Review of the water abstraction charges scheme Water UK

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Review of the water abstraction charges scheme Water UK Powered By Docstoc
					                                                                    Water UK
                                                                   March 2004



Water UK response to
Review of the water abstraction charges scheme

    1. Introduction
Water UK represents the UK water industry. We welcome the
opportunity to comment on the Environment Agency’s proposals.

Abstraction licensing in England and Wales is essential to protect the
rights of abstractors and to protect the natural environment from the
potentially harmful effects of abstraction. Water UK supports the concept
of licensing and we support the aims of this consultation developing a
nationally consistent approach, which reflects environmental sensitivity,
takes account of the purpose of water use and looks at the cost of
replacement water. However, we have a number of concerns about the
wording and conceptual approach being suggested.

    2. Key points

2.1 Environment Agency Efficiency

     There is a fundamental issue over value for money. Water
      customers pay the majority of the cost of abstraction licensing and
      it is concerning that the Environment Agency does not state its
      commitment to reducing the level of charges though efficiency
      savings.
     There is wide variation in abstraction charges and the Environment
      Agency should look at benchmarking performance between regions
      with the aim of streamlining the process and reducing costs.
      Benchmarking could include the length of time for processing and
      the unit cost.
     Deregulation of 16% of licenses with only a 1% reduction in
      revenue should lead to increased efficiency and cost savings should
      be passed on to other abstractors.

2.2 Clear Environmental Objectives

     The Environment Agency seems to be taking action against non-
      time-limited licenses irrespective of their environmental impact,
      this seems arbitrary. Non-time-limited licenses are held in good
      faith by abstractors, they are not illegal and are valuable business
      assets; there is no justification for this action.


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                                                                   March 2004

     With regard to compensation, as a matter of principle, this should
      be met through grant-in-aid to the Environment Agency at the
      national level and not recovered from abstractors. If abstractors are
      not causing damage to the environment we do not believe they
      should be responsible for paying compensation to other abstractors,
      this would be at odds with the ‘Polluter Pays Principle’ and the full
      cost recovery objectives of the Water Framework Directive.

2.3 Transparency

     There must be transparency in Environment Agency's regional
      costs and in the way:
      - regional or national Standard Unit Charges (SUCs) are set
      - losses are determined
      - environmental harm is assessed
      - licenses are chosen for revocation
     All abstraction should be metered to ensure equity of cost
      allocation, if there is not full metering how can the impact of water
      supply abstraction be measured.
     There must be a clear justification why the water industry and its
      customers pay 90% of the abstraction charges.

2.4 Payment by water industry

     The statement that an 'alternative funding source' (p3 and p14 in
      Section 4.2.2) exists through the AMP process is concerning. Why
      should the water industry and its customers contribute to the
      compensation of other abstractors (£309m) while also fully funding
      the cost of the change to its own licenses (£436m). There needs to
      be transparency over how compensation for loss of licenses is
      funded.
     Reductions in expenditure referred to in the consultation only relate
      to Environment Agency expenditure and not expenditure made by
      other groups of customers, such as water customers. The
      Environment Agency should address an holistic view of costs and
      not just those aspects of costs that relate specifically to their own
      activities.

2.5 Compensation

     The assumptions made on both the value of replacement water and
      the absence of assessment of availability of replacement is
      fundamentally flawed. The price payable in compensation should
      be directly aligned with the cost of replacement with the next
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                                                                   March 2004

      available resource and therefore regional compensation cost
      estimates should have been based on the next available scheme
      costs for the region under consideration.
     It is disappointing, bearing in mind the Agency’s support of
      demand management measures, that the unit cost for demand
      management schemes has not been used, or reflected in the price of
      water used.
     The use of £1.5 million per megalitre is an underestimate for areas
      of water scarcity as it only represents the replacement of a water
      resource scheme and does not allow for additional costs associated
      with water stressed areas or polluted waters or, demand
      management measures such as water efficiency schemes.
     It is unclear why there will be an additional cost of £20 million for
      site investigation. We do not see these costs differently from
      current Agency activities when investigating environmental
      impacts on abstraction.

    3. Specific responses

CSR1 Do you agree with our proposal to retain regional SUCS or do you
feel that the benefits of moving to a single England and Wales SUC
outweigh the difficulties that might be involved.

Whilst local circumstances would be expected to give rise to regional
variability, we note that there is a very wide variability in charges.
Therefore it is clear that there are opportunities for efficiency savings in
the SUC. We would expect the Environment Agency to use this
opportunity to assess cost savings and reduce the overall charges. In
particular the deregulation of 8,000 licences should generate savings at
they provide only 1% of the income but constitute over 16% of the total
number of licences, this reduction in workload for a small loss of revenue
should enable price reductions for other abstractors.

There are a range of views on regional versus national SUCs. On balance
Water UK would like to see the regional structure maintained, with the
Environment Agency making efforts to reduce higher charges in order to
reduce the variability.


CSR2 Is it reasonable for water companies to contribute towards the
costs of compensation in other sectors if changes to water company
licences are funded through AMP4 or should these costs be met by
abstractors in other sectors.

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                                                                    March 2004

In principle we believe that compensation should be met through grant-
in-aid to the Environment Agency and not recovered from abstractors.
Expecting abstractors who are not causing environmental damage to pay
compensation is unjust.

However, if compensation is recovered from abstractors, it is not
reasonable for water companies to contribute towards the cost of
compensation in other sectors, as this would distort the value of the
impacts on the environment of current water abstraction licence holders.
Individual sectors should meet the cost of their impacts.

We are concerned that the consultation assumes that an alternative cost
recovery mechanism is available under the AMP4 process, without
recognising that this money comes from water customers. This situation
is exacerbated by the proposal that water companies should also bear 90%
of all other compensation costs, even though their activities do not cause
those impacts. As indicated above we consider this proposal to be entirely
unreasonable.

CSR3 We would welcome any views that consultees may have on the
potential use of reverse auctions for recovering unsustainable abstraction
licences.

The use of complex and sophisticated approaches to compensation would
not be necessary if funding was provided through grant-in-aid to the
Environment Agency.

In our view the use of reverse auctions, such as a “second lowest price
sealed bid” process, for recovering unsustainable abstraction licences can
be helpful although there remain issues, such as compensation for
stranded assets, that can arise from such mechanisms. The principle also
assumes common carriage is fully operable and while in principle the
rules for this are established, they are not yet common in operation.

CSR4 Do you think the proposed mechanism for calculating the
Environmental Improvement Unit Charge (excluding supported source
charge but including the tidal factor) is the most effective way of
recovering compensation? We would welcome alternative mechanisms

The proposed mechanism for calculating the environmental improvement
unit charge is reasonable as it creates a differential proportional to impact.
However, it may not create an incentive to optimise abstraction, as the
differential is unlikely to create significant price elasticity.


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                                                                     March 2004

CSR5 Would it be better to recover compensation for England and Wales
jointly or separately? If we recover compensation separately should this
be based on the Welsh political boundary or the boundary of the English
Regions and Environment Agency Wales?

This section only deals with non water company compensation charges
recovery, it does not appear to address the scale of ongoing abstractor
operating costs that would be incurred as the result of changes in
operation and therefore does not fully describe the impact of costs on
water customers.
In specific response to CSR5, we would expect compensation for England
and Wales to be dealt with separately following the principle of regional
recovery. In our opinion this mechanism is also compatible with the
principles being pursued under the CAMS mechanism and indeed is
therefore compatible with the Water Framework Directive.

This section also explores cost recovery by type of water use which, in
our opinion, is essential if markets are to properly account for the impact
of their activities on the environment. Spreading the recovery of
compensation costs across sectors would distort market forces and the
charging mechanism should not be used to compensate for deficiencies in
funding regimes such as the Common Agricultural Policy or the
dominance of supermarkets within the farming community or other
market distortions. We do not agree that it is unreasonable for specific
sectors to carry the burden of their own compensation and therefore do
not agree with the Agency’s proposals that sectoral charging is
unreasonable. There is no specific question allowed for in the
consultation document for this issue, although this was discussed at the
workshop in February.

CSR6 What do you think the likely effectiveness of a time-limiting factor
and what will influence the effectiveness of such a factor?

We note that the Environment Agency believes that the introduction of
time limiting of licences would allow for greater flexibility in the face of
changing environmental expectations. However, it should be emphasised
that this is flexibility from the Agency’s perspective and an improvement
in flexibility for the Agency carries with it the corollary of a reduction in
flexibility for other parties and therefore additional costs arising from that
reduction in flexibility. This may have impacts on reductions in water
company security of supply and accordingly increases in investment in
order to allow for a greater margin of headroom within water resources
plans. The Agency should consider the full range of costs that would arise
from introduction of such time limiting factors and not just consider the
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                                                                    March 2004

benefits arising for the Agency. In principle, any change to time limiting
carries with it an increase in risk on the part of the abstractor, which
would increase charges and costs to their customers in turn.

There is an issue of principle relating to the introduction of additional
charges for all non-time-limited abstractions, as many of these licences
will not be causing environmental damage and introducing an additional
charge on abstractors simply for issues of convenience is unjust.

CSR7 The Agency would welcome
  a. the views of abstractors on whether they would respond to the
     incentive of a time-limiting factor and
  b. the views of all consultees on whether a ‘reduction’ factor should
     be applied to time-limited licences or a ‘premium’ factor applied to
     non-time-limited licences.

Any differential introduced by the Agency under these proposals is
unlikely to generate a material response, as the increases in costs for
abstractors are likely to significantly outweigh the reduction in the
charges offered.


CSR8 What do you think about the potential for introducing a stress
factor and our proposal that this should be considered in the light of
further research? Suggestions of alternative mechanisms or ways to
overcome some of the practical issues are welcomed.

The concept of environmentally stressed areas must be considered
alongside the water stressed area concept for water companies. This link
is not clear in the consultation.

We support the concept of relating the assessment of an incentive charge
with the outcome of the CAMS process and also therefore that more work
is required looking at the outcome from the CAMS cycle before such
charge incentives could be introduced. Once again, of course, any
proposal should examine the scale of costs that are likely to be incurred
by abstractors in order to assess the scale of differential that would be
required in order to overcome those costs.

CSR9 What do you think about the potential for introducing incentives to
achieve the three objectives outlined in this section? Do you have
suggestions on alternative incentives and possible mechanisms for
achieving them?


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                                                                   March 2004

Looks at other incentives and, in particular, one to encourage the use of
poor quality water.

This is a very important factor, which should be given more attention in
the proposed charges mechanism. This is particularly significant in the
South-East, where water resources are stressed and yet resources are
being sterilised through pollution issues. This mechanism should
encourage abstractors to explore alternative uses of poorer quality water
and to invest in the additional treatment required to deal with it.

This is of particular importance to groundwater where otherwise polluted
sources may remain untreated for many years. If we look at the
implications of the new Groundwater Directive and the Water Framework
Directive it is key that such a mechanism is introduced if, as a nation, we
are to achieve the good status for groundwater anticipated by those
directives.

We recognise the opportunity for encouraging licences relating to hands
off flow or hands off level conditions plus to increase the likelihood of
water rights trading. However, mechanisms for introducing such
incentives are not clear and require further study.

These actions need to be fully integrated with the CAMS process and the
Environment Agency needs to focus more attention on the links between
quality and quantity.

CSR10 Suggestions of alternative charging mechanisms to encourage
abstraction to take place in winter rather than summer are invited.

All incentive charging should be considered in the light of the costs to be
incurred by abstractors in order to be able to respond to those incentives.
In the absence of such a consideration it is not possible to ascertain the
impact of such incentive charging schemes and in our view these are not
likely to be successful in generating change in abstraction patterns.

The main driver to encourage winter rather than summer abstraction is to
fund farmers to build winter storage reservoirs.

CSR11 Comments are invited on whether existing loss factors accurately
reflect the net environmental effect of abstractions and, if appropriate,
how this might be improved.

In our view loss factors such as those proposed would relate to a specific
site by site charge mechanism. We would consider this appropriate in
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                                                                    March 2004

order to ensure that the real cost of impact of any particular abstraction is
borne by that party causing the impact. Nevertheless, this introduces the
possibility of a very complex, detailed and bureaucratic charging
mechanism which we do not consider would be appropriate in the future.

CSR12 Comments are invited as to how different approaches to actual
volume charging could be taken in different geographical areas.

The document suggests that actual volume charging would be
significantly hindered by the absence of measurement of abstraction in
many cases and the costs arising for correcting this. In our view this is
unacceptable. The water industry has invested significantly over the years
in order to ensure its abstraction volumes are properly monitored and
measured and we would expect more abstractors to be subject to the same
controls which would enable actual volume charging to be implemented.
Should this be introduced we would expect to see charges relating to the
impacts at a regional level. However, we do not consider that actual
volume charging would create an incentive to reduce abstraction. In
practice, there would be a shift from the charges paid in proportion to
licensed volumes to charges in proportion to actual volume and whilst
this is a marginal improvement as it adheres to the principle that costs are
directly proportional to impact we are not satisfied that the additional
costs and the management that would be required outweigh the benefits.
Accordingly our conclusion is that charges should remain on a licensed
abstraction basis.

CSR13 Views are invited on the potential for moving from charging on
the basis of licensed volume to actual volume charging and our proposal
that this should be considered in the light of progress in the time-limiting
process. Suggestions of alternative mechanisms or ways to overcome
some of the practical issues are welcomed.

In addition, payment on the basis of licence does currently have the
benefit on the incentive to persuade those holding currently but not using
licences to dispose of them, i.e. they incur a cost for hanging on to a
licence they no longer need. The benefits of paying the annual licence
charge is of course offset in particular when considering potential value
under the Agency’s previous proposals for incentivising trading. It should
be borne in mind that the Agency does have existing powers to revoke
unused licences.

CSR14 Comments are invited on the charging proposals for temporary
and transfer licences.


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                                                                  March 2004

The charging proposals for temporary and transfer licences are helpful in
introducing flexibility for operational purposes and indeed we would see
this as advantageous, for example when dealing with response to
pollution events where temporary licensing arrangements would assist in
maintaining security of supply.

CSR15 Do you agree that no annual charge should be applied to transfer
licences but that full licences for the purposes of transfer should be
charged?

We agree no annual charge should be applied to transfer licences but that
full licences, for the purposes of transfer of water, should be charged.

CSR16 What do you think of the loss factors proposed for these currently
unlicensed purposes?

We have no objection to the proposals for loss factors for currently
unlicensed purposes.

CR17 Your views are sought on the loss factor that is proposed for trickle
irrigation.

We have no objections to the proposals for introducing charges on trickle
irrigation.

CSR18 Should trickle irrigation be incentivised and if so, how might this
be achieved?

We have no objections to the proposals for introducing charges on trickle
irrigation.

CSR19 Should two-part tariff charging be extended to trickle irrigation
and, if so, should this be subject to the extension of emergency variation
of licences to trickle irrigation? The Agency would welcome evidence on
whether the difficulty in predicting demands also applies to trickle
irrigation.

We have no objection to two-part charging being extended to trickle
irrigation.

CSR20 What do you think of the proposal not to phase in charges for
newly regulated purposes, but to introduce charges from the end of the
three year period for the determination of applications?


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We agree with the Agency’s proposals to introduce charges at the end of
the 3-year period of determination of applications, as this would give
enough notice for abstractors to amend their operations in light of the 2-
year period they have already received.

CSR21 We would welcome views on the proposed options and the impact
that the agreement with BW is likely to have on the water supply market.

We are of the opinion that British Waterways should be treated equitably
with any other abstractor when operating in the commercial sector. This
is the underlying principle under competition legislation.




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