04 February 2019

On 15 January 2019, the Department for Environment Food & Rural Affairs (Defra) published a public consultation on its proposals to reform regulation of the water sector in England. The key objective of the proposed reforms is to modernise water regulation and empower the sector to respond more flexibly in the face of extreme weather conditions and other effects of climate change. Defra intends to do this primarily by allowing improved long-term planning of water resources and drainage to increase resilience to flood and drought.

Regulation of the water sector and abstraction

The water industry in England and Wales is regulated through the Office of Water Services (Ofwat). Ofwat is primarily responsible for setting the prices charged by water companies and has the ability to modify company's licence conditions, with the agreement of the company. If the company does not agree the amendment, Ofwat can refer the issue to the Competition and Markets Authority (CMA).

Water abstraction is regulated by the Environment Agency (EA) via the issue of abstraction licences. Abstraction is the process of taking water from any water source, such as a river or aquifer, for purposes such as irrigation or treatment to produce drinking water. Too much abstraction can harm the environment and ecological status of surface water and ground water. The current regime is over 50 years old: although it has been developed during its lifetime, ongoing older licences contain onerous restrictions and conditions, such as requiring the EA to pay compensation if it is required to restrict abstraction during periods of low water flows. As a result of these concerns, the Government has been consulting on various proposed reforms to the abstraction licence regime since 2013.

Further key players in the water industry are Internal Drainage Board (IDBs) which manage water levels and flood risk on behalf of local communities.

Water resource planning

Currently, under the Water Industry Act 1991, water companies are required to produce water resource management plans (WRMPs) on a five-yearly basis. WRMPs are required to show how the company intends to manage and develop water resources to meet supply and demand obligations over the next 25-year period.

Defra's view is that this has largely worked well as an approach; however more can be done to integrate and improve resource planning at a regional level. In particular, water transfers between water companies remain low and few strategic water schemes have been developed.

Although water companies have some legal responsibilities to ensure effective drainage and sewerage, there is currently no legal requirement to make any formal, long-term plans for management of waste water.

Proposed reforms

The consultation sets out Defra's proposals for reform, which fall under two broad categories.

Improving long-term planning for water resources and drainage, through:

  • Improving water resource planning to facilitate collaborative regional planning. This would involve giving the Secretary of State powers to direct water companies to prepare joint plans on a regional, or wider, scale; taking into account the needs of other water abstractors and the achievement of environmental objectives.
  • Creating a statutory obligation for water companies to prepare drainage and wastewater management plans on a five-yearly basis, similar to the existing WRMPs. This would require water companies to carry out assessments of wastewater network capacity and to develop collaborative solutions with local authorities, who are responsible for parts of the drainage system.

Modernising water regulation, through:

  • Reforming the abstraction licensing regime to link it to wider Government objectives for the water environment. In particular, this would involve:
    • Introducing and clarifying conditions under which the EA can amend licences to secure good ecological status for water bodies. This is due to Government concern that around 1,500 of the existing 13,000 abstraction licences are unsustainable and may have detrimental effects on the relevant water bodies and wider environment.
    • Increasing the circumstances in which abstraction licences can be varied or revoked to prevent environmental risk due to unsustainable abstraction, without compensation being payable.
    • Allowing underused abstraction licences to be varied, again without compensation being payable.
  • Amending existing legislation to enable a new charging methodology for IDBs to allow Government, where there is local support, to create new IDBs or expand existing IDBs.
  • Incorporating the Somerset Rivers Authority as a Flood Risk Management Authority and a major precepting authority to allow it to work more effectively with other organisations to protect residents and the local environment from flood risks. Precepting authorities are able to levy a charge on local tax payers through council tax or business rates, in the same way as local authorities, in order to provide services across a region.
  • Improving the process for modifying water company licence conditions, with the intention of bringing them in line with other utilities. This would involve giving greater powers to Ofwat to improve the way that water companies operate by removing the current right that water companies have to veto licence changes proposed by Ofwat. Rather than the current veto power, it is proposed that companies would have a right to appeal changes made by Ofwat to the CMA.

As part of the consultation, Defra is also seeking views in respect of new ways to raise funding to tackle flooding and coastal erosion in local areas.

The consultation is open for feedback until 12 March 2019.

How else is water regulation changing?

Changes across the water sector and beyond are anticipated in order to achieve the goals of the Government's 25 Year Environment Plan, published in January 2018. The Plan sets out the Government's ambitious target to "achieve clean and plentiful water by improving at least three quarters of our waters to be close to their natural state as soon as is practicable".

Defra reports that a number of water resource management initiatives are in progress to work towards this goal, including:

  • the EA has recently consulted on the approach to the next round of river basin management plans;
  • the Government is investing £2.6 billion between 2015 and 2021 in flood and coastal defence projects;
  • water companies are reportedly planning to invest £50 billion over the next five years to improve water quality and increase flood and drought resilience; and
  • Defra is also currently consulting on its draft National Policy Statement for Water Resources Infrastructure, which aims to provide a framework for decision making on applications for Nationally Significant Infrastructure Projects (or "NSIPS") for water resources in England. See our thoughts on this here.

How can Burges Salmon help?

Burges Salmon regularly advises clients on all aspects of environment and water law and advises multiple clients in the water sector. These issues cut across all of these areas and we are well-positioned to advise on these changes, the impact they will have and to assist with drafting consultation responses. For further information please contact Michael Barlow or your usual Burges Salmon contact.

Key contact

Michael Barlow

Michael Barlow Partner

  • Head of Environment
  • Head of Water
  • Head of ESG

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