(10 years, 1 month ago)
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Baroness Anelay of St Johns (Con)
My Lords, I have it in command from Her Majesty the Queen to acquaint the House that Her Majesty, having been informed of the purport of the Water Bill, has consented to place Her interests, so far as they are affected by the Bill, at the disposal of Parliament for the purposes of the Bill.
Amendment 1
Lord De Mauley
“Chapter 3ARetail exit: non-household premisesRetail exit: non-household premises
(1) The Secretary of State may by regulations (“exit regulations”)—
(a) make provision for a relevant undertaker whose area is wholly or mainly in England to apply to withdraw from the non-household retail market in relation to that area;(b) make provision about the determination of an application under paragraph (a) (an “exit application”),(c) make provision for and in connection with the transfer of so much of a relevant undertaker’s undertaking as relates to the non-household retail market to an eligible licensee or licensees, and(d) make provision about the operation of the water industry in relation to an area in respect of which an exit application has been granted (a “retail exit area”).(2) Provision under subsection (1)(a) may require a company that is a water undertaker and a sewerage undertaker to make an exit application that relates both to its functions as a water undertaker and to its functions as a sewerage undertaker, subject to such exceptions as exit regulations may specify.
(3) Exit regulations may include provision for protecting customers affected by a relevant undertaker’s withdrawal from the non-household retail market.
(4) For the purposes of this Chapter—
(a) a reference to a water undertaker withdrawing from the non-household retail market in relation to an area is a reference to a water undertaker ceasing, in relation to that area, to exercise such functions relating to the supply of water to non-household premises as are specified in exit regulations, and(b) a reference to a sewerage undertaker withdrawing from the non-household retail market in relation to an area is a reference to a sewerage undertaker ceasing, in relation to that area, to exercise such functions relating to the provision of sewerage services in respect of non-household premises (including trade effluent functions) as are specified in exit regulations;and a reference to the non-household retail market is to be construed accordingly.(5) Exit regulations may—
(a) prohibit a water undertaker from exercising, in relation to a retail exit area, such functions relating to the supply of water to non-household premises as are specified in the regulations;(b) prohibit a sewerage undertaker from exercising, in relation to a retail exit area, such functions relating to the provision of sewerage services in respect of non-household premises (including trade effluent functions) as are specified in the regulations.”
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, government Amendments 1 to 12 and 18 address the subject of retail exits. The question of whether an incumbent water company should be able to exit the market for retail services to non-household customers has been discussed at all stages of the passage of the Bill through your Lordships’ House and another place. Most recently, it was raised in debate on amendments tabled by my noble friend Lord Moynihan and the noble Lords, Lord Whitty and Lord Grantchester, at Report.
Having listened extremely carefully to the thoughtful and well informed contributions to the debate on retail exits, I undertook to consider the matter further, with the aim of bringing back government amendments to respond to the views of the House. The proposed new clauses are intended to do just that.
The attached provisions reflect the key policy objectives of the previous amendments on this subject. They offer incumbent water companies the option to exit voluntarily from the non-household retail market, subject to the consent of the Secretary of State. I said before that this was not a simple matter, and indeed it is not. Enabling exit will require a number of changes to the Water Industry Act 1991—for example, to address issues around the incumbent’s duties to supply and other statutory obligations to customers.
In making this commitment, I put on the record that the only practical way of delivering this objective would be to take wide-ranging powers, and that is what the amendments seek to deliver. Although the enabling powers are, of necessity, broad, we have sought to provide as much detail of the nature of the changes to be made as possible. I recognise that your Lordships have limited time in which to undertake detailed scrutiny of these clauses. However, as I said, the broad policy has been widely discussed throughout the passage of this Bill.
Further work will be needed to consider the practical implications of exits and to develop the detailed policies that will underpin the use of these powers. Broad consultation will, therefore, be essential. Following these detailed discussions with all interested parties, there will be a further opportunity for parliamentary scrutiny under the affirmative procedure.
Several key policy issues about how an exit policy should be shaped and delivered are still to be resolved. For example, discussions in your Lordships’ House and elsewhere have mooted a number of different models for the transfer of customers from the exiting incumbent to a retail licensee. One model suggested is the transfer of customers to an associate licensee within the wider structure of a parent company. Others have suggested that incumbent companies which no longer wish to provide retail services may just want a simple route out of the retail market. Some have identified customers as an asset to be sold for profit, while others see them as a liability to be transferred. Ongoing dialogue with the industry, customers and others will be essential to inform the decisions about how exit will operate in practice. Our guiding principle must be to ensure that customers are protected and that they are no worse off as a result of the exit.
These provisions are therefore intended to provide government with the flexibility necessary to respond to the views of industry and its customers about the best way to deliver the new regulatory framework for the sector. They provide the Secretary of State with powers to put in place, through regulations, a framework which enables exits. This will entail a restructuring of the key provisions in the Water Industry Act 1991, the regulation of the industry and suppliers’ relationships with their customers.
The purpose of these provisions is to permit incumbent water or sewerage companies, with the consent of the Secretary of State, to stop providing any retail services to current or future non-household customers in their areas of appointment. The services will then be provided by one or more retail licensees. This is likely to lead to a consolidation of retail businesses. Exit will be irreversible and result in the incumbent divesting itself of some of its statutory supply duties in relation to non-household premises. However, incumbents will retain all their current responsibilities for household customers.
In summary therefore, these proposed new clauses enable the Secretary of State to make exit regulations, which would allow any incumbent water company whose area is wholly or mainly in England to apply to exit the non-household retail market for that area. The regulations may include grounds for refusing an exit application and provide for the transfer of customers to an eligible licensee. The regulations may also make provision for what happens in the area from which the company has exited after the exit has taken place. The powers make provision for the protection of both household and non-household customers affected by the exit.
Throughout the debates on this matter in both Houses, there has been a clear consensus that exit must be undertaken voluntarily. We have stated on a number of occasions that any suggestion that a provision could be used to force exit and drive legal separation of an incumbent’s retail and wholesale business risks undermining investor confidence in the sector. Amendments 7 and 9 ensure that the regulations can provide for important checks and balances as regards the conditions under which divestment and exit may, or may not, be required by the competition authorities.
We all agree that we must ensure that customers are protected. The regulations must ensure the protection of both those non-household customers that are subject to a transfer and the household customers who would remain with the incumbent. There is currently a range of statutory protections for customers in place. These are being reinforced by protections for the reformed competitive market in the Bill. For example, we are reforming the interim supply duty, or supplier of last resort, in Clauses 31 and 32. The statutory protections in the current retail market generally rest on the duties of the incumbent. These new provisions on retail exits are therefore required to enable regulations to rework the relevant statutory duties and obligations, in the event of a transfer of customers to a licensee. For example, we have provided for price regulation to be introduced for licensees, as well as regulation over the terms and conditions that they can offer to customers. We have provided for incumbent companies to be relieved of the interim supply duty, which currently requires them to serve customers when their previous supplier defaults. This role would then have to be taken up by the licensed market.
In addition, Amendments 1 to 12 and Amendment 18 enable the Secretary of State to make regulations which put in place safeguards requiring the exiting incumbent to take certain steps prior to making an application, such as, importantly, consulting its customers. The regulations may also set out the grounds on which such an application may be refused: for example, if the company could not demonstrate that exit was in the best interests of its customers. These provisions will enable us to put in place a stable and transparent framework within which exits can take place. I beg to move.
Lord Moynihan (Con)
My Lords, I am grateful to the Minister for providing a comprehensive solution to the issue of exit, for tabling these amendments and for his clear explanation of the Government’s intent. While the legislative drafting is more extensive than some of us had anticipated, these amendments achieve the desired effect of facilitating a clearer framework for competition. Additionally, the greater transparency on cost allocation that such a voluntary transfer mechanism brings will help to ensure that the incumbent companies are less able to adjust their cost allocations to the detriment of household customers.
This transparency is fundamental to effective economic regulation and the policing of effective markets. It will allow companies to organise their businesses in the way that they consider to be in the best interests of their shareholders and indeed their customers. Allowing exit to occur voluntarily, as confirmed by the Minister, will allow transfer mechanisms to enable more competitive third parties to enter the non-household water and sewerage retail market to the benefit of business customers, as has proved to be the case in Scotland. Above all, as demonstrated by both Oxera and Macquarie, exit will save customers unnecessary cost.
I am very grateful to the Government for confirming today that they will now consult fully on safeguards, consulting particularly with those who represent the interests of the customers, given that the powers granted through these amendments confirm the opportunity, not the obligation, for incumbent water and sewerage companies to propose transfer schemes to the Secretary of State for his consideration.
As tabled, the amendments place a considerable degree of power in the hands of Ministers, notably to adjust the powers and duties of key industry stakeholders, including Ofwat. While this could be problematic were the powers to be used to their full extent, I am confident from what the Minister has said that there is absolutely no intention to undermine the freedom of manoeuvre of the regulator.
With the clauses soon to be in the Bill, I hope, it will be important to enter into constructive discussion and engagement in order to consult widely and urgently to meet what I hope will be the reasonable deadline of market opening in 2017. I also agree with noble Lords who emphasised at an earlier stage that it is also very important to secure customer protection on retail exit.
I hope that the amendments will be welcomed on all sides of the House and by all those who have taken part in the debates over exit, with the request that the Government will give a firm and unequivocal commitment to using their new powers to facilitate efficient and orderly market entry and exit. If so, the benefits will be considerable for business customers. Once this House, in future legislation, has the opportunity to review the working of the market for business customers, I hope that it will not subsequently hesitate to move forward to deliver competition to the household sector as well.
Lord Haskel (Lab)
My Lords, has the Minister seen the report from the Delegated Powers and Regulatory Reform Committee? It is quite critical of these amendments. The committee found that the amendments were prepared in a hurry, and was particularly concerned that the procedure should have a strengthened affirmative procedure. I was not sure from the Minister’s introduction whether he was giving an undertaking that this would be so, or indeed whether he accepts this recommendation from the committee. The committee also found that the powers are conferred in rather permissive terms and, where regulations must make provision, the committee suggested that the regulations should be required to make provision. Again, I did not quite gather from the Minister’s introductory words whether he had taken these recommendations on board.
Baroness Parminter (LD)
I rise to speak to Amendment 13, which is in this group. It is tabled in my name and that of my noble friends Lady Bakewell of Hardington Mandeville and Lord Marks of Henley-on-Thames.
I think my views on retail exit are well known in this House. I am not in principle against it, but I have concerns that it is a complex issue and therefore one should not legislate in haste. The amendments the Government have introduced today, at this late stage, give broad-ranging powers to the Secretary of State to implement changes to allow voluntary retail exit from the non-household market. Given the nature of these powers and the need to get the details of retail exit right, I believe the fullest consultation and parliamentary scrutiny are required. Only this will ensure that retail exit is introduced in a way which delivers improvements in services to all customers.
The Delegated Powers and Regulatory Reform Committee argued yesterday that,
“the opportunity for discussion in Parliament of the extent of the powers and the manner in which they are likely to be exercised has been seriously curtailed”.
It went on to argue that,
“the powers to make exit regulations should require a strengthened affirmative procedure on their first exercise”,
and outlined what procedure it had in mind for that. I agree with the committee. My amendment does what it called for yesterday, which the Government sadly chose not to table.
Why is this important? It is because we need wide stakeholder engagement and strong parliamentary scrutiny to ensure that the real concerns about retail exit can be addressed and taken into account. It is because we need to make sure that retail exit proposals protect the rights of customers, both affected non-household customers and household customers who remain with incumbent providers who cannot divest them. Given that the retail exit is for business customers only, householders could be left with a water company that has signalled a lack of interest in providing customer services. We must ensure a good level of service for effectively stranded customers. As it stands, water companies take ownership of the provision of clean drinking water from source to tap and plan with their customers to deliver that efficiently and safely. Aggregating water retail apart from water provision means we will not necessarily have water providers working with retailers to help customers manage water efficiently. Major water-saving initiatives have been driven by robust planning by water companies which know the supply constraints and want to work with customers through their retail operation to manage that supply for the long term. We need to ensure retail exit is not done in such a way as to hinder that incredibly valuable objective.
Let us also not forget that there is no consensus in the water industry that retail exit is the best way forward, as Water UK makes clear. Indeed, the only vocal advocate among water companies is Thames Water, or more precisely Macquarie, which is one of Thames Water’s major investors. The paper it produced is about selling off customers to extract maximum value for its investors. That blatant self-interest is in stark contrast to the needs of those investing in the industry for the long term. They want stability in the sense of predictability, no surprises and carefully thought-through, outcome-based, long-term logic. We need to ensure that retail exit is done in such a way as not to unsettle the wider investment community whose investment we need to deliver long-term water resilience.
The Government’s amendments show that they are alive to these concerns. For example, they propose a requirement to consult customers prior to an application to exit, and an application can be refused on the grounds that it is not in the interest of household or non-household customers. Equally, the Government are proposing further dialogue with the industry, regulators, customers and others in advance of laying a proposed regulatory framework before Parliament, and a consultation is proposed later this year. This is all welcome, but it does not go far enough. We need a process with full consultation and then the opportunity for Parliament to scrutinise any draft proposals before regulations are put to the House, at which point they cannot be amended.
My amendment would deliver what the Delegated Powers Committee asked for and ensure that any proposed framework for non-household retail exit receives the widest consultation and full parliamentary scrutiny. That way we can be sure that retail exit improves customer service, gives investors confidence and delivers the long-term water resilience we need.
Lord Marks of Henley-on-Thames (LD)
My Lords, I support Amendment 13, which was spoken to by my noble friend Lady Parminter and to which I have added my name. I do so as a member of the Delegated Powers and Regulatory Reform Committee of which the noble Lord, Lord Haskel, who has already spoken, is also a member—other members are in their places today—to explain why that committee takes the strong view that a strengthened procedure, often called the super-affirmative resolution procedure, is important, at least on first exercise in the case of these regulations.
The context in which these amendments fall to be considered is that they are a wide-ranging set of amendments which represent a radical change of direction in the Bill. The Bill itself introduces considerable change in the way that the water industry operates, that industry being of great importance to the UK economy as a whole and to individuals. Although these amendments on retail exit are concerned with non-household supplies, as my noble friend has already stated, they are nevertheless of wide public importance.
The noble Lords, Lord De Mauley and Lord Moynihan, and my noble friend Lady Parminter have all explained the political context and impact of these amendments. I will confine what I say to the three reasons why a strengthened procedure is so important. First, there has been very limited time for the consideration of this scheme as a whole, as the noble Lord, Lord De Mauley, frankly recognised. The amendments are introduced in this House at Third Reading in response to amendments introduced earlier, notably by the noble Lords, Lord Moynihan, Lord Whitty and Lord Grantchester. However, in legislative terms, the amendments come, in this House at least, not even at the 11th hour: it is a minute to midnight. It is not, I suggest, satisfactory, and it is certainly not desirable, for nearly 11 pages of amendments to be introduced at such a late stage in the passage of the Bill without the time for lengthy and informed scrutiny of the detail of the proposed scheme. The amendments are complex and demand detailed scrutiny after all interested parties have had ample opportunity to consider them and to comment on them. The timing of their introduction has simply not permitted this to happen and the use of a simple affirmative procedure, as is proposed, would be likely to lead to a draft set of exit regulations being laid before Parliament for approval in unamendable form.
Secondly, quite regardless of the issue of timing, this is, I suggest, a case for a super-affirmative procedure in any event. The amendments would introduce into the Bill the power to make regulations which would effectively amount to an entire new legal framework to enable relevant undertakers to withdraw from the new market arrangements. If those provisions become part of the Bill without a super-affirmative procedure, then Parliament will have, as your Lordships well know, no opportunity to consider and report on the individual details of the proposed regulations and, in practical terms, no opportunity to invite detailed revision of their provisions. With the super-affirmative procedure set out in our amendment, there will be an opportunity for a committee of either House to consider the draft regulations in detail and to recommend changes to the draft for the Secretary of State to consider. The procedure proposed is similar to that in Section 102 of the Local Transport Act 2008, which the Delegated Powers and Regulatory Reform Committee recommended as a model. There is no rush to introduce these exit regulations, particularly not when they are potentially of such importance. They should not be the subject of delegated legislation without a full opportunity for Parliament to consider their detail.
Thirdly—this was touched on by the noble Lord, Lord Haskel—our committee was extremely concerned by the degree to which the amendments establish, not a list of requirements to which the Secretary of State must adhere in presenting the regulations, but a menu from which he can largely pick and choose at will. I have no objection to the fact that the power to make regulations in the first place, in subsection (1)(a) of the new clause proposed in Amendment 1, is permissive and not mandatory. It may be that the Secretary of State decides against exercising the power to make such regulations at all, although that is of course unlikely. However, if he makes such regulations, it is surely right that he should be required to incorporate all the safeguards of which the noble Lord, Lord De Mauley, spoke, which are essential to protect customers, to ensure proper consultation with interested parties, to safeguard the public interest and to secure appropriate parliamentary scrutiny. Yet the amendments as drafted are almost entirely permissive in respect of such matters.
I will trespass on your Lordships’ time for a moment or two to look at a couple of examples. Amendment 1 provides that exit regulations,
“may include provision for protecting customers”,
affected by a relevant undertaker’s withdrawal. Amendment 2 provides that:
“Provision under subsection (1)(a) may require a relevant undertaker … to consult”.
Amendment 4 states that:
“Exit regulations about the transfer of a part of a relevant undertaker’s undertaking may include provision for the making of a scheme to transfer property”.
These are all matters on which this House would wish to be given the opportunity for detailed consideration.
General directions are of general application. I will address two points on Amendment 9. Subsection (1) states:
“Exit regulations may make provision for the Secretary of State to publish … a statement setting out general directions for the”,
regulators. Subsection (4) states:
“Exit regulations may make provision for the Secretary of State, before publishing a statement under the regulations, to consult”.
These are all matters which I would expect, and I suggest your Lordships would expect, to be requirements. They are matters which concerned the Delegated Powers and Regulatory Reform Committee. The list goes on. The central point is that it is vital for Parliament to have the opportunity to consider the proposed exit regulations individually and to recommend changes to particular regulations before they become law without being restricted by the limitation inherent in a simple affirmative resolution procedure.
Lord Whitty (Lab)
My Lords, first, I apologise to the Minister that, due to a misreading of the Order Paper, I was not here to hear his first couple of minutes.
The Minister gave us a fulsome presentation of the changed position of the Government, which explained in considerable detail how these new powers would work. Those of us who sat through Committee and Report will know that the Government were faced with a pretty widespread view across the House that they needed to change their mind on retail exit. The noble Lord, Lord Moynihan, headed a series of debates which eventually brought the Government to change their mind and present these new clauses that are before us today.
It is of course a pity in many senses that this comes so late. Given this stage of the Bill, which has gone through both Houses of Parliament, it is difficult to deal with such a complex set of amendments. I am sure that when the noble Lord, Lord Moynihan, put amendments in this direction on the Order Paper at an earlier stage, and certainly when I did so, we did not expect to create quite such a substantial job-creation scheme for parliamentary counsel, but the Government have done a major job here and it would be churlish to quibble too much about it. However, there are problems with it. We all welcome deathbed conversions, but the central problem here is the lateness of the conversion. I wish that we were a stage earlier in the proceedings, when we could have tried to make minor amendments to the proposed clauses.
I echo the points made by the noble Lord, Lord Marks, in particular that there are several points in this, from the first new clause onwards, particularly in the very first line and the reference to protecting consumers, where “must” really ought to be substituted for “may”. With a bit more time, the Government might have come to that conclusion themselves in the instructions that they gave to counsel. However, we are where we are, and this is a major concession by the Government to the House. In a sense, the whole process has been a vindication of the way in which the House considers complex legislation and minds are changed—and we have the result here before us.
Baroness Neville-Rolfe (Con)
My Lords, I would briefly like to intervene, first to thank the Minister for the efforts that he has made to address concerns and to make these amendments this afternoon. The Bill is hugely complex and the amendments are extensive, as my noble friend Lord Moynihan put it so succinctly. However, I feel that these provisions will add more complexity. So it is all the more important that the Minister confirms the plans that I know that Open Water has to summarise all the many regulatory provisions on water in the Bill and elsewhere, in order that customers, entrants, companies and investors can understand the complex web of rules and subordinate legislation that is planned, providing a force for simplicity. I believe that the good sense of our administrators is the key thing here and that is actually more important than to bring in a special new procedure. I support the amendments that the Government have made.
Lord De Mauley
My Lords, I thank all noble Lords for their contribution to this debate. I have listened to them extremely carefully. I thank my noble friend Lord Moynihan for welcoming the changes that we are making to the Bill to enable incumbent water companies to exit the non-household market for retail services. I thank the noble Lord, Lord Whitty, as well, for his comments in that regard.
I thank, too, the noble Lord, Lord Haskel, for his intervention, and I hope that he understands that I thought it best to allow my noble friend Lady Parminter to explain her amendment before I addressed the question that he raised. Before I get into that question, I address the question raised by my noble friend Lady Neville-Rolfe. She raised a very valid point about the additional levels of complexity added by the retail exit provisions. The noble Baroness also raised the issue of bureaucracy. Indeed, she has done so throughout the course of the Bill and has worked tirelessly on the subject. I strongly agree with her on that matter. In that regard, I highlight the work that Open Water is doing in presenting water regulation in guidance and online. It is presenting the information in a way that helps customers, entrance companies and investors to understand the sector, and which meets their particular information requirements.
These proposed new clauses set out, in as much detail as possible, the basis on which we will establish regulations to enable exits. We will now need to move from the high-level, in-principle statements regarding the case for exits to tackle the detailed, practical implications for companies and their customers. In doing this, we will need to consult widely. We will also provide further opportunity for parliamentary scrutiny through the draft affirmative procedure.
I think that all noble Lords who have spoken in this short debate have commented on the breadth of these powers. On Report, I put on record our view that the only practical way of responding to the will of the House on this matter would be to take a very wide-ranging power.
The question of whether to allow exits has been discussed at all stages during the passage of the Bill in both Houses. The overall policy of retail exits has been discussed at length. Powerful speeches from my noble friends Lord Moynihan and Lord Selborne, the noble Lord, Lord Whitty, and others demonstrated the strength of feeling in this House about the matter. I have tabled the amendments before us today in response to that pressure.
Throughout our debates on this subject there has been a broad consensus that we should allow for retail exits in such a way as to meet three important criteria: they must be for non-household customers; they must be undertaken voluntarily; and they must ensure the ongoing protection of customers. This is what the amendments do. The breadth of these powers is, unfortunately, unavoidable in this case. The debates in your Lordships’ House have ably set out the high-level principles in support of the case for retail exit. Nevertheless, further detailed work is required to address the practical implications of this change.
A number of changes will be required to the Water Industry Act 1991 and the detailed thinking has yet to be done by any of the interested parties on what these might be, what would be involved, how the implications for customers would be managed and the type of safeguards that would be required to avoid any risk of forced exit or separation. None of these is an inconsequential issue and it is clear that substantial further consultation and engagement will be required. We will consult widely on these matters. Following this there will be a further opportunity for parliamentary scrutiny under the draft affirmative procedure.
Noble Lords have highlighted that the Delegated Powers and Regulatory Reform Committee met yesterday to consider the new retail exit powers. I apologise to the committee for the inconvenience caused to it. We are very grateful to the committee for its report. I particularly appreciate its meeting at such short notice and I welcome the important contribution that it has made to this debate. I welcome the fact that the committee does not consider the powers conferred by the proposed new clauses to be inappropriate. The focus of the committee’s concerns has been on the relatively late stage in the passage of the Bill at which these proposed new clauses have been tabled rather than on their content. The committee did, however, recommend a strengthened affirmative resolution procedure for the exit regulations on their first use.
I fully understand and sympathise with concerns that the new provisions have not received detailed scrutiny as they have been tabled at this late stage. I agree with the committee’s view that, given the permissive nature of these powers and the need for further work on the detail, extensive further engagement is required with both parliamentarians and other interested parties. Our amendments already include a consultation requirement before any regulations may be made.
I can confirm that before tabling the first exit regulations we will consult widely and that we will ensure that there are many further opportunities for all interested parties to comment, and I can be clear that the Government’s use of the powers will take account of issues raised during that consultation. I believe that this extensive and wide-ranging approach to consultation will provide the level of engagement envisaged by the committee. Consultation of this nature with industry experts is an important part of the policy development process and it reflects that used in Section 102 of the Local Transport Act 2008—the procedure to which the committee refers.
I fully accept that we need to ensure that parliamentarians are given adequate time to scrutinise the precise wording of the proposed regulations before the final draft is laid before Parliament. We will therefore commit to publishing a draft of the regulations well in advance of laying the final regulations before Parliament so that there is a real opportunity for changes to be made to address any concerns that parliamentarians may have. We will also send a copy of these indicative regulations to the Environment, Food and Rural Affairs Select Committee in the other place so that it has an opportunity to comment on our intentions.
I believe that these measures fulfil the spirit and practical implications of the enhanced affirmative processes detailed in Section 102 of the Local Transport Act. In addition to the detailed consultation, these powers will be subject to the draft affirmative resolution procedure, which means that there will be further opportunities for parliamentary scrutiny.
The use of strengthened affirmative procedures for delegated legislation is unusual, and rightly so. There must be a very strong case for the use of such a procedure. The Government have brought forward these retail exit amendments in response to the level of pressure across your Lordships’ House. The amendments seek to provide clarity as to what matters are to be within the scope of the regulations, while delivering precisely what your Lordships asked for. Exit regulations would be the subject of extensive consultation and of debate in both this House and the other place.
I agree with the committee that further scrutiny and debate on these matters are required and I am very grateful for its work in raising these important matters. Given the history of these changes and the recommendations that the committee has made with regard to future scrutiny and engagement, I should like to place on the record that my department will continue to keep all interested parties up to date with progress on this area. I have no doubt that the relevant Minister will be very happy to make themselves available to parliamentarians from both Houses for further discussions as we develop the detailed plans for use of the regulation-making powers.
As I said, I am very grateful for the work of the Delegated Powers and Regulatory Reform Committee. I will reflect on its other comments and will reply formally in due course. In particular, paragraph 6 of the committee’s most recent report, to which the noble Lord, Lord Marks, referred, focuses on the importance of protections for customers. I confirm that ensuring that the interests of all customers are fully protected will be the guiding principle that underpins this work. These protections will embrace both the household customers who will stay with the incumbent water company and the non-household customers who, in the event of an exit, will be transferred to a retail licensee.
Concern was expressed that some companies may be seeking exit as a route to short-term financial gain. During Committee, my noble friend Lord Moynihan highlighted a report published by Macquarie, a major investor in the water sector, arguing for exit. This report identifies long-term benefits for customers from greater consolidation and efficiency in the retail market. It also identifies potential financial benefits for those companies that transfer or “sell” their customers to a licensee.
The enabling powers that we have been discussing today would allow the Secretary of State to put in place a framework governing the process of transferring customers and to place appropriate boundaries on the value that may be extracted by the exiting companies and on the costs that may be passed on to customers. For example, these provisions will enable the Secretary of State to place conditions on consent to an exit application, such as profit sharing with affected customers and compliance with charging rules to ensure that transferred customers are no worse off.
Lord De Mauley
“Application for retail exit
(1) Exit regulations about exit applications must make provision requiring a relevant undertaker to apply to the Secretary of State, and may include—
(a) provision requiring a relevant undertaker to take such steps as the regulations may specify before making an application;(b) provision as to the form and manner in which an application is to be made and as to the contents of an application;(c) provision about payment to the Secretary of State of a fee of an amount specified in or determined under the regulations;(d) provision about the information that is to accompany an application;(e) provision for the Secretary of State to require a relevant undertaker to provide such further information as the Secretary of State may require in order to make a determination;(f) provision as to the grounds on which an application may be refused;(g) provision for the Secretary of State to grant an application subject to conditions.(2) Provision under subsection (1)(a) may require a relevant undertaker—
(a) to consult—(i) its non-household customers and its other customers,(ii) the WSRA,(iii) the Chief Inspector of Drinking Water,(iv) the Consumer Council for Water, and(v) any other person specified in the regulations;(b) to prepare and publish a report assessing the effect on non-household customers and other customers if the undertaker withdraws from the non-household retail market; (c) to publish notice of its proposed exit application in such manner as the regulations may specify.(3) The grounds that may be specified under subsection (1)(f) include—
(a) grounds relating to the public interest or to the interests of a section of the public;(b) grounds relating to the interests of non-household customers or other customers; (c) grounds relating to costs associated with a transfer of part of the relevant undertaker’s undertaking;(d) grounds relating to the eligible licensee or licensees to which a transfer of part of the relevant undertaker’s undertaking is proposed to be made.(4) The conditions that may be imposed under subsection (1)(g) include—
(a) conditions as to the persons who are to pay the costs associated with a transfer of a part of the relevant undertaker’s undertaking;(b) conditions as to the application of money received by the relevant undertaker in connection with a transfer of a part of its undertaking;(c) conditions about the relevant undertaker giving consent to modifications of the undertaker’s conditions of appointment;(d) conditions about an eligible licensee to which a transfer of part of the relevant undertaker’s undertaking is proposed to be made giving consent to modifications of the conditions of its water supply licence or sewerage licence;(e) conditions about the treatment of non-household customers affected by the transfer of part of the relevant undertaker’s undertaking.(5) Exit regulations may make provision about how particular descriptions of customers and premises are affected by a relevant undertaker’s withdrawal from the non-household retail market, including in particular any of the following—
(a) premises to which the supply of water has been disconnected,(b) premises that are to be demolished,(c) premises that are temporarily unoccupied,(d) premises in relation to which the owner or occupier has served notice under section 63AA of the Water Industry Act 1991 (supply by water supply licensee: domestic supply),(e) premises in relation to which the owner or occupier has served notice under section 63AB of the Water Industry Act 1991 (supply by water supply licensee: non-domestic supply), and(f) premises in relation to which the owner or occupier has served notice under section 110K of the Water Industry Act 1991 (provision by sewerage licensee).(6) Provision under subsection (5) may include provision about how exit applications deal with particular descriptions of customers and premises.
(7) Exit regulations may make provision about the disclosure by a relevant undertaker of such information as the regulations may specify about—
(a) its non-household customers, and(b) the charges payable by them (whether payable under a charges scheme under section 143 of the Water Industry Act 1991 or under an agreement).(8) Exit regulations may specify—
(a) the persons to whom the information may be disclosed;(b) the purposes for which it may be disclosed.”
“Eligible licensees
(1) Exit regulations may—
(a) make provision for a relevant undertaker to specify in its exit application the eligible licensee or licensees to which it proposes to transfer a part of its undertaking;(b) make provision for the WSRA to direct one or more eligible licensees to accept the transfer of a part of the relevant undertaker’s undertaking.(2) In this Chapter “an eligible licensee” is a company—
(a) that has a water supply licence with a retail authorisation or a sewerage licence with a retail authorisation, or both, and (b) that has elected to be an eligible licensee for the purposes of this Chapter.(3) Exit regulations may—
(a) provide for an eligible licensee to be specified in an exit application only if the licensee agrees to be so specified;(b) provide for the WSRA to give notice before giving a direction under subsection (1)(b);(c) provide for an eligible licensee to temporarily suspend an election under subsection (2)(b) so that it may not be given a direction under subsection (1)(b).(4) Exit regulations may make provision about electing to be an eligible licensee, and may in particular—
(a) provide for a company to satisfy such criteria as are set out in a code published by the WSRA before the company may elect to be an eligible licensee;(b) provide for the WSRA to assess whether a company satisfies those criteria;(c) provide for the WSRA to publish a code setting out—(i) the criteria mentioned in paragraph (a), and(ii) how it conducts such assessments, and(d) provide for the WSRA to comply with the code in making such assessments.(5) Exit regulations may—
(a) allow an eligible licensee, to which a transfer of a part of a relevant undertaker’s undertaking is proposed to be made, to be a company associated with the undertaker,(b) require the eligible licensee to which such a transfer is made to be such a company, or(c) prohibit such a transfer being made to such a company.(6) For the purposes of this section, a relevant undertaker is associated with an eligible licensee if one of them is a subsidiary of the other or both are subsidiaries of the same body corporate.”
“Transfer of undertaking
(1) Exit regulations about the transfer of a part of a relevant undertaker’s undertaking may include provision for the making of a scheme to transfer property, rights and liabilities where an exit application has been granted.
(2) Exit regulations about the transfer of a part of a relevant undertaker’s undertaking may include provision about arrangements under Chapter 1 of Part 5 of the Water Industry Act 1991 for fixing, demanding and recovering charges.
(3) Provision under subsection (2) may include—
(a) provision for and in connection with treating such arrangements as if they were agreements between the undertaker and the person liable to pay such charges;(b) provision about the terms and conditions of such agreements.(4) Exit regulations may make provision for a scheme under subsection (1) to contain—
(a) provision identifying the property, rights and liabilities to be transferred (which may include property, rights and liabilities that would not otherwise be capable of being transferred);(b) provision for the division of property, rights and liabilities, including— (i) provision creating an interest in or right over property;(ii) provision creating new rights and liabilities;(iii) incidental provision as to the property, rights and liabilities of other persons;(c) provision about the consideration to be provided (and about the enforcement of such provision).(5) Subsection (4) is not exhaustive of what a scheme may contain.”
“Operation of retail market
(1) Exit regulations about the operation of the water industry in relation to a retail exit area may include such provision as is described in the following subsections.
(2) Exit regulations may make provision for and in connection with requiring a relevant undertaker to impose on an eligible licensee only such charges under a section 66D agreement or a section 117E agreement as would enable the licensee to fulfil its obligations under agreements (including deemed agreements) transferred to the licensee from the undertaker under the regulations.
(3) Exit regulations may make provision for and in connection with requiring a water supply or sewerage licensee, where the licensee is providing services under the licensee’s licence in relation to a retail exit area, to provide such services under its licence in relation to that area as the regulations may specify.
(4) Exit regulations may make provision for and in connection with such arrangements between a water supply or sewerage licensee and a relevant undertaker as would enable the licensee to comply with requirements imposed on it under subsection (3).
(5) Exit regulations may make provision as to the functions of a relevant undertaker in relation to a retail exit area and may, in particular, modify or disapply a duty imposed on a relevant undertaker by—
(a) section 63AC(2) (interim duty to supply water), or(b) section 110L(2) (interim duty to provide sewerage services).(6) Exit regulations may provide for a water supply or sewerage licensee that—
(a) is a company,(b) is providing services under its licence in relation to a retail exit area, and(c) satisfies such criteria as may be specified by the regulations (which may include criteria as to market share),to be subject to provision for special administration (see section 23 of, and Schedule 2 to, the Water Industry Act 1991) in such circumstances as the regulations may specify.(7) Exit regulations may include provision—
(a) requiring relevant undertakers, water supply licensees and sewerage licensees to provide such information as the regulations may specify to customers;(b) requiring relevant undertakers, water supply licensees and sewerage licensees to provide such information as the regulations may specify to the WSRA or the Secretary of State;(c) requiring the WSRA to record such information as the regulations may specify in the register it maintains under section 195 of the Water Industry Act 1991.(8) Provision under subsection (7)(b) may in particular specify information about customers and the arrangements under which they receive services.”
“Operation of retail market: charges etc
(1) Exit regulations may make provision for water supply licensees and sewerage licensees, that are providing or proposing to provide services under their water supply or sewerage licences in relation to a retail exit area, to make, and from time to time revise, a scheme containing the terms and conditions which, in the absence of agreed terms and conditions, are to apply to such services.
(2) Provision under subsection (1) may include—
(a) provision for a scheme to make different provision for different purposes, or different areas;(b) provision about the publication of a scheme or revised scheme;(c) provision about sending a copy of a scheme or revised scheme to the WSRA;(d) provision enabling the WSRA to direct that terms or conditions be modified generally or in a particular case; (e) provision requiring a licensee to comply with a direction under paragraph (d), including provision for enforcing such a duty under section 18 of the Water Industry Act 1991.(3) Provision under subsection (1) may also include—
(a) provision requiring the WSRA to issue a code about providing services to which a scheme under subsection (1) relates;(b) provision for the code to include, in particular, provision about—(i) the terms and conditions contained in such schemes;(ii) licensees informing owners or occupiers of premises about their schemes before agreeing any terms and conditions for the provision of services;(c) provision for the WSRA, if it considers that a licensee is not acting as required by such provision as is described in paragraph (b), to give the licensee a direction to do, or not to do, a particular thing specified in the direction;(d) provision requiring a licensee to comply with a direction under paragraph (c), including provision for enforcing such a duty under section 18 of the Water Industry Act 1991;(e) provision requiring the WSRA from time to time to review the code and, if appropriate, to issue a revised code.(4) Exit regulations may make provision for the WSRA to issue and enforce—
(a) rules about charges for services that may be imposed by water supply or sewerage licensees in relation to a retail exit area;(b) if exit regulations make provision for licensees to make schemes about such charges, rules about such schemes.(5) Provision under subsection (4) may include—
(a) provision for the rules to make different provision for different cases;(b) provision for the WSRA to direct a licensee to comply with the rules;(c) provision for such directions to be enforceable by the WSRA under section 18;(d) provision for the Secretary of State to issue guidance as to the content of the rules;(e) provision for the Secretary of State to prevent rules being issued.”
“Exit applications: further provision
(1) Exit regulations may make provision about the provision relating to exit applications that may be included in a relevant undertaker’s conditions of appointment.
(2) Exit regulations may in particular prohibit the inclusion of provision requiring a relevant undertaker to make an exit application.
(3) Exit regulations may make provision for requiring the WSRA or the CMA to obtain the consent of the Secretary of State—
(a) before exercising a function so as to require a relevant undertaker to make an exit application, or(b) before exercising a function in a way that is likely to result in a relevant undertaker making an exit application.”
“Modification of appointment and licence conditions
(1) Exit regulations may provide for the WSRA to modify the conditions of appointment of a relevant undertaker where it considers it necessary or expedient to do so in consequence of the transfer of part of the relevant undertaker’s undertaking under the regulations.
(2) Exit regulations may provide for the WSRA to modify the conditions of a licence under Chapter 1A of Part 2 of the Water Industry Act 1991 where it considers it necessary or expedient to do so in consequence of the transfer to the holder of that licence of part of a relevant undertaker’s undertaking under the regulations.
(3) Exit regulations may provide for the WSRA, where it modifies conditions under subsection (1) or (2), to make such incidental or consequential modifications of other conditions of the appointment or, as the case may be, other conditions of the licence as it considers necessary or expedient.
(4) Provision made by exit regulations as regards the modification of conditions under this section may include—
(a) provision for the Secretary of State to give consent to a modification proposed by the WSRA;(b) provision as to the period during which a modification may be made.(5) Provision under subsection (4)(b) may not allow a modification to be made after the end of the period of one year beginning with the day on which the transfer in question takes place.”
“General directions
(1) Exit regulations may make provision for the Secretary of State to publish, from time to time, a statement setting out general directions for the WSRA and the CMA as regards the carrying out of their relevant functions in circumstances where the WSRA or the CMA, in carrying out those functions, might be able—
(a) to require or bring about an exit application, or(b) to have an effect as regards the making of an exit application.(2) Exit regulations may require the WSRA and the CMA to carry out their relevant functions in accordance with any statement published under the regulations.
(3) Exit regulations may make provision about formulating a statement to be published under the regulations, and may in particular—
(a) require the Secretary of State to have regard to—(i) the duties of the WSRA mentioned in section 2(1)(b) of the Water Industry Act 1991,(ii) the duties of the CMA under the Competition Act 1998 or the Enterprise Act 2002, and(iii) the protection of the interests of consumers (within the meaning of section 2 of the Water Industry Act 1991), and(b) enable the Secretary of State to have regard to such other matters as the Secretary of State thinks fit.(4) Exit regulations may make provision for the Secretary of State, before publishing a statement under the regulations, to consult—
(a) the WSRA,(b) the CMA,(c) the Consumer Council for Water,(d) relevant undertakers,(e) water supply licensees and sewerage licensees,(f) the Welsh Ministers, and (g) anyone else the Secretary of State thinks appropriate.(5) Exit regulations may—
(a) require the Secretary of State to lay a draft of a statement before Parliament before publishing it;(b) require the Secretary of State to wait for a period specified in or determined under the regulations after laying the draft statement under paragraph (a);(c) prohibit the Secretary of State from publishing it if, within that period, either House of Parliament resolves not to approve it.(6) In this section “relevant function” means—
(a) in relation to the WSRA, a function mentioned in section 2(1)(b) of the Water Industry Act 1991;(b) in relation to the CMA, a function of the CMA under the Competition Act 1998 or the Enterprise Act 2002.”
“Exit regulations: general
(1) Exit regulations may make such provision as the Secretary of State considers appropriate—
(a) for modifying a person’s duties and powers, and(b) for imposing new duties and conferring new powers on a person.(2) The persons in relation to whom provision under subsection (1) may be made include—
(a) the Secretary of State;(b) the Chief Inspector of Drinking Water;(c) the Welsh Ministers;(d) the Chief Inspector of Drinking Water for Wales, if there is one, or the Chief Inspector of Drinking Water if section 86(1B)(b) of the Water Industry Act 1991 applies;(e) the WSRA;(f) the CMA;(g) the Environment Agency;(h) the NRBW;(i) the Consumer Council for Water;(j) relevant undertakers;(k) water supply licensees and sewerage licensees.(3) Exit regulations may—
(a) apply enactments, with or without such modifications as the Secretary of State thinks fit;(b) amend, repeal or revoke enactments.(4) The provision that may be made by exit regulations includes provision conferring power to make subordinate legislation.
(5) Exit regulations may—
(a) contain such consequential, incidental, supplementary, transitional or saving provisions (including provisions amending, repealing or revoking enactments) as the Secretary of State considers appropriate, and(b) make different provision for different cases, including different provision in relation to different persons, circumstances or areas.(6) In this section “enactment”—
(a) includes an Act or Measure of the National Assembly for Wales;(b) includes an enactment contained in this Act, other than this Chapter.”
“Interpretation
(1) In this Chapter—
“the CMA” means the Competition and Markets Authority;
“eligible licensee” has the meaning given by section (Eligible licensees);
“exit application” means an application under section (Retail exit: non-household premises)(1)(a);
“the NRBW” means the Natural Resources Body for Wales;
“non-household customer” means a person who is the customer as regards a service provided in respect of non-household premises;
“non-household premises” means premises other than household premises as defined in section 17C of the Water Industry Act 1991;
“retail exit area” has the meaning given by section (Retail exit: non-household premises);
“the WSRA” means the Water Services Regulation Authority.
(2) Except in so far as the context otherwise requires, terms used in this Chapter have the same meaning as in the Water Industry Act 1991.”
Lord De Mauley
“Procedure
(1) Before making exit regulations, the Secretary of State is to consult—
(a) the Welsh Ministers;(b) the WSRA;(c) the CMA;(d) the Consumer Council for Water;(e) relevant undertakers whose areas are wholly or mainly in England;(f) water supply licensees and sewerage licensees;(g) persons whom the Secretary of State considers to represent the interests of investors in the water industry.(2) The power to make exit regulations is to be exercised by statutory instrument.
(3) A statutory instrument containing exit regulations made by the Secretary of State may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
Baroness Parminter
Baroness Parminter
My Lords, the noble Lord, Lord Krebs, and I return again to the issue of the use of any surplus reserves for Flood Re. I will not repeat the arguments we advanced in Committee and on Report. I feel that the House is clear that our aim is to ensure that any significant surplus funds can be used by Flood Re to encourage householders to adapt to the impacts of climate change and flooding, and so manage down risk.
I am grateful to the Minister for meeting the noble Lord, Lords Krebs, and me last week to discuss the matter again. We accept that decisions cannot be made now—pinning down in legislation what level of reserves should be built up and what should happen to them. However, we need clarity about the decision-making process that will condition what happens to surplus funds. Will the Minister confirm that Flood Re will have to draw up a strategy to manage surplus funds and that it will be published? Equally, we seek confirmation that the approach of “invest to save” is not ruled out if significant surpluses are built up. By this I mean spending on property-level protection where the economics of that approach show that it delivers the best value for money in managing down risk. Given that it has been shown that such an approach delivers a benefit of at least £5 for each £1 invested, it is too important an approach to discount. It could make a decisive difference to individual householders and their protection. It will also benefit the insurance industry by reducing the level of overall claims. It is, therefore, in the interests of a smooth transition at the end of the process of Flood Re. To that end, I beg to move.
Lord Krebs (CB)
My Lords, I, too, thank the Minister for meeting the noble Baroness, Lady Parminter, and me to discuss this amendment. I do not wish to say anything at length but I shall make a couple of simple points. If we accept that Flood Re, according to the Government’s own figures, will build up a reserve, we can ask what this surplus might be used for. It could be used for future discounting of policy charges; it could be saved up for—excuse the pun—a rainy day when the call on insurance may be greater than anticipated; or, as our amendment suggests, it could be used to manage down future risk. As the noble Baroness, Lady Parminter, said, this is in effect a proposal that Flood Re should invest to save, to reduce both its own future costs by encouraging household-level protection measures and to help those householders to exit at the end of the period of operation of Flood Re.
According to the work of the Adaptation Sub-Committee of the Committee on Climate Change, which I chair, about 190,000 properties could benefit from property-level protection. It would seem reasonable that some of the money that accrues as a surplus in Flood Re should, given the returns on investment to which the noble Baroness has already alluded, be used to help some or, I hope, eventually, all of these 190,000 properties to become more resilient.
Lord Curry of Kirkharle (CB)
My Lords, I have some concerns about the amendment. If I can describe the noble Baroness, Lady Parminter, and the noble Lord, Lord Krebs, as friends, I hesitate to object to their amendment, but I have concerns. I declare an interest in that I was, until two years ago, a chair of an insurance company.
My concerns are around the following issues. First, as a policyholder contributing to the funds that will be accumulated to create Flood Re, I am concerned that some of my contributions will be used to create resilience measures—which are, I assume, measures to reduce the risk of flooding—for a select group of properties. That is not why we will contribute the funds.
Lord Campbell-Savours (Lab)
Does the noble Lord not accept that in the long term the insurance company will benefit because it will save money?
Lord Curry of Kirkharle
Perhaps I may respond to that as I work through my argument.
Secondly, identifying the properties that will be subject to this special treatment will require the wisdom of Solomon and might create division and resentment among other property owners who are not able to benefit from the resilience measures used.
Thirdly—here I have some sympathy with the comments made by the noble Baroness, Lady Parminter—Flood Re needs a strategy for the amount of reserves that will be appropriate and need to be built up to cover flood risk. A strategic approach to the amount of surplus required is important. It will be very difficult to determine what the reserve should be to cover flood risk over a period of years, but it is essential that a reserve is established to maintain adequate funds to cover significant flood risk.
Finally, my most important point—I respond here to the comments made by the noble Lord, Lord Campbell-Savours—is that, as a policyholder, I do not want to continue contributing to a fund that has established a significant surplus. Once the surplus has been determined and achieved, I would hope that the Government and the ABI would have a mature discussion about reducing the contributions to the fund so that they do not establish an ever-increasing fund which may never be used. It would benefit the insurance companies if they did not need to continue collecting funds to contribute to this reserve. Resilience measures are essential and should be taken as properties are restored after flooding, but it is not the role of the fund to provide the resources to do that.
Lord Whitty
My Lords, I can see the immediate attractiveness of the amendment but I share some of the reservations of the noble Lord, Lord Curry. If we are going to do this, we have to be more precise than the provisions in the amendment. The noble Lord rightly said that Flood Re will need a strategy for its surpluses and the limitations on the degree of cross-subsidy it can require from policyholders more generally. There will be a limit as to what is acceptable in that regard. It will also need a strategy to ensure that resilience and mitigation measures are adopted by those at the highest risk. If this amendment means that, and if it is a relatively small part of such surpluses—by which I mean a very small part—I can probably go along with it. If, however, it is as open-ended as it appears—and we know what the demands for flood mitigation as climate change and population pressures increase are likely to be—the temptation for insurance companies outside the system, the Government and the population to try to raid the Flood Re surplus for those purposes will begin to increase as well.
Despite the initial attractions, I do not think I can support the rather open-ended nature of the amendment as it stands. However, as we move forward and review the scheme, I hope that the Government and the administrators of Flood Re, along with other stakeholders, will find ways of ensuring a maximal take-up of resilience measures by those who own properties at risk and their insurance companies.
Lord De Mauley
My Lords, I thank my noble friend Lady Parminter and the noble Lord, Lord Krebs, for Amendment 14. I am glad to be able to return to your Lordships, having considered the proposals in more detail. As I have said previously, reserves that build up during the lifetime of Flood Re will be used primarily to pay flood claims in the bad years. It will not be easy to identify surplus funds and any decision about Flood Re’s reserves will require a judgment about the level of cover needed for the unpredictable risks it bears. Any commitment by Flood Re to spend a proportion of its reserves in a certain way, such as on betterment or resilience, would potentially increase the amount of capital it needs to hold on an ongoing basis, thereby having an impact on the cost of the scheme and ultimately the levy.
However, it is entirely right that there should be clarity on the principles regarding how surplus reserves would be dealt with, should that situation arise. This is not about small reserves that could provide one or two years’ comfort for Flood Re, but significant additional capital implying that Flood Re is excessively capitalised. It is important to recognise that this is not a situation that we anticipate occurring in the first few years of Flood Re’s life, as reserves will build up only gradually, if at all.
We have previously set out that during Flood Re’s life, we would expect the levy and eligibility thresholds to be set in such a way as to manage down excess reserves. I agree with my noble friend Lady Parminter that it should be open to Flood Re to spend some surplus money on resilience measures if it is appropriate to do so as part of its commitment to support households to prepare for risk-reflective pricing. Flood Re will have a duty to deliver value for money. One of the benefits for both households and insurers of installing property-level resilience measures is that, properly fitted, they can reduce the cost of future claims. Research suggests that for some homes, installing resilience measures can reduce the cost of subsequent flood claims by more than 70%. While we recognise that there is still work to be done to improve the evidence base, a point that the insurance industry raised in the Public Bill Committee on the Bill in the other place, I strongly agree that investment in resilience measures from whatever source could have a role to play in reducing the overall cost of claims over the lifetime of the scheme.
I recognise, too, that it would be helpful to provide greater clarity about how Flood Re will support policy- holders to prepare for transition to risk-reflective prices. We therefore propose that the secondary legislation, which will itself be subject to the affirmative procedure, will set out in more detail the points that Flood Re’s transition plan should cover, including that Flood Re could encourage and incentivise policyholders to make their properties more resilient to flooding. We will also expect Flood Re to consider in broad terms the process for managing any surplus during the lifetime of the scheme, either as part of the transition plan or in its wider governance framework. Parliament will have an important role to play in holding Flood Re to account for its use of resources and the delivery of its purpose, and its directors will be directly accountable to Parliament for that.
In relation to any reserves at the end of Flood Re’s life, as I have previously explained, Clause 71 allows the Government to require Flood Re to transfer a sum of the reserves to government, following consultation with Flood Re. It will ultimately be for the Government of the day, in consultation with Flood Re and Parliament, through affirmative resolution, to decide on the treatment of any reserves. I reassure your Lordships that there is no presumption about how reserves might be disbursed.
Baroness Parminter
I thank all noble Lords who have joined in this short but important debate as we seek to ensure that Flood Re achieves what we all want it to achieve, which is to help individual households move towards risk-reflective pricing and make them more able to cope with the challenges of climate change, as most clearly reflected in the flooding situations that we have seen. I listened carefully to what the Minister had to say and was pleased to see that he again articulated that “spend to save” is not ruled out in the administration of Flood Re and, secondly, that any secondary legislation will set out that it is open to Flood Re to spend any surplus helping households invest in more resilience measures. Those are both important steps which needed putting on the record. I think both I and the noble Lord, Lord Krebs, will be very grateful and thankful for that comment.
On that basis, we have probably pushed this issue as far as we can. We have sought throughout the process to be helpful to the Government in their ongoing discussions with the ABI, and I hope they feel that we have achieved that. We look forward, once the Bill has completed its parliamentary stages and secured state aid clearance, to looking at the secondary legislation, where I am sure this matter will be touched on again. Finally, as this will probably be the last time I speak on this matter in the House, I would very much like to put on record my thanks to the Minister and the Bill team for all the constructive discussions and dialogues they have had with me and my colleagues on these Benches. It has been an extremely technical and complex Bill and we are grateful to them for the time that they have given to help us in our job of making sure that the Bill leaves this House in better shape than that in which it came to us.
Lord Campbell-Savours
“(e) the need to review annually the operation of the Scheme”
Lord Campbell-Savours
My Lords, in moving this amendment, which calls for an annual review of Flood Re to deal with business which I do not believe has been concluded, I need to declare an interest. I have a leasehold interest with my wife, which I have declared on previous occasions on the Bill, in a band G home on the Thames. Although it is built on the flood plain, my flat is not threatened by flooding. It has never been flooded and can never flood because it is on the second floor. Nevertheless, I have to report that the car park area that serves our block of flats was recently subjected to some flooding, and it is with that in mind that I feel I should restrict my comments today and limit again what I have to say.
The problem with this whole debate on Flood Re is that it was never fully considered in the House of Commons. Some of the worst flooding—certainly this century and for a greater part of the previous century—actually took place after consideration in the Commons and during consideration in the Lords. I believe that many Members of Parliament in the other place would have been drawn into the debate as a result of pressure from their constituents in the event that they had experienced what many people experienced in January and February.
Before I make my wider comments, I thank the Minister for generously offering to arrange a meeting through his office, and I thank Mr Leckie, one of his staff, who has been excellent in his dealings with me. I hope at that meeting to have a representative of the ABI; Miss Anne McIntosh, the Member of Parliament for the constituency to which I referred on another occasion; and one of her constituents, whose statements I drew upon in the previous debate.
I have tabled this amendment because for many people in the country these proceedings are the most important part of the Bill, and they are watching what is happening in this debate on the internet. Many thousands of people in the country are following this debate because they feel that they have been excluded from Flood Re. While we all want Flood Re to go through, I believe that it remains unfinished business. I want to refer specifically to a group of properties, which would not include my own, that fall under the lower council tax bands A to D—mine is G, so I would not be affected by my own amendment or by what I am advocating. I choose those council tax bands because they involve, generally speaking, a group of lower- income people who can ill afford the arrangements that are being made.
I want to call on some correspondence that I received by e-mail, which a number of Members have received, from a man called Mr Junco Cochrane. He has been expressing concern in desperate e-mails to Members of this place in his best e-mail English. He says:
“I wrote to the ABI Director and have had quite a bullying type of reply. Leaseholders”—
he is one; they are excluded from Flood Re—
“have very little say and are virtually told what to do and how high to pay”.
He then points out the need to,
“prevent discrimination and distress for leaseholders”—
I believe he is speaking for leaseholders all over the country—
“who often are the poorer and older persons at the end of the property market, and with rip-off charges in various areas, often for nothing of any or little value”.
This is how he has phrased his e-mail. He goes on to say:
“Many leaseholders are pensioners and are not comfortably off ones. May I say respectfully, not like you in your fortunate situation”—
he is talking about me and my band G—
“as many of us just have the one small leasehold and struggle to keep that”.
I repeat: this man is excluded from the arrangements that are being made. He goes on to say:
“Many of us are the poorer category of households, old people in retirement flats, sheltered housing and social leaseholders, who are generally older people, of which there are millions in these types of flats”.
He is exaggerating but he obviously believes that there is a great number. He goes on:
“They are not in the ‘three’ conversions such as those referred to by DEFRA”.
We know what the three conversions are: they are where you have three flats in one block and there has been a compromise in Flood Re whereby they are now included. His e-mails to me and to others are desperate. This is the desperate voice of someone who is really upset about the way in which the legislation is being handled.
In response to people like him—and to Beverley Morris, who wrote to me on a previous occasion—the ABI maintains that insurance at reasonable rates will be made available. In a letter which the Minister kindly arranged to be sent to me, Otto Thoresen, the director-general of the ABI, gives assurances to government that it can deliver on reasonably priced insurance. He states:
“While there are a range of customers seeking insurance in the leasehold market, on the whole freeholders of leasehold property are commercial enterprises that buy their buildings insurance in a different way from ordinary homeowners. There is no failure in this market, and we expect affordable cover to remain available for such properties in an open market. For this reason, they do not need to be included in Flood Re … We fully expect the competitive market that currently allows leasehold managers to buy affordable cover to remain in place, and there remains no evidence to suggest it will not. It may be helpful to stress that Flood Re will be available for contents cover bought by individual residents in leasehold properties”—
which is true—
“and that leaseholders who insure their building in their own name will be able to access buildings and contents insurance through Flood Re if needed”.
That statement is simply inaccurate. He must know what the truth is. He must have seen the evidence that we presented on Report, wherein a lady writes to tell us that her insurance is to go five times higher than what it is at the moment. It is to go up from £5,000 to £23,000, yet Mr Thoresen gives those assurances.
That is the case with Mr Cochrane and people all over the country—very often low-income families—who live in properties many of which at the end of the day will not even be insured because people will not be able to find insurance. If a lower-income family living in a block of flats in an affected area finds that they cannot afford the insurance at the higher prices, they will still have to buy it, because those who have taken out a mortgage are under pressure from their mortgage company to insure their flats. Therefore, they are locked into high reinsurance premiums and there is no way out.
I understand that Mr Ian Fletcher of the British Property Federation, while expressing his concerns about the comments of people such as Mr Thoresen on Flood Re in general, told the Daily Telegraph—and this is his explanation as to why the insurance companies have taken the position that they have:
“We think the problem stems from the fact that insurers’ systems can’t cope with leasehold as a residential form of ownership. They are viewed as commercial properties from insurers’ viewpoints”.
Well, the fact is that they are not necessarily commercial properties. Anyhow, surely they could have changed their systems when they were devising Flood Re somehow to incorporate such people, particularly those in lower-income groups, who are going to find themselves in a pretty difficult position. That matter must inevitably become the subject of Flood Re at some stage in the future.
I move on to another group of people who feel very aggrieved. I have a note, which has just come down the line to me, from Lynne Jones, the chair of the Keswick Flood Action Group. She is speaking on another group who are excluded and who should be of equal concern to us. She states:
“I am … Chair of Keswick Flood Action Group”—
Keswick Flood Action Group is an action group in my former constituency of Workington in Cumbria—
“I am frequently asked about how to get insurance and within my duties as Chair I would also like to point out some local issues with Flood Re working against others in my community”.
She then goes on to comment on the issue of rented property and how that is affected:
“To not give guarantees to rented properties would affect some of the least well off in our town. Most of these are not covered by the Statement of Principles. Landlords’ insurance is currently commercial. The interesting issue will be whether the introduction of Flood Re will affect this market. One of the things I have been arguing for is that it should be mandatory for landlords to hold insurance and that this should cover flooding. That would be a significant improvement on the current situation. Housing associations tend to build on cheap land—flood plains. Thus here as, I suspect, in towns and cities throughout the UK, there are quite a few local occupancy and housing association homes in flood risk areas. But these are typically covered by commercial insurance”—
all excluded.
“Houses are expensive here and many locals can’t buy homes so they can ill afford high premiums—or no flood cover. Tenants will be covered by Flood Re for contents insurance, but my real concern is landlords not taking out insurance at all”.
That is because they are not included. We are not talking about vast commercial landlords, but the chap who buys the house next door or someone who buys something in the town which they may rent out.
“In addition we have a significant amount of housing stock taken over to self-catering. This is a good point and needs thinking about. What proportion of that is covered by residential insurance rather than commercial? How much is currently covered by the Statement of Principles? How much of this would be at significant flood risk? Keswick relies on tourism and the surrounding area relies upon Keswick for the wealth visitors (national and international) bring. Are these also to be denied the chance of flood insurance?
I hope that you will take this information on board when you look at the future of flood insurance”.
Again, that is a group of people concerned about the absence of Flood Re cover.
The Earl of Lytton (CB)
My Lords, I had not intended to intervene on this amendment but what the noble Lord, Lord Campbell-Savours, has said compels me to do so. That is because of the point that I made during earlier stages of the Bill: the question of insurance cover, or the lack of it, is not a lone entity as it also concerns the other financial structures that occur around property purchase and finance. I refer, of course, to mortgage lending because the existential risk of damage that might be covered by insurance is also an existential risk that affects mortgage lenders, as I explained previously. Because of the risks of default, mortgage lenders themselves wish to refinance or reinsure through the markets and the entire process becomes, to a degree, self-censoring.
The Minister has allowed me to belabour him fairly mercilessly with this principle and I realise that it lies, to a large degree, outside the scope of the Bill. However, it just so happens that it is also in consequence of what inclusion or exclusion from a construct such as Flood Re happens to expose. I come to this from the background of my profession as a chartered surveyor. I suppose that I ought also to declare that although I do not think that I have a property that has either suffered from flooding or is necessarily likely to be included in Flood Re in the first place, like other noble Lords, I of course have policies of insurance on properties, so I declare that interest.
The Minister was sympathetic during the last meeting I had with him, and I am very grateful for that meeting and for the listening ear that I encountered there from the Minister and his officials. To some extent, all one can do on that is wait and see. However, as it stands, the amendment from the noble Lord, Lord Campbell-Savours, highlights the very significant potential increases in insurance premiums that might need to be paid because of properties falling outside Flood Re but none the less being at some material risk. I am afraid to say that that material risk is a bit like the length of a piece of string. I think we debated this in Committee and the discussion then, which involved the noble Baroness, Lady Parminter, the noble Lord, Lord Krebs, who is no longer in his place, and the noble Lord, Lord Campbell-Savours, was very much about the mapping of the risk areas and just what you could or could not deduce from that process.
A more individual risk assessment is itself a slightly dangerous construct; when you consider that the whole purpose of insurance is to have a pool that spreads the risk, you might ask how far you want to move to an individual risk assessment. As we move towards that, though, the danger is that you are then forced to look in more and more detail at the geophysical and hydrological factors that affect individual properties. We supposed in Committee that there might be rather a postcode lottery; I drew attention to the fact that I had been sent a piece of an Ordnance Survey sheet that showed Environment Agency blue ink cutting right through the middle of a linear-shaped postcode area, which was effectively one half of an urban street. That just goes to show that all sorts of properties that might not be at particular risk themselves will be caught by this.
My worry is that this unravels the other aspects in respect of the views of mortgage lenders. If insurance premiums go up fivefold, clearly that will affect ability to pay. That ability to pay is not so much the generality of repayment on a mortgage, and it certainly is not so much the generality of what happens in the leafy south-east, particularly within the M25; rather, the problem is the static and relatively constrained values in other parts of the country where the year-on-year increase in value does not provide that cushion to fund not only the possibility that there will be a default on the mortgage but also the damage that might be caused in the event of a flood, so you have a double-whammy situation. My fear is that it will impact most severely on those areas that are already in challenging, relatively flat and not particularly growth-rich areas of the country, and I think we all know that there are plenty of such areas.
It is therefore right that there should be a constant review, and I believe that the Minister intends that there should be a regular monitoring of what goes on and what the fallout might be from these various factors. I am hopeful that he will be able to say that constant attention will be paid to this issue. I am less clear about whether it requires the doctrinal imposition of some formal review, but the thrust of the noble Lord, Lord Campbell-Savours, is certainly important, for the very reasons that he gave and for the other unintended consequences that would potentially flow from the uninsurability of particular properties.
Lord Whitty
My Lords, I am grateful to my noble friend Lord Campbell-Savours for tabling the amendment and, more particularly, for reminding the House and the Government that at the end of Report there was still considerable confusion over inclusions and exclusions in Flood Re and, as the poignant examples that my noble friend has alluded to make clear, a considerable amount of alarm out there about the potential exclusion from insurance of leaseholders in particular but also of other groups of people who are not clear whether they are included or excluded. As the noble Earl, Lord Lytton, has just said, it is a question not just of insurance but of current and future mortgage and other loans that one can raise on the property, and it therefore has very profound effects.
As the noble Earl said, whether we need a review every year is one matter, but it is incumbent on the Government to say that we need this continually under review, and the only formal reference to review is every five years. This confusion and alarm need to be cleared up a lot sooner than in five years’ time. I hope the Minister can at least give some reassuring words to my noble friend that that will indeed be done.
Lord De Mauley
I thank the noble Lord, Lord Campbell-Savours, for his amendment and I thank him even more for reminding me that, in my excitement over my earlier amendments, I have so far omitted to declare my interests, and I should do so. I own a farm, through which a tributary of the River Thames runs, I have an extraction licence, a bore hole, a house which was flooded in 2007 and a minority stake in a lake. I am glad to put that on the record.
As I explained in previous debates, Flood Re will be subject to regular review. We expect these formal reviews will take place at least every five years. These formal reviews will need to consider the effectiveness of Flood Re in discharging its purpose and functions. Importantly, the reviews will also need to consider the levy and premium thresholds, particularly in relation to its capital model, which we debated in detail earlier in relation to the amendment from my noble friend.
The reviews will also need to consider Flood Re’s effectiveness in managing the transition to risk-reflective pricing over the operation of the scheme. As I said earlier, the secondary legislation will set out in more detail the points that Flood Re’s transition plan should cover. Flood Re will have to lay its accounts in Parliament on an annual basis, and its responsible officer will be directly accountable to Parliament. The Comptroller and Auditor-General will examine Flood Re’s economy, efficiency and effectiveness as well as its propriety and regularity.
It is also important to note that there is nothing to preclude the formal reviews taking place more frequently, which the noble Lord, Lord Whitty, asked me to confirm, should concerns be raised; for example, if it is seen that excessive surpluses are being built up.
I hope that it is clear that Flood Re is going to be regularly reviewed and closely scrutinised, but we need to strike a balance and, in particular, I am concerned about significant risks to the certainty and stability of Flood Re income if it is under constant review. Flood Re, the insurance industry and policyholders need to have some degree of certainty about its operation and Flood Re must be allowed to plan for transition accordingly. Insurance is a long-term business. An annual review of the scheme would be resource intensive and I am not clear what added value it would bring in addition to the current arrangements for parliamentary scrutiny.
In addition to the formal review process which will be carried out at least every five years, as I have described, both the Government and the Association of British Insurers have committed to monitoring the market for flood insurance and will publish the results of that monitoring.
Lord Campbell-Savours
Will the Minister ask his officials to contact the ABI and ask it, prior to our meeting, how it responds to the cases that I have brought forward of people who say that they cannot find insurance or that their insurance premiums rise five times over, or whatever? I would like to hear its response prior to the meeting.
Lord De Mauley
I will certainly do that. I, too, would like to hear the answer.
This ongoing monitoring will enable us to identify trends and any potential issues in the market, including in the leasehold sector, to which the noble Lord referred. We have discussed the rationale for the scope of Flood Re at length and in detail in your Lordships’ House. The design of Flood Re was guided by three principles: affordability, progressivity and fairness. We have been clear that Flood Re should not increase the cost of insurance for those at low or no flood risk so it is fair to all households. To achieve this, Flood Re will replicate the cross-subsidy that currently operates in the domestic market. The benefits of Flood Re will be targeted at lower council tax bands, where affordability is more likely to be an issue.
In previous debates, I have gone into some detail on the thought process behind the leasehold sector; if the noble Lord will forgive me, I will not reiterate those arguments. I am, as he knows, sorry to hear about the specific examples he cites. As I have said, I would be happy to speak to the ABI about the initial case to which he referred. It would be helpful to me to have some more details; perhaps we could discuss that.
The noble Lord also asked about the letter from Otto Thoresen. I am sorry that he feels that the assurances from the ABI are inadequate. We have previously asked for evidence of problems and, to date, have had nothing but anecdotal evidence. Again, however, if the noble Lord would like to share the details with me, that would be helpful and I would be happy to take the matter forward.
I have a number of notes here which deal with matters that we have dealt with at some length in earlier debates; I hope that noble Lords will forgive me if I do not simply reiterate old arguments. It might be helpful if I deal with the issue of maps, which some noble Lords have raised. It was probably the noble Lord, Lord Campbell-Savours, who asked what happens if a property is not proven to be at risk. If a home owner has evidence that the maps do not accurately reflect their level of risk, they can provide it to their lead local flood authority or the Environment Agency for review.
There was a complaint that it takes too long for the Environment Agency to update maps and then share them with insurers. The Environment Agency—and I see the chairman in his place—revises the rivers and sea flood risk maps on a quarterly basis. It is possible that some insurers do not choose to receive updates as regularly as that, which could explain the time lag that some people have experienced. It almost always pays to shop around or to contact a specialist broker to explore ways of reducing premiums. This is important: there is a competitive market in the United Kingdom which will and does help to keep prices low. From personal experience, I know that different insurers take different approaches to pricing risk, which is, as I say, why people should be encouraged to shop around. One of the benefits of Flood Re is that it enables the provision of claims data from the insurance industry to the Environment Agency to help improve risk mapping in the future.
Under the statement of principles, people had to stay with their existing insurer to benefit. Therefore, they were prevented from shopping around for the best price—something I have been going on about at some length. Once Flood Re is up and running, people will be able to shop around, with those in scope knowing the maximum they should expect to pay for the flood risk part of their premium. Insurers have estimated that only 1% to 2% of the market would expect to pay prices higher than the proposed premium thresholds which were set out in the impact assessment. These are the people who will need Flood Re. The majority of the market is expected to be covered by prices lower than those offered through Flood Re. I hope that that is helpful and that, on that basis, the noble Lord will feel able to withdraw his amendment.
Lord Campbell-Savours
I thank the noble Lord for his response. I do not want to detain the House. As I say, we will have to come back to these matters in the future. I hope that, in light of what the Minister said, he will be looking for further information. Those who are watching this debate on the internet might well send me their concerns about it, and I will forward them to the Minister. On that basis, I beg leave to withdraw the amendment.
Lord De Mauley
Lord De Mauley
My Lords, I have tabled four minor changes to strengthen and correct the Bill. I will run through them quickly.
Amendment 16 to Clause 55 provides certainty to the National Audit Office that, when auditing Flood Re, it is able to consider the economy, efficiency and effectiveness with which the scheme administrator has used its resources and the propriety and regularity of the scheme together and at the same time. Amendment 17 is intended to ensure that, in the unlikely event of the transfer of the scheme, employment contracts will be transferrable where they might otherwise not be. This reflects, in Clause 56, powers which are present in Clause 71(4)(a) in relation to the winding up of Flood Re at the end of its lifetime. Amendments 19 and 20 correct a numbering error in the Water Industry Act 1991. Section 12(3D) was inserted by the Enterprise and Regulatory Reform Act 2013 and unfortunately included the incorrect reference to Section 16B. Amendment 20 changes this reference to read “14B”. I will be happy to provide any further clarification if any noble Lord wishes me to do so.
I believe it is customary at this juncture to say a few words to place on record my thanks to all noble Lords who contributed to the debates on the Bill and to the hardworking officials who have laboured long over it as well. I extend special thanks to my noble friend Lady Northover for ably supporting me at the Dispatch Box and in many ways throughout the course of the Bill. I am very grateful for the detailed scrutiny the Water Bill has received from your Lordships. It leaves this House genuinely in better shape than when it arrived. I beg to move.
Lord Mackay of Clashfern (Con)
My Lords, Amendment 17 refers to the “pension liabilities of staff”. Does that mean the pension liabilities incurred in respect of pensions to be paid to the staff?
Lord Whitty
My Lords, I thank the Minister for these amendments and for his explanation. I will not oppose any of these amendments, as he is no doubt gratified to hear. I will make two points, one of disappointment and the other of praise.
The disappointment is that among amendments brought forward by the Government at this stage are not those that relate to clarifying the position on abstraction reform and on providing some greater assurance on affordability of water bills. Whoever is in government in the next couple of years must address those two issues with some degree of urgency. It is a pity that we did not manage that in the Bill.
My praise, like the Minister’s, goes to his officials, who undoubtedly gave us a lot of information at the beginning of the Bill and put up with all our idiot child questions throughout the Bill. We made considerable progress, even today. I thank the Minister and the noble Baroness, Lady Northover, for their patience.
Lord De Mauley
Lord De Mauley
( ) ”
“( ) in subsection (3D), for “16B” there is substituted “14B”.”