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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.

Implementation

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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