The Government is to introduce new measures in the Water Bill to ensure that neither water trading under the new competition regime which starts in 2017 and bulk transfers between water companies and other incumbents leads to over-abstraction or negative impacts on the environment.

The measures are intended to address concerns about over-abstraction and unsustainable water use  by both existing water companies and new entrants to the water supply market as a result of the new competitive retail market in 2017.

The upstream reforms set out in the Water Bill are intended to make it easier for new players to enter the water sector who might offer new water sources, water efficiency goods and services or innovative ways for dealing with wastewater and sewage sludge.

However, some stakeholders have raised concerns that legislating for upstream reform in advance of abstraction reform may lead to unintended consequences for the water environment, the two key areas of concern being:

a. Upstream reform could provide an incentive for non-water company abstractors that are not currently utilising their full licensed volumes (‘sleeper’ licences) to increase use unsustainably; and

b. Upstream reform could provide an incentive for water companies that currently have ‘headroom’ within their abstraction licences to increase use unsustainably for the purposes of trading between water companies.

In a briefing note update published by last week on the Water Bill, the Department for Environment, Food and Rural Affairs (Defra) said:

“The Government is clear that any such outcome would be wholly unacceptable. Ofwat, Defra and the Environment Agency have carefully considered the issue and are confident that the existing regulatory framework, correctly applied, is fully capable of managing these risks. “

“Safeguards to ensure no risk of unsustainable increase in abstraction due to upstream reform”

Under the amendments to the Bill, in order to sell water into public supply all non-water company abstractors will need to apply to the Environment Agency for a “change of use” for their abstraction licence i.e. to go through the same process as if applying for a totally new licence. The Agency could refuse a “change of use” request if it would lead to unsustainable abstraction or deterioration in the catchment or it could apply conditions to ensure that this did not happen.

The Bill will be amended to enable regulations about water supply agreements between incumbent water companies and other relevant parties to require Ofwat to consult the Environment Agency or Natural Resources Wales before any changes are made to an agreement.

In addition to the existing process for issuing abstraction licences and regulating change of use, there are separate licensing requirements for new entrants to the water sector. The Government has already amended the Bill in Committee in the House of Commons to require Ofwat to consult the Environment Agency before issuing a water supply licence entitling the holder to input water into the public supply system.

Ofwat will attach complementary conditions to the water supply licence to ensure that there is consistency between the economic and environmental licensing regimes. The Environment Agency will also require that any abstractor supplying water to a water supply licensee for input to public water supply holds an abstraction licence for that purpose.

The briefing note states:

“These safeguards will ensure that there is no practical risk of an unsustainable increase in abstraction by non-water companies or water supply licensees in response to the implementation of upstream reform. “

On bulk supplies agreements already in place between incumbent water company areas, Ofwat will also be required to consult the Environment Agency or Natural Resources Wales before making changes to a bulk supply agreement. The Government intends to amend the Bill to require Ofwat to consult, in particular, on whether the proposed supply would secure an efficient use of water resources, in light of its effect on the environment.

 Ofwat has already established a Trading and Procurement Code to mitigate against possible environmental risks of trading, including a sustainability clause, in response to the Water Trading incentive in the current Price Review.

 The Government now intends to strengthen the codes on bulk supply agreements by amending the Bill to add a requirement for Ofwat to consult the Environment Agency and Natural Resources Wales before it issues the codes. The Briefing Note states:

 “These safeguards will ensure that there is no practical risk of an unsustainable increase in abstraction as a result of reforms to remove barriers to bulk supplies between water companies. "

No major changes on abstraction until after 2020

The Government has been criticised in a number of quarters for the slow pace of change on abstraction reform. As far back as July 2012 the House of Commons Select EFRA Committee said:

" The Government’s current plans - to reform the abstraction regime by the mid-to-late 2020s - will not take effect rapidly enough given that our rivers are already running dry. ....The reform of abstraction licenses must be brought forward to protect against the effect of severe droughts such as the one we saw earlier this year.”

However, overall reform of the existing water abstraction regime is not part of the current Water Bill. Defra said in the briefing note:

“ The UK and Welsh Governments are working together to develop water abstraction reform options with stakeholders. The options were published for formal consultation in December 2013. We should not rush this: if we get it wrong there will be real consequences for a range of businesses and industry, including farmers, food manufacturers and the power sector, as well as the environment. “

The most significant change currently in place on abstraction in the Water Bill is the removal of a water company’s statutory right to compensation for losses resulting from modifications and revocations of their abstraction licences.

The Government’s current consultation on the policy options for long-term reform of the abstraction system set out by Defra in the Water White Paper is not due to close until on 28 March.

The Government said it is working closely with licence holders to understand the impact the options for reform could have on different business sectors.  The aim is to legislate for abstraction reform early in the next Parliament (from 2015) with a view to implementation in the early 2020s and  ensure that the implementation of both upstream and abstraction reforms are carefully co-ordinated, with the timetable for expansion of upstream water resource markets and transition to a new abstraction regime likely to be broadly similar.

The Briefing Note states:

“The Water Bill includes reform of the existing upstream water markets as part of wider market reforms of the water industry. The upstream reforms will require careful planning and close working between the water industry, regulators and customer representatives. To allow sufficient time for this, the main upstream reforms will not be implemented in advance of the next Price Review which will set charges for 2020 – 2025.”

New Water Bill measures to protect against over-abstraction due to competition