The water supply infrastructure used today was designed to cope with the climatic conditions and population levels of the UK in the 1960s, and is not adequate for current or future use. Climate change will affect the quantity of water we need through a change in rainfall distribution, demand for water and use of land. The Environment Agency (EA) also needs to implement the Water Framework Directive ’s (the Directive) key objective of achieving ‘a good chemical and ecological status in all surface and ground water bodies by 2015’. Under the current water abstraction licensing regime, however, the EA’s hands are tied. It argues that it cannot ensure that its environmental objectives on water are met without reforming exemptions and enforcing time-limited licences. The idea behind time limiting licences is that the EA would periodically be given the opportunity to address environmental conditions, such as over-abstraction. The provisions of theWater Act 2003 (the 2003 Act) were created in reaction to the threat that the weirs of the River Darent in Kent may dry up altogether.
The majority of abstraction licences have previously been granted as of ‘right’ so that abstractors are expected to hold their licence in perpetuity on a ‘first come, first served’ basis, with little thought to long-term sustainability. Abstractors are unlikely to relinquish these licences, which they see as valuable property rights, even if they are unused and the EA is unable to revoke licences without paying compensation, at least until July 2012 when it will be able to amend or remove a licence without compensation if the licence is causing serious damage to the environment. Given the current dilemma on water quality and water abstraction issues, the UK government proposes to bring into force existing legislative powers under the 2003 Act in relation to abstraction provisions, and is also considering new legislation that will shift all abstraction licences onto a time-limited footing. This article considers the existing legislative framework, Defra’s options to improve the existing framework and the consequences these changes will have on abstractors.
Legal Framework
The Directive was adopted in late 2000 and included a requirement that member states introduce measures to control the abstraction and impoundment of water. Member states were exempted from that control where there was no significant impact on water resource standards. In November 2000 Defra published a draft water bill for public consultation, working towards achieving its goals of improving water conservation, protecting public health and the environment, and improving the service offered to consumers. There was a significant amount of concern raised by respondents to the proposals set out in the draft bill and it was not until May 2002 that the government published its response to the consultation. The bill was given Royal Assent on 20 November 2003, becoming the Water Act 2003. The 2003 Act introduced several changes to comply further with the Directive by amending the Water Resources Act (WRA) 1991. Together, these statutes provide the legislative framework required to modernise the system and to promote the more sustainable use of water resources. The 2003 Act is divided into in three parts:
- water resources
- regulation of the water industry; and
- other provisions.
Different provisions within each part have or will come into force at different times.
Future Water and the Cave Review
On 7 February 2008 Hilary Benn, Secretary of State for Environment, Food and Rural Affairs, unveiled a new water strategy setting out policies to encourage the more sustainable use of water in light of the pressures of climate change. The strategy was outlined in a document entitled ‘Future Water’ and included promises to cut water use by12-20%, as well as to review water charging. It included targets for the state of the water industry and water environment in 2030, highlighting the drought of 2003-04 and the flooding of 2007 as examples of problems that may arise in the future. At the same time, Professor Martin Cave was commissioned to undertake a review of competition and innovation in water markets in England and Wales. The aim of the review was to recommend changes to the legislative and regulatory framework of the water industry that would encourage the efficient use of water, and deliver benefits to consumers and the environment through greater competition and innovation.
Abstraction Exemptions
Between April and July 2009, the government published a consultation explaining its proposals for implementing the remaining abstraction provisions of the 2003 Act. The consultation set out a series of regulations and orders that were due to come into force on 1 October 2009, at the same time as various sections of the 2003 Act. Defra has revealed, however, that the provisions will come into force at a later, undisclosed date due to complications following the consultation. All the provisions have been approved by Parliament through the 2003 Act. The changes cover the areas detailed below.Removal or limitation of existing exemptions
The limitation or removal of certain exemptions from water abstraction regulations under WRA 1991 enables theEA to refuse to consent to abstractions that it believes are causing damage to wetlands and rivers. This move may require the payment of compensation for loss of abstraction rights, an issue that wasvery contentious during the drafting ofthe water bill and which is looked at below. The exemptions relate to abstractionrights of navigation, harbour and conservancy authorities, and of visiting forces, as well as rights to abstract for drainage purposes.
Equal application across England and Wales
The removal of the patchwork of exempt area designations over England and Wales has provided greater clarity and consistency in the regulation of abstraction. The instruments formerly governing the exempt area designations made under s33 ofWRA 1991 are due to be revoked by the Water Resources (Miscellaneous Revocations and Repeals) Order 2009 and the Water Resources (Miscellaneous Revocations and Repeals) (Wales) Order 2009.
New exemptions
The 2003 Act gave powers to create new exemptions under s33A of WRA 1991. New exemptions are due to be introduced by the Water Resources (Exemptions) Regulations 2009, which will largely refine, modify or consolidate existing exemptions in relation to the abstraction of saline water for ports (in connection with dredging operations). Also, new exemptions will apply to the management of water meadows, the underground strata in the Cheshire basin and the exercise of the functions of the Internal Drainage Boards.
Abstraction Time Limits
The government opened a second consultation between May and August 2009 on proposals for time limiting water abstraction licences to canvas opinion on the best approach to making water abstraction more sustainable. In a policy document published over ten years ago entitled ‘Taking Water Responsibly’, the government indicated that the EA should implement a policy to convert most water abstraction licences to time-limited status and that negotiated voluntary agreement should be sought wherever possible. The 2003 Act converted this policy into a legal requirement and introduced initiatives to encourage voluntary conversion of existing licences to time-limited status. Efforts to replace perpetual licences have stalled and the incentives offered to abstractors to adopt time-limited licences have had little effect. The proportion of time-limited licences held by abstractors is still only 20% and the government recognises that existing measures are not enough to bring about a change in this statistic. The publication of Future Water indicates that the government believes there is a need to change policy to ensure that water resources are allocated efficiently. The voluntary conversion mechanisms of the 2003 Act are regarded as inadequate and so Defra are considering the need for new legislation.
Defra’s options
Future Water suggests that the EA should either use current legislative powers to impose time limits on abstractors causing the greatest environmental damage or implement a mandatory time limiting regime across all abstraction licences through the enforcement of new legislation. Defra favours the latter approach because it believes it to be more efficient and less likely to lead to large compensation payouts and an overloaded appeals system.
Time limiting all licences would enable the EA to assess the pressures in each catchment area regularly through the catchment abstraction management strategy process, and to respond to those assessments by amending and adapting abstraction licences, as needed, to protect the environment. The consultation closed on 4 August with very few responses received. This has meant Defra will find it difficult to gauge the impact on the most affected groups, such as agriculture, fish farms and private water suppliers. It is not yet clear which approach Defra will take but every indication is that it will adopt mandatory time limiting across all abstraction licences. Choosing this option will mean unused abstraction rights can be revoked and excessive abstractions reviewed and cut back when the imposed time limits expire. Alterations to licence volumes and other conditions will be designed to reflect the uncertainties and pressures of climate change in each catchment area, and will open the door for potential new abstractors in cases where existing licences have been operating inefficiently.
Compensation and trade
Abstraction exemptions
Where licences are revoked or varied by the EA, compensation for loss or damage will be payable under s61 of WRA 1991. Compensation will be limited when previous abstraction has caused ‘serious damage’ to the environment and when no water has been abstracted under the licence for a period of four years. Compensation will be based on loss or damage that results in depreciation of the value of an interest in land under the rules in s5 of the Land Compensation Act 1961. Compensation disputes will be referred to the Lands Tribunal. The EA has voiced strong objections to these licensing reforms because there will be a need to generate a compensation fund of approximately £100m.
The issue of how compensation payments will be funded was considered at length by Defra, Ofwat and the water industry. Part of the agreement they reached was that water companies whose licences are revoked or varied will not receive compensation and are excluded from contributing to the compensation fund. Their replacement funds will be recouped from consumers. Compensation for non-industry abstractors will be funded through abstraction charges, meaning that a sharp increase in these charges will occur (considering they are currently set to cover administrative costs only). The EA warns that abstraction charges will increase 10% each year for a period of up to 23 years in some regions. As this increase will only apply to non-water industry abstractors, the EA concludes that a two-tier charging scheme will be required, resulting in an imbalance in the economics of water resources that undermines the conclusions of the Cave review. The EA wants a review of the water industry’s exemption from the compensation scheme but such a move is likely to be resisted by the industry itself or Ofwat.
Abstraction time limits
The consequences of imposing time limits on all water abstraction licences will include the reduction in licensed volumes and should lead to an increase in the trade of water abstraction rights between abstractors. There will be no compensation available to abstractors if Defra imposes time limitations on all water licences and this will mean that any loss resulting from licence changes will be borne solely by the abstractor. Rather than the environmental cost of over-abstraction being borne by the whole abstractor community through compensation payments from money raised from abstraction charges, it is sole abstractors whose licences are changed that must bear the cost. Defra’s policy assumes that sole abstractors whose licences are reduced are causing (or risking) significant environmental damage, on the principle that the polluter (or impactor) pays. However, this assumption is founded on a shaky premise. It does not take into account abstractors with licences that are unlimited in time who do not abstract all their licensed volume or have an impact on the environment. Under the new provisions, such abstractors are effectively ‘over-licensed’ and will lose a considerable asset without compensation when the EA review the imposed expiry of their licence. On the other hand, imposing time limits to licences will benefit those who do not have adequate abstraction rights. Greater accessibility to the abstraction of water will enhance competition in abstraction licence trading, which is greatly encouraged by the EA. However, the marketplace will always be subject to checks and balances imposed by the EA in their term review of each licence.
Timescale
Implementation timescales are still being debated but the EA has indicated that all abstraction licences will be given a time limit within the third cycle of the River Basin Management scheme, covering the period 2021-27. This will allow time for the EA to complete its Restoring Sustainable Abstraction Programme, which evaluates the sustainable level of water abstraction at any given site and catalogues sites to which abstraction may cause damage. This time frame will also give abstractors a long time to prepare for the change, ensuring that a balance is achieved between the needs of the licence holder and those of society and the environment.
Conclusion
The recent volatility of the UK’s climate has been a catalyst for the review on government strategy in the implementation of the 2003 Act. The knock-on effect was a hasty introduction of the provisions of the 2003 Act that were due to be brought in on 1 October and an even hastier retreat from implementation. In the meantime, Defra has its hands full with the parallel consultation on time limiting abstraction licences. Both these changes have far-reaching consequences that will inevitability increase the burden on the EA and Land Tribunals nationwide, reduce water supply, and inflate the competition and price of water for abstractors and consumers alike.
By Michael Barlow, partner, andGeorge Fellowes, solicitor,Burges Salmon LLP.E-mail: michael.barlow@burges-salmon.com;george.fellowes@burges-salmon.com.
