Solway Tweed river basin characterisation

Defra’s view, expressed in previous consultations on the WFD, is that there is no need to alter present pricing policies to meet the requirements of the Directive. The present arrangements deliver charges by water and sewerage undertakers that recover the costs of these services, both overall and by sector of customer. This system takes account of the principles and objectives of the Directive and the provisions of Article 9 in particular.

However, as revealed by the Cost Recovery and Incentive Pricing Report this is not the same as recovery of cost by broad user group (households, industry and agriculture). It is not currently possible, given existing data and bearing in mind the cost of additional data collection, to identify recovery of costs of water uses by these water user groups. In addition, some of the costs imposed by water uses (such as diffuse pollution from roads, agriculture etc) may not be adequately recovered from the relevant users but further research is required to establish this.

Additional work is planned in relation to the recovery of financial costs and in relation to environmental and resource costs ahead of the 2010 deadline for demonstrating an adequate recovery of costs of water services.

Article 5 requires that future pricing policies will be further informed by the economic analysis of water use undertaken in accordance with Annex III of the Directive. This section provides information on the current levels of the recovery of the costs of water services in the Solway Tweed RBD to assist in this process. The following sections outline:

The information provided in this section is based on analysis undertaken by ERM and Stone and Webster. The full report, referred to as CRIP (Cost Recovery and Incentive Pricing) is available to download from the Defra website⁵⁰.

Water Services are defined by the Directive in Box 1.

In England, the definition of water services encompasses the water industry together with activities providing similar services. For the sake of transparency, it is also important to consider self services in addition to water services.

Two water companies operate in the English area of the Solway Tweed RBD. The estimated proportions within the RBD of each company’s total customer base are provided in brackets:

These companies also provide sewerage service. The estimated proportion within the Solway Tweed RBD of the total number of households serviced by each company is provided in brackets:

These figures reflect the fact that the water service areas of these companies do not coincide with the Solway Tweed RBD. The majority of United Utilities customers are within the North West RBD, with only a small proportion in Solway Tweed.

Ultimately the analysis of cost recovery needs to be undertaken at a river basin district scale, however for the purposes of this report it is only possible to report rates of cost recovery on the basis of water service areas. Hence in the following analysis of cost recovery in the Solway Tweed RBD, figures are presented for all water companies. In addition an indicative “RBD allocation” is provided. This is based on a simple pro-rata allocation and may not reflect well the actual costs and revenues associated with particular geographic areas. It is provided for indicative purposes only.

Service providers

United Utilities and Northumbria Water provide water services in the Solway Tweed RBD. Details of the services provided can be found in the CRIP report (water sources, treatment works, length of mains, sewage loads and facilities etc.). In addition information related to business plans, investments, costs and prices for the period 2005-2010 can be found in the Final Determination of Water Prices⁵¹.

In addition to the water service companies in the Solway Tweed RBD listed above, there are a range of private water and sewerage services. Private water services cover any water service that is not supplied by a statutory water or sewerage undertaker, and can include self-service.

In the United Kingdom, private water supply services are governed by the Private Water Supplies Regulations 1991 which transpose the 1980 European Drinking Water Directive (80/779/EEC) in relation to private water supplies. These regulations place responsibilities on local authorities to monitor and improve private supplies to reflect the number of private water supplies in a particular area and the specific priorities of the local authority.

Recent local authority surveys are inconclusive about the likely extent of private water supplies in England & Wales. The estimated number of supplies ranges between 50,000 to 100,000 and the population served between 300,000 to 1 million, with this concentrated in rural locations. A majority of supplies for domestic water use purposes (about 70%) serve single properties. Larger commercial uses of private supplies are concentrated in the Food & Drink manufacturing sector.

Recent analysis of the 2001 English House Condition Survey also suggests around 700,000 (3.3%) household properties in England are not connected to the mains supply for drinking water purposes. Based on typical household occupancy this would suggest a population of around 1.5 million do not receive mains water supply. No comparable estimates are currently available for the Solway Tweed RBD within England, nor is there a comparable Government Office Region which broadly matches this RBD. Analysis of data from this survey at local authority district level suggests only about 1% of household properties are not connected to the mains water supply.

Private sewerage services can involve either the collection of wastewater, the treatment of sewage effluents and the discharge of treated wastewater to water-courses and the safe disposal of sludge (waste products from treatment processes) or all of those services. It has been estimated that there are between 80,000 to 200,000 km of private sewers in England & Wales and nearly half of all household properties are served by private sewers or lateral drains. The vast majority of private sewer connections ultimately discharge wastewater to the public sewerage network.

Septic tanks and cesspools represent the most common form of private sewerage service for household properties that are not connected to the public network. It is estimated that around 400,000 (1.9%) household properties in England are served by either septic tanks, cesspools or private sewerage systems. No direct estimates are currently available for the Solway Tweed RBD, nor for a broadly equivalent Government office region. However, data at the level of local authority districts provides some evidence of relatively high concentrations of private sewerage connections within the Solway Tweed RBD. For example, based on the sample data for the districts of Carlisle, Allerdale, Eden, South Lakeland and Berwick upon Tweed which are wholly or partially in this RBD around 6.7% of properties (about 8,000) are estimated to have private sewerage connections.

Within the manufacturing and industrial sectors, private and in particular self-services are well established in respect of effluent treatment and disposal. One direct measure of this is provided by Environment Agency data on the direct discharge of effluent to watercourses (which requires authorisation by the Agency in the form of discharge consents. These are collectively termed trade discharges as opposed to discharges from treatment works operated by sewerage companies. About 30% of total consented discharges in England & Wales are made by trade sources. The concentration of trade sources is likely to be significantly lower in Solway Tweed given its largely rural characteristics. Consent compliance is lower for trade discharges.

Private suppliers, in the form of drink companies, have increasingly been selling bottled water to households. It is estimated that bottled water makes up almost 9 percent of average individual water consumption.

Further work on identifying the characteristics of private water suppliers is ongoing. In particular, the information collected is not currently at the correct geographical basis to provide more detailed information in this report. In general, the abstractions and discharges from industries other than the public water suppliers (see Tables 7 and 12) are related to private abstractions and discharges, including self service water users.

Water uses are defined in Article 2 as: “water services together with any other activity identified under Article 5 and Annex II having a significant impact on the status of water.” Article 9 of the Directive specifies that the water uses should be disaggregated into at least households, agriculture and industry.

An attempt is made as far as possible to report the information on water uses into these categories, however some uses cannot be disaggregated in this way and this will need to be subject of further analysis after the Article 5 report. This further work will also consider the appropriate sub-categorisation in the context of water pricing and programmes of measures. Current sub-categorisation is on the basis of the uses identified in the impacts and pressures analysis.

Some water uses, such as land reclamation, drainage etc. do not fit easily within the categories of households, industry and agriculture. As recognised in the reporting guidance it is necessary to include these ‘other uses’ which are identified on the basis of the river basin characterisation.

Households and non-households (commercial properties)

These are the customers of the licensed water undertakers (including some commercial, non-household), other providers and households with private water supply and wastewater systems.

Tables 16a and 16b below provide the number and population of households and non-households receiving water and sewerage services from the main water service providers, as well as the volume (Ml/day).

There are estimated to be 156,000 households and 11,000 non-households provided with water services by water companies in the English part of the Solway Tweed RBD.

There are estimated to be 92,000 households and 6,000 non-households provided with sewerage services by water companies in the Solway Tweed RBD.

Industry: trade effluent and large users

These are the large user (water and sewerage) and trade-effluent customers (including some agriculture) of the licensed water undertakers, plus direct industrial dischargers and abstractors, plus the customers of other third party water services. Table 17a, 17b and 17c summarise the numbers of customers and volumes for large volume water users, trade effluent and large volume sewerage service users for each of the water services in the RBD. The tables also note the number of customers and volumes associated with special agreements. This information is provided on a water service area basis as an RBD allocation of trade effluent and large users is not possible given there is no currently adequate variable for apportioning data (unlike population in the case of households).

These are the agricultural customers of the licensed water undertakers, as well as those that directly abstract water for agricultural purposes. Direct abstractions from the agriculture sector make up around 13 percent of all abstractions in England and Wales, with the fish farming sector accounting for most abstractions.

These are users that do not fit into the above categories, such as transport, infrastructure etc.

There are different types of pollution in the context of the WFD and it is useful to identify polluters who give rise to increased costs of providing water services. This is a technically difficult area and a large number of assumptions are required to arrive at an answer. The approach adopted is explained in the Report on Cost Recovery and Incentive Pricing (found at http://www.defra.gov.uk/environment/water/wfd/economics/index.htm).

Data reported by the water companies operating the English part of the RBD to Ofwat can be used to identify some costs that can be associated with polluting activities. In the case of water supply the company’s costs reflect capital and operating expenditure on nitrate and pesticide removal, removal of other contaminants (metals, phosphates, soil, arsenic) and reducing the risk of cryptosporidium.

Table 18 summarises the capital and operating expenditure in terms of annualised costs. The table also provides an indicative estimate of how much of these annual costs are attributable to external sources, in this case the agricultural sector⁵².

The estimates suggest that currently around £326.7m of annual remediation cost is incurred by water companies to deal with standards on nitrate removal, pesticide removal, other contaminants and cryptosporidium risks. This equates to about 10 percent of total public water supply costs in these companies. About £227.5m of this is attributable to the external impacts of the agricultural sector on raw water quality. Based on the population allocation procedure, around £0.6 million of these costs arise within the English area of the Solway Tweed RBD.

Table 18 shows that water treatment capital expenditure has been and continues to be a significant proportion of the total capital expenditure for water quality enhancements. The balance of this expenditure has been shifting from issues such as nitrate and pesticide removal to the reduction of cryptosporidium risks.

Table 18 Estimated annual costs in 2002-03 associated with external impacts on raw water quality

For the sewerage service one of the key sources of pollution giving rise to elevated costs is diffuse run-off received at sewage treatment works, which contains hazardous substances. Hazardous substances may also be present in urban drainage and sewers where substances are inappropriately disposed of, or indeed released by households in their legitimate use of, for instance, cleaning products.

It is not presently possible to quantify the level of costs involved. The sectors responsible for these costs are domestic (disposal of household and DIY chemicals or use of products containing hazardous substances) manufacturing, transport and construction. These sectors contribute differently towards the recovery of those costs with households and industries that are customers of sewerage companies bearing the treatment costs.

Current level of financial costs of the water services

The financial costs of the water and sewerage service companies operating in the Solway Tweed RBD are summarised in Tables 19 and 20. These costs include the remediation costs identified above.

In 2003-04 the financial costs of the water and sewerage services were £14.4 million and £18.1 million respectively for the Solway Tweed RBD. These are based on population allocation.

Table 19 Solway Tweed RBD – Public water supply – total financial costs (£m, 2003-04 prices)

Table 20 Solway Tweed – sewerage service – total financial costs (£m, 2003-04 prices)

Tables 21 and 22 summarise the unit financial costs of the companies operating in the Solway Tweed RBD for the water and sewerage service. The tables show an indicative, population based allocation of these unit costs. In 2003-04 the unit water supply cost was £0.80 per m3 and for the sewerage service £1.07 per m³.

Table 21 Solway Tweed RBD – Public water supply – unit financial costs (£/m³, 2003-04 prices)

Table 22 Solway Tweed RBD – sewerage service – unit financial costs (£/m³, 2003-04 prices)

Since privatisation (1989), Water companies in England have incurred capital and operating expenditure in order to mitigate the environmental impacts of the sewerage services and to investigate and alleviate the impacts of their abstractions on the aquatic environments. Ofwat has analysed the sewerage services costs on a RBD level and Table 23 illustrates the Solway Tweed results⁵³.

Column 1 shows the percentage of the water companies costs which are attributed (on an indicative basis) to the NW RBD. Column 2 shows the capital expenditure recorded as being spent on environmental mitigation of sewerage services. In United Utilities Water Plc, these have amounted to £2.4 billions between 1989 and 2003. Column 3 shows the incremental annual costs associated with operating these assets (operating expenditure and capital charges). Column 4 and 5 show the figures on the basis of the Solway Tweed RBD. As the table shows, the capital expenditure incurred in the Solway Tweed RBD is in the region of £83 million. Taken together with the operating expenditure this means that around £3 million of the water service providers’ costs are associated with mitigating environmental impacts per annum.

The identified water service providers recover the costs of providing water services from customers within their water service areas.

The structure of charges in the water companies varies. Where metering is in place, tariffs (for both water and sewerage services) have two components: a standing charge which is irrespective of consumption and is the same for all customers on the tariff; and a volumetric charge, which varies according to how much water is consumed.

Unmeasured tariffs (for both water and sewerage services) usually comprise a fixed charge, which includes the customer related costs of supply; and a rateable value (RV) related charge (based on the value of the property). The structure varies with the Water Company and zones or geographical districts they operate in. In all cases, the amount customers pay is not related to levels of water consumption. Detailed information on these tariffs for the relevant water companies operating in the Solway Tweed RBD can be found in the Ofwat Tariff Structure and Charges 2004 – 2005 report⁵⁴.

The breakdown of metered and non-metered households is given in Table 24 below. This table presents metering information for all water and sewerage companies operating in the English area of the Solway Tweed RBD, rather than for all households and non-households in the Solway Tweed RBD. As such, the table below provides indicative information only on the level of metering in the RBD.

Table 24 Percentage of water and sewerage customers taking metered supplies: 2003-04

Revenue in the companies arises from the provision of a range of services which make up the overall water service. These include measured and unmeasured charges for:

There is also a variety of other minor charges discussed in the CRIP report. For each of the charges, the cost recovery mechanism is slightly different in each case but for each source of charge income, prices are generally cost reflective.

Tables 25 and 26 are based on work done for the CRIP report, which found that cost recovery was generally around 100 percent⁵⁵. These tables have been updated for more recent data collected by Ofwat in annual water company returns.

Table 25 Public water supply – cost recovery for Solway Tweed RBD (£m, 2003-04 prices)

Note: For English area of the Solway Tweed RBD only. Total financial costs do not exactly match total revenues, as the costs shown here are expressed gross of minor (negative) accounting adjustments for the impact of general inflation on the real value of working capital.

Table 26 Sewerage service – cost recovery for Solway Tweed RBD (£m, 2003-04 prices)

In any specific year, because of five-year cycle of the regulatory regime, water companies total costs and total revenues do not always match exactly. However, the balance between costs and revenues is necessarily achieved over a longer time horizon in the economic regulatory regime in England. The licensed providers of water and sewerage services are totally financed by revenues from customers. Further information is provided in the Economic Analysis Supportive Document.

Water companies (and other abstractors and dischargers) pay abstraction and discharge fees for the water they abstract to use and on-sell and the discharges they make to water bodies and courses. The Environment Agency (EA) administers the abstraction and impoundment licensing system for all water users, including the water and sewerage service companies. The EA levies administrative charges to recover its costs of managing water resources in line with the Water Resources Act 1991.

Abstraction charges are calculated according to the total volume authorised by the license, adjusted for:

In addition, there is an annual charge and an application charge for every new or varied licence application (with the exception of a simple reduction in volume).

The discharge consents scheme includes an application charge and an annual charge. The annual charging system gives greater weight to larger volumes, more sophisticated effluents (since higher monitoring costs are incurred due to greater complexity) and the complexity of monitoring given the nature of receiving waters (sampling and analytical problems being most associated with estuaries).

The EA also recovers part of its costs in dealing with water pollution incidents from some polluters.

This section uses the available information to assess the environmental costs of current water pollution and abstraction in England and Wales. This provides contextual information indicating the importance of the environmental and resource costs of water use and highlights the need for their careful and serious consideration. This contextual information cannot and should not determine any specific measures since this will require careful appraisal of feasibility, scope and costs and benefits of reducing the environmental impacts of water use.

Environmental and resource costs arise where water uses affect water bodies and contribute to water bodies failing to achieve good status. As there is no definition of good status nor a classification scheme for it at present, it is difficult to measure the gap between current and good status and hence the level of environmental and resource costs. However, it is still possible to infer their significance.

In England it is possible to use the available assessment methods and information from the Overall Benefits Assessment for the current Periodic Review of Water Prices (PR04) to indicate the significance of environmental and resource costs; but it should be recognised that further work is needed to update the assumptions in the existing studies.

After the implementation of the environment programme recently agreed in the periodic review of the water industry (PR04), the remaining quantified environmental damage costs caused by water pollution and abstraction in England and Wales will be about £1bn - 1.5bn pa. The water industry and agriculture contribute equally to about 85 percent of this total. Other diffuse and point sources such as diffuse urban pollution, landfill sites and contaminated land account for the remaining 15 percent⁵⁶.

These estimates do not include:

These impacts are likely to be significant. They will be assessed as far as possible as part of the appraisal of options affecting such water bodies for the draft River Basin Management Plans in 2008/9.

These estimates do not relate fully to the issues to be addressed in the Water Framework Directive. It does not include important issues and environmental pressures identified by the river basin characterisation exercise as affecting risks of achieving good status (e.g. morphology pressures such as flood risk management, impacts on coastal and transitional waters and lakes, and release of priority hazardous substances). These issues are likely to be significant and they will be considered as far as possible as part of the appraisal of options for the draft River Basin Management Plans in 2008/9.

Due to the above factors regarding the scope of the estimates, they might under-estimate the environmental and resource costs of water use. But on the other hand there are countervailing methodological and empirical reasons why they might be over-estimates; as well as further reasons why they might be under-estimates. More work is needed on this subject.

These estimates provide contextual information that highlights the importance of this subject and the need for its careful and serious consideration. However, on their own, they cannot and should not determine any specific measures since this will require careful appraisal of the feasibility and scope for reducing these environmental impacts, for which the potential costs could rise significantly to achieve greater reductions. Moreover it will require careful appraisal of the costs and benefits of the options to determine the cost-effectiveness of options across all sectors and whether the options are disproportionately costly. Being based on a pre-WFD approach to the assessment of the impacts of environmental pressures, this assessment should only be seen as an initial marker.

Collaborative research programme

In this vein, various government departments, agencies and stakeholders in the UK are carrying out research to develop the economic analyses and appraisal techniques for efficient implementation of the Water Framework Directive. In particular, this includes a current study to develop methods to assess the costs and effectiveness of options. This will build on a recent report for Defra on “Cost Effectiveness Analysis and Developing a Methodology for Assessing Disproportionate Costs”, which can be found at http://www.defra.gov.uk/environment/water/wfd/economics/index.htm.

This research will assess the environmental and resource costs to aid in the assessment of disproportionate costs as part of drawing up the programmes of measures and to aid the examination of pricing policies and the adequacy of the recovery of costs, including consideration of environmental and resource costs.

52 Pretty (2000) provides the source for the assumptions on the shares attributable to this sector.

53 Note that the results are sensitive to the assumptions that Ofwat adopted in its analysis.

56 For information on these estimates and the methodology applied to derive them, see Environment Agency (2004) “The Environmental damage costs of current water quality and flows in England and Wales and the contribution of PR04 in reducing them”. Forthcoming on www.environment-agency.gov.uk/economics