Legal Briefing

The water white paper and changes to the abstraction licensing regime

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Projects, energy and natural resources | 01 March 2012

The government’s widely anticipated water white paper ‘Water for Life’, released in December last year, sets out Defra’s vision for future water management:

‘… in which the water sector is resilient… water companies are more efficient and customer focused, and… water is valued as the precious and finite resource it is’.

This article provides an overview of the important changes proposed in the white paper, then focuses on the changes to the water abstraction regime and highlights 
the implications of changes in this area 
for businesses.

BACKGROUND, NEW WATER BILL AND POLICY

The white paper draws on the conclusions of the 2009 Cave review on competition and innovation in water markets, the 2009 Walker review on charging for household water and sewerage services and the 2011 Defra review of OFWAT and consumer representation in the water sector. The white paper also reflects the increasing pressures on water resources from climate change and a growing population and was released alongside a report on reforming water abstraction produced by the Environment Agency (EA) and OFWAT1.

Key documents will be produced this year:

  1. a draft Water Bill for pre-legislative scrutiny early this year, with a Water Bill as soon as Parliamentary time allows; and
  2. a new strategic policy statement for OFWAT (picking up on the findings from the recent review of OFWAT and the priorities for the sector as set out in the white paper) and social and environmental guidance.

Some of the legislative changes have already begun. The Water Industry (Financial Assistance) Bill, which will enable the government to fund South West Water to cut bills by £50 per year for all household customers (see below) and also to provide contingent financial support for exceptionally large or complex water or sewerage infrastructure (such as the proposed Thames tunnel in London) was introduced into the House of Commons on 2 February.

Immediate steps in implementing the white paper also include:

  • supporting catchment pilots across 
the country, with 25 to be evaluated 
in early 2013;
  • working with stakeholders on designing a new abstraction regime in early 2012 and publishing information on progress of the Restoring Sustainable Abstraction programme later in the year;
  • publishing final social tariff guidance in early 2012; and
  • producing draft guidelines for the next water resources management planning round during 2012.

WHITE PAPER: THE KEY REGULATORY CHANGES

The key proposals of most interest to business customers in the white paper are likely to be reforms to the current water supply market to increase competition and changes to the abstraction regime.

Reforming the market and increasing competition

Defra does not plan fundamental change and will not take forward the proposals for separation of the retail businesses of water companies proposed by the Cave review.

Despite some of the reservations on the scale of these proposed changes, the white paper does include reforms to the existing Water Supply Licensing (WSL) regime (which allows new companies to supply water to eligible customers once they have a licence) and inset/new appointments regime (the process by which one company replaces the incumbent as appointed water and/or sewerage company for a specified area), which impact on business customers.

Reduced threshold for business customers to change supplier

The Water Supply (Amendment to the Threshold Requirement) Regulations 2011 came into force in December 2011 and reduced the threshold at which business customers can switch water supplier from 50 million litres per annum to 5 million. There are plans to reduce the figure to zero and extend the WSL regime to sewerage services in a future Water Bill.

The new reduced threshold in England will allow approximately 26,000 customers to change water supplier, a first step towards increasing competition. Businesses using more than 5 million litres may be eligible to change water supplier and should check whether they meet the eligibility criteria. Once they have found a new supplier, they will need to check the commercial terms for the supply. OFWAT and the Consumer Council for Water can also provide further information on eligibility and the options available.

One practical restraint on increasing competition through ‘common carriage’ has been the difficulty in establishing clearly who is responsible for end of pipe water quality, and revised legislation will be needed to address this.

Other proposals

Other proposals on reforming the market and increasing competition in the white paper include:

  • unbundling of the combined WSL licence so that, for example, new entrants wishing to input water resources to a company’s system will no longer be obliged to provide retail services;
  • establishing a new market for retail water and sewerage services in partnership with the Scottish government;
  • removing the need for new entrants to negotiate terms with incumbent water companies and statutory market codes, to increase transparency;
  • extending new entrants’ access rights to water companies treatment and storage systems, rather than just 
mains and pipes;
  • amending the special merger regime to exclude more mergers from automatic reference to the Competition Commission.

These technical adjustments will go some way to promoting competition across the sector, but are unlikely to result in early significant change. OFWAT has warned that the ‘overly cautious’ plans fail to foster competition and prevent companies engaging in retail mergers and delivering economies of scale.

Other proposals of interest in the white paper include:

Regulatory interface
  • Defra will work with the EA, OFWAT and the Drinking Water Inspectorate to minimise burdens on companies from the separate planning processes in the water sector;
  • Defra, the EA and the water industry will consider whether strategic national infrastructure projects are necessary to ensure water supplies remain resilient and whether there are barriers to their delivery that should be removed; and
  • Defra will consult on national standards for sustainable drainage and mandatory build standards for new sewers.
Affordability

Defra plans to:

  • publish final guidance to companies on the introduction of social tariffs this year and ensure water companies have freedom to offer enhanced terms to WaterSure customers (which generally helps those on meters who use a lot of water because of a medical condition or a large family and also receive benefits) through social tariffs from April 2013;
  • provide funding to South West Water to enable it to cut bills by £50/year for all household customers (who have faced the highest water bills in the country due to the network improvements required since privatisation and the relatively low number of households in the region), until at least the end of the next spending review period.
Improving water quality and the catchment approach

The new ‘catchment approach’ to dealing with water quality and wider environmental issues is re-affirmed in the white paper. Defra note that they will provide clearer guidance for farmers on the basic measures required to safeguard watercourses and continue to tackle other rural diffuse pollution sources.

ABSTRACTION

One of the key areas of the white paper set to have an impact on business customers is changes to the abstraction regime.

The current position

An abstraction licence is required under the Water Resources Act 1991 (with a limited number of exceptions) for the removal or abstraction of surface waters (such as from rivers, streams and canals) and ground water. There are three types of licence: full (for most large abstractions), transfer (for large scale transfers of water from one location to another with no intervening use) and temporary (for abstractions over 20m³ per 24 hours over a period of less than 28 consecutive days).

Some changes to the formal licensing system for abstractions in the 1991 Act were made in the Water Act 2003. The present system gives the licence holder the right to abstract a specified quantity of water from a specific source of supply for a specific use. Abstraction licence holders can also benefit from the ability to sell their right to abstract some or all of the water to another party under a scheme by which the EA administers and authorises trading (water rights trading).

Since 2001, all new abstraction licences have been issued with a time limit, usually of 12 years (albeit with a presumption of renewal). After the expiry of those 12 years, a fresh application is required to the EA who carry out a re-assessment. The Water Act 2003 brought with it a greater focus on efficient and sustainable water use to the regime, with the EA using Catchment Abstraction Management Strategies (CAMS) to determine how much water is available for abstraction. The 2003 Act also introduced powers to address (without compensation but with lengthy notice) abstractions causing significant environmental damage. Finally it tightened up the ‘use it or lose it’ provisions by providing that licences unused for four years (instead of seven) should cease to have effect.

Issues with the current regime

The government and the EA consider that the current regime is not responsive enough to meet the challenges of climate change, increasing population and increased pressure on resources. OFWAT’s and the EA’s joint paper released with the white paper (see note 1) points out that:

  • many licences have a fixed water allocation and are without a time limit. 83% of licences in England do not include any conditions to reduce or stop abstraction when water availability decreases;
  • licences are (from the EA’s perspective) difficult and time consuming to change. While the EA can change licences under s51 of the Water Resources Act 1991 by way of a voluntary mechanism (where changes are mutually agreed with the licence holder), if changes are not voluntary they must be made under s52 (enforced change) and the EA must develop a case to support each proposed licence change. The licence holder may object and claim compensation for losses;
  • there is no dynamic water abstraction market, meaning abstractors who do not take their full water allocation do not hand back or sell-on licences as their needs change. There have been few incentives to trade abstraction licences, and there is no single set of regulations to set out the procedure for such trades to take place. Only 53 trades took place between 2003 and August 2011;
  • charges are considered by the EA and OFWAT to be relatively low and not linked to the volumes abstracted.
The white paper changes: 
implications and future issues

The white paper claims that fundamental reform is required to the abstraction licensing regime, which will be a long and complex process. Nevertheless, consultation on the proposals is not expected until 2013, legislation is not expected until early in the next Parliament and the new regime is not expected to be in place until the mid to late 2020s. However, Defra have acknowledged that change is required now as well as in the longer term, including OFWAT’s work on future price limits and the use of Water Act 2003 powers to remove/vary licences causing serious damage from 2012.

Compensation: possible scope for legal challenge?

In terms of immediate issues for those holding abstraction licences, one issue that should be considered sooner rather than later is that of compensation. The government has indicated in the white paper that there are no proposals to fund compensation for any losses individual abstractors incur on the change to a new system, and even suggests that compensation would ‘not be legally justified’. However, if licences are revoked or limited without compensation it will raise questions about property and human rights and could be challenged.

Licences are a form of property, and restraints on their use would normally require compensation in other than exceptional circumstances. Powers were introduced in the Water Act 2003 to be able to remove licences in extreme cases such as rivers running dry, without compensation but with lengthy notice. The signs now are that the EA would like to use these or similar powers in a much wider range of circumstances. Major users such as water companies would almost certainly challenge any restriction of their licences that did not involve compensation. Other abstraction licence holders will need to be assured that their treatment is fair.

Trading: will it work?

Government and the EA have supported abstraction trading in theory for years, but no market has got off the ground. Clear rules will be required to set the framework for trading if it is to be a success. In practice at present, would-be buyers and sellers are left to work out trades from first principles for each transaction, which is impossibly complex and expensive.

CONCLUSION

The water white paper is an important document, which has been met with mixed reviews. While some of the white paper actions are immediate (such as changes to the WSL regime), others will see changes introduced over a much longer period of time. There is some way to go before a new Water Bill is introduced into Parliament, but it is becoming clear that both business and individuals could be significantly affected by its provisions.

Some of the white paper’s proposals seem to be in conflict. For example, water licence or volume trading is an economic approach to addressing over-licensing and establishing the value of water. Intervening in the market, restricting licences or removing them without compensation will not tend to encourage that market. It is questionable whether both policies can be combined successfully in the same Bill.

The white paper covers a number of different issues and how all of these (some apparently conflicting) issues materialise into the Water Bill will be monitored with interest.

By Michael Barlow, partner, 
William Wilson, barrister, and 
Joanne Attwood, solicitor,
Burges Salmon LLP.

E-mail: michael.barlow@burges-salmon.com; 
william.wilson@burges-salmon.com; and 
joanne.attwood@burges-salmon.com.

Note

  1. ‘The case for change – reforming water abstraction management in England’ (Report GEH01111BVEQ-E-E) http://www.environment-agency.gov.uk/research/planning/135501.aspx