Agency frustrated over abstraction reform delay

The Environment Agency’s plans for reforming the charging system for water abstractions are in disarray. Frustration is evident in the Agency as the Environment Department (DEFRA) has twice performed major policy shifts on the issue.

Many watercourses and groundwaters are suffering from over-abstraction and the Agency is reviewing abstraction licences to ensure they are sustainable. Abstraction charges are likely to rise substantially to cover the cost of compensating abstractors whose rights to take water are to be reduced.

To date, abstraction charges have not weighed heavily on abstractors because they only cover the Agency’s administration costs. But with price rises in the offing, the system of calculating the charges is under review.

A paper for the Agency board meeting in November revealed irritation that after two consultations and nearly three years of discussion, the issue is not close to being resolved.1 The key issues are how the water industry’s costs will be met and how the burden of higher charges will be spread across England and Wales.

The latest estimate of compensation costs is £420 million. Some 90% of abstractions are made by water companies, so a large majority of costs will fall on them.

The Agency first consulted on the issue in January 2004, when it was proposed that water firms’ costs would be funded through the industry’s 2004 price review PR04 (ENDS Report 348, pp 39-40 ).

By the time of the second consultation, in September 2005, the decision had been taken to spread costs nationally, with separate funds for England and Wales (ENDS Report 368, pp 27-28 ).

Water firms and financial regulator Ofwat protested that the industry would be paying both its own compensation costs through the price review mechanism and the larger part of compensation for other abstractors in increased abstraction charges.

The result was that in the final ministerial guidance for PR04, the cost of replacing firms’ unsustainable abstractions was taken out of the mix. Water firms and other abstractors would be treated in the same way and both would have to claim the costs of replacing unsustainable abstractions from the Agency’s abstraction charges fund.

But since the close of the last consultation, it seems ministers have decided that a regional rather than national basis for calculating charges is preferable, and there is also doubt about the decision not to use the price review mechanism to fund industry costs.

The Agency paper complains of "significant delays" due to "changing opinion within DEFRA over PR04, unwillingness to allow release of the second consultation in the months leading up to the general election [and] the shift in position to support a regional approach."

"Most recently we have experienced three months of delay in confirming the DEFRA legal view of using PR09 to fund [relocating] damaging water company abstractions," the paper says.

The document also notes the consultations have cost the Agency £40,000 and amendments to its abstraction licensing database £150,000. Two staff have been working on the project for five years. The paper’s author, Agency director of water management David King, admitted: "There is frustration but there is a lot of money at stake and a lot of different stakeholders involved."

The delays mean that instead of being resolved over 2005-2010, unsustainable abstractions are continuing and are unlikely to end before the next review. The lack of progress is likely to jeopardise compliance with the habitats Directive which requires abstractions affecting designated sites to be reviewed by 2010.

Nevertheless, Mr King insists "so far the delays in funding have not really delayed our progress with the habitats Directive… but we need a decision pretty quickly."

The Agency now wants to see a decision in favour of using PR09 to fund changes to water industry abstractions. Using the price review mechanism is "the most efficient solution," said Mr King. "It allows a strategic decision and avoids the costs, uncertainty and drudgery of the statutory route."

If PR09 is to be used to fund the water industry’s contribution to abstraction reform, the Agency will then consult on the charging scheme to deal with remaining abstractions.

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