UK Government Releases Water Resources Reform Proposal: Water for Life

The UK Department for Environment, Food and Rural Affairs (Defra) has released a new reform proposal for water resources, entitled Water for Life. While we generally think of the UK as a relatively wet place, Defra identified a number of water challenges facing the nation, including over-abstraction from rivers and groundwater basins, point and diffuse source pollution, projected future population growth and climate change. Water for Life collects a number of more specific reform proposals to form an integrated national water policy for approximately the next 20 years.

For the majority of my readers who are based in the US, some background may be helpful. The UK water utility industry was reorganized in 1989 with the privatization–or, as they would say, privatisation–of all retail water and sewerage services. Water and sewerage services are divided among 34 private companies, each of which has a monopoly within its own service area. Environmental and water resource regulations are overseen by the Environment Agency, while the Water Services Regulation Agency (Ofwat) governs economic issues such as capital investments, customer fees and competition. Despite the fears of many in the US regarding water services privatization, the UK experiment has largely been successful.

In order to address identified challenges, Defra proposes a number of water resource reforms, which would be implemented through new legislation and regulatory agency action. Large-scale goals include protecting and restoring the environment, increasing resiliency of the water utility sector through efficiency and innovation, ensuring that water is affordable to all citizens and appropriately valued, and enabling economic growth.

Regarding over-abstraction from water sources, the government proposes to modify the existing system of abstraction licenses created in the 1960s to create greater certainty in light of future changes to water resource availability, protect in-stream flows and incentivize efficient water use. Examples of specific policy reforms include:

  • Varying water abstractions based on the volume available at the given time rather than a fixed volume;
  • Issuing abstraction licenses to approximately 30,000 currently exempt abstractors;
  • Holding reverse auctions to buy back licenses in over-subscribed catchments;
  • Invoking a power in the Water Act 2003 to limit abstractions that cause serious damage to rivers without compensation;
  • Improving connections between water systems;
  • Removing barriers to bulk water transfers;
  • Increasing abstraction charges to better reflect scarcity of water resources;
  • Better connecting water resource planning and Ofwat economic regulation, including price review; and
  • Requiring water companies and businesses that rely on water abstractions to better manage risks of reduced water availability with a long-term perspective.

These actions will be undertaken at the catchment level, and specific solutions will be based in part on experience gained through pilot projects in the Restoring Sustainable Abstraction (RSA) program administered by the Environment Agency.

Of particular interest to me, having just come from a December 12-13, 2011 meeting of the Western Governors’ Association and Western States Water Council on innovative water transfers, is the proposal to increase use of water markets for bulk water transfers. The UK government noted the advantages of markets to coordinate supply deficit solutions across basins, allow businesses to obtain new or expanded water supplies without the issuance of new abstraction licenses, promote efficient use of water and encourage abstractors to invest for climate change adaptation sooner rather than later. The initial stage of water transfers will be limited due to the perception of relatively high expense and carbon emissions to transport water over long distances, but may be expanded in future as envisioned in the Assessment of regulatory barriers and constraints to effective interconnectivity of water supplies (Defra, 2010) and Exploring views on the potential for more active water rights trading (Synovate UK, 2008). Defra plans to work with Ofwat, the Environment Agency and water companies to remove barriers to water transfers, particularly through the use of economic incentives. The Environment Agency started these efforts by publishing new rules for water rights trading in October 2011.

Regarding water use efficiency, Defra proposed to encourage household water use reduction measures, such as use of rain barrels, efficient appliances and leak reduction. Water companies will be required to conduct a thorough review of water use efficiency improvements as part of their water resource management plans every six years. Interestingly, Defra does not support blanket use of water meters at the individual customer level, instead looking to regional differences as to whether metering is appropriate. In England and Wales, only 37 percent of households pay for water according to usage; the remainder pay for water and sewerage services based on the value of their homes. Use of meters is increasing, particularly in water-stressed South East England, and Ofwat has established a Smart Metering Advisory Group. Defra is looking at additional ways of conserving water by non-water companies, especially in energy generation, agriculture and the public sector.

Defra noted that water companies have an important, but not singular, role to play in resource management. Responsibilities also lie with government agencies, businesses and individual citizens. The government expressed concern about the impact of proposed reforms on affordability of water and sewerage fees, especially for low-income customers. The water companies will be encouraged to develop “social tariffs” targeted at vulnerable customers, and Defra proposed national-level subsidies to South West Water to deal with uniquely high rates facing customers of that company based on need to develop infrastructure more fully in recent years.

Finally, Defra plans to look at ways to increase competition between retail water companies for non-household customers. Current rules limit the market to a few large customers, which has resulted in few market entrants in England. This is in contrast to the situation in Scotland, where an alternative regulatory regime has led to 42 percent of eligible customers switching or renegotiating their water supplies, with significant attendant cost savings. This proposal follows the recommendation of the Cave Review released earlier this month and, as might be expected, is very controversial among the water companies and business customers. It will be interesting to see if the UK can experiment with retail water competition in a way that provides lessons (or warnings) for other jurisdictions.

Specific reform proposals from Water for Life will be developed with consideration of linked policy objectives such as food security, energy security, climate change mitigation and international competitiveness. Defra has promised a public process, including formation of a national advisory group of key stakeholder representatives in 2012. New legislation is scheduled to be introduced in 2013, with many reforms being implemented on a river basin level, starting with those under the most stress and finishing by the mid to late 2020s.

The Defra report proposes many policy reforms in the right direction, but as with many reforms, there can be a significant distinction between the direction and magnitude of the reform vector. I am struck by the significant gap between Defra’s aggressive policy goals and the list of specific actions that will be taken to achieve them. As seen in the 1989 reforms and more recent austerity actions, however, the UK seems politically willing to make needed reforms. That is one way in which the UK is ahead of the US, which seems to be stuck with little will to respond to our water resource, infrastructure and economic challenges.

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