Consultation outcome

Charge proposals: Kielder Reservoir and transfer scheme: response document

Updated 24 May 2024

1. Introduction

Kielder Reservoir and transfer scheme provides water to support stretches of the Tyne, Wear, and Tees. A total of 8 abstraction licences benefit from the supported sources and these are held by 2 companies.

The reservoir and transfer scheme is owned and operated by Northumbrian Water Limited. The Kielder supported source supplementary charge income pays Northumbrian Water Limited the costs of this scheme, including our regulatory and oversight costs. The consultation set out the proposed Kielder supported source supplementary charges for the next 3 years:

• year 2024 to 2025
• year 2025 to 2026
• year 2026 to 2027

These proposals were based on our best projections for the total costs for each of these 3 years.

2. How we ran the consultation

The consultation ran for 5 weeks, from 25 January to 29 February 2024.

We ran the consultation in line with our legal requirements to consult following the Cabinet Office’s consultation principles and after approval from the Secretary of State for Environment, Food and Rural Affairs.

The consultation was published on GOV.UK. We contacted the 2 companies before commencing the consultation and notified them when the consultation was launched.

During the consultation period we held several direct meetings to discuss our proposals with the 2 companies. We explained the costs we will have to cover over the next 3 years, together with recovering the debt that has accumulated since the last charge setting process in 2020.

We received 2 responses in total from the 2 abstractors impacted by this consultation.

3. Summary of main findings and actions we will take

Both respondents supported the principle of recovering costs from those who benefit from the operation of the scheme. They had concerns over the:

• profiling of the charge increases
• scale of the increases
• impacts on business

3.1 Summary of the responses

One respondent had concerns about the profiling of the charges increases. As we proposed the deficit to be recovered in full in 2024 to 2025, they said this would add an additional £9 million pressure to the increases, and they would like to see this deficit recovery phased over 3 years.

One company also highlighted the separate charges consultation on water quality that was being consulted on at the same time. They indicated concern about the combined significant financial burden in 2024 to 2025 with both consultations being immediately before the 2024 to 2025 financial years.

One company did not consider that they benefit from major components of the transfer scheme.

They recognised there is some uncertainty in the projections for costs for the Kielder operating agreement and want to make sure that a process is in place to rebate or abate annual charges, where appropriate, to avoid overpayment.

The other company did not agree with the banded charge. Their view was charges should be based on actual abstraction volumes. They further highlighted that the rising costs of water and energy in the northeast compared to other countries, impacted the European and global competitiveness of their operations making capital investment more difficult.

3.2 Our response

The deficit on the Kielder operating agreement has risen substantially over the last 3 years. The rising costs have been met by reducing the investment in water resources activities which are funded by other charge payers across the country. The HM Treasury guidance in managing public money requires us to recover the costs of our activities from charge paying abstractors that we regulate, where the water management activities relate to this abstraction.

The Environment Agency is required to balance its accounts year on year. To phase the recovery of this deficit would mean other customers would see an extended reduced level of activities to pay for these phased costs. We require all other water resources charge payers to pay their costs in the year of operation. Offering a phased payment plan over many years would mean one customer is receiving preferential treatment on their charges. This would not be transparent and fair to all other charge payers.

The charges consultation on water quality is about a completely different set of regulated activities. So, although an operator may undertake both types of activity, the individual regulatory regime must cover its own costs and not cross subsidise.

Where projections for future years show we would over recover our charges we will consider abating those charges.

Our regulatory work and oversight of the Kielder operating agreement has been under resourced and underfunded for several years. Therefore the activity we did was limited to avoid passing these costs onto other water resources charge payers.

We have reviewed the resources we need to properly regulate and provide oversight on the Kielder operating agreement and have included those reasonable costs in our proposals. We will implement this agreement in full to provide the funding from 2024 to 2025 which is in line with the HM Treasury guidance in managing public money. 

We note the comments about the structure of the Kielder supported source charge, but it is not part of this consultation to review that structure.

We note the comments made about the level of charges for the Kielder transfer scheme, and the potential impacts on the company’s competitive position.

We will introduce the charges as consulted on to provide the funding for the work we need to do to regulate the Kielder Reservoir and transfer scheme under the Kielder operating agreement and to recover the deficit.

4. Next steps

We have considered the feedback to the consultation and included this in our submission to ministers on the proposals to increase the Kielder supported sources supplementary charges for the next 3 years.

Our proposals were approved by ministers in the Department for Environment, Food and Rural Affairs before implementation on 1 April 2024.

Due to the pre-election period, we were unable to formally publish this document until after the local elections. On 27 March 2024, we wrote to the 2 respondents advising them of the submission to ministers and our intention to implement the proposed charges.

5. List of organisations or groups responding

Northumbrian Water Ltd

Essity Ltd