Memorandum by UK Office of Water Services on sites of special scientific interest

Birmingham, 26 July 2004

Memorandum by the Office of Water Services (Ofwat)

Summary

1. The Government has set a public service agreement (PSA) target of 95% for all sites of special scientific interest to achieve ' favourable condition' by 2010. In February 2004, English Nature estimated that 61% of land is already in a favourable or recovering condition. Water and sewerage companies, and hence their customers, are already contributing to improvements to SSSIs. At the price reviews in both 1994 and 1999 our determinations assumed that companies would take action to allow environmental sites, including SSSIs, to be maintained and improved. Water companies have therefore already made a substantial commitment to investigating and implementing work to improve the aquatic environment.

2. At this price review water companies will be funded to take action that contributes to the delivery of the Government's target on SSSIs. We have now received Ministers' principal guidance setting out what they want companies to include in business plans. However, there are many upward pressure on bills and all future investment needs to be set in that context. Companies' draft business plans, in August 2003, indicated that customers will face rising bills without the additional upward pressure resulting from additional drinking water quality and environmental enhancements. Recent customer research has demonstrated a willingness to pay for further improvements by a substantial proportion of the customer base but this still leaves a significant proportion who take the opposite view. We all may need to tailor our expectations for the scale and pace of improvements to what can be financed efficiently by companies and to what customers are willing to bear.

3. In order to meet the Government's targets, actions will need to be taken by all contributors to pollution. Investment by the water and sewerage companies alone will not deliver the required improvements. We await the Government's promised consultation paper on the control of diffuse pollution. Water customers meet the costs of the companies' investment and should not be expected to remedy pollution caused by others just because this is the easiest course of action. The polluter pays principle should apply. Action by several parties may be needed to deliver the full potential environmental improvements.

4. Before investment is undertaken it is vital that the 'right' solutions to environmental problems are identified. The tripartite investigations into the River Derwent in Yorkshire provide a model for this and are explored more extensively in our memorandum. Thorough investigations and a full understanding of the issues are essential before major improvement works are triggered and customers are asked to finance the costs of particular schemes to deliver improvement to SSSIs. There are mechanisms to deal with changes in companies' obligations and consents during the period 2005-10, when further investigations identify the 'right' solution.

Background

1. Ofwat is the economic regulator of the water and sewerage companies in England and Wales. Our role is to set price limits that enable a well managed company to deliver services in a sustainable and efficient way. Section 3 of the Water Industry Act 1991 also sets down the expectations on the water companies and Ofwat for SSSIs. The importance of nature conservation is set down in the Countryside and Rights of Way Act 2000 (Section 28G), which echoes the duty placed on Ofwat by the Water Industry Act 1991.

2. In 'England's best wildlife and geological sites' (December 2003), English Nature identified 4,112 SSSIs in England covering 1 million hectares, 7% of the land area of England. The Government's PSA target is that 95% of this land should be in a 'favourable' condition by 2010. English Nature estimates that 61% (February 2004) of this is already in a 'favourable' or 'recovering' position. Around 3% of the land area is inland aquatic SSSIs. Although this is only a small percentage of the total, it is made up of rivers, streams and lakes which are high priority. In addition, 8% of the total comprises water-related areas, such as fens, marshes and lowland grassland, or shorelines.

3. Water companies are directly responsible for some SSSIs which they own and manage. More significantly their activities in providing public water and sewerage services can also have an impact on aquatic SSSIs.

Water and sewerage company action

4. Although English Nature report that the water sector owns or manages 43,000 hectares or 4% of the land area under SSSIs, very little is aquatic habitat. The majority is owned or managed by water companies with upland catchments. The sites they manage/own are mainly upland heath in the collection areas for reservoirs. The majority (55%) of this land is not in a 'favourable' condition. However, this is not due to direct activities arising from providing water and sewerage services, much of the damage was caused by industrial air pollution in the past. It is not within the powers of the water companies, or any land management practice, to bring this back into a favourable condition soon. Water companies are only directly responsible for a small proportion of aquatic SSSIs, chiefly reservoirs and open water.

5. There has always been an awareness that delivering the public water supply and dealing with disposal of sewage from a population of almost 52.5 million people in England and Wales means that water enterprises do have an impact on the aquatic environment and specifically on SSSIs. At each price review since privatisation the companies have set out in their business plans their strategies for dealing with this.

6. The first programme of work to deal with the impact of abstraction for the public water supply on low flow rivers was initiated at the price review in 1994. This continued at the price review in 1999, and on the water service 57 projects (£75m) on solutions and investigations into abstractions affecting low flow rivers and SSSIs were provided for in price limits. On the sewerage side, £43m worth of work was identified for improvements required under the Habitats and Birds Directive and also work on SSSIs. Water companies have already made a substantial commitment to investigating and implementing programmes of work to alleviate their impact on nature conservation sites.

7. We are now defining the work programmes to be expected from companies in the next five years 2005-10. Information from the Environment Agency in November 2003 indicated that companies may need to carry out significant extra work as they review consents for both medium and low priority sites. In our public letter to the Secretary of State (annex 1), we indicated that the range of costs for water companies to deliver the improvements included in companies' draft business plans (August 2003) was between £200 million and £500 million for the water service and about £900 million for the sewerage service, for 2005-10.

8. We do not expect this investment to deliver a significant contribution to the achievement 'favourable' status of sites in England. Much other work is needed to reduce the level of nutrients at aquatic SSSIs fed by moving or static water. Point source discharges chiefly comprising sewage effluents deliver just under half of the phosphorus to these sites and less than one third of the nitrates. Work also needs to be carried out to reduce other contributions of nutrients to the aquatic environment, such as those from diffuse (chiefly agricultural) pollution, other sources of run off and other point sources. At present water and sewerage customers are financing by far the major part of action plans in this area.

9. For example, Wessex Water has told us that at one site on the Hampshire Avon it has reduced nutrient levels in sewage effluents, and now its sewage effluent only contributes a third of the phosphorous present. The company estimates it may cost over £50m to reduce phosphorus levels further in the Hampshire Avon and Frome catchments. However, unless action is taken to deal with the majority arising from diffuse (mainly agricultural) pollution water customers' investment will not result in the improved water quality necessary for the desired aquatic habitat.

Investigations

10. We believe it is essential for the dynamics of ecosystems to be thoroughly understood before major investment is undertaken. For example, abstraction from the Derwent in Yorkshire for the public water supply was initially considered to be environmentally detrimental and Yorkshire Water would need to find alternative sources. However, a tripartite investigation (English Nature, the Environment Agency and Yorkshire Water) into the Derwent found that it is the management of the catchment and the natural water courses that is paramount. Abstraction for the public water supply had a minimal impact on the environment. Without this comprehensive research the company could have been required to invest in major new sources, without achieving the desired environmental benefits. This is summarised in annex 2.

11. Where it is unclear, at this stage, what action each company should take to deal with SSSIs there are mechanisms that will allow decisions to be made during the period 2005-10. Particularly where further investigations will lead to more effective solutions. New requirements on companies can be financed through an interim determination application or through logging up the net additional capital costs to be financed at the 2009 periodic review. The protocol that we put in place at the 1999 price review for dealing with changes in companies' obligations and consents provides the blueprint for this. This protocol will be updated in the next few months for use in the 2005-10 period.

Meeting targets

12. On its website English Nature identifies many reasons why SSSIs are in an unfavourable condition. The key factors are overgrazing - a factor in 45% of 'unfavourable' sites and moor burning - % of sites.

13. Diffuse pollution contributed to 3% of unfavourable sites; direct pollution, including pollution from sewage effluents, to 2% of sites; and abstraction including the public water supply, less than 1%. We recognise that these relatively low percentages are due to aquatic SSSIs only being a small, albeit very important, subset of the total. However, this illustrates that it will only be possible to address the current unfavourable status of a large number of SSSIs if action is also taken to address problems arising from, for example, management of grazing, drainage and moor burning. Action by the water companies can, at a maximum, only improve 3% of sites. Water customers through the periodic review process are already paying significant amounts in water bills and will be expected to pay more after 2005. These payments are not one-off but will run in perpetuity. In order for the PSA targets to be realised polluters and others having an impact on both the aquatic and other SSSIs should also contribute within the same timescales.

14. We welcomed the EFRA Committee's recognition of this in its report following its inquiry into 'Water pricing' (HC21).

"...where a particular problem has several causes and action by a water company alone would not be enough to significantly improve the situation, there is a case for delaying the requirement on the water company to act until the other causes are also addressed. Second, while the requirements for environmental improvements are likely to keep increasing, customers' willingness and ability to pay ever larger bills are not."

Next steps

17 The Environment Agency and English Nature are identifying the actions that must be taken by the water companies. The economic regulation of the water companies via the periodic review process ensures that these obligations will be delivered. It is essential that comparable and effective measures are now taken urgently for other sectors to play their part, so that the full environmental benefits can be realised.

Office of the Water Regulator