Member Article

Pressure for change is building in the water sector. The industry is one of the country's largest energy users (it takes a lot of power to move and clean water) and reducing that use is an important step in meeting climate related targets. Concerns about the affordability of charges for some customers are increasing whilst European legislation is driving environmental standards up, protecting our vital resources but demanding ever increasing spending to do it. Successful as it has been, there are also concerns about diminishing returns from the traditional comparative regulatory model and, of course, some parts of the country are experiencing apparently unusual levels of drought whilst others flood.

You may therefore have noticed the multiplying number of studies, reviews and strategy documents being prepared. Questions are being asked about how the industry can do better and the Coalition Government is expected to produce a White Paper in the summer of 2011 that will provide the basis for new legislation and a refresh of the industry.

In England and Wales, one of the many areas being considered for reform is the water abstraction and licence-trading regime. The current regime is essentially focused on the environmental impact of abstracting water The whole regulatory model looks at the costs of the operations and assets needed to deliver clean water to customers and safely dispose of dirty water, but does not attempt to place a value on the water. The Scottish regime is similar but suggestions for reform are not yet as advanced.

Ofwat and the Environment Agency have worked together for a number of years to identify ways in which the existing facility to trade water abstraction licences could be improved so as to encourage more trading as a proxy route to discovering at least a notional value of water. In turn, it is hoped, water companies will be able to make more efficient decisions about how to source and transport the water and customers will be given better information, including through differentiated charges in some instances, to help them use water more effectively overall.

It is also hoped that the facility for water users and companies to buy and sell the right to abstract water will create differences in price that will pull abstraction towards areas of high water availability / low water price and away, as much as possible, from areas of low water availability / high price. This could help mitigate the impact of over licensing in some areas and help 'smooth' the use of the nation's resources overall.

Naturally any reforms in this area, including new legislation, should be seen as part of a suite of measures and are unlikely to work on their own. For example, reforms to the basis on which companies can charge for use of their pipes will be important if would be water traders are able to move the water about once it has been abstracted.

It is also important to remember that the highly geared water companies have been operating under the existing regime for a long time and together hold 40% of the abstraction rights by volume. Any changes that threaten to significantly reduce the value of those licences, even if they provide a route to greater liquidity, are likely to be strongly resisted and so changes are unlikely to be immediately radical. Nonetheless, Australia introduced water trading across four of its states and has reported a $220m economic benefit as a result. Agencies such as Ofwat and the Environment Agency are more clearly articulating and exploring the positive opportunities reforms present and some of the water companies themselves are taking the initiative and looking to be more active in this area. Speculation as to the value of a barrel of water may therefore not be too far away.