RD 07/02

TO ALL REGULATORY DIRECTORS OF

WATER AND SEWERAGE COMPANIES

AND WATER ONLY COMPANIES

PERIODIC REVIEW 2004 – ENVIRONMENTAL DRIVERS FOR AMP4

Current price limits for water and sewerage companies run until April 2005, and a periodic review of price limits will conclude with the final determination in November 2004 for the period 2005/06 - 2009/10 (AMP4). As part of the preparations for the periodic review, the Environment Agency, in partnership with English Nature and the Countryside Council for Wales, is about to start gathering information on environmental requirements that could impact on the water industry. The Agency will also be looking at the changes in water companies' supply – demand balances that are necessary to maintain security of public water supply.

The Environment Agency has produced the enclosed paper 'Environmental Drivers for AMP4'. The sections that deal with nature conservation were prepared with English Nature and the Countryside Council for Wales. The paper identifies potential environmental drivers that might require improvements to water industry supply and sewerage assets, or changes in the way they are operated, between 2005 and 2010 and, in some cases, beyond. Its purpose is to inform subsequent submissions. It provides guidance on the scope of environmental drivers for water companies' draft business plans, which should lead to better-informed plans, including a requirement for well-founded cost information and timescales for delivery.

'Environmental Drivers for AMP4' is a working document, and will be updated when necessary. The document will be subject to a version control system. The main part of the paper is divided into Section A on Maintained Planned Level of Environment Protection and Section B on New Requirements. This division is administrative and is not a rigid definition of the expenditure purpose categories that will be used by Ofwat. There are elements in section A which will result in specific enhancement schemes, for example, schemes proposed to meet the requirements of S101A of the Water Industry Act 1991 (as amended by the Environment Act 1995). The appropriate expenditure purpose category for such work will be reviewed separately by Ofwat.

We ask that water companies work with their respective Environment Agency regions to specify the potential improvements that could be required to meet the environmental drivers detailed in the attached paper. We propose holding joint meetings with each sewerage company, the Agency's AMP4 project team and regional staff, and Ofwat's Quality Enhancement Team to discuss the development of the quality programme for the 2004 periodic review. Initially we would like to arrange a first round of meetings in late spring 2002 after you have had time to understand the possible impact of the drivers. We will also discuss with all water companies whether early meetings will be useful in identifying water resource drivers affecting their supply-demand position.

We are sending copies of this letter and the attached paper to officials at DEFRA, the National Assembly for Wales, English Nature, the Countryside Council for Wales, Regional Directors of the Environment Agency, and the Reporters for the water companies.

BILL EMERY                                           PAUL LEINSTER

Director of Costs and Performance  Director of Environmental Protection

and Chief Engineer

cc

Daniel Instone and Rodney Anderson, DEFRA
Philip Bishop, NAW
James Marsden, English Nature
Malcolm Smith, Countryside Council for Wales
Regional Directors, Environment Agency
Reporters for the water companies