The water companies have expressed serious concerns about proposals to reform the current water abstraction licencing regime.

The comments come in the response to the Department of Environment Food and Rural Affairs consultation on abstraction licence reform by Water UK , the body which represents all of the UK water companies at both national and international level. However, the response has also flagged up divided views between Water UK's traditional water company membership and newer members - which could have wider implications for upcoming market reform. 

Water UK said that generally, the current abstraction regime has worked well for public water supply (PWS) while at the same time, Ofwat’s price regulatory regime had ensured an affordable and reliable water supply. The response says that a number of features of the current abstraction regime have worked well for PWS, in particular:

• Strong incentives within the current system for water companies to reduce levels of leakage, reduce demand for treatment water resources, and increase resilience to extreme weather.
• Current system gives certainty over the amount of water available from a source and therefore the confidence to invest in catchment management, water treatment and distribution from this source of water.
• Numerous water company abstraction licences are already conditional in nature, with mechanisms built in to protect the environment and other abstractors.

"Unfortunate" that Defra has not made more detail of impact asssessment available

The response says it is “unfortunate” that the detail behind the impact assessment being undertaken by Defra to understand how the reform options may affect abstractors has not been made visible, as this “would have helped to generate more confidence in the process.”

Water UK expressed a desire to contribute more towards the modelling of policy options, in particular, working with Defra to understand the impact of the different reform proposals on water companies’ deployable outputs.

While welcoming the proposals to better link abstraction to water availability and the introduction of electronic licences as a sensible proposal that will help to reduce the costs of administering the system, the response has questioned why the changes could not have been be introduced under the existing system. It also flags up the water companies’ particular concerns about the impact of some of the reform proposals on PWS and the need to ensure that unintended consequences are avoided.

Concerns over process

With regard to process, the response says that Defra's consultation highlights a number of times that the current process of applying for, or varying a licence, is slow and complicated. The response states:

“Whilst it is always right that the application process should be as quick, simple and as low cost as possible, it is only appropriate that any change to an abstraction licence is well evidenced. The majority of our members believe that abstraction licences should only be increased if detailed environmental studies have shown that this is acceptable, and abstraction licences should only be decreased if detailed environmental studies have shown that this is required. “

Water UK also says it should be recognised that an abstraction is only part of a water use process. In the case of public water supply the water needs to be treated, stored and piped to customers – all of which involve significant operating, and in particular, capital costs, commenting:

“ The infrastructure that sits downstream of an abstraction licence is relatively inflexible, and therefore changes to licences should only be made if we are very confident that they are required (if the licence is being decreased) or acceptable (if the licence is being increased). “

In Water UK’s view overall the proposed options appear to be more complex than the current system – and the water companies would be concerned that the increased administrative costs would be reflected in higher abstraction licence charges.

The response also highlights issues related to water resources management planning. As a consequence of the proposal to reduce licensed volumes as part of the transition to the new system and the reform options themselves, the deployable output of sources would be affected. However there is no assessment of how the proposed changes would impact deployable output (the amount of water companies would have available to meet demand in a dry year). Water UK says that potentially Water Resources Management Plans, Drought Management Plans and investment programmes could change radically as a result of abstraction reform.

The response says the consultation document does not provide sufficient information for companies to make a proper assessment of the risks and is seeking the opportunity to work with Defra to develop a shared understanding of how the reform proposals could affect water company deployable outputs and consequently investment plans.

 “Little consideration of need for strategic planning...and Govt role in development of large-scale interconnection and storage assets” 

On strategic planning , the response says that although the consultation document appears to be predicated on additional storage, there is little consideration of the need for greater strategic planning in the provision of that storage or its costs. While water can be stored to address deficits at times of low flows, the amount that can be carried over between seasons is limited by the available storage capacity and “significant investment and planning would be required to address this.”

In addition, there is little consideration of the role for Government in the development of large-scale interconnection and storage assets. The response says that in theory, market forces could play a substantial role in the development of this strategic infrastructure. However, there is a question as to whether the market alone will be enough to facilitate such investment. The response states:

“Such strategic assets can raise many complex social, environmental, political and economic issues, which create heightened uncertainty around whether any investment will be recoverable. “

“Reforms could drive up bills for customers …. or drive them down”

The response does however highlight divided views between Water UK’s traditional water companies and the organisation’s newer members on a number of issues, stating:

“ There is concern from many in the industry that the reforms in this consultation could potentially end up driving unforeseen additional costs and the impact on customers' bills of the different options is an important omission from the work presented in the consultation document and the cost benefit analysis in particular….…..However, some of Water UK’s new members feel that this view is heavily partisan, and that it is as likely that the reforms will drive down costs or produce unforeseen additional savings.”

 Transition and environmental protection appears to be another area of tension between Water UK’s traditional membership base and its newer members. Many of the water companies are concerned about the proposal to reduce licensed volumes as part of the transition to the new system and take the view that in any transition process abstractors should be given the opportunity to re-justify their need for their current licensed volume.

However, some of the body’s new members believe that it is for the water company to present an adequate justification to maintain licensed volume substantially above actual abstraction and that presumption in favour of reducing licensed and transferring a percentage of this into the ‘water reserve’ would greatly assist in achieving the aims of abstraction reform.

Some new members have also pointed out that avoiding serious environmental impact is not the sole aim of abstraction reform, and that new entrants can drive both efficiency and environmental improvement.

Administrative allocation rules… likely to dampen impact of market-based reform

 The response also raises a number of interesting questions about how the proposals will impact on upcoming market reforms. Water UK is keen to work with Defra on its current drought and resilience modelling, commenting:

“Administrative allocation rules which override market outcomes when the system is under most stress are likely to dampen the impact of market-based reform – particularly on investment in peak capacity.”

More clarity needed over water use under current system before reform

Water UK also wants to see more clarity with regard to who is actually using water under the current system, before “meaningfully changing” the system to ensure a fair allocation and management of water in the future.

The response points out that there are are some significant users that currently do not have licenses – for example, the MOD, trickle irrigators and the canal network – which means it is not clear where the resource stresses in some catchments lie.

It also expresses concern about the use of Environmental Flow Indicators (EFIs) as the means by which the environmental flow needs of a river are protected which both of Defra’s reform options envisage, commenting:

“Whilst the EFI approach would reduce the cost to the Environment Agency in calculating flow targets and bands, we consider it is a poor substitute for detailed investigations, similar to those that have been undertaken in many catchments over the last 20 years. Potentially the use of EFIs could result in insufficient protection for the environment in some circumstances and significant economic inefficiency in others if abstraction licences were unnecessarily restricted as a result.”

 Water UK “nervous” about company discharge requirements  

 The response also says Water UK is “ nervous about the potential impacts of requiring water companies to discharge specified volumes from defined locations.” The  consultation raises the question of how water company discharges should be treated in the new system – but it also  acknowledges that the requirement could lock companies into inefficient solutions and reduce their scope for innovation.

Looking ahead, Water UK said it would continue to work with Defra and the Environment Agency to understand the impacts of the proposed reforms on PWS – but would welcome opportunities for more collaboration. Water UK also expects and anticipates further public consultation on abstraction.

Key areas where Water UK is particularly interested in understand and contributing towards include:

• the potential impacts of the proposed reforms on water company deployable outputs;
• the treatment of water company discharges;
• the performance of reform options during a drought, and interface between the new system and drought management arrangements;
• how water company abstraction licences should be transitioned into the new system; and,
• the development of trading rules and markets. 

Click here to read the Water UK response in full