Water abstraction: reforms in the pipeline?

The days of unlimited water abstraction are over. Owen Lomas, Rachel Devine and Claire Smith of the Environmental Law Group at Allen & Overy, tell you why.

Change in the water industry is firmly back on the government's agenda and its current proposals to reform the water abstraction regime are an important part of this. The intention is to redress the balance between historical water abstraction uses that were granted unlimited in time and amount, and the need to secure more sustainable water supplies, and to protect aquatic habitats damaged or threatened by over-abstraction.

Framework directive
The main objective of the Water Framework Directive, adopted by the EU last year and which must be implemented by Member States by December 2003, is to provide a framework for the sustainable management of surface water and groundwater based on natural watersheds or river basins. Amongst other things, the Directive requires Member States to create management plans for river basins or catchment areas that record abstractions and aim to ensure that abstraction only amounts to a small proportion of available water resources.

Substantive details of the government's plans will be available during 2002. The government has, however, sign-posted its intentions: several changes to water abstraction are contained in the draft Water Bill and Environment Agency (EA) policy regarding Catchment Management Area Strategies (CAMS). In addition, the government is also encouraging the trading of abstraction licences.

Drafting the Bill
The Department of Environment, Food and Rural Affairs (DEFRA) is in the final stages of consultation on the draft Water Bill published in November 2000 which sets out a number of major reforms to the abstraction regime. Presentation of a revised Bill to Parliament is unlikely to occur until late 2002. The current proposals in the draft Bill relating to abstraction include:

(a) making all new licences time limited (except for impounding licences which can be granted without an expiry date at the discretion of the EA);

(b) abolishing the entitlement to compensation for revocation or variation of existing licences on the grounds that the abstraction is causing significant environmental damage;

(c) empowering the EA to revoke an abstraction licence without compensation if it has not been used for four years (at present, this is seven years);

(d) removing most licensing exemptions currently given on the grounds of use;

(e) introducing a de minimis threshold of 20 m3/day under which no licence is required;

(f) altering the licence application process so that the only precondition requirement is right of access to the point of abstraction;

(g) increasing penalties for enforcement of breaches of licence conditions, for example, the maximum fine will be increased to £20,000.

The government anticipates that the introduction of the de minimis threshold will remove 20,000 of the existing 48,000 licence abstractors from the licensing system. These abstractors, mostly farmers, will no doubt be relieved to have one less licence to obtain. However, an estimated 2,000 abstractors - including those carrying out dewatering and trickle irrigation - will be caught by the proposed reforms. These trickle irrigators, together with various other respondents in the water industry and agricultural sectors have raised a number of criticisms of the draft Bill.

Over the long term there will be a significant impact from introducing time limited licences and giving the EA powers to revoke licences on environmental grounds without compensation. The EA's estimate is that the total bill for revoking abstractions to protect the environment could be in the region of £0.5 billion.

The National Farmers Union (NFU) believes that the removal of 'licences of right' without compensation is contrary to the Human Rights Act. In response, DEFRA maintains the public interest argument - that environmental protection outweighs a licence holder's rights.

It is likely that this tension of competing rights will be resolved via litigation. The government, however, is clinging to the hope that the long warning period now being given to abstractors will be a deterrent to litigation.

Another key concern is that there is no provision in the draft legislation to protect 'sleeper licences', which might only be activated in times of drought, from the EA's power to revoke unused licences after four years. As a result, water companies could retain responsibility for drought and emergency plans but not be capable of implementing them - a matter of considerable concern.

Catchment strategies
Tied with the approach in the draft Water Bill, the EA published a policy in April 2001 introducing time limits for all new and varied water abstraction licences within the CAMS framework. CAMS are essentially local strategies for the management of water that aim to balance the needs of abstractors with those of the aquatic environment and will be subject to consultation with the local community and key stakeholders.

CAMS will enable the EA to manage time-limited abstraction licences and determine whether, and on what terms, they should be renewed. For example, concerns have already been raised that new licences required by trickle irrigators will be refused in over-abstracted catchments even though they provide a more efficient means of water use in the long term.

The 'normal renewal period' for licences will be 12 years and common 'end dates' will apply to all time-limited licences in a CAMS area. Arguably, these periods are too short to give certainty to those making long term capital investments that there will be sufficient water supply.

Water companies and the NFU are concerned that, as a consequence, the value of assets will be reduced and the costs of borrowing will be increased. In response, the EA has suggested that longer licences, such as 24-year duration, may be allowed. There will also be a presumption of renewal subject to various tests relating to environmental sustainability, continuing 'reasonable need' for the schemes and efficiency of water use.

One concern with the draft Water Bill is the lack of guidance about how the government intends to introduce competition into the water industry. Although this guidance has been promised for some time there have been continuous delays in publishing a consultation paper.

It is now likely that an indicative paper will not be available until next year. Signals have been given by the Environment Minister, Michael Meacher, about the government's general aims to encourage competition.

However, any detailed information relating to abstraction is missing. When preparing its position paper it will be crucial for the government to clearly establish how the competition proposals interact with those already published on abstraction licences.

Various water industry groups favour trading water abstraction licences to increase market flexibility and provide a necessary precursor to introducing competition into the water industry. The government has adopted this view and asked the EA to progress it through a timetable of actions set out in Tuning Water Taking. The EA is required to issue draft guidance (particularly on the issue of what the 'reasonable need' of an abstractor is), publish a standard information sheet to advise abstractors of the scope for trading in the current system, and to set up a web site where potential traders can advertise.

For trading to begin, the government has made it clear that CAMS do not need to be in place, water legislation does not need to be enacted and a pilot scheme is unnecessary. Instead the government wishes to rely on the EA's existing powers to protect the aquatic environment as being sufficient to create this trading system.

Ultimately, the government expects significant trading to begin in 2003. However, as seen with emissions trading, setting up a trading scheme is no easy task, and the EA has been slow to respond to the government's call for action. So it is difficult to believe that the existing timetable for introducing trading will be maintained.

The hope is that implementation of these water abstraction proposals will result in better services, lower costs, greater customer choice and reduced effects on the environment. Simplifying the abstraction process and introducing competition, initially by preparing for licence trading, are useful steps towards achieving these goals.

However, it remains to be seen whether these objectives can actually be attained and any judgement must be deferred pending more detailed government proposals. Until then parties affected by these water reforms will need to be cautious about over-relying on abstraction sources and making capital investments. Given the current rate of progress, it is clear that this is not a high priority for the government and achieving certainty for abstractors is a long way down the pipeline.


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