perceptions and raising awareness' has already been mentioned, which is likely to include employing social marketing tools to change customers' attitudes and behaviour, including towards water efficient products.

In addition, Ofwat is developing incentives for companies to improve their promotion of water efficiency. As part of this work, the Group is looking at providing incentives to developers to install water efficient devices, by for example linking the charges that developers pay to a water company for connection to the water infrastructure to the buildings' level of water efficiency. Differential infrastructure charging between areas of water stress and less resource-intensive areas may also be considered. In the event of the use of differential charging Ofwat would consult on any proposals prior to the next Periodic Review of water company price limits for 2010-2015 (PR09).

8.44. We look forward to seeing the findings of the review of the water fittings regulations and urge the Government not to delay in the implementation of appropriate changes.

A Ministerial commitment was given on 9 March following consultation on the Code for Sustainable Homes. As mentioned in the reply to recommendation 8.43 DCLG and Defra are currently looking at options for making regulations to require water efficient fixtures and fittings in all new and existing homes, and in non-household buildings in respect of the domestic use. Following this consultation period the regulations will be made in 2007.

8.45. We recommend that the Government consider what role reduced levels of Stamp Duty or Council Tax could play in making water and energy efficient homes more appealing to buyers.

Over 45% of homebuyers are exempt from stamp duty because they purchase property valued under the £125,000 starting threshold or under the higher £150,000 threshold available in 2000 enterprise areas. For these homebuyers stamp duty reductions would have no impact. Over 80% of homebuyers are either exempt from stamp duty or pay only the 1% tax rate. This limits the scope for meaningful incentives for a large majority of buyers, and would have little impact on affordability. It is also important to remember that schemes which subsidise or reward action which has already taken place or would take place anyway can end up with very costly dead weights and therefore limited cost effective impact.

Environmental standards in new build housing are being improved through regulatory measures such as Part L and the proposed regulations on water efficiency. It would clearly be unjustifiable to exempt from stamp duty developers who are simply complying with existing regulations. A stamp duty exemption could also be counterproductive by subsidising regulatory requirements (and therefore not leading to additionally).

Council tax is currently being reviewed by Sir Michael Lyons as part of an independent inquiry into the funding of local government, which will report before the end of this year. The Government will consider the case for council tax incentives in light of Sir Michael's recommendations.

8.46. We recommend that the Government press for a mandatory EU labelling scheme for all household water-using products.

There is clear potential for environmental product information in general and labelling in particular, and Government will encourage the development and provision of reliable consumer information on the water efficiency of products.

As a first step, and as part of the work of the Water Saving Group, Defra is leading on the workstream on assessing the feasibility of introducing a voluntary labelling scheme to promote the most water efficient products. This workstream is supported by the Government's Market Transformation Programme (MTP) that is working on defining performance standards and benchmarks for a range of water using products.

The cost/benefit and technical and legal feasibility of introducing a mandatory labelling scheme for water-using projects have yet to be established.

Building Regulations

8.47. We welcome the decision to review Part G of the Building Regulations, but are concerned that the Government may be setting their sights too low. We recommend that they examine the ambitious water efficiency requirements established in Victoria and New South Wales and consider whether an analogous scheme could be introduced in England and Wales. We also recommend that the Government explore fully the advantages and potential problems in introducing some degree of regional variation in this area.

Defra and DCLG are currently working jointly on proposals to make minimum standards of water efficiency mandatory in new homes (underpinning the Code for Sustainable Homes), existing buildings and in respect of the domestic uses of non-household buildings.

We expect to consult on these proposals, which have been developed with a range of key stakeholders, later in the year. Subject to consultation, we will make regulations in 2007 to come into force as soon as possible. As part of this we are looking at Building Regulations and Water Supply (Water Fittings) Regulations in order to achieve this.

Code for Sustainable Housing

8.48. We welcome the Government's intention to strengthen the Code for Sustainable Homes and urge them to establish genuinely challenging standards for water efficiency. We recommend that the Government set a timetable for the Code's incorporation into Building Regulations and give serious consideration to providing fiscal incentives to encourage maximum take-up of the Code in the meantime.

When the Government announced its intention to strengthen the Code in March, we also said that the revised Code will form the basis for the next wave of improvements to building regulations. The committee will be pleased to note that this is still our aim. However it is not currently possible to give a definitive timetable while work is underway both on the Code and on reforming the building regulations system to make it simpler, more transparent and less piecemeal.

The Government agree with the committee's recommendation that fiscal incentives would encourage take up of the code. This is why we have been in discussion with the Treasury on fiscal incentives and this is still currently ongoing.

8.49. We recommend that the Government consider altering the Code so as to include existing homes. We further recommend that they look at making water efficiency assessments—on the basis of the Code star rating—a mandatory component of Home Information Packs.

The Government is determined to improve the environmental sustainability of new and existing buildings.

Earlier this year we announced that we are strengthening the draft Code for Sustainable Homes with minimum energy and water efficiency standards for every level. We also said that the Code will signal the next wave of mandatory building regulation standards. Work on the Code is ongoing and we expect to publish the Code in final form by the end of the year.

DCLG and Defra will shortly consult on measures to mandate water efficiency in new and existing buildings. The proposals will revise Building and Water Fitting regulations in order to save water in new buildings, and existing ones when they are refurbished. We are also leading a cross government review of the Sustainability of Existing Buildings which is examining the scope to build further on the current regulations, incentives and voluntary initiatives.

The Government also recently announced revisions to the implementation of Home Information Packs (HIPs) which will include mandatory Energy Performance Certificates (EPCs) for residential sales from 1 June 2007. We are currently considering the best way to align energy and other environmental assessments through the Code, EPCs and HIPs to ensure that the rating system for new and existing homes is both effective in achieving environmental improvements and easy for householders to understand.

Industrial and Agricultural Water Efficiency

8.50. We recommend that the Government make water audits compulsory for industrial and commercial consumers above a certain size, with those consumers meeting the cost through a direct charge or through their water bills. We also urge the Government to consider how Envirowise could reach out to a greater number of businesses—including small and medium sized enterprises—in a broader range of sectors.

The Government recognises the potential for improving the water efficiency in industrial and commercial consumers. Large industrial and commercial users of water have systems in place which encompass water audits, in order to meet their corporate reporting responsibilities. Water Companies also work with their key industrial and commercial consumers to review water consumption and provide assistance with water audits to assist in benchmarking water use and promote efficiency.

In 2006, the Government published the Food Industry Sustainability Strategy which included of assessment of water consumption. The Government, Envirowise and businesses are working to establish improved data on water consumption across the food sectors and to establish benchmarks for water consumption best practice.

The Government is committed to ensuring that Envirowise continues to work effectively with businesses to review their water use and efficiency. The Big Splash initiative, aimed at improving engagement with a range of businesses was launched in July 2004, with a second phase launched in July 2005. The initiative has been successful resulting in 322 companies being signed up to date, with the majority, using data supplied by the companies, indicating they were small and medium sized enterprises.

The Government will continue to work through Envirowise to engage with a range of businesses to raise awareness of water consumption and promote efficiency.

8.51. We recommend that the Government consider adding water efficient agricultural equipment to the Enhanced Capital Allowance Scheme.

The Government keeps the scheme for Enhanced Capital Allowances (ECA) under review and considers the case for additional technologies. One of the key issues is that the technology should have a wide application across business sectors so that it has the maximum environmental impact. European Community state aid rules prevent the ECA scheme supporting a technology that is primarily used in the UK by one sector.

Efficient irrigation equipment, which in the UK is predominately used by the agriculture sector, has been considered for inclusion under the ECA scheme. However, as well as the issues of state aid, there were various other reasons for deciding that this technology could not be supported under the ECA scheme.

ECAs are awarded to businesses from UK Treasury funds and one condition of the award of ECAs is that businesses making the claim are not receiving support from other sources that could be used for investment in plant and machinery. The agriculture sector currently receive funding from other aid schemes, e.g. the Fresh Fruit and Vegetables Aid Scheme (from the European Agricultural Guidance and Guarantee Fund), and farmers claiming support for irrigation equipment from such schemes would be unable to claim ECAs as well.

Also, the award of an ECA is dependent on the end user business recording profit in that financial year. Profits from farming depend on a large number of variables (weather, fluctuating farm gate prices, changing subsidy regimes, fuel prices) and consequently generate variable revenue streams from one year to the next. Figures from HM Revenue & Customs reflect this by showing that a significant portion of the commercial growers market is not in profit.

A further issue involved the forecast of anticipated investment by end users. UK farming is undergoing a radical change with the decoupling of funding from production through the introduction of the Single Payment Scheme (SPS) and requirement for farmers to meet the Cross Compliance regulations to receive their payment. The impact of this support mechanism on "UK agriculture plc" cannot be forecast over the short-term and historical data on the farming sector may become redundant through these changes. This undefined market impact creates significant uncertainty in any forecast to the Treasury over anticipated investment by farm businesses.

ECA-support for efficient irrigation equipment would require notification to the EU. As part of this process, the expected market impact and effect on competitiveness would be required. However, as accurate forecasting in this sector is not feasible, the necessary information could not be provided to the EU as part of the notification. Therefore it was almost certain that this omission would have prevented EU acceptance of the proposal for ECA support.

Water and the Environment

Water Framework Directive

8.52. We welcome the Water Framework Directive, particularly its emphasis on river basin planning. However, it is essential that the Environment Agency should clarify the precise meaning of "good ecological status" as soon as possible if there is to be any hope of complying with the proposed timescales. In addition, the Agency must ensure that the new Liaison Panels represent a true cross-section of all stakeholders in each River Basin District.

The UK Environment Agencies responsible for implementing the EU Water Framework Directive (WFD) are working together through the UK Technical Advisory Group on the WFD (UKTAG) in the development of environmental standards and conditions that support the achievement of 'good ecological status'. UKTAG have recently completed a stakeholder review on the science underpinning the first tranche of these standards and conditions. This will be followed by a consultation from the UK Administrations, including Defra, in the summer of 2006 which will outline the key aspects of the UKTAG proposals, how they will be used by the respective Environment Agencies in river basin planning, and will be accompanied by an RIA which will explore the costs and benefits associated with the standards and conditions. Ministerial agreement on their use is expected during autumn 2006. A similar process is envisaged for a second tranche of such standards and conditions early 2007.

In parallel a European exercise is taking place through the EU WFD Common Implementation Strategy to align or 'intercalibrate' the ecological classification of waters covered by the WFD so that a common understanding is reached between member states and the Commission. The UK is playing an active role in this process which will complete (as far as possible) for the first river basin planning cycle by autumn 2007. The classification schemes of individual member states will need to take account of the final intercalibration outcomes once they are available. Gaps are expected in the intercalibration process in support of the first river basin planning cycle since certain datasets are not available in all or most member states. Member states and the Commission are working together to try and agree a process for filling these gaps (current proposals suggest by 2012). By this time reliable results will be available and can be used from the WFD monitoring regimes in place in the member states (WFD monitoring regimes must be established and operational from end 2006 onwards and usually take three years to yield reliable datasets).

The Environment Agency is in the process of establishing River Basin District Liaison Panels as part of stakeholder engagement and partnership working under the Water Framework Directive. The Agency is putting in place one Liaison Panel for each River Basin District in England and Wales. Each Panel will be tailored to each RBD and will comprise the key organisations who are responsible for implementation, and others who can represent the public interest and help in driving behavioural change. This includes business, public bodies, and the voluntary sector. There will be equal representation from both sides of the border on the Severn RBD Liaison panel.

The Environment Agency has assessed applications for membership of each of these panels. Liaison Panel membership has been informed by the key issues in each District. All liaison panels in England and Wales will meet on a quarterly basis, with the first meeting taking place in August 2006.

8.53. It is apparent that the biggest challenge in terms of tackling diffuse pollution comes from agriculture. We welcome Defra's Catchment Sensitive Farming Delivery Initiative to help farmers tackle water pollution, but it will only be successful if farmers and advisers work together in an open and positive spirit. Moreover, the Environment Agency must not place unrealistic or excessively rigid demands on farmers when formulating River Basin Management Plans. However, at the same time, the water industry must not be seen as a soft target for tackling diffuse pollution when compared to agriculture. We recommend that the Government give further consideration to how the Single Payment Scheme and cross compliance requirements could be used to help tackle agricultural diffuse pollution in a flexible manner.

The Government accepts the recommendation that further consideration be given to using Cross Compliance to help tackle diffuse water pollution from agriculture. However, Cross Compliance requirements have to be agreed at EU level and must either be justified under Article 5 and Annex IV of Council Regulation 1782/2003, which makes no specific mention of diffuse water pollution (and only relates to the protection of soils and minimum maintenance of land); or be included within Annex III of this Regulation as one of the statutory management requirements (SMR). It is not yet clear if, like the Nitrates Directive, the Water Framework Directive is suitable for inclusion as a SMR.

The achievement of Water Framework Directive (WFD) objectives through other policy instruments such as Cross Compliance and Rural Development Regulation measures is an important strategic objective. An EU Strategic Steering Group, which is working on creating better linkages between the WFD and the CAP, and is jointly led by the UK, with France and the Commission, will be working on this objective throughout next year. The outcome of this work will contribute to a major review of Cross Compliance in 2008.

The current Good Agricultural and Environmental Condition (GAEC) requirements of the Single Payment Scheme, particularly those which relate to soils, already make a contribution to tackling diffuse water pollution, not least because of the large number of farmers who have to comply. In particular, GAEC 1 requires farmers to complete a Soil Protection Review by September 2006, with related farm measures put in place from January 2007. This process is helping to identify and address soil-related risks such as erosion, run-off, loss of organic matter, compaction and poaching, all of which contribute to diffuse water pollution. A number of other GAECs also help, including those relating to the management of land after harvest, overgrazing and supplementary feeding and protection of watercourses.

Priority Substances Directive

8.54. The lack of de minimis levels in the proposed Priority Substances Directive is extremely worrying, making it difficult—if not impossible—to comply with the Directive's requirements. Moreover, it is most unlikely that a Directive without realistic target levels—taking into account background levels of these substances—could be justified in terms of the potential costs. We strongly recommend that the Government work towards the inclusion of appropriate, science-based de minimis levels in the Directive.

The proposal for a Water Framework Directive (WFD) daughter directive in the field of Priority Substances is expected during July. The Government can only speculate therefore on the proposal's contents, and whether they make provision for background concentrations.

In respect of the daughter directive, the WFD requires that "the European Parliament and the Council shall adopt specific measures against pollution of water by individual pollutants or groups of pollutants presenting a significant risk to or via the aquatic environment, including such risks to waters used for the abstraction of drinking water. For those pollutants measures shall be aimed at the progressive reduction and, for priority hazardous substances, as defined in Article 2(30), at the cessation or phasing-out of discharges, emissions and losses'; and that 'the Commission shall submit proposals for quality standards applicable to the concentrations of the priority standards in surface water, sediments or biota'".

Of these requirements only the cessation or phasing out of discharges, emissions and losses of priority hazardous substances is susceptible to a de minimis provision since:

• for the remaining priority list substances a 'progressive reduction' of emissions discharges and losses (rather than their cessation or phase-out) is required; and
• the requirement for environmental quality standards (EQSs) for substances indicates by definition that very small concentrations of priority substances are to be anticipated in the aquatic environment.

The requisite measures are to be 'aimed at' progressive reduction and cessation or phasing-out etc. The WFD objectives must clearly be taken seriously, but this terminology does offer some flexibility in the interpretation of an apparently unduly rigid legal requirement. Indeed the fourth recital to the European Parliament and Council Decision of 2001 to adopt the Priority List notes that, for naturally occurring substances, complete phase-out is impossible.

Against this background the Government do not anticipate that limit values or emission standards will be proposed for Priority List substances. It will therefore be for Member States to set appropriate standards in discharge consents in order to achieve the WFD's objectives, and to decide whether in negotiations it would wise or appropriate to seek any more explicit 'de minimis' provision.

Sustainable Drainage Systems

8.55. We strongly recommend that the Government give urgent consideration to ways in which the financial, legislative and regulatory barriers to the wider use and adoption of sustainable drainage systems can be removed. However, we are of the opinion that operational and maintenance responsibilities should not be entrusted to individual property owners due to the high risk that they will not be carried out satisfactorily. We suggest that the Government consider alternative arrangements such as those in Victoria, Australia and in the United States of America, which have facilitated the widespread utilisation of sustainable drainage systems.

The Government is already urgently considering ways to remove barriers to the wider use and adoption of sustainable drainage systems.

The issues of ownership and responsibility for maintenance were identified as barriers to the further use of sustainable drainage systems as part of the 'Making Space for Water' consultation.

The background paper Sustainable Drainage Systems (available at www.defra.gov.uk/environ/fcd/policy/strategy/techdocs.htm) specified that ownership and responsibility "should rest with durable, accountable organisations that can be expected to have the financial capacity to meet their responsibilities in the longer term." As a group, property owners fall outside this specification due to the transience and variable financial capacity of individual property owners.

A number of other options for ownership and responsibility were also identified in the background paper, some of which are very similar to the arrangements in Australia and the United States of America. The background paper is the basis for Defra's current work and we have embarked on a substantial exercise, exploring options for the adoption, management and funding of SUDS.

In relation to Building Regulations: They encourage source control through porous paving and other techniques. They also encourage the use of soakaways and provide design criteria.

Part H of the Building Regulations 2000 sets out a clear hierarchy for rainwater drainage, essentially:

The use of porous paving where possible and where positive drainage is necessary, this should be taken:

(1)  To soakaway or other infiltration systems. If this is not possible:

(2)  To a watercourse. If this is not possible:

(3)  To sewer.

Part H also recognises the benefits of rainwater harvesting.

DCLG is progressing the issuing of the new Planning Policy Statement 25, Development and Flood Risk (PPS25) to provide stronger and clearer guidance to Planning Authorities that they should promote sustainable drainage schemes in new development proposals. Local Planning Authority policies should complement Building Regulations on sustainable rainwater drainage. A Practice Guide accompanying PPS25 will give more guidance on how planners should encourage the use of sustainable drainage schemes and the Practice Guide is intended to be available on the DCLG website in the autumn as a 'Living Draft' to accompany the publication of the new PPS25. DCLG is working closely with Defra and the Environment Agency on this document. The final version is hoped to be produced after a six month informal consultation period.

8.56. We were highly impressed by the use of Water Sensitive Urban Design in Melbourne. We commend such projects to the attention of the Government, and recommend that they give active consideration to ways in which the re-use of stormwater for irrigation of urban parks might be facilitated in England and Wales.

The use of alternative sources of water to irrigate parks and leisure areas is to be encouraged and is already happening in practice in some areas. For example, many golf courses harvest rainwater in onsite reservoirs and then reuse the water to irrigate the golf course during summer. Some sports grounds, such as Old Trafford in Manchester, also have rainwater harvesting schemes in place which are then used for irrigation. However, rainwater is not the only alternative to potable water for irrigation. In areas where groundwater is available it provides a suitable alternative source for irrigation purposes.

The Government supports the use, and reuse, of alternative sources of water where practical and we are currently examining ways to encourage and facilitate this practice as part of our broader work on sustainable drainage systems and integrated urban drainage management. In the course of this work we will, of course, be mindful of examples of best practice from other countries.

8.57 We welcome the integrated approach to water management being pursued in Ashford, which is a positive step forward. In order to mitigate the need for significant expenditure to meet the requirements of environmental legislation in the water environment around new developments, we recommend that an integrated approach be taken—together with appropriate funding for supporting studies—wherever a large new development is planned.

The Government welcomes the Committee's approval of our integrated approach to water management in Ashford. However, it is important to note that the majority of locations face only one aspect of concern, and these concerns can vary considerably region to region. The Government does not believe that the universal adoption of the approach used in Ashford would be the most useful approach to water management in all new developments.

The planning system is well placed to take forward water management issues for new developments. The Environment Agency and water companies are both statutory consultees for Regional Spatial Strategies (RSS) and Local Development Frameworks (LDF). They play an important role in informing the relevant planning body and independent inquiries at key stages of the plan-making process. The planning system is concerned with making adequate provision for water resources in the context of future development, both at regional and local levels through the RSS and LDFs. In addition to this, planning authorities will become statutory consultees on the water company water resources management plans, when these plans are put on a statutory basis; this is expected in April 2007.

The combination of the water companies' long-term planning processes, combined with the development and review of RSS will provide a robust framework for the consideration and resolution of water supply issues as part of the Government's ambitions for housing growth.

Water Resources

8.58. We recommend that the Office of Science and Innovation and the Research Councils give urgent consideration to ways in which the need for additional research into the water resource requirements of freshwater ecosystems can be met. We also call on the Natural Environment Research Council to fulfil its commitment to maintain and strengthen the research in key areas at the Centre for Ecology and Hydrology, particularly with regard to freshwater ecology research. We shall keep this issue under review.

The Economic and Social Research Council (ESRC) has identified water management as a priority area for further research and is currently exploring options for taking forward research in this area in partnership with other funders and other Research Councils. As an initial step, ESRC has recently agreed to co-fund a research project at the University of Lancaster to examine the responses of consumers, regulators and water companies on water consumption in the context of the 2006 drought, in partnership with five water companies, UK Water Industry Research (UKWIR), Defra, the Environment Agency and Ofwat.

Water resources and biodiversity have been identified as key science areas in the Natural Environment Research Council's (NERC) next Science Strategy. The water resource requirements of ecosystems are a major research component of the Centre for Ecology and Hydrology's (CEH) Water Science Programme 2005-2010 under the key headings:

• 'Ecological responses to hydrological extremes Physico-chemical processes'; and
• 'Effects on freshwater biota Biological interactions'.

CEH will further endeavour to fully maintain its long-term monitoring activities and to develop these where possible, for example through the establishment of catchment-to-coast observatories.

8.59. We welcome the introduction of Catchment Abstraction Management Strategies, but the Environment Agency must ensure that an appropriate balance is struck between the needs of water users and those of the environment, factoring in the potential change in climate. We also recommend that the Agency consider the water quality implications of each CAMS plan and assess how this might tie in with the requirements of the Water Framework Directive.

The Government agrees with the Committee that Catchment Abstraction Management Strategies (CAMS) should seek to achieve a suitable balance between the need to protect the environment with the legitimate interests of various water users. The CAMs process aims to ensure a consistent approach to the assessment and management of water resources that balances the needs of abstractors with those of the environment. To achieve this CAMS will rely on the active involvement of all key stakeholders. Consultation is an integral part of the CAMS process to ensure it is as transparent as possible and all interested parties have an opportunity to play a full part in helping to develop informed and sustainable water resources strategies.

CAMS will play a key role in the implementation of the river basin management plan for each river basin district required by the Water Framework Directive. It is likely that each river basin district will be made up of several CAMS areas, and these will be updated every six years to correspond with the six year review cycle of the Water Framework Directive timetable. Water quality considerations throughout a catchment area in both surface and groundwaters are included in the principles used in CAMS to determine the proper use of water resources. This should ensure that the Environment Agency's assessment of the water quality implications of each CAMS contributes to the requirements of the Water Framework Directive as recommended by the Committee.

8.60. The Environment Agency is required to take a precautionary approach to reviewing abstraction licences under the Habitats Directive, but at the same time adequate consideration must be given to security of supply. Moreover, abstraction licences must be judged on the basis of site specific information, not generic data alone, and we welcome the Government's assurance to this effect.

The Committee can be reassured that the Environment Agency uses a combination of site-specific and generic data when reviewing the impact of licensed abstraction on the conservation status of Natura 2000 sites.

It is important to recognise the distinction between using site specific information in carrying out an assessment, and where necessary using generic information (usually in the form of targets and thresholds) against which to make judgements about the significance of that site specific information. To determine the risk or impact on a site, the criteria against which the observed or predicted water supply changes should be tested should be based on the best available knowledge. Such criteria may be based on the best understanding of the functioning of such sites in general (based on national data), or for that specific site in particular, where this information is available.

Environment Agency (EA), English Nature (EN) and Countryside Council for Wales (CCW) have agreed the use of appropriately precautionary generic criteria in the site specific impact assessment process for wetland and freshwater Natura 2000 sites, where robust local hydro-ecological information is not available. Discussions between EN and EA are underway over the scope for applying a similar approach for those freshwater SSSIs which are not also protected under the EU Habitats and Birds Directives.

ANNEX A

Response to Appendix 4: Comments from Professor Adrian McDonald

Purpose of the study

In Appendix 4, Professor Adrian McDonald comments on the analysis used by the Government relating to water demand. The analysis is based on research—A Sustainability Impact Study of Additional Housing Scenarios in England (the Sustainability Study)—carried out by Entec and others for ODPM.

This research was intended to inform national decisions on the level of ambition for housing growth. The delivery of increased housing numbers through the regional planning process will look in more detail at the regional impacts of any housing growth. This will include the completion of a Sustainability Impacts Assessment which will form part of the evidence at the Examination in Public.

The assertion that there "are both errors and worrying assumptions in this analysis" is unfounded and based on a misunderstanding of the analysis in question. The Government believes that the analysis is a valuable contribution to the research base and that it shows that the additional housing announced in response to the Barker Review will lead only to a marginal increase in water demand.

Baseline

Current delivery of billed water is around 12,000 megalitres per day. The Entec analysis assumes, based on current plans, that from 2001-2016 an additional 2.8 million dwellings will be built across the whole of England. This includes the housing supply in the Thames Gateway and other growth areas announced by the Government in the Sustainable Communities Plan. This increase in housing supply, along with increases in population, is estimated to produce additional water demand of 728 megalitres per day in 2016, which is an increase of 6.1%. This was the baseline against which the impact of additional housing was estimated.

Additional housing supply

Entec carried out analysis based on a number of scenarios for additional housing supply. These scenarios are set out in Table 1 below. In addition to these scenarios, ODPM used Entec's model to estimate the impacts of a number of realistic trajectories, which would see housing supply increase from the current level to the Government's ambition of 200,000 net additions by 2016. Those trajectories typically involved additional housing supply of 100,000 to 200,000 net additions over and above current plans, over the ten-year period up to 2016. To be clear, that is an average of 10,000 to 20,000 extra net additions per year over a ten-year period.

Total water demand is determined by both total population and per capita consumption. A larger population will demand more water than a smaller one. Smaller households with lower occupancy tend to have higher per capita rates of consumption than larger households. While the baseline assumes that population will increase, the analysis assumed that there would be no further population growth induced purely as a result of building additional dwellings on top of the baseline.

The research takes into account the fact that the additional dwellings will not be occupied by "new people". In reality, building these additional houses will enable some existing households to split and form new, smaller households. As people will typically be moving from a higher occupancy household to a lower occupancy household, average per capita consumption upwards will shift marginally upwards. While new households add to water demand, existing households, which fall in size, will demand less water. The result is the overall net impact on water demand is marginal—driven by marginally lower occupancy rates.

It was estimated that the overall impact of an additional 100,000 to 200,000 dwellings over the ten years up to 2016, would be to increase water demand by 12 Megalitres per day in 2016. This represents an increase of about 0.1% compared with the baseline. This figure does not take account of the water efficiency savings or changes in water consumption patterns.

Previous studies

Professor McDonald also compares the results of the most recent analysis with a previous Impact Study by Entec. His report states that:

"It may be that the 12Ml/day increase in water demand relates to the additional water needed to move from targets of 190,000 homes to 200,000 homes. If this is the case then the Government Response is not addressing the same estimates as the Impact Study and is not being clear about what is precisely being estimated".

The 2004 Defra report Study into the Environmental Impacts of Increasing the Supply of Housing in the UK considered some of the same issues as the Sustainability Study. However, in the context of estimating water demand, the report only considered gross change in demand. As highlighted above, gross figures fail to take into account that we are not creating "new people", and as such the gross figures will overestimate the actual change in water demand.

The other major difference with the study is the scenarios on which the study is based. The earlier report for Defra considered four different growth scenarios up to 2016 rather than 2031. The scenarios (along with the later scenarios considered by the ODPM report are presented as follows:

The key point to note is that the baseline for the 2005 study for ODPM assumes a higher level of house building than the 2004 study for Defra. This is reflected in the 6.1% increase in water demand in the baseline for the 2005 study.

Conclusion

The analysis is not claiming that there will be no increase in the demand for water. On the contrary: it is very clear that as a result of increased housing supply and more importantly population growth, there will be a 6.1% increase in water demand over the next ten years. However, building an additional 100,000 to 200,000 new dwellings over ten years, on top of the current stock of around 24 million dwellings, and current plans to increase the stock by around 2.8 million dwellings, will add only marginally to water demand.

The analysis represents a step forward in the quality of evidence used as the basis for housing supply decisions. The Government believes that the analysis is a valuable contribution to the research base and that it shows additional housing announced in response to the Barker Review will lead only to a marginal increase in water demand.

August 2006