Water Bill
Lord De Mauley Excerpts(12 years ago)
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Lord Whitty (Lab)
My Lords, last week’s de facto alliance between the noble Lord, Lord Moynihan, and me extends in part to these amendments, in that it would be sensible for the Government to contemplate positively some of the latter amendments in the group, particularly those that inhibit the degree to which incumbents can effectively square the market against new entrants. However, my agreement does not extend all the way, I am afraid, particularly to the earlier amendments in the group. We must remember that the Bill is not quite as radical as all that, and, if it were to be a bit more radical, a lot of other things should follow.
We are, actually, introducing competition immediately only in a narrow part of the market. It is an important part, and there may be subsequent lessons to be learnt, but it is going a bit far to say that Ofwat’s central duty should be extended to promote competition. It already has a duty to look after the interests of consumers, where appropriate through competition, and we are making sense of that in a way that has not been done in the past 20-plus years of privatisation. However, we are not in any way legislating in this Bill for residential properties to be subjected to competition. Some noble Lords may think that we should be doing so, and it may be that I could be persuaded of that, but the fact is that we are not doing so here. If we were, that would raise a whole range of other protections and issues that would have to be considered.
It is also true—the noble Lord, Lord Moynihan, referred to upstream competition—that a number of hesitations were expressed around the Committee last week about triggering the upstream aspect to this, particularly in relation to abstraction reform occurring first. I would not want the noble Lord’s Amendments 115 and 116 about promoting competition to give Ofwat the impression that their provisions would override the need to ensure that abstraction protection was in place before competition in the upstream area was triggered.
Therefore, I cannot support this group of amendments as a whole. The Government may wish to consider one or two of them but, at this point, many of them go too far beyond the scope of the Bill or could be interpreted as doing so.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, my noble friend Lord Moynihan’s Amendments 115 and 116 would introduce a new duty on incumbent water companies to “facilitate competition”. This would sit alongside their primary duties to supply water and provide sewerage services to their appointed areas. Amendments 138 to 145 would change Ofwat’s powers to amend licences to introduce the market reforms set out in the Bill.
One part of the proposed new duty on incumbents would require them to act in a manner that did not “prevent, restrict or distort” competition. I think we can all agree that it is essential that incumbent water companies play by the rules of the market so that customers benefit from competition. That is why the Competition Act 1998 already prohibits business from making agreements that involve the prevention, restriction or distortion of competition, or from abusing a dominant position in the market. Both incumbents and licensees are subject to an overarching competition law regime that deals with the concerns that the amendments seek to address. As my noble friend thought I would say, Ofwat is able to enforce the Competition Act 1998 in the water sector because it has concurrent powers with the Competition and Markets Authority.
In some of our debates on Tuesday, noble Lords made comparisons with Scotland, as did my noble friend today, but I note that a facilitating competition duty was not imposed on Scottish Water, although it, too, is subject to the aforementioned Competition Act. It is worth noting here that WICS does not have the same powers as Ofwat under the Competition Act, which may explain some of the differences in the way Scottish Water is regulated.
Incumbents will be subject to enforceable licence conditions, market codes and charging rules which will ensure that they operate fairly in the competitive markets. I question why the amendments do not require licensees to be under the same or a similar duty because both licensees and incumbents operate within the retail market and some licensees are associates of incumbents.
Viscount Hanworth (Lab)
My Lords, as I had occasion to remark at Second Reading, some water companies have been making exorbitant profits on the back of the rather generous tariffs that have been allowed by Ofwat. Whereas consumers were once able to disregard the cost of their water usage, it can now be a significant item in their budgets, to the extent that those in poverty may struggle to pay their bills. I have also indicated that the revenues of the water companies have often been used by the owners of those companies for purposes quite unrelated to those of the industry, when they should be used to cover operating costs and the costs of investing in capital infrastructure.
This amendment seeks to ensure that consumers will be adequately informed of the details of tariffs and that they will be properly alerted to any schemes that are available for mitigating the costs when they prove hard to bear. The amendment can also be seen in the context of the various schemes that have been proposed that would alert consumers to their current water usage. This amendment and the one that follows it seek to cast further light on the costs and revenues of the water companies, which continue to be opaque, to say the least.
Lord De Mauley
My Lords, I thank the noble Lord, Lord Grantchester, for introducing Amendment 118, which, as he said, would insert a new clause into the Bill to place a legal requirement on water companies to include information on their bills about the Water Sure scheme. The scheme provides a mandatory safety net for low-income customers on a meter who, for reasons of ill health or because they have a large family, use larger than average amounts of water. It caps the bills of these households at the average for their company area.
The eligibility criteria for Water Sure are twofold: the household must be in receipt of a relevant low-income benefit and must have three or more dependent children living at home or someone with an illness that necessitates high water use. It is unfortunately a feature of all means-tested benefits of this sort that take-up, as the noble Lord mentioned, can fail to match eligibility. That is why promotion of the scheme is so important. I am pleased to be able to tell the noble Lord that all water companies already voluntarily provide information about Water Sure on their bills.
In addition, Amendment 118 would require all water companies to provide information about tariff structures and the lowest available tariff. This is not the energy sector—water companies do not have complex tariff structures. In fact, the situation is quite the reverse. The choice for the majority of household customers is between paying according to volume of water used—a metered tariff—or according to the rateable value of their home. All water companies provide information on household customer bills about how to get a meter fitted free of charge. Companies also provide advice to customers on whether or not they might benefit financially from the installation of a meter; a role also performed by the Consumer Council for Water. The cheapest option for each household will depend on the location of the property and the amount of water used by the household. Where a company offers a social tariff, information on whether a household may qualify is provided by the company alongside the customer bill. The Consumer Council for Water works closely with each water company on the information provided on household bills to ensure that customer interests are met. Its very practical advice is that customers are likely to be put off by too much information in their bills.
For these reasons, I cannot agree that customers will be best served by placing an increasing number of legal requirements on water companies to include additional information on customer bills. I believe that the current approach of working in partnership with the body responsible for representing the interests of customers is more likely to be effective. I therefore hope that I can persuade the noble Lord to withdraw his amendment.
Lord Grantchester
I thank the Minister for that reply. I had not heard that all companies were already providing this information. My information was that this was not the case and that only some were. I am encouraged that the reassurance has been provided but, nevertheless, feel that the promotion of the scheme could be improved if it was included in people’s bills when they had to pay them. I am sure we will want to return to this issue because, given that the uptake of Water Sure payments is at a rather low base at the moment, we want to be reassured about what more could be done to bring this to the attention of families.
Thanks largely to the Consumer Council for Water, customer service has been improving in the water industry, dominated as it is, as my noble friend behind me has said, by large regional monopolies. Nevertheless, it is regrettably necessary to spell out these requirements. In the mean time, I beg leave to withdraw the amendment.
Lord De Mauley
My Lords, I thank the noble Lord, Lord Whitty, for Amendment 119, which would insert a new clause into the Bill to place a requirement on the Government to introduce by secondary legislation what is described as a national affordability scheme, with eligibility criteria set by government.
Keeping bills affordable while ensuring continued investment in essential water and sewerage services are the driving principles behind this Bill. I thank the noble Lord for giving us the opportunity to debate these important points. However, while I am in full agreement with him that we must consider the impacts of bills on hard-pressed households, I am not persuaded by his proposal.
First, the concept of a scheme with nationally mandated eligibility criteria simply ignores the reality of the water industry, which is structured on a regional basis. Different water company regions have different customer bases. Average incomes and the cost of living vary substantially from region to region, as do the costs of supplying water and sewerage services. A top-down, centralist approach could take no account of these regional variables. A centrally mandated set of eligibility criteria would have a completely different impact on households living in otherwise identical circumstances, depending on which region they happened to be in.
This is why the Government’s approach is focused on company social tariffs. We have issued statutory guidance that requires the companies to work with their customers to develop local solutions. These must be tailored to local circumstances and acceptable to customers who foot the bill. Companies have been able to introduce social tariffs since April 2013—for slightly less than a year. In the past year, three have done so. The noble Lord, Lord Whitty, feels that the pace of change is too slow, but by 2015-16 the majority of water companies will have a social tariff in place.
Legislating for this change will not make it happen any faster. Given the requirements to develop nationally mandated eligibility criteria, it could actually slow the pace at which social tariffs are rolled out. That could delay the point at which some hard- pressed households receive the help that they need. As the noble Lord said, I have mentioned before that all incumbent water and sewerage companies have already developed packages to help customers with affordability problems. These include customer assistance funds, support tariffs, debt advice and water efficiency measures. Social tariffs have provided a valuable additional tool.
The second important point in relation to this proposal is that it remains far from clear how it is intended to fund this scheme. This is not a minor point of detail; it is the key point, which needs to be addressed. In discussions in another place, there were two suggestions for how such a scheme could be funded. Broadly speaking, these can be characterised as either some form of cross-subsidy from ineligible customers, or some form of tax on profits. These are materially different approaches with very different implications, so it is right to seek to get to the bottom of what is being proposed.
A nationally mandated affordability scheme funded by cross-subsidy would be a tax on all water customers ineligible for help. This would be a very blunt instrument. We must not forget that a great many households that are ineligible for help with their water bills are nevertheless living on very modest incomes. It would be hard on them to argue that they should have to foot the bill without being properly engaged in the development of a locally appropriate scheme.
Alternatively, some have proposed that a national affordability scheme could be funded by some form of windfall tax on company profits. In a price-capped sector such as water, this would be an odd thing to do. The recent publication of water companies’ business plans has demonstrated how the price review can work to claw back benefits for customers. By taking account of lower financing costs, Ofwat estimates that the next price review could significantly reduce pressure on all customers’ bills by between £120 million and £750 million a year. Most water companies are proposing flat or declining customer bills from 2015 to 2020. This is in advance of Ofwat’s efficiency challenge. The spectre of a tax on profits would seriously undermine the regulatory stability on which this system is founded, unnerving investors and pushing up costs for all customers.
I agree with the noble Lord, Lord Whitty, that it is vital that those who are struggling to pay get help. However, I believe that the current approach of regional affordability measures meets the realities of the sector. I therefore ask the noble Lord to consider withdrawing his amendment.
Lord Whitty
My Lords, on this amendment, the noble Lord has misunderstood the nature of the proposition and downplayed the nature of the problem. He says that all companies will have social tariffs in a couple of years. I hope that that is true and that it means that the majority—even pretty well all—of the 2 million people who have affordability problems will have been helped by those schemes.
Lord De Mauley
I ought to interject. I did not say that all companies within a couple of years would have social tariffs. I said that the majority of water companies will have a social tariff in place by 2015-16. All incumbent water and sewerage companies have already developed packages to help customers with affordability problems. I went on to say that these include customer assistance funds, support tariffs, debt advice and water efficiency measures.
Lord Whitty
My Lords, that is even less reassuring than what I thought the Minister said in the first place.
The Minister’s criticisms fall into two categories. The first is that this is a top-down proposition. It is not: it is a framework for companies to introduce social tariffs and other measures that help affordability within their own structures, subject to some minimum standards. It is not an imposition from the centre of exactly how to do that. It is, however, a failsafe if they fail to do it. The reality is that both the regulator and the companies have hitherto been quite resistant to such propositions. The noble Lord is right to say that, strictly speaking, 2013 was the first point at which they could consider them, but that was because of the three-year delay since the 2010 Bill and, before the 2010 Bill, deep resistance within the industry to any such concept. Therefore, we have form here and it is not sensible to be complacent that in 18 months’ time the companies will have sorted all this out. I do not believe they will. That is why they need a push and a framework that sets minimum standards of eligibility and operation.
The Minister’s second criticism concerns the funding of this proposition. He said that it could be funded out of a tax on profits. I have not proposed a tax on profits and I think the noble Lord’s brief misunderstands what was said in another place about this. It is fairly evident to me—and my noble friend Lord Hanworth has pointed this out on many occasions—that actually most water companies could afford to be a bit more generous to their consumers in relation to profits, dividends and the tax that they currently pay, but that is not in any sense an advocacy of a windfall tax, so let us get that out of the way. The other funding proposal is by cross-subsidy. In one sense, social tariffs are by definition a cross-subsidy. Therefore, if the Minister hopes that all companies will come up with social tariffs or equivalent schemes, the objection is just as valid to his proposition as it is to mine. Therefore, there is no additional cross-subsidy compared with the preferred outcome of the Government on this.
Lord De Mauley
I thought I had made the point that we accepted that there will be some sort of cross-subsidy but that, in our view, it would be better if that was organised on a regional basis because one could take into account regional circumstances.
Lord Whitty
Yes, but my proposition allows for that. It gives a push to companies to develop their social tariff schemes on a regional basis provided they meet minimum standards. I am not precisely defining what the national affordability scheme should consist of; it is up to the Minister and his department to come up with the appropriate forms in discussion with the DWP and other government departments and agencies that work in this field with vulnerable and low-income households. I am not attempting to lay that down. Therefore, this is not a top-down approach. It allows for some diversity of delivery.
The Minister’s objections to this proposition really do not stand up on either count. I hear what he says. I suspect that the department is pretty immovable on this but it is certainly an issue to which I intend to return. For the moment, I withdraw my amendment.
Baroness Byford (Con)
My Lords, over the years that we have been debating water bills, this has been a constant theme. I think that all of us in the Chamber, on whichever side we may have been sitting at a particular time, have agreed that it is a problem that needs to be resolved. What I am not quite clear about is whether Ofwat with its new responsibilities has the power to tackle what is being proposed by the noble Lord, Lord Whitty, and whether that would then make his amendment unnecessary. However, I am still sympathetic to what the noble Lord said about those who can pay and will not pay. I rather gained the impression from Ofwat when it gave a presentation recently that it had the power to make adjustments to individual water companies. I might be wrong, but I would be glad of some clarification.
Lord De Mauley
I thank the noble Lord, Lord Whitty, for his amendments. Amendment 120 would add a new clause to the Bill requiring landlords to provide contact details for their tenants at the request of the water company. Section 45 of the Flood and Water Management Act 2010 already enables Ministers to bring forward secondary legislation that would require landlords to provide water companies with personal details about their tenants—or themselves become liable for paying the bill.
Following extensive consultation in January 2012 with the industry and with landlords’ organisations, the Government took the decision that a voluntary approach would be more suitable. During consultation, landlords argued that the additional regulatory burden on them would be disproportionate, as they are not the source of the problem that we are trying to tackle.
We seek to make decisions based on the evidence. One purpose of the consultation was to invite the water industry to provide evidence of the benefits of the regulatory approach. In particular, neither the companies nor Water UK were able to provide any facts about the proportion of bad debt in rented properties that results from a lack of information about the occupier. This evidence was essential to assessing the benefit of the measure. The evidence provided by the water sector to support the case for additional regulation of millions of small and micro businesses was weak. The Government do not believe that more regulation is always the answer.
The evidence shows that good practice in tackling bad debt is not applied consistently across the water sector—the noble Lord, Lord Whitty, referred to this; that is something that we can agree on. The significant variation in performance between companies tells me that the focus should be on driving better standards across the sector rather than on regulating landlords. I used to run my own business and I know that debt collection, which is a subject that I know quite a lot about, is a matter largely of application and hard work. One reason why we do not propose to bring forward the bad debt regulations on landlords is that we do not wish to endorse the argument that performance on bad debt is outwith the control of the water companies. There is more that the companies can do to collect their debts and we want them to focus on this rather than looking to government to solve the problem for them.
Of course, the real driver of company performance is the incentives and penalties set by the regulator, so I am pleased to be able to report that Ofwat has changed the approach that it takes to bad debt in the methodology that it is using for the 2014 price review. The new approach will enable it more effectively to bear down on the costs of bad debt. It is doing this by insisting that the companies demonstrate that any increase in bad debt is genuinely beyond their control and that they have taken all available steps to control it. Unless they can prove that this is the case, they will not be allowed to include it in customer charges.
We are already seeing our focus on the industry taking responsibility for tackling bad debt bearing fruit. The industry is working with landlords’ organisations to establish a new voluntary scheme—and this answers the point raised by my noble friend Lord Selborne—that will enable landlords to provide information about their tenants directly to water companies swiftly and easily. This approach has the support of both Water UK and the main landlords’ organisations. The new database will launch in March this year. For these reasons, I believe that Amendment 120 is unnecessary.
The new clause proposed by Amendment 122 would provide a new power for both Ministers and Ofwat to disallow companies from recovering the costs of unpaid bills from their paying customers. Ofwat has the power to decide which costs may be recovered through the price review. As I have explained, and I think this answers the point made by my noble friend Lady Byford, Ofwat is already using the price review process to bear down on the costs of bad debt. It is requiring companies to demonstrate high performance in debt collection and to show that any increase in bad debt is genuinely beyond their control before they will be allowed to include it in customer charges. The current price review will challenge the poor performers to raise their game.
Lord Whitty
My Lords, I congratulate the noble Baroness on producing such an important amendment. I suspect that it is beyond the Minister’s pay grade to agree that, in accepting the amendment, we would at one and the same time get Parliament to rationalise the way in which we legislate, get Ministers to ensure regulators co-ordinate with each other and get departments to make their activities comprehensible to the public. Nevertheless, these are welcome ambitions. The noble Earl, Lord Selborne, added some rationalisation of the quangos as well. I am afraid that all this is indicative of the way in which we do business. From listening to the noble Lord, Lord Crickhowell, both at an earlier stage and today, I understand that this is not a new problem—I have noticed that the Water Industry Act 1991 is seven pages longer than the Bill we are considering.
However, to be serious about this, one of the great failings of Parliament has been the failure to produce consolidated legislation in any field. After 15 or 16 years in this House, I still fail to understand why Parliament has not devised a procedure for pulling together consolidation of Acts in all areas, so the noble Baroness’s amendment has wider implications. Whether the amendment should sit in the Bill I will leave to the Minister but, much more narrowly, the proposition that for each subject matter there should be a single website address which links to all the different bits of regulation, authorities and other government interventions, is very good. It is one which has been talked about in Whitehall but hardly delivered at all. The one point where Defra could probably take this amendment on board in the context of water is regarding that single website. I think practitioners, companies and consumers would be very pleased to see such a development. I congratulate the noble Baroness, but we will see what the Minister says.
Lord De Mauley
My Lords, I thank my noble friend for her Amendment 122A, which would introduce a new statutory duty on the Secretary of State to ensure that the bodies involved in regulation of the water industry work to minimise bureaucracy. It would also require a definition of all the statutory bodies concerned with water to be published on a single website. I strongly support her in her desire to minimise bureaucracy, duplication of effort and waste. I am quite sure that I railed against it and for the consolidation of legislation when I was in opposition, as the noble Lord, Lord Whitty, is enjoying doing today. These issues are not exclusive to this sector. Indeed, this Government have an energetic and far-reaching programme of reform designed to slash red tape wherever possible. I would argue that we have made some considerable progress with that.
My department has been one of the trailblazers in Whitehall in transforming our approach to regulation. For example, through our Smarter Environmental Regulation Review, in which I have been closely involved, we are attacking unnecessary complexity, inconsistency and duplication of environmental regulation. We are also rationalising environmental guidance and data reporting to make it easier to comply with legal obligations. My department has also carried out a comprehensive assessment of the costs and benefits of all the regulations for which we are responsible. Through the Red Tape Challenge initiative, we have reviewed more than 1,200 regulations and by the end of this Parliament we expect to be delivering savings to business of more than £250 million each year. I hope that this provides my noble friend with some assurance that the Secretary of State already has bureaucracy squarely within his sights.
On the specific changes being made by the Bill, first and foremost I should emphasise that it does not create any new public bodies. The existing regulatory landscape remains unchanged in that regard. I am grateful for this opportunity to clarify the current framework for regulation in the water sector. In England, the water industry is regulated by three separate, independent bodies: Ofwat, the Drinking Water Inspectorate and the Environment Agency. Ofwat is the economic regulator responsible for ensuring that water and sewerage companies provide consumers with a good quality service and value for money. This includes setting price limits to ensure that customers receive a fair deal, while ensuring that the companies are able to attract low-cost investment in our essential services.
The Government commissioned an independent review of Ofwat and consumer representation in the water sector in 2011. Undertaken by experienced regulator David Gray, the review concluded that regulation in the water sector has worked well since privatisation and that major changes to the statutory and institutional framework were not required. The Ofwat review made a range of recommendations about the ways in which the regulator could reduce the regulatory burden it places on the industry. In response, Ofwat put in place a programme of internal reform and substantially reduced reporting and other burdens. It has since revised its approach to the price review—something we talked about earlier today—in order to ensure that companies focus on their customers’ priorities rather than looking to the regulator for guidance.
The Environment Agency regulates the impact of the water industry on our environment and promotes sustainable development. It regulates water abstraction as well as the treatment and discharge of wastewater back into the environment. It also helps water companies with their long-term water resource management and drought-planning functions. The Government have introduced a process whereby all public bodies are subject to triennial review to scrutinise how the Government deliver their objectives as effectively and efficiently as possible, achieving the best possible value for taxpayers and the public. The Environment Agency was reviewed under this process in 2013. The review looked at how it could work in leaner, smarter ways to enable and drive sustainable growth, making best use of the resources available to it.
The Drinking Water Inspectorate is responsible for ensuring that companies provide safe, wholesome drinking water that meets standards set down in law. Although not a regulatory body, the Consumer Council for Water also plays an important role by representing water and sewerage customers.
My noble friend referred to the market operator. In our debates on Tuesday, we clarified that this is neither a public body nor a regulator but a straightforward administrative entity that will be run by the industry for the industry, within the context of the regulations laid down by Ofwat. In fact, the market operator will serve to minimise bureaucracy by providing a single set of administrative systems for switching customers, which would otherwise need to be duplicated by every company operating in the market. In our debates on this matter on Tuesday my noble friend Lord Selborne noted that such bodies are a common feature of regulated utility industries.
I hope that I have gone some way to clarify the roles and responsibilities within the water sector. As with any sector, we are always looking for ways we can do things better and more efficiently. As I have said, we are active in challenging red tape and bureaucracy. We have the Red Tape Challenge process, which has already scrutinised all the regulations affecting the water industry. We have established the principles for economic regulation to guide the high-level institutional design of the regulatory frameworks by the Government. These reinforce the Government’s role in establishing the policy direction and appropriate guidance, leaving regulators to regulate independently. A new regulators’ code also takes effect in April that will apply to non-economic regulators such as the Environment Agency and the Drinking Water Inspectorate. It is the latest step in the Government’s drive to put businesses’ need for clarity, transparency and minimum bureaucracy at the heart of the regulatory system.
There are more examples of the provisions already in place to ensure the roles and responsibilities of regulators and other public bodies are clear, and that unnecessary bureaucratic burdens are identified and removed. One of the more relevant of these is the shared duty of the Secretary of State and Ofwat under Section 2 of the Water Industry Act 1991 to have regard to the principles of best regulatory practice. The Act already specifies that their respective regulatory activities should be undertaken in a way that is transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed.
Lastly, I know that my noble friend is keen to see information about the various bodies concerned with water on a single website. I am therefore pleased to be able to confirm to her that all of Defra’s agencies will move across to the gov.uk website by the end of March this year. I also thank my noble friend Lord Moynihan for his welcome for the notes and the road map, which is indeed on the website. Although I fully concur with the spirit in which my noble friend’s amendment has been tabled, I ask her to withdraw it as it would effectively duplicate existing provisions.
Baroness Neville-Rolfe
My Lords, I am grateful for the trenchant support I have had from this side of the House for my efforts to reduce bureaucracy and promote clarity and transparency, especially from my noble friend Lord Crickhowell. My noble friend Lord Selborne talked about the possibility of the map I proposed being made on a catchment area basis. However, my experience of broadband, where there is a county-by-county map, is that it is not very effective. One of the things I was looking for was to have all the rules, regulations, agencies and requirements in one place on the one website. That can certainly be on the gov.uk website, as the Minister has kindly suggested, but they all need to come together so that a consumer, an investor, or a water undertaker who may be bringing in a new reservoir can see the whole piece. I would find that bottom-up approach hugely valuable. I feel that the documents that have already been made available are a start, but they do not—
Baroness Neville-Rolfe
They are, but I was suggesting that we have a website that brought all the different things together in one place, not just the helpful notes that the Minister has put forward, and which takes people through the rules.
I am extremely grateful for the Minister’s support in reducing bureaucracy and in outlining the different things that have been done to achieve that end. However, it is all the more important to bring the various requirements together to make it clear what is happening. We could bring about a quiet revolution of clarity and transparency and make entry into the industry much less forbidding if we could bring what is being set out in these different laws and by these different agencies into one place. Of course I welcome the idea of putting those on to one website, but I will study what the Minister has said and consider whether further thought needs to be given to how that might be done, to find a way forward. Perhaps we can also do some policy formation in the Bishops’ Bar. I thank my noble friend, and I beg leave to withdraw the amendment.
Lord De Mauley
“(7) For the purposes of section 63AC, premises which are outside a water undertaker’s area are to be treated as being within that area if they are supplied with water using the undertaker’s supply system.
(8) In subsection (7), the reference to the undertaker’s supply system is to be construed in accordance with section 17B.”
Lord De Mauley
Lord De Mauley
I thank the noble Lord, Lord Whitty, for his amendments. I shall deal with the amendments in reverse order, Amendment 146 followed by Amendment 137, as to some extent the latter builds on the former.
The new clause introduced by Amendment 146 would give water companies a duty to report every year to Ofwat and the Secretary of State about their performance, investment, tax, corporate structure and dividends. If obtaining these data is the noble Lord’s concern, I can confirm that all this information is already freely available in the public domain. The effect of the amendment would be simply to duplicate existing reporting requirements. The cost of the additional administrative burden on water companies would ultimately be met by customers. All companies—not just water companies—are already required to report on many of these matters in their annual reports and accounts. Any additional water sector-specific reporting requirements are a matter for the regulator, which is ardent in pursuing them.
The noble Lord raises some important issues about the way in which the sector is run, regulated and structured. I believe that the regulator is already taking action to address these issues. Let us be clear about the direction of regulation in the water sector. Ofwat is already taking vigorous action to improve standards of corporate governance across the sector. It is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance generally. Ofwat recently published the outcome of a consultation on principles relating to board leadership, transparency and corporate governance. The principles set out clear standards for what the sector must do and set a clear timetable for their introduction across the sector. The response from water companies has been positive and I welcome that.
Ofwat has also launched a similar consultation relating to holding companies, seeking to apply basic principles to holding company boards across the sector on issues such as risk, transparency and long-term planning. I believe that the proposed annual review would place an additional burden on companies for very little gain, so I share the concerns about it expressed by my noble friends Lady Neville-Rolfe and Lord Moynihan.
Amendment 137 builds on the clause which would be inserted by Amendment 146. It would place a new duty on Ofwat to take into account the proposed annual report by water companies to the Secretary of State. It would then give Ofwat a further power to consider this information when determining whether to reopen a price review. Ofwat already has the power to reopen a price review under the substantial beneficial effects clause of the water company’s licence or by making an interim determination. If a water company is profiting from factors outside its immediate management control that were not anticipated at the time of the price determination, Ofwat can reopen its five-year price settlement. So Ofwat has the powers necessary to revisit price determinations. However, given the importance of regulatory stability in keeping prices down for customers, it rightly utilises these with caution and considers carefully whether there would be benefit to customers.
We are at risk of talking about things as they were, not things as they are or will be. Ofwat is changing the way in which it regulates. It is seeking to change the culture of the water sector and to facilitate companies taking greater ownership of and accountability for delivery to customers, now and in the long term. Therefore, I am not persuaded that these further powers and duties are necessary and I hope that I can persuade the noble Lord to withdraw his amendment.
Lord Whitty
My Lords, I would not disagree with the Minister and the noble Baroness that Ofwat is toughening up its stance, including on issues of governance within the sector. I think that I am at one with the Government in hoping that we move away from the detailed, costs-checking form of regulation of the industry towards a more broad-based one which will be helped by a degree of competition within the industry.
The Minister is right that Ofwat has emergency or overriding powers. The fact of the matter is that it has not used them and would have to meet some fairly stringent criteria so to do.
The Minister rightly admonishes me for looking backwards rather than forwards, but we have to look backwards to the immediate past. We have had two five-year price reviews. At the beginning of those reviews, the cost of capital, which is a huge part of the actual expenditure of the industry, was seriously overestimated over a period of 10 years, and prices set accordingly. During that period, the capital value of water companies went up substantially; the dividend payments went up substantially and a number of them were taken over, sometimes two or three times. Somebody made a significant amount of money out of that; it was not because of the increased efficiency of the industry, although the industry did make some efficiencies. It was a fortuitousness similar to when Ofwat, with what it thought was the best information at the time, set the allowance for capital; that allowed a much bigger profit than one had assumed at that time.
Under its existing powers, Ofwat did not judge, nor did successive Secretaries of State seek to nudge them to intervene. If the public knew that the system of regulation did not allow them to do so, they would be pretty appalled. I therefore think we need to do something. The Minister might not like my particular proposals—and they certainly are not perfect—but Ofwat needs to know what the unforeseen financial consequences are of the companies’ operations. It needs to have some ability to intervene on behalf of consumers—business as well as individual consumers—if it thinks that something has gone seriously wrong. At the moment, those powers are not sufficient.
I would like to see a measure like this on the statute book; I would not envisage that Ofwat would very often use it, but the experience of the past 10 years—it may well be exactly the opposite experience in the next 10 years as far as the cost of capital is concerned—leads me to think that there is a gap somewhere in Ofwat’s powers. We need to address that somewhere in this Bill and I am sorry that the Minister is not prepared to take it away and look at it in this context. I will withdraw the amendment, but this is something to which we might need to return in a slightly different form. I beg leave to withdraw the amendment.
Lord De Mauley
“3A In section 2A (strategic priorities and objectives: England) (inserted by section 24), in subsection (4)(d), for “licensed water suppliers” there is substituted “water supply licensees and sewerage licensees”.
3B In section 2B (strategic priorities and objectives: Wales) (inserted by section 24), in subsection (4)(d), for “licensed water suppliers” there is substituted “water supply licensees”.”
Water Bill
Lord De Mauley Excerpts(12 years ago)
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Lord Crickhowell (Con)
My Lords, this has been a remarkable brief debate. I thought that the noble Lord, Lord Whitty, introduced the amendment in a very low key, charitably commenting on the Government’s position. That powerful speech was followed by what I was going to say was a lecture, but certainly a speech, that ought to be read by every civil servant in the department, because it was one of the most impressive speeches—lectures—about market economics and their realities that I have heard for a very long time.
I know my noble friend on the Front Bench knows something about business and will have listened with care. I beg him on this occasion to listen to the realities of the market rather than the detached views of civil servants, who, by their training and nature, may not be as equipped to deal with market realities as my noble friend Lord Moynihan clearly is.
It was only really when I heard the speech of the noble Lord, Lord Whitty, and even more so when I heard my noble friend Lord Moynihan’s speech, that it seemed we were going to deal with this point about uncertainty. I simply cannot believe that people advance that as a serious argument. All the evidence suggests that if you want to have market confidence—the confidence of investors and of the people who advise them—you need to have a clause of this kind. Far from an uncertainty, it is an absolutely essential requirement in order to give the market confidence. On that ground alone, I believe that this amendment simply has to be taken seriously by the Government. I hope that, rather than advancing any arguments that have been put in his papers before the debate, my noble friend makes a very cautious response, takes away my noble friend Lord Moynihan’s speech and demands that his department consider it adequately and fully before we come back again on Report.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, I am very grateful to the noble Lord, Lord Whitty, for moving his amendment and to my noble friends for speaking to theirs, as well as for the debate as a whole on retail exits and for an understanding of the concerns of noble Lords.
Amendment 98, tabled by the noble Lord, Lord Whitty, and Amendments 107 and 132, tabled by my noble friends Lord Selborne and Lord Moynihan, take two different approaches to enabling incumbent water companies to exit the non-household water and sewerage retail markets. Amendment 98 would provide for such exits through regulations produced by the Secretary of State, and Amendments 107 and 132 through transfer schemes produced by incumbent water companies and approved by the Secretary of State.
For completeness, I should be clear from the outset that new entrant licensees may enter and exit both the retail and upstream markets whenever and however they wish. It could be as simple as surrendering their licences to Ofwat, and their customers could then be distributed to other licensees through the supplier of last resort regime introduced by Clauses 31 and 32. Alternatively, they could sell their customers or their infrastructure to other licensees ahead of surrendering their licences. These companies operate only in the competitive part of the market, serving non-household customers who will be able to switch to another retailer if they are unhappy with the service they receive.
However, these amendments deal with the thorny issue of retail exits by incumbent water companies, the quasi-monopolies appointed in each area of England and Wales. We have heard a range of arguments for retail exits at Second Reading, during the passage of the Bill in another place and now this evening. This is a complex issue with far-reaching ramifications for both customers and investors. It is clear that the intention, at least of Amendment 98, is to allow exit only from the non-household market, leaving household customers with the incumbent companies. However, this partial form of exit would leave many questions unanswered about the future relationship between the incumbent water companies and their customers in both the household and non-household sectors. We want our market reforms to lead to real improvements in services for all customers, including of course household customers, and we do not consider that making such a change at this time would be in the overall interest of customers. Before making potentially far-reaching changes to the relationship between all customers and their water companies, we would need to ensure that they were effectively engaged. The Consumer Council for Water, the independent organisation responsible for making sure that the customer voice is heard, supports the Government’s approach to retail exits.
We want to see a successful non-household retail market. The Bill sets a framework for new-entrant retailers to enter the market on an equal footing with the retailers of the incumbent water companies. We expect Ofwat to use its regulatory powers to make sure new entrants can be confident they are competing on a level playing field. Clause 23 introduces a shared obligation between the Secretary of State, Welsh Ministers and Ofwat to take steps to reduce the likelihood of incumbents discriminating in favour of their own retail businesses or associate licensees. However, retail exits are not about delivering a level playing field. They are about some incumbents wanting to exit because they do not want to participate in a competitive retail market and would prefer to stop offering services to any non-household customers in their area. While we might expect there to be a more active market in England from 2017, a scenario in which incumbent companies lose most or all of their customers is highly improbable. Incumbents sitting around while customers disappear is, in our view, an unlikely scenario.
The point we are making is that this is evolution not revolution. Many non-household customers may choose to stick with the incumbent supplier because the incumbent supplier improves its services as a result of these reforms. Where customers choose to switch, we anticipate a growth market where innovation and competition lead to benefits, both environmentally and in customers’ bills.
Incumbent water and sewerage companies are given clear responsibilities for a reason. Their unique status as virtual monopolies requires some commitments from them in return. This means that following a retail exit, the incumbent might still be required to provide retail services to any non-household customers that move into the area, or when new non-household developments are completed, or if the market failed. Incumbents are the default supplier of first and last resort regardless of whether they are able to hive off their existing non-household customers to a licensee. Allowing partial retail exits would also open the door to forced separation. We have already discussed the risks relating to separation.
It was incumbent water companies themselves and their investors that persuaded us of the risks to future investment should separation be forced onto the sector. They told us that forced separation would increase risk to investment and push up costs to customers if they had to renegotiate their finance packages as a result of restructuring their businesses. Neither companies nor their investors have told us that they have reversed their view on this.
Amendment 132 would prevent the new Competition and Markets Authority—but not Ofwat—using these provisions to force separation as a remedy to address issues to do with discrimination. We doubt that such a mechanism would be appropriate. More importantly, for the reasons I have explained, we believe integrated companies that are able to provide services to customers within their area of appointment are the right approach for the time being.
Let us be clear: any decision on separation should be made by Ministers and Parliament. We are not prepared to take the risk of any restructuring, or even the potential for it, destabilising investment or increasing costs or even supply risks to customers. While all these amendments envisage the Secretary of State permitting exits, this will also be open to challenge. I have already said that there are very good reasons for not allowing exits yet.
I hope that noble Lords will appreciate that there is more to this matter than simply allowing some incumbents to exit the market. We are not ruling this out for the future but we have a responsibility to consider all the impacts on household customers and on choice in the competitive markets before putting provisions into law.
The noble Lord, Lord Whitty, and my noble friend Lord Moynihan, suggested that we should allow failing companies to exit. The focus of many comments has been the exit of failing companies. Advocates for exit assume that the large players will swallow up the small. These are the companies, however, that customers value for the quality of their service and are often the most efficient suppliers of retail services. Do we really want to see consolidation that loses these efficient and valued companies?
My noble friend Lord Moynihan referred to Macquarie. I simply say to him that its figures need to be looked at with some care. It assumes complete exit, including from the household market, and that there would be no risk of separation. That is not the model proposed by these amendments and it raises some significant issues about the protection of household customers.
It has been suggested that an OFT report—Orderly Exit, published in December 2012—supported the case for allowing retail exits. That report is about designing continuity regimes to allow orderly exits from the provision of public-facing services without interrupting the delivery of services to customers when a business becomes insolvent or otherwise fails. It is not about allowing a company to decide whether it wants to continue with some of its statutory obligations and to get out of others because it no longer feels it wants to compete. The regulatory regime for incumbent water companies already provides for orderly exit in cases of insolvency and for enforcement purposes.
The deadline for the retail market opening in April 2017 is challenging but achievable under the conditions set out in the Bill at present. That would be put at risk if we were to legislate for further structural changes to the industry at this time. Given what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.
The Earl of Selborne
My Lords, Amendment 108 refers to the rights to discharge and its purpose is to support the installation of sustainable urban drainage systems, or SUDS. It is generally recognised that SUDS are part of the long-term solution towards the sustainable use and drainage of water. They improve surface water management and reduced the risk of flooding, and they may include rain gardens, permeable paving, swales and the like. They are designed to collect water and release it slowly back into the environment.
Clause 21, which we have just agreed, clarifies the function of a sewerage undertaker under the Water Industry Act 1991 to include the building and maintenance of SUDS features, so we are here to promote SUDS and the Bill does that. However, there is a problem. To install a SUDS scheme an undertaker, a water company or a drainage company has at present to negotiate the right of discharge. Without such a right or with the prospect of costly negotiations and litigation—there has been plenty of that—there is little incentive to deliver SUDS schemes as opposed to surface water sewers.
The amendment would remove this uncertainty, which has led to litigation and to a lack of incentive for the installation of SUDS. It helps sewerage undertakers to deliver SUDS schemes. We are of course awaiting secondary legislation, which is a separate issue, on the maintenance and the issues with local government on SUDS. That apart, this deals with a much more fundamental issue. It would resolve the legal uncertainty that has arisen since 1989, when a previous water Bill removed the right of sewerage undertakers to discharge. The amendment would therefore restore the legal position to where it was before 1989, when sewerage undertakers had a statutory right, as highway authorities still have, to discharge pure water into any watercourse. I emphasise that it has to be pure; no one is suggesting that there should be a licence to pollute in any shape or form.
At the moment traditional pipe discharges, which are inferior in many respects to SUDS, as I have explained, can be acquired by compulsory purchase powers. However, again, under the Bill we are not extending compulsory purchase powers to SUDS. I am not suggesting that they should be but that once you have the right to discharge, these powers will give an incentive for SUDS to be installed. That incentive is greatly needed, and I beg to move.
Lord De Mauley
My Lords, I am grateful to my noble friend for raising the importance of sustainable drainage systems and I agree with him on this. I can confirm—my noble friend referred briefly to this—that we plan to bring forward the secondary legislation needed to implement Schedule 3 of the Flood and Water Management Act 2010 by April this year, and to commence it at the earliest possible opportunity.
I appreciate, also, that the issue of the right to discharge water is important for sewerage undertakers. However, this is not, by any means, a straightforward issue and there are more interests which would need to be taken into consideration, including the impact on landowners and bill payers. The amendment would allow the discharge of water without express consent. It suggests that compensation should be paid if there is any damage but that no permission needs to be sought. Interference with third parties’ land rights would need careful and detailed consideration.
Current case law suggests that there is no general right to discharge without compensation under the Water Industry Act 1991, for sewerage undertakers or others. Private parties who wish to discharge water on to other parties’ land or into other parties’ assets such as lakes, canals or rivers have to negotiate an agreement to discharge water with the owners.
As my noble friend knows, a challenge to the existing case law on whether there is a right to discharge has been made and will go before the Supreme Court in May. I am sure noble Lords understand that it would not be appropriate to comment on that case. In the circumstances, I ask my noble friend to withdraw his amendment.
The Earl of Selborne
I am grateful to my noble friend. The fact that this has led to such protracted, expensive and time-consuming litigation demonstrates that the law was left in an ambiguous situation—to put it at its kindest—after 1989. The issue clearly has to be resolved but whether the Supreme Court is the right organisation to do so is another matter. I think it would be more appropriate for it to be done by an appropriate Act of Parliament. This is not asking for something particularly unusual. As I said, highways authorities have the right to discharge at the moment. Before 1989, sewerage undertakers had the right to discharge. If landowners found themselves inconvenienced, it would only be in the sense that they were reverting to a situation to which they had been quite accustomed.
I have heard what the Minister says and accept that, with a case in the Supreme Court, he is constrained from discussing the detail. I therefore beg leave to withdraw the amendment.
Water Bill
Lord De Mauley Excerpts(12 years ago)
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Lord Whitty (Lab)
My Lords, compared with some of the amendments before us this afternoon, this one is pretty straightforward and also pretty fundamental. We on this side of the House support the principle of extending competition in the non-residential retail sector of water, partly because we have been impressed by the progress made and experience in Scotland. There, not only have businesses and public bodies benefited from competition within the sector but also there appears to be benefit for the household sector from improved efficiency driven by that competition. That is a good model but of course history does not always repeat itself. We have a very different structure here in England and Wales, and markets are funny things. You cannot predict how the knock-on effects of introducing competition will work out in either the short or medium term.
The Government have made it clear that they do not at this juncture wish to give powers to extend competition into the household sector directly. The logic of competition in the non-domestic sector may well lead to improved efficiency but could equally lead to much tighter margins in the incumbent companies. Ideally, there would be other ways of compensating for those tighter margins but there would be a temptation for companies to restore their margins effectively through higher costs or less good customer service to the household sector. We know that that is not the intention of the Government, nor of the Opposition in supporting the Government in the principle of the move in this respect. We also know that Ofwat will use codes and charging regimes to try to prevent such a thing happening to the disadvantage of the household sector. However, would it not be sensible for this essential principle to be embedded right up front in the Bill?
I am sure that the Government will argue that this is probably not the right place for it but, because of the way the Bill is constructed and the slightly obscure way that retail competition comes in the redraft of 20 year-old legislation, the introduction of retail competition does not exactly leap off the pages of the Bill. Therefore, it would be sensible to put the qualification in early.
Accepting Amendment 1 would ensure that there is no ambiguity and that the intention of the Bill is to introduce retail competition in the non-domestic sector, but with no disadvantage in either price or in kind to the domestic sector. In addition to Amendment 1, Amendment 121 in this group would require Ofwat to keep an eye on the relativity between non-household and household charges. Amendment 45 reflects the need not to disadvantage the household sector by either price or lower service in relation to setting charges and establishing codes, which Ofwat is required to do under the Bill.
Amendment 1 is the principal amendment and would amend Clause 1 so that there would be no ambiguity. I very much hope that the Government can accept such an amendment, or something very like it. I beg to move.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, I thank the noble Lord, Lord Whitty, for his Amendments 1, 45 and 121 on the important issue of protecting householders. It is a crucial issue and one that the Government take very seriously.
Before I go further, I ought to take the opportunity to reiterate disclosure of my interests. I have a tributary of the River Thames running through my farm; I have an abstraction licence and a borehole. I own a house that was flooded in 2007 and I own one-third of a commercially operated lake.
The noble Lord, Lord Whitty, introduced the Water Act 2003 to Parliament, which was intended to put the customer at the heart of the water sector. This Government have continued that work through the water White Paper. We have been very keen, throughout the reforms that the Bill makes to the non-household market, that the household customer remains fully protected, and I think that we have achieved that. Indeed, the Bill introduces reforms designed to help us manage future pressures as efficiently as possible, ensuring that customer bills are kept fair for the long term.
The Secretary of State, Ofwat and the Consumer Council for Water all have a shared duty to protect customers. They must have special regard to, among other people, rural customers and people who are unable to switch their suppliers when carrying out their statutory functions.
There are already mechanisms in place to prevent business customers’ bills being subsidised by household bills. Ofwat’s policy of setting different retail price caps for household and non-household in the current price review will ensure that households do not subsidise the competitive market. Let us be clear about what that means. We can be certain that household customers will not cross-subsidise retail competition because there are separate wholesale and retail price limits. The costs of implementation for upstream reforms will be shared, as will the benefits. It is not desirable to prevent that, as this would also isolate household customers from the benefits of this reform.
We expect that household customers will benefit from the improvements and innovations that competition will foster. Water companies will be incentivised to introduce efficiencies and invest in improved customer services in order to retain and attract non-household customers. There will be positive knock-on effects. Household customers are also likely to benefit from these improvements, as our impact assessment shows.
We will come to the issue of de-averaging in later debates, so I will not detain your Lordships by talking about it now.
I stress that the Bill puts in place a framework that enables household customers to be protected against any changes to their bills resulting from the expansion of the competitive market. To be explicit, our charging guidance will say that de-averaging must occur only where it is in the best interests of customers.
I started by saying that we take the protection of customers of customers seriously. I hope that I have been able to reassure the noble Lord that we have thought about these issues very carefully indeed, and I hope that he will agree to withdraw his amendment.
Lord Crickhowell (Con)
My Lords, perhaps I might take this opportunity right at the start of the Committee to make two general observations. First, I cannot think of any complicated Bill which has been so admirably handled as this one has, so far, by my noble friend Lord De Mauley. He has had a series of briefing meetings trying to explain the complexities of the Bill and has taken infinite trouble to write to those of us who expressed anxieties at Second Reading or on other occasions and give us reassurance.
Having said that, this is an extraordinarily complex Bill, as the noble Lord, Lord Whitty, indicated in moving his amendment. I am told that there are competitors but in my 43 years in both Houses, I do not believe that I have ever had to follow a more incomprehensible Bill. That is because it takes two major pieces of legislation, and one or two other less relevant pieces of it, and amends them in a series of complex ways. It then introduces a whole string of regulations, some of which are not yet defined and made. Simply finding your way through the Bill to find the clauses is extraordinarily difficult. When I thought that I might put down probing amendments to bring out one or two points, I abandoned the task as I could not begin to see where I could do it.
That leads me to make one other observation. When we are confronted with this kind of legislation, I wonder whether it would not be better simply to start with a clause which says, “This Bill cancels and replaces”—or whatever the word might be—“the following Bills”, so that it presents the legislation affecting the industry in one comprehensive new Bill which everyone can follow. What worries me is that once we have completed our proceedings in this House and the Bill becomes an Act, how on earth are the general public and those who have to operate it going to discover easily what the Bill’s contents mean for them? I wonder whether the Government have yet given any thought to having a clear way in which they could present things to the public, and indeed to the water authorities and the new people who we hope will be brought into the industry. Perhaps they could build on the kind of papers that my noble friend has so helpfully presented. There is a real problem and I hope that, as we go through these proceedings, the Government will give careful thought as to how we tell the British public and those who have to implement the proceedings what is actually in the Bill.
Lord De Mauley
Perhaps I might quickly respond to that. First, what I should have done when I spoke first was to thank those noble Lords who have come to discuss their concerns with the Bill with me. That has been an extremely informative and helpful process. I am grateful to my noble friend for his point; he is not the first to say it. As he kindly says, we have been doing our best to help noble Lords with the Bill and I will continue to do that. I also take his point about informing the wider public. If I may, I will take that point away and see what we can do.
Lord Whitty
My Lords, I thank the Minister and the noble Lord, Lord Crickhowell. I have to say that if the noble Lord, Lord Crickhowell, cannot understand this Bill, with not only his experience of the whole legislative programme and procedures in both Houses but his intimate knowledge of the water sector, there is precious little hope for the rest of us. As for the general public or even those people who are to operate it within the industry and its regulation, there are some serious difficulties.
The noble Lord, Lord Crickhowell, was absolutely right to say, as I mentioned at Second Reading, that the Minister and his officials have been extremely generous with their time and effort. A lot of those documents are extremely comprehensible. It is a pity that that is not reflected in the Bill but it is a huge improvement on some departments that we have at times known, under all Governments. So I congratulate Defra and the Minister on the information given to us.
However, given the Bill’s complexity and the difficulty of reflecting it in simple terms for those who are operating it, let alone the average consumer or small business at the far end of the water chain, would it not be simpler to put something quite straightforward, like my amendment, right at the beginning of the Bill, so that everybody could understand it? The Minister has not taken this point fully.
I can understand the Bill sufficiently to see that there are checks and balances in relation to the charging system. It is difficult to see how the domestic sector would, literally, come to subsidise the non-domestic sector as a result of competition being introduced in the latter. However, it is not just about pricing. If the incumbent is faced with squeezed margins it is not just a question of banging the price up a bit because that is, by and large, set for five years and Ofwat would be pretty stringent in ensuring that it stays. However, you can save money by diminution of service and this is why I use the word “disadvantage” rather than referring to cross-subsidy. The sector could suffer from non-price effects of this if it went wrong and competition, instead of driving efficiency across the board, as we are told it has done in Scotland, did not have that effect on the supply to the domestic sector.
I would like to see this at the front of the Bill but I am clearly not going to get that from the Minister today. However, I suspect that, as we go on, there will be other points where greater clarity and part of the Bill being written in large letters would help people to understand. I beg leave to withdraw the amendment.
Lord Whitty
My Lords, I speak only because the noble Earl, Lord Selborne, and to some extent the noble Lord, Lord Moynihan, have rather pre-empted my speeches on the next group. Clearly we are on the same page. The reason I did not put my name to these amendments was that I was not entirely clear what they would do. I thought it would be better to establish a principle position on de-averaging and see what the Government thought. Clearly the Scottish experience is important. Given that experience, it is incumbent on the Government to tell us why they are not legislating in that way for England and Wales, and whether the precise amendments suggested by our Scottish colleagues would work under the Ofwat regime. Clearly the principle is an important one and it is one I will come back to on the next group.
Lord De Mauley
My Lords, these amendments, tabled by my noble friends Lord Selborne and Lord Moynihan, seek to introduce a fundamental change which would narrow the approach to upstream competition in this Bill by removing the link between upstream arrangements and retail arrangements with customers. They would mean that licensees would be able to make arrangements with incumbent water companies to provide water and sewerage services without needing to have a specific customer to consume the water or use the sewerage services through the retail market. The implication is therefore that the market might be established through incumbents tendering for new resources under a so-called single buyer model. This would be a significant change from the regime that has been in place since the Water Act 2003 and which we propose to extend through this Bill.
The current approach provides common carriage rights to licensees who want to provide their customers with water resources or sewerage treatment services using incumbents’ networks. Common carriage is the term used when new entrants are given rights to use incumbents’ networks to provide services to their customers. A single buyer approach is a very different model with decisions on tendering for water supplies or sewerage services resting with the incumbent. It provides fewer rights and less flexibility for new entrants.
The Water Act 2003 brought in a specific common carriage regime for new entrants to access the public supply system by making water supply a licensable activity. Under this regime, the same licensee that puts the water into the system must supply the retail services to the customer. The Bill reforms the existing regime by allowing different licensees to input water and provide retail services to eligible customers, but still requires there to be a specific customer. There is nothing in existing legislation that prevents incumbent water companies from making arrangements with third-party water suppliers or sewerage service providers to input water into the system or deal with sewerage disposal. Indeed, we are pleased to see that Thames Water has gone to the market to see which third parties could provide it with water in order for it to meet future water resource needs. Potential suppliers to Thames Water do not need a water supply licence to be able to make an input under this tendering process. There is no need to amend the Bill to make it possible for third-party suppliers to sell water to incumbents, should we feel this is the right way to go in the future. Clause 12 is designed to enable this. The Bill also provides for licensees to withdraw waste water and sludge from the sewerage system through the disposal authorisation in the sewerage licence. This could be used by Ofwat to introduce a similar model to a single buyer arrangement in the sewerage market if it feels that this would be appropriate.
Through the Bill, we are seeking to bring in new resources and introduce more innovation into the sector. My noble friends’ amendments would allow incumbents to dictate the future direction of upstream markets. This would reduce pressure on those incumbents to introduce efficiencies that will benefit customers and the environment because only those licensees that are able to bid for and win contracts would be able to enter the market. Incumbents rather than customers would therefore determine future upstream markets.
My noble friends have indicated that the main objective of the amendments is to remove risks connected with the de-averaging of water charges. As the noble Lord, Lord Whitty, said, that is something which we will come to in a little more detail in the next group of amendments, but I hope that your Lordships will allow me to say a few words on it now in response to the contributions that have been made. There is a crystal clear steer from the Government in our charging principles that Ofwat must not allow de-averaging that is harmful to customers. Ofwat has all the necessary regulatory tools to enable it to limit the effect of de-averaging on customer charges. Ofwat has clearly stated that it believes that these tools are sufficient. The Government’s charging principles make it plain that Ofwat must use these tools to ensure that any de-averaging or cost reflectivity is in the overall interests of customers. Two independent experts have reviewed the issue of de-averaging: Professor George Yarrow for Ofwat and Professor Martin Cave for the Consumer Council for Water. Both experts confirmed that Ofwat can facilitate upstream competition without any de-averaging. De-averaging has not happened in other regulated utility sectors, even though greater proportions of those markets are open to competition, and it is no more likely to happen in the water sector.
I stress again that the Bill puts in place a framework that enables household customers to be protected against any changes to their bills resulting from the expansion of the competitive market. Our charging guidance will explicitly say that de-averaging must occur only where it is in the best interests of customers.
My noble friend Lord Selborne raised the case of Shotton as a legal precedent to support the case that de-averaging is a real risk. It is a complex and long-running case, but I hope I can persuade him that it is a misunderstanding to describe it as a case of de-averaging. Shotton was a very unusual case and it is not appropriate to extrapolate from it more widely. For example, it concerned a discrete system that served only two customers, one of which was served by Albion Water. This is very rare. To give some context, the case only represented 0.01% of Welsh Water’s turnover. At the time of the dispute, this agreement was not subject to regulation by Ofwat. The Bill includes measures that will bring all such transfers within the scope of the regulatory regime. Ministerial guidance and Ofwat’s charging rules will therefore set out how charges between water companies and inset appointees such as Albion Water should be determined in future.
My noble friend raised the concern that EU competition law might require that indiscriminate de-averaging takes place, affecting both business and household customers. First and foremost, there is no general prohibition under competition law against the use of average pricing. In fact, it is common practice in both regulated and unregulated sectors. The obvious examples are the gas, electricity and telecoms sectors. In each of these regulated, networked sectors, regionally averaged prices have remained the norm. There is no suggestion that this approach is inconsistent with competition law.
My noble friends Lord Moynihan and Lord Crickhowell referred to parallels with the Scottish system where there is no upstream competition. In England, we have a very different market structure and a different set of resource challenges. We are learning from the example of Scotland where it is appropriate to do so but they are different systems and their regulation will accordingly be different. Perhaps we might discuss the Scottish situation in more detail in subsequent groups of amendments.
My noble friends’ amendments remove the direct risk of de-averaging but may not lead to a better outcome for customers. They could still see an increase in charges if incumbents introduced overly burdensome standards in tendering contracts or made poor decisions over which bids to accept. Ultimately, incumbents would not be incentivised to make their upstream services more efficient and would continue to be incentivised to make decisions that benefit themselves rather than customers.
Given that these amendments considerably narrow the scope of competition in the sector, I ask my noble friend to withdraw his amendment.
The Earl of Selborne
My Lords, I was not expecting a resounding round of applause from the Minister for these proposals, which are fairly fundamental in tackling the whole concept. Nevertheless, the Committee should look seriously at precedents, such as Shotton, which, the Minister assures me can be ignored because it is almost irrelevant. When we have an example of a court case which has determined that the price of the local supply of water should prevail, there is, I suggest, quite a threat that this could be rolled out on a larger scale. I think we should take note of that.
We are effectively being assured that Ofwat will have the ability to regulate contracts made between the wholesaler and the retailer. We will come later in other amendments to test the extent to which Ofwat has sufficient powers and codes to ensure that these contracts do not ultimately work to the disadvantage of, for example, rural communities and others. I am not entirely clear why my noble friend is so certain that this puts the incumbent in a stronger position than he might otherwise be, because you are effectively getting back to the same position, which is that Ofwat, under the Bill, has to determine any contract.
The Earl of Selborne
My Lords, I support this group of amendments and I have put my name to my noble friend Lord Moynihan’s amendments in the group. The noble Lord, Lord Whitty, is absolutely right to recognise that the more you put provisions in the Bill that help the Minister in his resolve to prevent de-averaging the better. It cannot do much harm. As you bring in competition, we see all sorts of snares and pitfalls in the way of Ofwat’s best intentions to prevent simple pricing determining the advantage. If Ofwat cannot do so—and we are still to test to what extent we find that Ofwat is capable of appropriate regulation of those individual contracts—provision such as that in Amendment 9 will clearly be helpful.
The real danger, after all, is that some retail providers could, for example, be providing excellent environmental and social services. They could be rolling out water butts, helping water harvesting and giving advice on water-saving gadgets. Those do not come free; they cost a bit. If they are competing against someone who is providing just a short, sharp service—the product in question at the cheapest price with none of those frills—we will eventually undermine those whom the Bill is intended to encourage, those with innovative practices that will lead to more sustainable use of water. Although I am all in favour of increasing the range of negotiation, we simply cannot allow the only differentiation to be on charges. That is why I think that the amendments are helpful.
Lord De Mauley
My Lords, before I address this group of amendments, perhaps I may answer the noble Lord, Lord Cameron, and my noble friend Lady Parminter, who asked about the truncated period between Committee and Report. I fear that these things are way above my pay grade and are decided through the usual channels. All I can do is apologise to noble Lords for any inconvenience that that may have caused and assure noble Lords that my door remains open. I will be there to answer questions between days in Committee and between Committee and Report; I hope that I can be helpful.
Turning to this group of amendments, I thank noble Lords for some articulate speeches about a complicated issue. It is one that we take very seriously. As noble Lords said in earlier debates, this is not an easy area to get one’s head around. Specifically on de-averaging, when we talk about averaging or de-averaging of costs, we are discussing how best to share the costs of sourcing and disposing of water between customers. Most providers of goods and services average their costs to some extent.
In my view, it makes sense to share the costs of maintaining the network on which all customers rely across all customers, regardless of their location. The network makes up about 90% of a water company’s assets, so when we discuss de-averaging in the context of the Bill, we are talking only about charges in the competitive part of the market, which accounts for about 10% of the companies’ activity. I think that many noble Lords agree that there could be real benefits from increasing the cost-reflectivity of charges for different sources of water to reflect the environmental costs of supply. That is especially important in water-stressed areas or for business users that use large volumes of water.
Strange as it may seem, at present, there are almost no economic incentives for businesses that use large volumes of water to seek out the least environmentally damaging source of water. Nor are there any economic incentives to encourage incumbent water companies or new entrants to the market to help businesses to identify the most environmentally efficient sources of water. The Bill is intended to change that. Our upstream reforms will encourage competition for business customers and incentivise more efficient use of resources. More efficient use of water resources must be good for customers and good for the environment.
I discussed earlier the measures in place to ensure that householders are protected. In regard to de-averaging, as I said in the debate on the previous group, we are clear in our charging principles that de-averaging must occur only where it is in the best interests of customers. In answer to my noble friend Lord Moynihan, when we issue the charging guidance we will make it clear that there must be robust boundaries on the scope of any de-averaging. In particular, Ofwat will be expected to exert control to prevent the de-averaging of network costs and any negative bill impacts that could arise from this. Any moves to enable greater cost reflectivity will be targeted squarely on water resource costs in the competitive parts of the market. This is where there may be social and environmental benefits from encouraging sharper price signals. The Government are completely committed to maintaining bill stability. Customers have made it clear repeatedly that stability is important to them. We will not permit anything that undermines that stability.
The charging rules that Ofwat makes, within the framework set by the Government’s charging guidance, will be flexible. As the situation changes over time, our guidance and the rules that Ofwat sets about charges will be able to respond to the way in which the market evolves. I mentioned earlier that it makes sense to provide a price signal that reflects important decisions about our precious water resources. Using the Bill to ban any kind of price signal would, I suggest, be disproportionate. At the same time, we want to ensure that customer bills remain stable and reasonable. The flexible framework of charging guidance and charging rules will achieve this.
The suggestion was made in the debate that customers could end up paying for stranded assets. This is a regulated sector and the important question of what costs should be borne by customers is one for the regulator. In fact, this point is less about de-averaging than about whether the investment made by incumbent water and sewerage companies is made efficiently and in the interests of customers. No one here, I suggest, would think it right that customers should have to foot the bill for inefficient investment. It must therefore be right that the regulator has the powers to protect customers from paying for inefficient investment.
My noble friend Lord Selborne asked how Ofwat can enforce rules on de-averaging. The charging rules produced by Ofwat will regulate the price relationship between the incumbent and the licensee. It will be able to set out how incumbents apportion the costs of the network and distribution. In making these decisions, it will need to take account of its duties, which include having regard to rural customers. It will also have to reflect the Government’s charging guidance. The Secretary of State can veto Ofwat’s charging rules if they do not reflect the guidance.
Noble Lords asked whether rural customers might lose out. Ofwat will continue to have a statutory duty to have particular regard to rural customers and the charging principles that the Government published recently reinforce the protections that will remain for rural customers. They require Ofwat to ensure that any greater cost reflectivity must provide benefits to customers. No customers should be unfairly disadvantaged by the way that reform impacts on water charges. The noble Lord, Lord Cameron, referred to water being a universal right and I strongly agree. Water companies are under a statutory duty to supply and the Bill will not change that fundamental requirement.
I mentioned earlier that both Professor George Yarrow and Professor Martin Cave confirmed that Ofwat has the tools to regulate the upstream market without any de-averaging. The Bill will impose a legally binding framework for the industry and the regulator regarding their approach to the averaging of prices. This view is supported by competition experts. For these reasons, I hope that the noble Lord will be reassured and be able to withdraw his amendment.
Lord Whitty
My Lords, I thank noble Lords who have spoken in support of this principle. On this occasion, I found the Minister’s reply slightly confusing. I thought that there were some novel parts and a few red herrings in there. He says he is in favour of robust boundaries to de-averaging then claims in aid Professor Cave and Professor Yarrow who say Ofwat have the powers. However, all the amendment asks is that we make those powers explicit and that we require Ofwat not to discriminate on the basis of location. There might be certain areas where they could discriminate but not in relation to location of either source or customer.
If the Minister is saying that that will happen because Ofwat already has all these duties to ensure everybody is treated fairly, including rural and remote consumers and so forth, why not stipulate what they are trying to do in the Bill, rather than through the interaction of several parts of different codes? The noble Lord’s argument about discouraging the use of the least environmentally efficient sources of water was a little unclear. Any individual source of water from a new provider is a very small part of the totality of the incumbent company’s activities. Discouraging environmentally inefficient or damaging sources of water will, and should, be tackled through the abstraction regime well before the Minister introduces upstream competition. The noble Baroness, Lady Parminter, and I have amendments to that effect later on. That is, surely, the direct way to discourage environmentally damaging and inefficient sourcing of water at the top end.
At the other end, the requirement of the noble Lord, Lord Cameron, that water should be universally delivered is not only a matter of delivering it but doing so at approximately the same cost wherever you live. That has happened, under various Acts of Parliament, with water regimes going way back to private and municipal companies, through nationalisation and every stage of privatisation. It would be a pity if this legislation, with all its benefits in improving efficiency at the far end of the water chain, were to move away from that basic principle. The Minister has not yet established that there is a good reason for moving away from that, nor that Ofwat’s existing powers, important though they are, would necessarily deliver that outcome. We shall probably return to this subject at a later point. For the moment, I withdraw the amendment.
Lord De Mauley
“(7A) For the purposes of this section and sections 66AA to 66C—
(a) premises which are outside a water undertaker’s area are to be treated as being within that area if they are supplied with water using the undertaker’s supply system, and(b) any pipes of the water undertaker which are used for the purpose of supplying premises as mentioned in paragraph (a) are to be treated as being part of the undertaker’s supply system (if they would not otherwise be part of it).”
Lord De Mauley
My Lords, I take this opportunity to draw the attention of noble Lords to government Amendments 12, 22, 23, 36, 37, 47, 53, 60, 64 to 73, 75, 77 to 94, 125, 127 to 129 and 147, tabled to Clauses 1 to 21. We have also grouped some linked amendments which appear later in the Bill. These are minor and technical amendments which provide clarity, ensure consistency and correct some drafting errors. I draw your Lordships’ attention to two areas which may be of particular interest.
Amendments 12, 53, 125 and 127 to 129 close a possible loophole that could have prevented some non-household customers from switching. Currently, the ability of a customer to switch is linked to its premises being connected to the supply system of the incumbent water supplier in whose area it is situated. In some instances it is possible for premises to be connected to the neighbouring incumbent water company because it is located nearer to the latter’s infrastructure. Where this is the case, and we do not want to discourage this, there is a risk that it may not be able to switch to a licensee. For that reason, these amendments ensure that these premises are able to secure the benefits of switching supplier.
The other area of interest is in relation to Ofwat’s market codes and in particular those regarding adoption of infrastructure in Clauses 10 and 11. Currently, Ofwat has a power to produce these market codes but, following concerns that water companies are not always consistent on the timing or content of the adoption agreements, we are changing this to a duty on Ofwat. This will help to ensure that development is not delayed by uncertainty around these agreements. I beg to move.
Lord Whitty
My Lords, to be honest I do not intend to challenge any of the Government’s amendments, even those that I understand. However, I would ask one question of the Minister. I had expected to see in this group of amendments, although maybe it will come later on Report, a response one way or the other to paragraph 12 of the report of the Delegated Powers and Regulatory Reform Committee, where the dehybridisation procedure—or the procedure to remove the hybridisation procedure—is adopted. It drew the House’s attention to that and to how it is being dealt with by the Government. If the Minister is saying that it may come up in a general reply to the committee, I am quite satisfied with that, but I thought that I would raise the matter here as it is in this part of the Bill.
Lord De Mauley
I assure noble Lords that we will deal with all the issues raised by the Delegated Powers and Regulatory Reform Committee, and I am sure that we will accept the vast majority. There are some quite complicated issues in there, which we are working through at the moment.
Lord De Mauley
Lord De Mauley
The Earl of Selborne
My Lords, I support my noble friend Lord Moynihan and welcome the tenor of the remarks of the noble Lord, Lord Grantchester.
I think that we are agreeing that common industry codes are critical. No one dissents from that. We come back to the question of the extent to which the existing codes, as written in the Bill, deliver these common codes and standards. New entrants simply cannot be allowed to be discriminated against by incumbents. Without a doubt, we have seen this in other utilities—in the rollout of broadband, for example. It is no coincidence that BT seems always to be on the inside track, so we should not be naive enough to think that the incumbent undertakers are not always going to try to ensure that they see off any competition. Later we will talk about discounts and special charges. These do happen. They need to be regulated and, in so far as these amendments help establish the principle that there should be common industry codes, I welcome them.
Lord De Mauley
My Lords, as noble Lords have explained, the purpose of these amendments is to ensure that access to the retail market is regulated to minimise burdens and make access to the market simpler. I agree that requiring all licensees to negotiate with each of the 21 incumbent water companies to enter the market would represent a considerable burden on the market participants and undermine what we are trying to achieve with our reforms.
Schedule 4 of the Water Act 2003 inserted current new Sections 66A(2) and 66D(2) into the Water Industry Act. These placed the incumbent water company under a duty to make a water supply agreement on certain terms agreed with the licensee or determined by Ofwat. This duty has been interpreted to mean that each individual agreement between an incumbent water company and licensee must be negotiated, or imposed by Ofwat where the parties are unable to agree. Ofwat has produced guidance to facilitate negotiations, but the parties to these agreements could ignore the guidance and come to their own agreement. This is clearly a considerable barrier to entry into the retail market in particular and one that provides unco-operative incumbents with an opportunity to delay the making of agreements, about which the noble Lord, Lord Grantchester, and my noble friend Lord Selborne have rightly expressed concerns.
New Sections 66A and 66D will be repealed by this Bill, and replaced with a requirement that agreements between incumbent water companies and licensees must be in accordance with new, enforceable charging rules and codes produced by Ofwat. This will reduce burdens and costs on all parties, and speed up customer switching when the market expands to include 1.2 million potential customers. Schedule 4 creates the same requirements for sewerage arrangements.
There has been some confusion as to the wording of some parts of Schedules 2 and 4 that might lead some to assume that a licensee will be able to enter the retail market only through a complex series of negotiations with every incumbent water company in England. For example, new Section 66DA states that codes may include provisions about procedures in connection with making a Section 66D agreement. This is not the case. We need some flexibility about allowing a certain level of negotiation in some cases, particularly for the upstream markets; negotiations might address water quality and environmental conditions specific to a locality in a water company’s area. We also want licensees to have some flexibility to negotiate innovative new ways of doing things. Market codes will be able to set out the circumstances when such negotiations would be appropriate or inappropriate. I draw noble Lords’ attention to new Section 66DA(2)(c) and (d) and new Section 117F(2)(c) and (d).
My noble friend Lord Moynihan referred to functional separation and we will discuss specific amendments on that matter in a little while, and perhaps I can address that at that point. He also referred to the regime in Scotland and the fact that it provides only for regulated access. Scottish legislation is silent on the need for WICS to produce codes to make the market work. WICS took the decision to regulate access to the retail market and Ofwat and the Open Water programme are taking the same approach. It is worth noting that there is no competition in Scotland for wholesale supplies of water. The two markets are therefore clearly not directly comparable.
I am happy to tell my noble friend that paragraph 5 of Schedule 2, which inserts new Section 66E into the Water Industry Act 1991, and new Section 117L, inserted by Schedule 4, already provide Ofwat with powers to regulate these charges between incumbents and licensees, and that Ofwat may make rules about their publication.
The Bill regulates licensees’ access to the supply and sewerage systems of the quasi-monopolistic incumbents only. We see no need to regulate arrangements between licensees themselves, as they all start on the same footing. That is competition and it will be left to market forces. I hope that my noble friend will therefore feel able to withdraw the amendment.
Lord Moynihan
My Lords, I am grateful to noble Lords for participating in this exchange of views. I particularly thank my noble friend Lord Selborne for his apposite comments. As he is aware, the Bill anticipates a relatively large number of codes. The experience of other industries, such as the electricity industry, shows the importance of keeping codes as simple as possible. For example, a single market code could help ensure that any central market system works by applying the same rules to all companies and retailers. Similarly, to help create a level playing field, I very much hope that retailers have a single point of contact with each water or sewerage company. Each company should have a code which every retailer must follow. To me that is an essential prerequisite for operating a successful market.
It is an appropriate moment to echo the comments that have been made on all sides of the House about how constructive, supportive and helpful my noble friend the Minister has been throughout the process since the publication of the Bill, through its early consideration and in the many meetings that he has hosted to provide clarity on this complex measure. I am grateful to him for his comments. I noted that he recognised that there was at least scope for misunderstanding on some aspects of the clauses that are relevant to the amendments that I have proposed. I agree with what he said about the codes which Ofwat may issue under the new Sections 66DA and 117F. They could be used but I am concerned that the current drafting does not adequately recognise the necessary scope that he has outlined. There will be merit in considering in detail what he has said this evening and reflecting on it before determining whether we revisit this subject at a later stage in our proceedings.
I very much appreciate the support of the noble Lord, Lord Grantchester. His comments echoed very clearly the concerns that I have tried to lay before your Lordships’ House. This is an important issue. If the Bill is to be enacted and then operate effectively in the market, this is a subject which needs to be absolutely clear. If we can help to improve the position by amending the legislation in order to achieve that clarity and efficiency of operation, we will add value to the Bill. I hope that we will be able to take this away and review whether or not we will come back with an improved amendment at a later stage of our proceedings. In the mean time, I beg leave to withdraw the amendment.
Lord Whitty
My Lords, my name is also on the amendment to which the noble Earl, Lord Selborne, has just referred. My reason for putting my name to it was very much the point he was underlining. Only by some form of no-detriment clause—some of the amendments go slightly wider—can we protect what is intended to be an outcome of retail competition, which is more focus on energy and environmental improvements at the retail-user end and final delivery. Historically, Ofwat has not been particularly good at being prepared to finance—if that is the word—through the price review, or to give priority in the price review to water efficiency schemes. I think that Ofwat improved a little in the previous price review and it shows intention to do so again in the next one, but the reality is that we have not done very well on that front. The introduction of upstream and, to some extent, retail competition could, if it is not contained, have an effect on improvements in water efficiency at the retail end, and the positive move by Ofwat in recent years to focus on water efficiency could be reversed. I strongly support what the noble Earl, Lord Selborne, has said on the amendment.
Lord De Mauley
My Lords, perhaps I may start by saying that our approach to retail competition is being developed jointly with the industry, along with the England and Scottish regulators, and others. This group is well placed to identify the conditions that will work best in England, capturing any lessons learnt and building on the Scottish experience.
I am not sure how a no-detriment duty would sit alongside the general duty for the Secretary of State and Ofwat to secure that licensees meet their statutory obligations and the conditions of their licences, given that these are set by the existing duties on Ofwat and Ministers. Ofwat is under a general duty to ensure that incumbents are able to finance their statutory functions. This duty enables Ofwat to create the right incentives to ensure that incumbents can benefit from investments that deliver improved water efficiency in their respective areas. It is suggested that incumbents may show preference to licensees that do not concentrate on water efficiency activities. This is addressed through Clause 23, which requires Ofwat to ensure that incumbent water companies do not discriminate in the provision of services. Ofwat is also able to address such issues through its Competition Act power, which incidentally is a power that WICS does not have in Scotland. In England and Wales, both incumbents and licensees are subject to a duty under the Water Industry Act 1991 to help their respective customers conserve water. I would not want to undermine the market for water efficiency services. I am sure that that was not an intended impact of the amendment.
Curbing the licensees’ water efficiency activities could also put them at a competitive disadvantage if a similar duty was not placed on the retail side of the incumbent’s business. Why should licensees be kept under a duty which potentially curbs their water efficiency activities, while an incumbent’s retail business is allowed to operate without this barrier? Amendments 46 and 53, in particular, may be a barrier to licensees working with customers to become more water-efficient because they impose a condition that any new arrangements designed to reduce pressure on networks must not impose any more costs on incumbent water companies. This same requirement is not being placed on the incumbents’ retail businesses through these amendments. A no-detriment clause works in Scotland due to its circumstances, having just one incumbent retailer and wholesaler. It simply will not work in the same way in England and Wales. For that reason, I ask my noble friend to withdraw his amendment.
The Earl of Selborne
My Lords, I shall come to the no-detriment clause in a moment. The earlier four amendments deal with strengthening the codes for Ofwat, and I am fairly confident that the more robust the powers that Ofwat has to prevent discrimination the better.
I simply do not understand why, if the no-detriment clause works in Scotland, where there is one undertaker—one company—it would not work if there is more than one. I think that the case becomes stronger, not weaker. However, I will read with some care what the Minister said because I suspect that the whole area of a no-detriment clause is something that we will want to come back to at a later stage. I beg leave to withdraw the amendment.
The Earl of Selborne
My Lords, we now come to special charges, which I have to admit were a bit of a mystery to me. I did not even realise that they existed. Clause 33(2) on page 81 of the Bill amends Section 142 of the Water Industry Act 1999 so that there is a duty on incumbents to notify Ofwat if they make an individual charging agreement with a customer that is not covered by a charging scheme. In other words, they are special agreements. Ofwat already requires information provided by incumbents about those special charging agreements.
Special charging agreements have the potential to undermine just about everything we have been talking about. Once there is a special agreement, which by its nature is not a common agreement, it flies in the face of the excellent provisions in the Bill, not least to ensure that there is a level playing field and transparency. We need to establish just how many such special agreements are in place at the moment. Amendment 106 does that. It would amend Schedule 2 to require Ofwat to review existing special agreements and assess the charges payable under these agreements. The purpose of the amendment is to ensure that such agreements that depart from the charging schemes are appropriately regulated in future. I would have thought that that was pretty uncontroversial, and I hope that the Minister agrees.
Amendment 103 requires any future special agreement to be allowed only if a customer has done, or has agreed to do, something that reduces or increases the costs incurred by an undertaker. Such agreement would have to receive the consent of Ofwat. In other words, there cannot be a deal that is specific to that particular customer. We would lose the averaging principle that we hold so dear. New Section 66E(3) is the basis on which Ofwat establishes these special charges. I am keen to ensure that Ofwat first makes it absolutely clear how many special charges exist at the moment and, above all, does not allow any future special charges, unless there is a reason that is transparent, obvious and does not undermine the averaging principle. I beg to move.
Lord De Mauley
My Lords, my noble friend would introduce changes to the way in which incumbent water companies’ special charging arrangements for customers operate in the reformed market. Special charging arrangements come about when incumbent water companies depart from published charges schemes to allow discounts on the wholesale element of a water charge where a customer, for example, agrees to do something to reduce pressure on a network or has made a contribution to a capital project carried out by an incumbent.
Amendment 103 would require Ofwat to approve special charging arrangements for licensees before they are put in place. Amendments 44 and 48 remove powers for Ofwat to introduce charging rules under Schedules 2 and 4 that would allow customers who receive discounts to switch to a licensee without losing those discounts. Amendments 106, 131, 166 and 169 will initially require incumbents, within one month of Royal Assent, to notify Ofwat of all existing special charging arrangements that are in place. However, Ofwat already collects and publishes information on special charging arrangements on an annual basis, which means that it is not necessary for the Bill to be changed for Ofwat to obtain details of historical agreements. The amendments would also require Ofwat to make and publish a determination about the appropriateness of these historical charges, publish details of its determination, and control the charges between the incumbent and the licensee as well as the price that the licensee can charge the customer from then on.
As part of the review of price limits for 2015 to 2020, Ofwat requires incumbent water companies to separate out the retail and wholesale components of the charges. Ofwat will be able to assess the appropriateness of such charges during this process and introduce charging rules under Schedules 2 and 4 to ensure that licensees will be able to access wholesale charges at a competitive rate and compete with incumbents on the retail element of the special charges. For example, rules can ensure that costs are properly allocated between the retail and wholesale elements of the special charge. Ministers will also be able to give their views on the content of charging rules.
Importantly, the change introduced by Clause 33 will place incumbents under an enforceable duty to report new special charging arrangements to Ofwat as soon as they are made. Clause 33 comes into force two months after Royal Assent. This provision also requires Ofwat to publish details of these arrangements in its register, which is available on its website. Taken together, Clause 33 and Schedules 2 and 4 deliver most of what my noble friend wants to achieve through his amendments. Like my noble friend, we want to increase transparency around the setting of new special charges to enable the beneficiaries to be able to switch to a licensee and still retain their discounts on wholesale charges, if appropriate. As part of the price review process for April 2015, when new price limits are introduced, Ofwat will be able to assess the appropriateness of existing special charges ahead of the retail market opening. With these assurances, I hope that my noble friend will feel able to withdraw his amendment.
The Earl of Selborne
My Lords, I draw some comfort from my noble friend’s response. I think we all agree that special charges represent a potential Trojan horse and are not to be encouraged. In so far as they can be transparent, reduced or even eliminated, that would surely be helpful. I should like to think that Ofwat would trenchantly make it clear that it is not in favour of special agreements, and that any special agreements would be published in a transparent and open way annually, as I understand the Minister says Ofwat does and will do. Above all, Ofwat should make it clear to the industry that it does not expect special agreements to be common practice, and should be countenanced only under exceptional circumstances. With that assurance from the Minister, I am happy to beg leave to withdraw the amendment.
Lord De Mauley
(a) a retail authorisation (whether that retail authorisation is an authorisation of the licensee requesting the introduction of water or another water supply licensee’s authorisation), or(b) a restricted retail authorisation of the licensee requesting the introduction of water.””
Lord Whitty
My Lords, I shall speak also to Amendment 97. I am asking the Committee to consider a rather more radical approach to the structure of this industry. In earlier debates today, there was reference to unravelling some of the accounting structures of companies. Indeed, the Minister referred to the requirement on separate indication of charging by the retail and wholesale ends. We have to remember what was said by several of us at Second Reading. This is a very odd industry. In England, it consists, effectively, of eight regional monopolies, all of which are totally vertically integrated, with high profitability over the years since privatisation. There has also been high investment but there has nevertheless been high profitability for their owners and high dividends have been paid out. There has also been a high level of gearing in order to meet those investments by going to the money markets. Most of them are now owned by international investment funds although in many cases they have had a sequence of owners. However, they retain a close resemblance to the pre-privatisation water authorities.
Over the years, there has been some degree of breaking up of monopolies in other industries, including vertical splits, to encourage a more effective form of competition. The recent report by Martin Cave and Ofwat’s own assessment of the situation give rise to suggestions that Ofwat, too, ought to be able to require separation of the wholesale and retail ends of the currently vertically integrated water companies. When we move to retail competition, its major feature is likely to be that the retail arms of other incumbent companies will begin to compete in the areas that are dominated by the historic incumbent companies. To some extent, that has happened in Scotland, where English-based companies provide some of the competition in the non-domestic retail sector.
We would expect those companies to continue, one way or another, to dominate the scene, even if they are in more direct competition with each other. As other noble Lords have said, that means that we have to separate out how those companies operate on the retail side and consider what the relationship between the wholesale water undertaker operation and the retail operation will be. One can do some of that by ring-fencing, separate accounting, Chinese walling or whatever, but we need to consider separation as legal entities or even disinvestment from one company to another. That option is not available to Ofwat or, indeed, the CMA, whatever the performance of companies, the competitive flaws of the market or the outcome for consumers may be. This argument about where to separate quasi-monopolies has applied. We have had many debates over recent years about banking, we have had the situation of the railways and the issue arose at some length during the debates on the Energy Bill. It is horses for courses, but the fact that there is no power to require this, even in a situation which is still pretty well dominated by regional monopolies, seems to be an omission.
There are reasons why Ofwat and successive Governments have not gone down this road, one of the main ones being that it might well frighten off investment. This is a pretty good investment. It has provided a very substantial return to those people who have invested in the English water industry over the past 20 or so years. They have had a pretty good and reliable return. Over the past two price review periods some would say that, particularly because of the over-allowance by Ofwat for the costs of capital, they have had an exceptionally good return on prices which have been designated by the regulator. That is not to say that a change in the circumstances would not cause some hesitation on the part of investors, but the reality is that on whatever basis we operate it will continue to provide a good, safe, consistent return to international investors. For that reason we should discount some of the scare stories that surround the issue of enforced separation.
These two proposals give the Government an option. Amendment 49 would give Ofwat, and by extension the CMA in certain circumstances, the power to mandate separation either for one company, or, following a market review, for all companies operating in that sector. That is a pretty substantial increase in their powers, although it is not very different from what the CMA can do in most markets if it finds that there is a breach of general competition law. The rather softer alternative which I think the Government might well consider more is Amendment 97. That would allow for voluntary separation in certain circumstances or negotiated separation if Ofwat were to intervene in order to enforce better competition and better performance.
Amendment 97 therefore is a minimalist form of separation. Amendment 49 is more draconian. The Minister can probably guess which I should prefer, but in this context I would be happy to see the Government take up either. At some point down the line, the current structure of the water sector is going to have to be challenged more fundamentally than is done by the Bill. If we were to give the contingency power to Ofwat now, or make it easier for the companies themselves or for Ofwat to negotiate and suggest to companies that they should split, that would give us the ability to reshape the industry following the introduction of retail competition even to the degree provided for in the Bill.
I suspect that the Government are going to be deeply resistant to either option, but they are wrong. The structure of the industry is not one which can be sustained for very much longer. It is one that requires significant investment and we do not want to frighten the investors. On the other hand, we have to face up to the reality that proper competition, meeting both business and household consumer needs plus the very substantial environmental demands on the industry, may well require a more radical solution to the structure of the industry than is envisaged in this reform.
I hope that the Government will at least take this matter seriously. Giving Ofwat some powers in this area would be a significant move forward. I beg to move.
Lord De Mauley
My Lords, I am grateful to the noble Lord, Lord Whitty, for tabling Amendments 49 and 97, which are about an important subject, that of separation, whether legal or functional. Legal separation is what Amendment 49 deals with. The amendment would require the eight licensed water suppliers currently operating under the existing water supply licensing regime—so not the incumbent water companies—to set up legally separated entities for the retail and wholesale parts of their business. It is unnecessary to require these licensees to undergo legal separation. In the current market, such licensees can already choose to offer retail services only. In fact all of them do. In the new market, licensees will be able to offer both retail and upstream services separately.
As drafted, this amendment would not require the legal separation of incumbent water companies, but I understand that that is the intention behind it. Legal separation of the incumbent water companies is usually perceived as a way of preventing them from discriminating against new licensees entering the market in favour of their own retail businesses. This discrimination could be either through the prices they charge or by other non-price forms of anti-competitive behaviour. However, legal separation would not eliminate the risk of discrimination in competitive markets, nor is it the only way to deal with discrimination. Ofwat has a range of tools it could use, for example by making licence changes to govern the relationship between the retail and wholesale parts of the companies. These could go as far as requiring effective functional separation. The Bill also gives Ofwat stronger powers to ensure that it can take action to tackle discrimination and ensure a level playing field for all market participants.
The water White Paper made it clear that we would not drive fundamental structural change to the industry, such as forcing the legal separation of incumbent water companies. We were persuaded by the arguments of water companies and investors in the sector that doing so would reduce the regulatory stability of the sector and put future investment at risk, something to which the noble Lord, Lord Whitty, referred. We must not take risks with a successful model given the challenges we face in building the resilience of the sector and the importance of keeping customer bills affordable.
The Government expect Ofwat and other competition authorities to take firm action to prevent discriminatory pricing or behaviour. This could include requiring undertakings from market participants to address anti-competitive behaviour, for example by introducing functional separation. Furthermore, under Clause 23, the Government have also introduced a duty on the Secretary of State, Welsh Ministers and Ofwat to ensure that incumbent water companies do not exercise undue preference to their own retail businesses, associated licensees or other incumbent water companies on non-price matters. Ofwat therefore has sufficient powers to reduce discriminatory behaviour without there being legal separation of incumbent water companies.
As the noble Lord, Lord Whitty, explained, Amendment 97 would enable licensed water suppliers to choose to specialise in either retail or wholesale services. Clause 1 and Schedule 1 to the Bill already enable this by removing the requirements in existing legislation for suppliers of upstream services also to provide retail services. This amendment is therefore unnecessary to achieve the objective the noble Lord seeks.
Forcing separation would not simply be about costs to investors, it would impact on costs to customers. If the sector becomes less attractive, the cost of capital increases, and increases of as little as 1% can lead to £20 on a bill. We must remember the need to ensure that bills remain affordable. I therefore ask the noble Lord to withdraw his amendment.
Lord De Mauley
“(4A) For the purposes of this section and sections 117B and 117C—
(a) premises which are outside a sewerage undertaker’s area are to be treated as being within that area if they are provided with sewerage services using the undertaker’s sewerage system, and(b) any sewers or drains of the sewerage undertaker which are used for the purpose of serving premises as mentioned in paragraph (a) are to be treated as being part of the undertaker’s sewerage system (if they would not otherwise be part of it).”
Lord De Mauley
Lord De Mauley
Lord De Mauley
“2A In section 2B (strategic priorities and objectives: Wales) (as inserted by section 24 and amended by Schedule 7), in subsection (4)(d), after “water supply licensees” there is inserted “and sewerage licensees”.”
Lord De Mauley
“( ) In this section and sections 40A to 40I “bulk supply agreement” means an agreement with one or more water undertakers for the supply of water in bulk and includes—
(a) an order under subsection (3) which is deemed to be an agreement by virtue of subsection (5), and(b) any agreement which has been varied by order under section 40A(1).”
Lord De Mauley
Lord De Mauley
““main connection agreement” means an agreement with one or more sewerage undertakers for that undertaker or each of them to permit a main connection into its sewerage system and includes—
(a) an order under subsection (3) which is deemed to be an agreement by virtue of subsection (5), and(b) any agreement which has been varied by order under section 110B(1).”
Lord De Mauley
Lord De Mauley
Lord Whitty
My Lords, I have Amendment 104 in this group, which touches on exactly the issue that the noble Earl referred to right at the beginning of his remarks. The essential problem here is that we have two issues: the introduction of upstream competition and the deficiencies in the present abstraction regime. Logically, it would be sensible to have accomplished, or at least set in train, the abstraction reform before we introduce upstream competition. In fact, the Bill gets it entirely the other way round.
The inadequacy of the abstraction regime has been fairly long-standing. I can remember having arguments within Defra when we brought in the 2003 Bill that we ought to have been more radical at that point. Indeed, ever since, the situation in several catchment areas has seriously deteriorated. Although the noble Lord, Lord Cameron, is right that it sounds odd for us to be talking about it in light of the recent inclement weather in most of the country, the reality in the long term is that a lot of our catchments are not in very good condition, either in terms of water resources or of their environmental flow. Abstraction levels and potential abstraction levels have had a serious effect on that.
The Government know this and have undertaken a review of the abstraction regime. It has been rather a long time coming, but they have nevertheless got to the point where they issued a very good consultation paper only last month, which gives two options as to how we could conduct the framework of reform. They could have gone a little further—issues such as charging, which the noble Earl also referred to, ought to be part of this. However, if we are unable to introduce that reform until into the 2020s, and meanwhile we have triggered upstream competition, we are aggravating the position. Once there are new suppliers, they will be looking at new sources. They will be looking at trading licences. In reality, it is not only the abstraction that is taking place that is damaging to a lot of our catchments, but the potential abstraction under existing licences. Many of these existing licences, which we talk about being introduced in the 1960s, are grandfathered rights, which probably existed centuries previously when the demand for water was less and the precipitation was probably even more than we recently experienced.
We have catchment areas that are subject to increased demand at the far end, to increased environmental deterioration and to climate change, and present potential problems for water quality as well as water supply. That problem needs addressing. If existing licences provide for twice the level that is actually abstracted—in other words, less than 50% of the potential abstraction actually occurs—and more people are trying to get their hands, figuratively speaking, on the water to put it back into the system and to enhance competition, then we have got a perfect storm. What, however, if we do it the other way around—if we speed up the introduction of abstraction reform and get the legislation we need? Some of it can be done without legislation, but probably not all of it. For example, the issue of compensation was a major inhibitor on the Environment Agency, as it comes out of the Environment Agency’s budget and the Treasury makes absolutely certain that it comes out of your budget. This inhibits the degree to which you can introduce modifications of termination of abstraction agreements. Probably, because it is a property right, that needs primary legislation. We need to move to primary legislation fast. We need to introduce it and you cannot introduce it all at once. It will take a bit of time to introduce it, but we need to start as rapidly as possible.
Once we have an abstraction regime that puts a cap, catchment by catchment, on the amount of water in aggregate that people can extract, and defines that in terms of the flow of the river, the demand on that river, and the potential environmental damage or benefit to which that river contributes, then we can relatively easily within that framework introduce competition, trading, sophisticated agreements of swapping water between one entrepreneur and another and indeed across boundaries of the water company areas. If you do it the other way around, however, you will affect the environment and the supply of water. You will make it much more difficult later to introduce rules in relation to the competition which affect the abstraction licences which exist, let alone new ones.
The Environment Agency is not without some powers in this respect. As we said in relation to the previous group of amendments, at the point of change of use, the Environment Agency can effectively introduce new provisions. However, not all of these will be change of use and if you have an abstraction licence currently, which would allow you to take out twice as much water as you actually need, then only part of that licence would be used for the public water supply system and the rest would remain. In effect, instead of taking 40% of the abstraction you would be taking 100% and only half of that would go into the public supply to provide for additional competition.
Although there are powers for the Environment Agency, they need to be strengthened. The sequence of events needs to be a rapid conclusion of the current consultation on abstraction, and introduction of the primary legislation and other regulations that we need as rapidly as possible over the next few years If we sped it up we could probably do that by 2020, which the department says is probably the earliest date that we could introduce upstream reform in any case. If we do not have that legislative sequence, we will get to 2020 without abstraction reform being properly implemented, and have all the problems of suddenly introducing upstream competition.
All we are asking in these amendments is to put the order right, put both elements in the Bill, and recognise that we will still need another Bill to do the abstraction reform in detail. I am suggesting that the division between the primary legislation for abstraction reform and the introduction triggering the provisions on upstream competition should be five years. The noble Lord, Lord Cameron, queries whether that actually made matters worse, but that is more or less the timescale the Government are working on for upstream competition in any case, so it does fit. If necessary we can alter that five years, but we need some clear sequence. At the moment the Government are dealing with only half of it in this Bill. The department have started the other half but we need to do them the other way around. I hope that the Government at least accept that principle, even if they are not prepared to accept the noble Baroness’s or my amendment tonight.
Lord De Mauley
My Lords, I thank my noble friend Lady Parminter for moving her amendment and other noble Lords for their contributions to this debate. This is, we all agree, a vital area. Amendment 96 would delay regulations under Clause 12 and the market for private water sales to water companies from coming into force until draft legislation is presented to Parliament on abstraction reform. Amendment 104 would introduce a new clause to prevent Clause 1 from coming into force until five years after the Royal Assent of future primary legislation on abstraction reform.
These amendments would delay both the upstream reforms and the retail market reforms in the Bill. We do not think they are necessary. I will explain why. We are fully committed to delivering abstraction reform and we share the views of noble Lords that just because we have had the wettest January on record does not mean that we will not imminently go into drought. We have seen that in recent years. We do not share the view, however, that there are risks in introducing upstream reform ahead of abstraction reform.
The Government and the Open Water programme—a partnership between the industry and regulators—are working towards retail market opening in 2017. Our retail reforms are widely supported by customers, who will benefit from improved customer service as a result of these changes. Non-household customers will be free to negotiate the best package to suit their needs. Customers with multiple sites will benefit hugely from being able to negotiate for a single bill from a single supplier. Improved customer services will have knock-on effects for household customers too.
Upstream reform will be introduced at a slower pace, as the noble Lord, Lord Whitty, acknowledged beyond the 2019 price review. This is because we recognise— and I thank my noble friend Lord Crickhowell, for his expert views which supported this—that upstream reforms will require careful planning and close working between the water industry, regulators and customer representatives. However, it is important to progress upstream reform because the current regulatory model is not delivering the kind of efficient resource use and innovation that we need. This reform will help to keep bills affordable and, vitally, to benefit the environment.
I assure noble Lords that there are sufficient safeguards in the existing regimes to prevent an unsustainable increase in abstraction being caused by the Bill. In order to sell water into public supply, abstractors will need to apply to the Environment Agency or Natural Resources Wales for a “change of use” for their abstraction licence. The Environment Agency can refuse such a request if it will lead to unsustainable abstraction. It can also refuse if it would cause deterioration in the catchment, or apply conditions to ensure that this does not happen.
In addition, Ofwat must ensure that anyone wishing to input to the public water supply system holds the appropriate abstraction licence, and informs the Environment Agency about any trades with other abstractors.
Through this Bill, in Clause 1, the Government will also require Ofwat to consult the Environment Agency or Natural Resources Wales before issuing a water supply licence. As my noble friend Lady Northover explained in the context of an earlier group of amendments, there are also safeguards in the existing regimes to prevent an unsustainable increase in abstraction by water companies for the purposes of water trading or “bulk supply” agreements. I also assure noble Lords that we are completely committed to abstraction reform and the introduction of a new system fit to face future challenges including changing climate and population growth.
Water Bill
Lord De Mauley Excerpts(12 years ago)
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Lord De Mauley
That it be an instruction to the Committee that they consider the Bill in the following order:
Clause 1, Schedules 1 and 2, Clauses 2 to 4, Schedules 3 and 4, Clause 5, Schedule 5, Clauses 6 to 37, Schedule 6, Clauses 38 to 44, Schedule 7, Clauses 45 to 48, Schedule 8, Clauses 49 to 74, Schedule 9, Clause 75, Schedule 10, Clauses 76 and 77, Schedule 11, Clauses 78 to 80, Schedule 12, Clause 81.
Water Bill
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Water Bill
Lord De Mauley Excerpts(12 years ago)
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Thes Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, the Government have prioritised growing the economy and improving the environment. This Water Bill contributes to both of these priorities. There are two important parts to the Bill; first, to reform the water industry to ensure it is fit for the long term, and, secondly, to provide a solution to deal with the availability and affordability of flood insurance for households at high risk of flooding.
Recent events have reminded us all just how devastating flooding is for those affected. They also remind us how important it is to help manage the financial impacts of flooding. Perhaps at this point I should declare some interests. A tributary of the River Thames runs through my farm. I have an abstraction licence, a bore hole and a recently flooded house, as well as a share in a lake. These are clearly issues close to my heart.
The Water Bill has three aims: to build the resilience of our water supplies without damaging the environment; to encourage and contribute to economic growth; and to give customers greater choice. These are important issues for noble Lords across the House and I look forward to discussing them in the coming weeks. I am very grateful to noble Lords who have already taken the time to talk to me about these aims. Their views have given me real food for thought and I will continue to work with them to try to address their concerns and answer their questions. I look forward to a similar, strong level of engagement during the Bill’s passage through your Lordships’ House. I value enormously the debate and scrutiny that this Bill will receive in this House.
First, I shall set out why this Bill is before us today, the issues we are addressing and why it is important. Water is essential to life. We need clean and plentiful water resources to supply our homes and to support a growing population and economy. Water is also critical for a healthy and flourishing natural environment. That natural environment is the essential foundation for sustaining our economy, for prospering communities and for our individual well-being.
The 2011 water White Paper, Water for Life, set out the Government’s ambitions for a sustainable, resilient and customer-focused water sector. It outlined the plans for delivering substantial improvements in the health of our rivers through improving water quality and tackling unsustainable abstraction. Let us be frank: we must acknowledge that a growing population and the impacts of climate change pose risks to our water resources and the ecosystems they support. We need to take these challenges seriously to avoid causing irreparable damage to our environment.
The White Paper set out the challenges for the water sector through to 2050. This Bill is one part of our policy response, which is designed to drive long-term changes to ensure a secure and sustainable water system. Delivering this long-term change requires action by government, Ofwat and the Environment Agency, the water sector and users of water across the economy. We have put this challenge at the centre of the policy framework we have set for Ofwat through the strategic policy statement. We are reinforcing that through the new resilience duty in this Bill.
We are driving change in water companies through our guidance on water resource management planning. This Bill includes a new power for the Secretary of State to direct in advance the level of resilience a water company must plan for. We are using the Bill to extend competition to drive innovation, bringing new players with new ideas into the sector. Competition will keep a downward pressure on the costs customers pay. This is about safeguarding our water supplies for the long-term future. Ensuring a resilient supply system will require action to develop new water resources and use them in a different way, and to manage demand.
The Bill will change behaviour and change the focus of the water sector. It will hardwire future resilience into its regulatory framework. This is resilience in a broad sense. It encompasses water networks and water resources. It includes the environment from which companies draw their supplies. Resilience was a central theme of our White Paper and is a key theme of the Water Bill. We will return to it time and again in our consideration of the Bill.
We must ensure that our infrastructure can deal with more extreme weather. The floods and indeed droughts we have experienced in recent years illustrate the risks we face. In 2012, one in every five days saw flooding but on one in every four days we were in drought, putting our water supplies under great pressure. The water White Paper recognised these challenges and set out the Government’s strategy for a sustainable and resilient water sector. This Bill is part of our plan.
Let me give your Lordships an example of action we are taking outside the Bill. Resolving the issue of unsustainable abstraction from our water resources is a priority. That is why we are taking action now, including in this Bill, and developing detailed plans for reform. We have intensified our work to tackle the overabstraction currently damaging our rivers by varying and removing licences. We will be bringing previously exempt groups into the system in the near future.
The Environment Agency has reviewed thousands of abstraction licences and has changed about 80 of them, returning 75 billion litres of water per year to the environment in England. That is equivalent to the annual average water use of a city larger than Birmingham. Over the longer term, we are reforming the abstraction regime to make it more flexible and resilient to future challenges. We published our consultation on future options in December.
The Government are absolutely committed to early legislation to deliver abstraction reform, but we have to get it right. The Government are acting in a wide range of ways as part of a strategy to secure the future of our water sector. With this wider context in mind, I should like to talk about the things that the Bill before us seeks to achieve. It will make a vital contribution to addressing the challenges that I have highlighted.
I turn, first, to reform of the water industry. The Bill will remove the regulatory barriers that discourage or prevent new firms competing in the water industry. This is not competition for competition’s sake. It will provide real choice for non-household customers and bring new entrants into the market. Competition between companies will drive improved customer service as companies will need to work harder to attract and maintain customers. As we go forward, this competition will exert a downward pressure on bills for all customers.
In the two decades since privatisation, the sector has attracted more than £116 billion in low cost investment. Privatisation of the water industry has been successful in attracting investment that has improved infrastructure and produced cleaner water supplies. The importance of the stability of this investment—the stability of the market—cannot be overstated. We must maintain the attractiveness of the water sector. We are talking about evolutionary change. We have been careful not to risk stability by forcing through sudden and dramatic changes.
The Bill seeks to build on the strengths of the current regime, using enhanced competition to drive improvements for the benefit of all customers. For example, the Bill will make it easier for water companies to trade water with each other, offering alternative sources of water to companies, which could be crucial, for example, in the case of drought.
We are making it easier for new businesses to enter the water market to provide new sources of water or sewage treatment services. We are making developing new sources of water, and selling it to water companies, easier and more attractive for landowners by creating a regulated market. We are also making it easier for innovative businesses to find different ways to treat and dispose of wastewater and sewage. This could include recycling and reusing wastewater as a new water resource, or using sewage sludge for anaerobic digestion rather than landfill.
There are some exciting and innovative things happening in our water sector. We are already seeing the first signs of a competitive market. In September last year, First Milk became the first multisite customer to switch to Severn Trent Costain. The two companies are working together to improve First Milk’s water efficiency and lower its environmental impact. These opportunities are limited at the moment because they are open only to the largest water users. The Bill is designed to encourage precisely such innovation by developing the market further.
The Bill will allow all businesses, charities and public sector customers to switch their water and sewerage supplier. This is a significant reform that will bring significant gains for multisite customers—such as hospitals and supermarkets—which could save thousands of pounds in administration costs by dealing with only one water company across their estate.
Competition in Scotland is delivering real benefits to customers and to the environment. The public sector in Scotland is forecast to save £36 million over four years, thanks to better water efficiency and discounts.
Competition will benefit the environment more widely. Water companies will offer better water efficiency advice and other services to attract customers, such as smart metering and improved customer service. This is where we expect to see knock-on benefits for householders. Water companies offering improved customer service and better awareness of water efficiency measures will also be serving household customers. All customers will benefit as the sector becomes more innovative and efficient at what it does. Householders will not subsidise the costs of increased competition. Ofwat has confirmed it has the tools it needs to ensure this. The Government’s charging principles also make it clear that the protection of householders is fundamental.
I should like to talk about affordability for households. We are all conscious of the impact of water bills across the country. It is not possible for us to discuss a Water Bill without mentioning water bills. Let us be clear. Water is a price-controlled sector. Ofwat sets an overall cap on the total amount that each water company can recover from their customers. It is Ofwat’s responsibility to ensure both that charges are fair and that the companies are able to finance their operations.
Ofwat estimates that the current price review could reduce pressure on bills by between £120 million and £750 million a year from 2015. Water companies themselves are taking action. A number of companies have already committed to keeping bills below the price cap for 2014-15. Water companies already help households struggling to pay their bills and most are planning social tariffs for 2015 that are designed to reflect local circumstances. It is important to recognise that the independent regulator is doing its job.
Water companies have reacted well, and that is the way the sector should work. Too much interference from Government would undermine the principle and advantages of independent regulation. The Government’s approach on this issue is a responsible one. A stable, independent regulatory system is critical to keeping bills affordable. Small changes to the industry’s financing costs can have a significant impact. A 1% increase in the cost of capital can add £20 to customer bills.
The Government are tackling affordability over the longer term. Our market reforms will exert a sustained downward pressure on water bills. Through this Bill, we are also taking important steps to address the affordability of flood insurance for households in areas at high risk of flooding. I know that future arrangements for flood insurance are of great interest to noble Lords. The recent extreme weather has served to highlight the important role that the insurance industry plays in helping people to get back on their feet after flooding. The measures in this Bill bring forward powers to provide affordable insurance for those at high risk of flooding. Both Government and the insurance industry recognised that there was a need to bring forward new measures following the expiry of the statement of principles agreement between Government and the insurance industry, which came to an end in June 2013.
Our preferred approach, a reinsurance scheme which is known as Flood Re, will limit the amount that high-risk households have to pay on the flood insurance element of their premiums and excesses. The effective limit on the premium would vary according to council tax band, rising for more expensive properties, which means that benefits will be targeted towards lower-income households, providing more support for those who need it the most. To fund this, an industry-backed levy would be introduced. It is initially expected to be £10.50 per policy. The Association of British Insurers has assured us that this will be achieved without increasing bills for those people at low or no risk of flooding.
The Flood Re scheme is designed to be industry run and led. Our ambition is that it will be up and running in 2015 and the insurance industry together with Government is working hard to achieve this. Insurers have agreed to continue to meet their commitments under the 2008 statement of principles until the Bill has passed through Parliament and Flood Re has been set up.
Although Flood Re is our preferred approach, we are seeking reserve powers to provide affordable cover if Flood Re should prove unworkable or prices in an open market prove unacceptable. Having a fallback means that customers can have confidence that the issue is being addressed. I also take this opportunity to draw noble Lords’ attention to the fact that arrangements for flood insurance are designed to be transitional measures. Over time, there should be a gradual transition towards more risk-reflective prices, based on robust evidence of local risk, to increase the incentives for flood risk to be managed over the longer term.
The Water Bill will prepare our water sector to face the challenges of the future. There will be greater choice for customers, leading to improved efficiency, more innovation and better levels of service. The Water Bill will put in place measures to ensure a future with resilient water resources and an improved environment, as well as ensuring that householders at high risk of flooding can access affordable flood insurance into the future. With these principles in mind, I beg to move.
Lord De Mauley
My Lords, I thank all noble Lords for their contributions to this debate. A large number of questions and points have been raised, and I had better get cracking if I am to respond adequately to as many as I can. All the points raised will be taken away and considered carefully. I know that during the remaining stages of the Bill I will have plenty of opportunities to answer any points that I do not address today.
Several noble Lords raised concerns about introducing upstream reform ahead of abstraction reform. We will not take action that would increase unsustainable abstraction. We have looked carefully at how the regulatory regime will operate to reduce this. There are strong safeguards in the existing regime to ensure that the Environment Agency and Ofwat work together to prevent unsustainable abstraction in the short term.
Noble Lords asked what environmental safeguards will be in place regarding upstream reform. In order to sell water into the public supply, all non-water company abstractors will need to apply to the Environment Agency for a change of use in their abstraction licence. They will be required to go through the same process as if applying for a totally new licence. The Environment Agency can therefore refuse a change of use request if it would lead to unsustainable abstraction or deterioration in the catchment, or it could apply conditions to ensure that this did not happen. In addition to the existing process for issuing abstraction licences and regulating change of use, there are separate licensing requirements for new entrants to the water sector. The Bill was also amended in the other place to require Ofwat to consult the Environment Agency before issuing a water supply licence entitling the holder to input water into the public supply system.
A number of noble Lords raised the issue of the resilience duty and compared it against a potential sustainable development duty. Having listened carefully to points raised in the other place, we have made amendments to the new duty of resilience. I am pleased that we have been able to respond on these important points and that some noble Lords who have spoken and stakeholders such as Blueprint for Water have welcomed the changes. This new duty is an important contribution to the regulatory framework. It will ensure that regulation of this sector takes appropriate account of the impacts of environmental pressures, population growth and patterns of demand on our essential services. Supporting reform of the aspects of the current system that institutionalise short-term thinking will help to reduce pressures on the water environment, on which we all rely.
The noble Lord, Lord Oxburgh, referred to Singapore’s experience. I lived there for five years. He is right about the growing population and demand, and a long reliance on neighbouring Malaysia. I can remember the pipes that ran the length of the country squirting water tens of metres high. That has forced Singapore to be hugely innovative, and it is quite a lesson to us.
The noble Lord, Lord Redesdale, asked: why the resilience duty; why not sustainable development? Ofwat has had a statutory duty to contribute to the achievement of sustainable development since 2005. We have also issued statutory guidance, which states clearly that sustainable development is central to everything that Ofwat does and must be fully embedded throughout its regulatory decision-making. We have thought carefully about how to change Ofwat’s duties to support action to address the long-term challenges facing the sector and encourage better outcomes for customers and the environment. The best means of doing this is to create a new overarching duty specifically designed to prioritise an enhanced focus on long-term resilience.
The noble Lord, Lord Whitty, asked whether the resilience duty included social resilience. Ofwat already has a primary duty to protect consumers, and this includes particular responsibilities to vulnerable groups. By requiring Ofwat to secure the long-term resilience of water supplies and services and the sustainable management of water resources, the resilience duty protects both current and future consumers and will help to keep bills fair for the long term.
Several noble Lords asked about metering. The Government agree that metering provides a fair way to pay. We want companies to do more to promote metering to those who would benefit, although it is important to remember that some struggling customers would see their bills rise. Therefore, water companies are best placed to find the most appropriate local solution in discussion with their customers. The costs and benefits of metering vary from region to region, depending on the level of water stress. As the noble Lord, Lord Cameron, said, and to answer the noble Baroness, Lady Kennedy, metering has winners and losers. Some bills go up and some go down. The evidence suggests that there is not a very good cost-benefit case for universal metering outside areas of serious water stress—areas where, indeed, universal metering is already possible.
My noble friend Lord Cathcart asked about a national policy statement for water, and we are continuing to keep the need for that under review. Water companies have recently consulted on new water resources management plans covering the period 2015 to 2040.
A number of noble Lords asked about retail exits. We have considered this issue very carefully, and I need to be absolutely clear about this. It is not something that we have completely ruled out for the future, but at present the risks of retail exit outweigh the potential benefits. First, we feel strongly that water companies must continue to be responsible for all parts of the supply chain. They must have a connection with their customers. Secondly, there is a risk that retail exit would be forced on the sector. That is not a risk we are prepared to take: it should be for Ministers and Parliament to decide whether or when separation should take place. Thirdly, we must not forget household customers, who will not be able to switch. If we allowed retail exit, householders could be left stranded with a water company with little incentive in investing in customer service once it had washed its hands of its business customers. This would effectively create a two-tier water market, with household customers losing out.
My noble friend Lord Moynihan said that 76% of companies support retail exits. However, there is in fact a real mix of views in the sector on this issue. The 76% figure comes from an article in the publication Utility Week. It is based on telephone conversations with 36 individuals and reflects the personal views of those interviewed.
The noble Lord, Lord Cameron, and my noble friend Lady Parminter spoke about de-averaging. This is the question of whether customers’ charges could directly reflect the specific costs associated with supplying their premises. This is instead of what we have now, where customers simply pay a share of the total costs of running the network.
We should be careful to distinguish between the different kinds of costs that are reflected in water bills. It makes sense to share the costs of maintaining the network on which all customers rely—more than 90% of water charges—across all customers, regardless of their location. The use of average pricing for such charges is common practice in comparable sectors such as gas, electricity and telecoms where regionally averaged network prices have remained the norm following liberalisation of those industries. However, I think that many noble Lords would agree that there could be real benefits from increasing the cost reflectivity of charges for different sources of water. It would reflect the environmental costs of supply, which is especially important in water-stressed areas or for business users that use large volumes of water. Our charging principles make it clear that the Government’s detailed charging guidance to Ofwat will place limits on the scope of any de-averaging of prices.
The noble Lord, Lord Cameron, and my noble friends Lord Selborne and Lord Moynihan referred to the Scottish model. The vast majority of our approach to retail competition is very similar to Scotland, but water is a devolved matter and the systems are different. Scotland has no upstream competition; the Scottish market is much smaller than the potential retail market for England; Scotland has only one incumbent retailer and one wholesaler. There are 19 integrated incumbent water companies in England and Wales. Our approach to retail competition is being developed jointly with the industry, along with the Scottish and English regulators and others. This group is well placed to identify the conditions that will work best in England, building on the Scottish experience.
On the specific issue of a no-detriment clause, the Bill already provides a general duty, in Clause 23, to ensure that water companies do not exercise undue preference to themselves or their own retail businesses. It is essential that all those who enter the markets have confidence that incumbent companies act appropriately. They must not be able to abuse their dominant positions. We have carefully considered the issues relating to discrimination in relation to the market reforms in the Bill. My noble friend Lord Moynihan raised the procedure for changes to water company licences. The issue is complex and sensitive and I am happy to discuss it further with him if he would like.
The noble Lord, Lord Whitty, asked about environmental protections for upstream. New entrants will be subject to the same environmental controls as other abstracters and those that discharge water back into the environment. The environmental regulators will be involved in the licensing and appointment of new entrants that offer upstream services to assess their suitability to operate in the water supply and waste water markets. They will also be a statutory consultee in the preparation of market codes. In the context of market reform, the noble Lord, Lord Whitty, suggested that the Bill only provides for negotiated access to the market. We are satisfied that the Bill will allow regulated access to the retail market through market codes and rules. There is flexibility to enable negotiation to allow, for example, local issues to be addressed in the upstream market.
My noble friend Lady Neville-Rolfe asked a number of questions, the first of which was to do with large-scale investment. We aim to increase resilience, included in which is planning our strategic infrastructure for years to come. Our work on water resource management plans, looking at water resources out to 2040, is part of this long-term planning. The framework we are setting for Ofwat will ensure that economic regulation of the sector supports these objectives. I am happy to commit to placing a note in the Library on responsibilities and accountabilities in the area requested by the noble Lord, Lord Oxburgh.
My noble friends Lady Parminter and Lady Neville-Rolfe asked about how we prevent the interplay of the various agencies and players now involved becoming bureaucratic and wasteful. The market operator is a company that will be set up to facilitate switching and financial settlement between market participants. It is common for such bodies to be established to simplify switching processes. The equivalent in Scotland is the Central Market Agency. Such bodies are not set up by legislation, as a general rule: they do not have any statutory powers, duties or roles.
My noble friend Lady Neville-Rolfe also asked about duties combined with the regulatory formula for water companies and whether that encouraged too much or too little capital investment in the longer term. It is the role of the regulatory system to ensure that there is sufficient investment in our essential water and sewerage services which are undertaken as efficiently as possible. Ofwat undertakes a comprehensive efficiency challenge every five years through the price review process. The Government are responsible for setting the policy and legislative framework. They also issue guidance to Ofwat to help it balance all its duties.
We have discussed the new duty of resilience in the Bill to address the specific uses relating to the long-term pressures facing the water industry. The duty makes it clear that this is not only about capital solutions; it could also be delivered through more innovative approaches, such as demand management and catchment management. It is widely recognised that such solutions have the capacity to improve long-term resilience.
There was discussion, particularly from the opposition Benches, about affordability and social tariffs. The Government take seriously the real cost-of-living pressures on households and the need to keep bills as low as possible. The average household combined water and sewerage bill in 2013-14 in England and Wales is £388 a year or just over £1 a day. The average increase in bills has been in line with inflation since 2009. That is because the price review process keeps bills affordable.
Looking forward, we support Ofwat in its efforts to ensure that consumers get a fair deal. Ofwat has estimated that the current price review could reduce pressure on bills from 2015 by between £120 million and £750 million a year. All the water and sewerage companies have developed packages to help customers with affordability issues. These include customer assistance funds, support tariffs, debt advice and water efficiency measures. Social tariffs give an extra tool.
We published social tariff guidance in April 2013. By April 2015, the vast majority of companies expect to have a new social tariff in place. The idea of legislating for a national social tariff overlooks the regional nature of the water industry. Costs are different in different regions, as are the nature of the affordability problems faced by customers. A national scheme would be a very blunt instrument. Company social tariffs allow for flexible schemes responding to local issues and are developed in consultation with customers.
My noble friends Lady Parminter and Lord Borwick, as well as the noble Baroness, Lady Kennedy, asked about the bad debt situation. We are firmly of the view that regulation should not always be the first resort of government. The effectiveness of measures to manage debt differs significantly between water companies. We want to see this change. At present, customers in some regions are paying much more than others to cover the cost of unpaid bills. We are making sure that the industry’s worst performers are challenged to match the performance of the best. The industry is already taking more responsibility in this area. It is working on a voluntary approach to sharing data and information on customers in rented accommodation through the landlord database which will be launched in March this year.
Several noble Lords, particularly on the opposition Benches, raised corporate governance and water company structures. Customers rightly expect governance standards in a regulated industry to be high. Questions about these standards go to the heart of the sector’s public legitimacy, which is why Ofwat is taking action to ensure improved standards of governance across the sector, ensuring that it leads the way in corporate governance. It is right that the independent regulator tackles these issues. The water companies’ licence makes clear that they are expected to be transparent about their board leadership, financial structures and governance arrangements.
Recently, Ofwat has consulted on new voluntary principles relating to board leadership, transparency and governance. We particularly support the drive for increased independent and customer representation on boards. For the record, I probably should say that I do not agree with the characterisation of the noble Viscount, Lord Hanworth, on the position regarding Thames Water and the Thames tunnel but he would not necessarily expect me to. My noble friend Lady Humphreys raised the Welsh water model and I welcome her comments. I note that different water companies excel at different things but no one model has been shown to have been better than any other. That model is popular with customers but I venture to suggest that the not-for-profit structure has not resulted in particularly outstanding performance on some key issues—for example, customer service or management of customer debt.
Turning to the insurance part of the Bill, I fully appreciate concerns raised in relation to those properties which are at the very highest risk of flooding or which some people have termed as genuinely uninsurable. I should like to make clear that all those properties will be included in Flood Re at the start of the scheme. However, over time, Flood Re may develop an approach for properties that flood very frequently that will help to reduce the impact of their claims on the scheme's affordability. For example, Flood Re could suggest resilient repairs and, if these were not taken up, could set higher premiums or excesses. Only in the most extreme cases would exclusion from Flood Re be considered.
My noble friends Lady Parminter and Lord Sheikh, the noble Earl, Lord Lytton, and the noble Lords, Lord Grantchester and Lord Whitty, all raised the issue of climate change and resilience and information to households. I recognise the strength of opinion on this important issue and share many of the views expressed. We welcome the constructive contribution of the adaptation sub-committee and recognise the need for Flood Re to publish a plan for transition to the free market. The Bill provides for that. The ABI has just come forward with some thoughts on providing information to householders in Flood Re about their flood risk. Discussions on the details of this and on incentives to drive the uptake of household-level resilient measures are continuing and I will provide a further update on this issue to your Lordships in Committee.
I am running short of time. Noble Lords have raised important issues about the various categories of exclusion. I hope that noble Lords will forgive me if I confine my remarks to saying that Flood Re is designed to help those who are struggling most to afford rising insurance premiums. Flood Re targets financial support to those at the lower end of the income spectrum by providing proportionately more support to those in council tax bands A to C. In designing Flood Re, a balance has had to be struck between supporting those at the highest risk and managing the impact on those at low risk. Including additional policies within Flood Re could not be achieved without decreasing the level of support going to those most in need or increasing the levy paid by all households. Perhaps we can talk further either before or during Committee about the specific issues of 2009 properties, business properties and council tax band H, which noble Lords raised.
The noble Lord, Lord Cameron, and my noble friend Lady Bakewell of Hardington Mandeville raised the issue of what has been going on over the past few weeks on the Somerset Levels. Flooding has had a devastating effect there and in other parts of the country. The Somerset Levels are among the most seriously affected and people have had to endure flood water and disruption for several weeks. It is incredibly hard for them and I know that all noble Lords share my sympathy for them. Local authorities, residents and the emergency services have been working around the clock to make sure that people are safe and to help with the clean-up.
We have been talking with local agencies about what more can be done and we have asked the Environment Agency for a detailed analysis on the proposed major dredging and any other action that can be taken to manage flood risk on the levels. A local task force has been set up comprising local partners and communities to develop a clear, long-term vision for the future of the Somerset Levels and moors. My right honourable friend the Secretary of State has been in Somerset today talking to local people, and the noble Lord, Lord Grantchester, should not necessarily believe what he reads in the red tops.
We talked about the need to keep water available and affordable and to continue to improve the environment. We also mentioned the importance of the provisions on flood insurance for the future availability and affordability of cover. This underlines the importance of the issues that we have been discussing today and will discuss over the coming weeks. For this reason, I am grateful for the many contributions today and I look forward to the debates that will follow.
I hope that in my few closing remarks I have been able to deal with some of the issues raised by noble Lords during the debate and I apologise that I just do not have time to come to them all, but I know that one way or another over the next few weeks we will do so. Once again, I commit to having further discussions inside and outside this Chamber with noble Lords on their concerns. If any noble Lord wishes to raise a concern, my door is always open. In the mean time, I commend this Bill to the House.
Flooding
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Baroness Royall of Blaisdon
To ask Her Majesty’s Government what measures they have in place in the light of renewed flood warnings issued by the Environment Agency.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, the Environment Agency and local authorities are in the recovery phase regarding the recent flooding. This entails restoring flood defences and working hard on preparations for the next flood incident. We are reviewing procedures adopted by them and by government departments to see where our response to flood warnings can be improved. Other government departments, local authorities, electricity distribution network operators and transport authorities are undertaking their own reviews.
Baroness Royall of Blaisdon (Lab)
My Lords, I am grateful for the information provided by the Minister. Right across the country, families, communities and businesses in our county and coastal towns are suffering from the dire effects of serious flooding. I have recently been given first-hand reports of the damage caused in Somerset, where people on the Levels are still having to use boats. The Conservative MP is blaming the Environment Agency. I suppose that that is better than blaming gay marriage. Can the Minister please reassure the House that the flooding in that county and elsewhere has had nothing to do with the reduction in investment in flood defences by more than £100 million in real terms since 2010?
Lord De Mauley
My Lords, I share the great concern of the noble Baroness for the people of specific villages in Somerset, who have had a really tough time, among many others around our country. We recognise the serious impact that the current flooding is having in Somerset. The Environment Agency is working with local authorities and communities in the county to help to mitigate the situation. We are making it easier for farmers to undertake their own watercourse maintenance activities, including through a pilot scheme on the River Brue in Somerset. However, we realise that the long-term sustainable management of the Somerset Levels and moors needs careful consideration, and we are working on that.
Lord Swinfen (Con)
My Lords, what steps are the Government taking to discourage further residential development on flood plains?
Lord De Mauley
My Lords, one has to be realistic about this. Around 10% of England is in high-flood-risk areas, including large parts of cities such as Hull and Portsmouth and, indeed, central London. Development in areas of flood risk is permitted only exceptionally, where there are wider sustainability considerations and must in all cases be safe, must not increase flood risk elsewhere and, where possible, overall flood risk should be reduced.
Lord Harris of Haringey (Lab)
My Lords, given that the Thames Barrier was raised only twice in its first four years of existence, but in the latest four years for which figures are available—apparently figures are not publicly available for the past two years—it was raised 24 times, are the Government really satisfied that it is sensible to wait until 2070 before considering its replacement?
Lord De Mauley
My Lords, the noble Lord will be aware that recent incidents, like those over the past several years, indicate that there are flood risks across our country. That is a very important one, and there are many others. We are, as the noble Lord well knows, spending a large sum of money: £2.3 billion over the current spending review period, and going on into the future. All these things are crucial and we must attend to them all according to their priority.
Viscount Tenby (CB)
My Lords, going back to an earlier answer given by the Minister, is he satisfied that building regulations in respect of flood plains are adequately enforced?
Lord De Mauley
Yes, my Lords. The NPPF contains tough requirements, so we can build in high-risk areas if there is nowhere else at lower risk; the needs and benefits outweigh the assessed flood risk, taking account of mitigation measures; buildings are safe and less susceptible to flood damage; and flood risk is not increased overall and, indeed, where possible, is reduced. So, yes, I am.
Baroness Parminter (LD)
The Secretary of State has received assurances from the ABI that households will receive every possible support from the insurance industry. Can my noble friend the Minister say what evidence there is to show that that is happening?
Lord De Mauley
Yes, my Lords. Indeed, some examples of how the insurance industry has responded are that it has drafted in extra staff, including cancelling Christmas leave, to ensure that capacity is sufficient to deal with the increased volume of claims; it has deployed emergency response vehicles to flooded areas to give advice to affected communities; it has called customers in flooded areas to offer assistance; it has deployed loss adjusters to visit affected areas as quickly as possible to assess damage, begin the drying out of properties and arrange for repair work to begin; and, importantly, it has prioritised vulnerable and elderly customers.
Lord Brooke of Alverthorpe (Lab)
My Lords, I am sure that the whole House is very pleased indeed with the information given to it about the actions being taken by the Government. However, to take the Minister back to the question asked by my noble friend Lord Harris, to which no basic reply was given, why have the Government decided that the review of improving the Thames Barrier should not take place until 2070? In fact, they have moved it from 2035. Can he explain to the House why they have done that and whether that is a safe act?
Lord De Mauley
That is an important question, and I absolutely take that. Noble Lords will be pleased, I hope, to hear that I am going out there to look at the construction myself. I might be better placed after that to answer their questions.
Baroness McIntosh of Hudnall (Lab)
As most people are understandably concerned about the impact on human habitation of flooding, what assessment have the Government made of the impact on agricultural land? The anecdotal evidence, as one travels around the country, is that a great deal of farmland is still under water from the rains before Christmas. There must be considerable loss to farmers. Can the noble Lord give the House any information about how that has been assessed?
Lord De Mauley
Yes, my Lords. More than 95% of arable land in England is either outside areas at risk of flooding from main rivers or the sea or is in areas benefiting from a greater than one to 75 standard of evidence.
Peatlands
Lord De Mauley Excerpts(12 years, 1 month ago)
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Lord Greaves
To ask Her Majesty’s Government what action they are taking to deliver their commitments made in the statement on peatlands by the Ministers from the Department for Environment, Food and Rural Affairs, the Welsh Government, the Northern Ireland Executive and the Scottish Government on 5 February 2013, in particular those on peatland restoration, land management policies to protect peatlands, and the inclusion of peatland restoration in national greenhouse gas emissions reporting.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, we are undertaking a number of actions supporting the restoration of peatlands, including working with the International Union for Conservation of Nature on the pilot peatland code, research to determine best practice in peatland restoration, and establishing three government-funded nature improvement areas. We are also investing more than £3 billion in a more targeted successor scheme to environmental stewardship, with the potential to include peatland restoration, and we are funding research on greenhouse gas emissions from lowland peat.
Lord Greaves (LD)
My Lords, that was quite a positive response. Is the Minister aware of the recent report by the Institute of Biological and Environmental Sciences at Aberdeen University, which found that building wind farms on undegraded peatland will not reduce net carbon emissions, and that they should not be built there? Many peatlands are in wild, remote, often upland areas, with large stocks of soil carbon. Developing them usually involves substantial excavation and draining of peat, which offsets the gains from wind power. Will the Government take these matters into account when considering their future energy strategy for the UK in conjunction with the devolved Administrations?
Lord De Mauley
Yes, my Lords. Applicants for consent for major energy infrastructure projects must provide assessments of potential biodiversity and geological impacts, including the effects of locating infrastructure on peatland. The decision-making authority must take such impacts into account before making its decision. Much can be done, through project design, to minimise and mitigate impacts. However, if there is damage that cannot be avoided, it is for the planning authorities to judge whether the benefits of the wind farm development outweigh those impacts.
Lord Krebs (CB)
My Lords, I would like to ask the Minister about the impacts of climate change on upland peat. As he will know, the report of the Adaptation Sub-Committee of the Committee on Climate Change, which I happen to chair, reported this year that only 4% of upland deep peat in England is in active, peat-forming good condition. Furthermore, only one-third of upland deep peat has a management plan in place. Will he inform the House what he intends to do about the other two-thirds of upland peat that has no management plan in place to improve its quality?
Lord De Mauley
Yes, my Lords—and I should take this opportunity to thank the noble Lord for the work he does with the Adaptation Sub-Committee; it is extremely important to us. The peatland code, which was launched in September, provides a basis for business sponsorship of peatland restoration; that is a key plank in what we are doing. We are also undertaking a considerable amount of important and relevant research. Environmental stewardship, which I referred to in my initial Answer, has for many years benefited peatlands, but the new ELMS will be more focused on environmental outcomes and therefore will be more directly beneficial to peatland restoration. The three nature improvement areas that have peatlands are working hard on improving their habitats.
Lord Cormack (Con)
My Lords, is not the best way in which to answer the plea of the noble Lord, Lord Greaves, to ensure that these unreliable, uneconomic and unsightly wind farms are not built on land anywhere?
Lord De Mauley
My Lords, of course, we have to take all factors into account in these decisions, but I shall pass on my noble friend’s comments to my colleagues at the Department of Energy and Climate Change.
Lord Knight of Weymouth (Lab)
My Lords, as the noble Lord, Lord Krebs, reminded us, only around 4% of our deep peat is in sufficiently good condition still to be actively forming peat. That is a decline from 6% in 2003. We also know that Birmingham, Exeter, Leeds, Liverpool, Manchester and Sheffield, as well as all of Cornwall, rely on peat catchments for their water. The Peak District peatlands alone supply 4 million people. Will the Minister therefore tell us what estimate the Government have made of the costs that could be avoided if the water storage and purification services provided by upland peat were restored?
Lord De Mauley
My Lords, the noble Lord will not be surprised to hear that I do not have a figure for that, but the gist of his question is entirely right. Peatlands perform an absolutely essential function in ensuring that we have clean and pure water supplies.
Lord De Mauley
I was not quite sure which noble friend was going to ask me a question then. The point on greenhouse gas emission reporting is that the metrics and technology are at a relatively early stage. We are still working on that, but noble Lords may rest assured that it is a key focus for us, and we will not rest until we have achieved that.
Lord Berkeley (Lab)
My Lords, the Minister said that they were looking for sponsorship for the management of these peatland areas. Does that mean that the only new areas that will get managed will be those sponsored by McDonald’s, et cetera?
Lord De Mauley
No, my Lords; that is why I mentioned the new environmental land management scheme.
Viscount Ridley
My Lords, is the Minister aware that it is not only in this country and not only with wind farms that some renewable energy projects are proving to be worse for carbon emissions, because of their effect on peat? For example, a study from Leicester University showed that biomass production from tropical peatland forests can worsen the effect of carbon dioxide emission.
Lord De Mauley
That is a very interesting point, but it strays a little wide of the Question.
The Earl of Courtown
I have got there in the end. I am looking at a slightly different part of this Question—at the end user of much of this peat, particularly the horticultural user. Would my noble friend agree that it would be wise for Her Majesty’s Government to look at the labelling of peat products for sale in garden centres, where peat material is sold as being low in peat when at least 50% of it is made up of peat?
Lord De Mauley
My Lords, that is an important point, too, because that is essentially—or at least a major reason—why our peatlands have been so badly destroyed in the past. A road map or plan has been produced from the work of the Sustainable Growing Media Task Force, which sets out recommendations on how a transition to sustainable growing media can be achieved. The Government responded in January 2013. As part of that, a growing media panel was established to oversee and co-ordinate delivery of the plan and to report on progress. The policy review will take place in 2015 to assess progress.
Independent Panel on Forestry Report
Lord De Mauley Excerpts(12 years, 2 months ago)
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Lord Clark of Windermere
To ask Her Majesty’s Government what progress they have made in implementing the recommendations of the report of the Independent Panel on Forestry.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, good progress has been made in implementing the commitments set out in January in the Government’s forestry and woodlands policy statement. An update report published in July highlighted progress in establishing a new body to manage the public forest estate, in maintaining forestry expertise in government, in supporting the forestry sector to improve its economic performance and in giving greater priority to plant health. A further update report will be published in the new year. I declare an interest as a woodland owner.
Lord Clark of Windermere (Lab)
My Lords, I thank the Minister for his answer. Is he aware that there are suggestions that the new forestry body will be forced to sell some of its land almost from its inception? Will he assure the House that that is not the case, and that the Government’s new forestry body will be provided with sufficient finance so that it is not forced into land sales within its first 12 months of existence?
Lord De Mauley
Yes, my Lords. Although the new body will be able to buy and sell land in its role as a land manager, there are no plans for it to sell any part of the estate to raise revenue to support itself.
Baroness Parminter (LD)
Do the Government intend to maintain transitional arrangements so that there are woodland grants until the introduction of England’s rural development programme in 2015, so that the Government’s welcome commitment to increase woodland cover can actually be achieved?
Lord De Mauley
Yes, my Lords. We have addressed the impact of a gap between rural development programmes by encouraging applicants who were originally considering applying for grants in 2014 to bring these forward to 2013. The Forestry Commission is presently considering applications to fund the planting of up to 2,600 hectares of woodland in 2014. The current RDP has seen over 12,000 hectares of woodland planted and funded through the English woodland grant scheme. Current applications for planting in 2014 therefore represent an annual planting rate above that in the rest of the current programme.
Lord Hylton (CB)
My Lords, I declare my interests as on the register. Is the Minister aware that I have a children’s forest school in one wood and much used public access in another? However, this question is not just about greenery and fresh air. Do the Government accept the report’s point about the economics of our forestry and its supply chain? What resources will they provide for adding value to British timber, not just using it for firewood and biomass?
Lord De Mauley
That is an important point. The Grown in Britain initiative is genuinely making a difference. Early successes show that it is already delivering results, including gaining commitment from several major corporates to buy or stock more home-grown wood products. To date, 19 major UK contractors-group companies, with a collective turnover of over £24 billion, have pledged to look into ways of procuring more British timber. Grown in Britain is also forging partnerships with businesses in the construction sector to seek good examples of projects using British-grown timber to promote as case studies for other forestry supply chains to follow. There is a lot going on in that sector, and it is important.
Viscount Brookeborough (CB)
My Lords, does the Minister agree that most landowners in this country who have forestry think that it makes a great contribution to their businesses? Can he explain why state-owned forestry in all parts of the United Kingdom has failed to make money over so many years?
Lord De Mauley
My Lords, I agree with the first half of the noble Lord’s question but the Government would not agree with the second half. The Forestry Commission is a dedicated and well run organisation. It has an important function to carry out, and the various functions that it carries out will continue to be carried out.
The Lord Bishop of St Albans
My Lords, as Her Majesty’s Government will be aware, there are several very serious diseases affecting trees in this country. What steps are being taken to ensure that, with the reorganisation of the responsibilities of the Forestry Commission, this important disease prevention, control and elimination work will not only continue but be strengthened?
Lord De Mauley
That is one of my department’s top four priorities, and we are making rapid progress in taking forward the implementation of the recommendations of the expert task force that the Secretary of State set up. In fact, this morning I attended our monthly biosecurity meeting and we are absolutely focused on both those plant health issues that are approaching us from overseas and those that are here already. We have established a prioritised plant health risk register, we are appointing a new chief plant health officer and we are engaged in contingency planning, among many other things.
Baroness Royall of Blaisdon (Lab)
My Lords, I declare an interest as a member of the steering committee of Hands Off Our Forest. Primary legislation is clearly needed to set up a new management organisation for the public forest estate. The Forest Campaigns Network has been told by Defra that Ministers are committed properly to pre-legislative scrutiny, so I would be grateful if the Minister could tell the House when we will see a draft Bill and whether or not it will be in this Session of Parliament. Will the Minister also confirm that the organisation’s mission will be to protect and improve the public forests, woodland and other assets held on behalf of the nation and that, however the organisation is structured, it will not be in danger of future privatisation?
Lord De Mauley
My Lords, we have always said that we will legislate as soon as possible, subject to the availability of parliamentary time. That remains the position and we are serious about it. Yes, we intend to make draft legislation available for pre-legislative scrutiny, but it is important to understand that we have also been focusing on making progress on all 36 commitments, and not all of those need legislation.
Badgers: Bovine Tuberculosis
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The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, we must not underestimate the scale of the devastation wrought on our farming industry and rural communities by the worsening bovine tuberculosis epidemic; I think most noble Lords who have spoken today have acknowledged that. It is unacceptable that in the 10 years to 31 December 2012, more than 305,000 cattle were compulsorily slaughtered as reactors or direct contacts in Great Britain. Moreover, a further 22,512 cattle have been slaughtered up to August this year solely because of bovine TB. As the noble Lord, Lord Knight, said, over the past 10 years the disease alone has cost the taxpayer more than £500 million. It is estimated that it will cost another £1 billion in the next decade unless we can use all the available tools to intensify the action that needs to be taken.
In the face of such a grave problem, difficult decisions must be made. There is no single solution—no silver bullet—so we must use every possible means at our disposal. As the noble Lord, Lord Krebs, said, strict controls on cattle movement must be applied, loopholes closed and measures tightened, a point I will come back to later. However, that alone will not reverse the inexorable spread of this devastating disease. The wildlife reservoir in the high-risk areas cannot be ignored, and it needs addressing urgently. That is why the Government have developed an ambitious and comprehensive strategy for combating the disease, with the aim of achieving bTB-free status for England within 25 years while maintaining a sustainable livestock industry. I thank my noble friend Lady Parminter for her comments on our intention to eradicate the disease.
The strategy emphasises that robust cattle controls must be combined with tackling the reservoir of disease in badgers, drawing on demonstrably successful approaches from around the world. It includes a comprehensive set of controls focused on the different disease risks in different areas of the country. The strategy also covers the development of new tools to control bTB such as diagnostic tests, alternative badger controls and, indeed, vaccination. Tackling the reservoir of disease in badgers is a key element of the strategy and we are committed to making it work. In this matter we must be guided by the experience of other countries which have successfully rid themselves of this terrible disease.
We have clear evidence from the randomised badger culling trial on the role of badgers in the spread of the disease in endemic areas. Work by Professor Christl Donnelly, to which the noble Lord, Lord Trees, referred, suggests that up to half of all cattle herds found to have TB in the high-risk area of England contracted the disease directly or indirectly from infected badgers. The evidence also shows that, carried out in the right way, badger culling will make a significant difference in reducing the incidence of TB in cattle. Other countries, such as the Republic of Ireland, New Zealand, Australia and the United States, have eradicated or greatly reduced the levels of bTB by culling infected wildlife in combination with tight cattle controls.
The results of the RBCT have been used to estimate that culling over an area of 150 square kilometres could reduce new herd incidence of bTB by an average of 16% over nine years: enough to stop the incidence of bTB continuing to increase and even begin decreasing it. We proceeded with pilots this summer to test the assumption that controlled shooting is a safe, humane and effective means of reducing badger numbers. These four-year pilots are closely managed and monitored by the licensing authority, Natural England. The independent panel of experts is now considering the information collected during the pilots. Its report to the Government in the New Year—to answer my noble friend Lady Parminter—will inform the decision on the wider rollout of badger control in those parts of England most severely affected by this disease. The report will be made available to Parliament and the general public. We have always been clear that these were pilots from which we will learn lessons in advance of taking any decisions. We expect to be in a position to take such a decision by the end of February.
Turning to questions raised by noble Lords, the noble Lord, Lord Knight, asked why the cull had been cut short in Gloucestershire. The decision that the licence for the extension should end was taken following discussions between the cull company in west Gloucestershire, Natural England and the NFU. The end of the cage-trapping season was agreed by the cull company and Natural England as a sensible point to stop activity. The decision was based on the decreasing number of badgers seen by contractors over the preceding weeks, which made achieving a further significant reduction in future weeks unlikely. Given that this was the first year of controlled shooting of badgers, it was uncertain how the winter would affect badger behaviour, but it was deemed likely that even fewer badgers would be seen due to the onset of cold weather, when they tend to stay underground for longer.
The noble Lords, Lord Knight and Lord Krebs, referred to perturbation. The RBCTs concluded that larger areas would offer greater benefits. The Gloucestershire area is 311 square kilometres and the Somerset one is 256 square kilometres. These are very substantially larger than those in the RBCTs. In the pilot culls, we were able to emphasise hard boundaries around the cull areas: sea, significant rivers and dual carriageways, each of which produces a significant challenge for badgers to cross. We are also conducting biosecurity measures, including vaccination, in the buffer zone around the cull areas. These are some of the lessons of the RBCTs on which we have been able to capitalise.
The noble Lords, Lord Knight and Lord Krebs, and my noble friend Lord King referred to population estimates in the context of a prospective rollout of culling in future years. Estimating badger populations is difficult, as is the case for all wildlife populations. However, the fact that it is difficult does not mean that we should avoid tackling disease in wildlife. When looking at lessons learnt in the pilots, we will look at how the efficacy of culling could be best assessed in future. In the RBCTs, as many badgers were removed as possible rather than having a fixed target. This approach, repeated each year for a number of years, resulted in an estimated 70% removal rate. This was not based on an estimate of the badger population in the area; instead, an estimate of the reduction of the badger population was made based on field signs and road kill over four years.
The noble Lord, Lord Knight, said that in Gloucestershire, the proportion of badgers killed was not more than 40%. It is worth saying that the most effective culls during the RBCTs had removal rates of between 64% and 76%, with an average of 70%. However, three areas had initial culls of lower effectiveness, with removal rates of below 40%. Those areas with low reductions caught up in subsequent years so that the reduction in population at the end of culling was comparable to those areas with good initial culls.
The noble Lord, Lord Knight, asked about the advice from the Chief Veterinary Officer. That advice was that a further increase in the number of badgers culled over the initial six-week period would improve the disease-control benefits achieved even further and enable them to accrue earlier. It was his view that a further significant reduction of the badger population in the first year would increase the likelihood of disease benefits in cattle over the full four years of the cull. A copy of his advice to the Secretary of State on the case for extending the culls in both Somerset and Gloucestershire was made public on 18 October.
The noble Lord, Lord Knight, asked about costs. The costs of the pilots must be put in the overall context of tackling the disease. Each TB outbreak costs an average of £34,000 and if left unchecked the disease will cost the taxpayer, as I said earlier, approximately £1 billion over the next 10 years. We must start tackling TB in wildlife to bring the disease under control and begin reducing the bill to taxpayers. We will know more about the costs of the pilots once the final figures have been disclosed and scrutinised.
The costs of the police efforts in Gloucestershire, for example, are likely to have been higher than expected. However, the uncertainty around costs provided an additional reason for the decision to proceed cautiously with two pilots before considering wider roll-out, where many of the current costs will not apply. The pilots will enable us to test our and the farming industry’s cost assumptions for areas where there is uncertainty, such as policing, and take these into account in a decision to roll out the policy more widely. As planned, costs will be reviewed after the conclusion of the pilots when all the information is available.
The noble Lord, Lord Knight, asked about vaccination. As noble Lords know, there are practical difficulties in using the injectable badger vaccine, including the cost and the fact that each badger must be trapped by a trained and licensed operator. Crucially, the vaccination does not cure already infected badgers and provides only limited protection to a proportion of uninfected badgers. Furthermore, unlike culling, we do not know what effect vaccinating badgers has on TB in cattle. Developing an oral badger vaccine remains a top priority for the Government. It is still at research stage and we cannot say when it will be deployable in the field, but we are progressing with this work as fast as possible and any additional spending will not speed the process up.
My noble friend Lady Parminter and the noble Lord, Lord Krebs, asked what we will do with the independent expert panel’s advice. The independent panel was established to provide a robust scientific peer review of the analysis of the data gathered during the pilot culls to support an assessment of the humaneness and efficacy of controlled shooting. When the panel has finished reviewing the output of this monitoring, it will submit its assessment and conclusions to Ministers. The panel will not be making recommendations about the humaneness of controlled shooting, but its conclusions about the robustness of the data will enable Ministers to make informed decisions about its use as a culling method in future years.
Measures are in place to ensure that the evidence base resulting from the pilots is robust. This is the first time a cull of this nature has been carried out and there are lessons that we can learn from the pilots. The panel’s report will be published in due course after it has been submitted to Ministers, along with the supporting evidence, and in deciding how to proceed we will consider it extremely carefully.
I have a number of other answers that I would like to have given noble Lords and I undertake to write with various answers. The noble Lord, Lord Trees, spoke about the Welsh Government providing funding for vaccination. We are providing the same amount of funding as the Welsh Government to help start-up vaccination in the annual TB testing area, and the fund will also be used to subsidise training and competence certification for staff and volunteers of voluntary and community sector organisations wishing to become lay badger vaccinators.
Although we have much to learn from this year’s experience, conducting two pilots has been a significant achievement and is another major step towards halting the spread of bovine TB. In helping us to achieve this, local farmers and landowners have undertaken the pilots in both areas, often in difficult terrain and weather, and in the face of a sustained campaign of harassment, intimidation and widespread criminal activity. I pay tribute to those undertaking the pilots for not wilting in the face of this and for showing commendable restraint in the manner in which they have conducted themselves throughout.
Controlling the disease in wildlife has to remain a key part of our TB strategy. No country has successfully dealt with TB without tackling the disease in both wildlife and cattle. Unless we tackle bovine TB in badgers, I fear that not only will we never eradicate it in cattle and free our livestock farmers of a huge burden but that we will see the disease in cattle and that accompanying burden continue to grow and spread until the disease is endemic throughout the whole of England. This Government are resolved to prevent this happening and to achieve freedom from TB in 25 years.