(10 years, 9 months ago)
Lords ChamberRead Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“( ) Granting of an authorisation of a retail or restricted retail authorisation for supply to non domestic sector customers must be done in such a way and on such terms that it does not disadvantage domestic customers.”
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.
Viscount Hanworth
“(8) The Secretary of State shall, following consultation, issue rules for the designation of the market operator for the retail non household market, setting out the procedures, responsibilities, status and governance of such market operator.”
Viscount Hanworth (Lab)
My Lords, I also thank the noble Lord, Lord De Mauley, for his very helpful approach in informing some of us of the intricacies of the Bill. This is a probing amendment, designed to throw some light on the arrangements regarding the so-called market operator. An electronic search of the Bill fails to reveal a single instance of the words “market operator”. We have been alerted to the intention to create this entity by an organisational flowchart entitled “How Will it All Work?”. This was provided by Defra officials in the course of a seminar that preceded the introduction of the Bill to this House. The words are to be found within a centrally located box that is connected to boxes labelled “the regulator”, “the retailers” and “the wholesalers”. I tend to view such charts from the perspective of the circuit diagrams of electrical engineering, hence I have anxieties about the dangers of short-circuiting or worse. This flowchart contravenes all the rules of electrical safety.
There was nothing in the document presented at the seminar to inform us of the role of the market operator. However, one noticed that the top left-hand corners of its pages were stamped with the logo of an organisation called Open Water. We have been told that Open Water is a programme created to support the Government’s vision for the future of water management in England and that it is to be steered by a high-level group consisting of representatives of Defra, the Scottish Government, the Welsh Government, customers, Ofwat, the Water Commission for Scotland and the water companies. Only Uncle Tom Cobbleigh is missing from the list.
An immediate question is whether this organisation is real or a mere fiction. One way of substantiating the existence of an organisation is to look for its website. The website of Open Water is readily accessible but an examination of what is there only adds to the doubts and confusion. One prominent item on the site is a question and answer file that purports to be an interview, in real time, with the programme director, Keith Fowler. It is clearly nothing of the sort and this assertion is notwithstanding the fact that the document ends by expressing thanks to Keith Fowler for “talking to us today”. I had not previously encountered this kind of bamboozlement.
A somewhat more informative document, available at this website, is titled Market Operator Target Operating Model. This purports to tell us what the market operator will and will not do. However, in places the document is curiously self-contradictory. Thus it is stated that the market operator,
“should carry out monitoring and reporting of market code compliance”,
and have delegated authority to issue,
“warnings and … financial and non-financial penalties”.
It is also stated, in a seeming contradiction, that:
“Enforcement of significant market issues should not be performed by the”,
market operator, and it is said, in an oddly confusing manner, that, if needs be, the market operator,
“should administer, but not arbitrate on, market disputes”.
Clearly, there is need for some clarification here, which is what the amendment seeks.
A further issue that needs to be clarified concerns the steering of a market operator, and its relationship to Open Water. We learn from the aforementioned document that the market operator,
“should be a company limited by guarantee”,
that will be owned and paid for by the water companies, that its set-up costs should be paid for by the wholesalers and that its running costs should be split between wholesalers,
“incumbent retailers, new entrant retailers and self-supply customers”.
A danger that may arise and that needs to be guarded against is that of regulatory capture, a process by which regulatory agencies eventually come to be dominated by the very industries that they have been charged with regulating. The terminology originated in the United States, where it has been used to describe how the intentions of the federal Government have been widely subverted. Aspersions of regulatory capture have already been made against Ofwat; we need assurances from the Minister that the Government are aware of such dangers and will take steps to avert them. I beg to move.
The Earl of Selborne (Con)
My Lords, I declare my interests, as I did at Second Reading, that, like the Minister, I am a farmer with an abstraction licence, although I have not been flooded—so to that extent, I do not claim the same interests.
The amendment would require Ministers to issue rules for the,
“designation of … procedures, responsibilities, status and governance”,
of a market operator. I cannot believe that such ministerial control would assist in the implementation of a successful market. In regulated utility industries, whether energy, communications or water and sewerage, the management and control of market operations is initially the responsibility of the regulator, working alongside the industry. Once the market is up and running, it becomes the responsibility of the industry, supported of course by the oversight of the regulator, which provides the framework. This approach helps to ensure that the regulator and the industry work together; the industry will need to adapt to innovation and new circumstances. We recognise that in this Bill we are promoting innovation and we have to ensure that the regulation adapts accordingly. The industry will need to adapt to innovation and these new circumstances, and it is for the regulator and industry to ensure that working practices are aligned in the regulatory framework that we are establishing in the Bill. I simply do not believe that it would be helpful to have a politician—the Minister of the day, of any party—fulfilling the role of controlling the market operator in this far-reaching way.
Baroness Parminter (LD)
My Amendment 95 is grouped with the amendment moved by the noble Viscount, Lord Hanworth. I wish to probe the issue to get a bit more information from the Minister on the shadowy role of the market operator. Before I do that, however, I take the opportunity on this first day in Committee to say that the truncated nature of the parliamentary process, with less than two weeks between Second Reading and going into Committee, has presented certain challenges to those of us who are trying to do our duty and give proper scrutiny to this complex Bill, as my noble friend Lord Crickhowell said. Like others, I thank my noble friend the Minister and the Bill team for the briefings and the clarity of the briefing papers, but that still leaves certain gaps in our knowledge. Noble Lords will be aware that the comments of the Delegated Powers and Regulatory Reform Committee on the Bill were published only on Friday, and we still await the Government’s response. Clearly, we have had to table our amendments before the Government have provided us with the response to important points that the Delegated Powers and Regulatory Reform Committee has made, and that is not particularly satisfactory or helpful.
Lord Whitty
My Lords, I thank my noble friend Lord Hanworth and the noble Baroness, Lady Parminter, for drawing our attention to this aspect of the reform. It is passing strange that, in one of the very nice charts that the department produced and on which we have been congratulating it, it is clear that this market operator is the key to how the situation will play out in practice. We are setting up a market that does not exist, and we are trying to create and sustain it in a way that on the one hand gives the Secretary of State certain powers and on the other Ofwat certain powers, building on its existing ones.
Nowhere in this legislation are there any specifics about this market operator. As my noble friend has found out—I did not know this and I am not sure if any other noble Lord knew—there is a 61-page document on Open Water’s website telling us what it is doing. Having tried to fight my way through that document I am not sure that I am any better informed. Nevertheless, it is clearly an important body. The noble Earl, Lord Selborne, may be right that the Secretary of State should not be laying down precisely how it operates.
The Minister owes it to the House at least to put on the record what the Government expect of this organisation. It has very wide functions. It is crucial to how the market is going to operate, and has fairly substantial powers in terms of dealing with relations between existing companies and with the regulator. This is absent from the legislation, in even the mildest form. That is a bit bizarre. Its objectives include registration and switching; financial settlements; market governance; slightly ambiguously, the enforcement of codes—certainly their operation and administration—and the operation of the industry database. It is owned not as a separate, independent stand-alone company, but by the operators in the industry, which are nine regional monopolies, or eight if Wales is not involved; I am not entirely sure about that. It will allow new entrants to come in, which is jolly good of it. It is not entirely sure whether potential new entrants also have a role in this in relation to the market operating well.
The organisation’s relationship with Ofwat is not clear. It is not owned by Ofwat, which it says explicitly. It is not a subdivision of Ofwat, but is it a contract from Ofwat? Is Ofwat giving these responsibilities to that organisation that is then run by the industry, in the way that the noble Earl, Lord Selborne, describes? If so, are that responsibility and contract ever contestable? There are a lot of questions here. In some ways, the powers and responsibilities that it has, and the governance that it appears to have, would have been familiar to 18th-century economists. They would probably have called it an institutionalised cartel. I am sure that is not what the Government intend, but the way it is described in these documents tends to suggest that it is a fixed market and not as open as the Government like to claim.
Leaving aside one’s anxiety about this issue not having even the slightest mention in the legislation, before we finish our consideration of the Bill the department and the Minister need to lay out a little more precisely how this body will be set up, how it will operate, to whom it is responsible and how its performance is to be judged. Therefore, although these are basically probing amendments, I support the intention behind them.
Baroness Northover (LD)
My Lords, I have no interests to declare except as a frequent user of water and sanitary facilities and, therefore, I am extremely grateful that we do, indeed, have both.
Amendment 2, moved by the noble Viscount, Lord Hanworth, seeks further clarification about the market operator. At his request, I will do my best to be clear and not add to the bamboozlement that he referred to. I say to my noble friend Lady Parminter that we are very grateful to the Delegated Powers and Regulatory Reform Committee for its careful consideration of the Bill. We will respond in due course and make sure that noble Lords receive a copy of the Government’s response.
I am most grateful to the noble Viscount, Lord Hanworth, and to my noble friend for tabling their respective amendments and thus for giving me the opportunity to discuss the market operator, clarify its role and purpose and, I hope, set their minds at rest about any concerns they may have. The market operator will be a company limited by guarantee that will initially be set up by Ofwat. Incumbent water companies and licensees that will operate in the competitive market will own and manage the market operator. As noble Lords will know, Ofwat is accountable to Parliament and has a primary statutory duty to protect customers as well as powers to take action against anti-competitive behaviour under the Competition Act. Ofwat will oversee the overall operation of the market and ensure that it is working in the interests of customers, with powers to intervene if the market operator were acting in any way that was anti-competitive. For example, Ofwat could take action against the market operator under the Competition Act 1998 if its activities were disadvantaging customers.
I should make it very clear that the market operator is solely a facilitator with an entirely administrative role. Despite what the noble Viscount, Lord Hanworth, said, it is not a regulator. The market operator will hold a register of premises eligible to switch. It will also facilitate switching and financial settlement between incumbent water companies and licensees. Ofwat will be involved in developing the licence conditions that will set out how licensees and incumbent water companies must interact with the market operator. Market codes may also be used to set out some aspects of these arrangements. The market operator does not in itself have any formal statutory roles.
Looking somewhat wider than the Bill—I see that the noble Viscount, Lord Hanworth, looks perplexed—I hope that the following remarks may be helpful. There are other examples of such companies set up in retail markets—for example, in the gas and electricity retail markets. Perhaps the noble Viscount needs to look at some other 60-page documents in relation to other utilities. The Metering Point Administration Service company administers switching in the UK electricity market and Xoserve does the same for gas. These are not exactly household names because they do not come into contact with the public. They are private companies set up for and by participants in regulated markets to operate silently in the background. None of these companies was established under statute and none has had its respective remit set out in legislation or by the Government.
The water industry and regulators have already set up a company limited by guarantee called Open Water Market Ltd. The noble Viscount has clearly done a lot of research on this matter. The company will initially be a vehicle to take forward the delivery of the Open Water programme, which is establishing the retail market on behalf of the Government, Ofwat and the industry. A decision will be made in the coming months on whether this company or another one will be established as the market operator for the retail market that goes live in April 2017.
The market operator will be governed by its articles of association and will be accountable to its members, which will be the incumbents and licensees that it serves. As a limited company, it will be subject to the provisions of the Companies Act 2006 and will have to prepare accounts and reports in accordance with that Act. Decisions will have to be made in the future on whether the retail market operator or another body should operate in the upstream market. If there were to be an upstream market operator it would not have roles around the inputting of water or withdrawals of sewage that would properly fall to the Drinking Water Inspectorate or the Environment Agency. The market operator’s role is likely to be limited to registering arrangements and verifying quantities of water input and consumed to facilitate financial settlement arrangements. An example of such a market operator in energy is Elexon, which facilitates settlements for the electricity generation market.
I shall comment on a point made by my noble friend Lady Parminter about market codes being subject to the affirmative procedure and explain that market codes will not be subject to any parliamentary procedure. The regulations under Clause 12 are subject to the affirmative procedure and these codes will be subject to consultation. If my noble friend needs further clarification we can provide that.
Coming back to the issue of what the market operator is, I conclude by saying that the market operator will not have any statutory roles, duties or responsibilities within the retail market of the sort that would need to be set out in regulations. I hope that I have clarified that. It will handle routine transactions and communications between incumbents and licensees to help them to meet their statutory and regulatory obligations, as prescribed by legislation, codes and their licences. The market operator will not take over any responsibilities that properly belong with the incumbents, licensees or regulators. I hope that I have provided some elucidation to noble Lords. Obviously we would be happy to provide any further elucidation that is required. In the mean time, I hope that the noble Viscount will be content to withdraw his amendment.
Viscount Hanworth
I thank the Minister for that explanation. She has told us that the market operator is intended to operate silently in the background but I am not sure that that justifies the complete silence of the documentation we have received about the market operator. This is a fundamental part of the architecture of the water industry as it is intended to evolve so the lack of any mention of it in the principal documents is extraordinary. I have made that point rather forcefully but I shall withdraw the amendment as it is a probing amendment. I hope that others will also voice an opinion about the extraordinary lacuna that we have in the documentation if not in the legislation. I beg leave to withdraw the amendment.
Lord Whitty
“(e) the Consumer Council for Water or other appropriate statutory consumer body”
Lord Whitty
Amendment 3 is the first of a number of amendments that we will propose from the Opposition Front Bench on engagement with the Consumer Council for Water. It is important to recognise that one of the main players in the water sector has been the Consumer Council for Water. The Minister referred to me bringing in the 2003 Bill, which was when we took the Consumer Council for Water out of Ofwat and made it an independent, self-standing, statutory consumer body. While there has been a lot of change in statutory consumer bodies over the years, the consumer council has played an important role. While it has supported the regulator’s focus on the consumer, it has also challenged it. There has been a reasonable relationship between Ofwat and the consumer council. In recent years, Ofwat has encouraged some greater sense of responsibility on the part of the water companies and set up consumer challenge groups, which have fed into the boards of those companies. The Consumer Council for Water has helped to facilitate that. It is therefore important that that relationship is fully institutionalised.
Baroness Northover
My Lords, I thank the noble Lord, Lord Whitty, for tabling these amendments. The Government recognise the significant role that CCWater plays in the industry by representing water and sewerage customers in England and Wales. The noble Lord made that case cogently.
However, these amendments concern the licence authorisations that relate to inputting water to the network, and the noble Lord is clearly well aware of that point. This means that they relate solely to the relationship between water supply licensees and the incumbent water companies, rather than that between licensees and customers. Before issuing a wholesale or supplementary authorisation, Ofwat must consult the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate. This is not least because they can provide intelligence on any prospective licensees that are trying to operate in this area. The purpose of this is to ensure that these parties are fit and proper persons for the purpose of operating in the new markets.
We would like CCWater to continue carrying out its valuable work of protecting customers and handling customer complaints. It is worth noting that Ofwat already publishes a notice on its website asking for comments from interested parties before it issues a licence with either a retail or restricted retail authorisation. CCWater therefore has the opportunity to respond on any issues that might affect customers at this point. I hope that any concerns, as identified by the noble Lord, Lord Whitty, can be addressed in that way. I hope that he is reassured by this and is willing to withdraw the amendment.
Lord Whitty
I thank the noble Baroness for those comments. She is right that these clauses deal with the relationship between new bulk suppliers and the incumbents, but that has a significant effect on the nature of the market beyond that. If the purpose of this consultation is to establish whether the newcomers negotiating a relationship with the incumbent are fit and proper persons, one issue is the effect on consumers down the line. I accept that Ofwat is open to people writing in, but why is the statutory consumer organisation not one of those listed to give a view in the first place? We are changing the market, and there should be a consumer view on how that market is changing and who is entering that market. I am looking not for a veto, but for an input. I hope that the Government will think slightly more. It would not cost them that much to add a new paragraph (e) to this subsection, and it would be consistent with what is done later in the Bill—admittedly on parts closer to the consumer—and with the established legislation and regulations. I withdraw the amendment for now, but I would hope that the Government could consider this further.
The Earl of Selborne
The Earl of Selborne
My Lords, I shall speak also to, I think, 32 amendments in this group. I am conscious of the fact that my noble friend Lord Crickhowell said that this Bill started hopelessly complicated, and I suspect that I stand charged by him with trying to make it ever more complicated—and I do so. This is because I am asking the Minister to ensure that the threat of moving towards de-averaging—something neither the Government nor any of us want—is not going to be advanced by the fundamental concept incorporated in the competition aspects of the Bill. That concept is the provision of a direct link between an upstream service provider, whether water or sewerage, and a retailer to non-household customers.
The position under the Bill is that the customer can contract directly with a resource provider. This may well bring lower charges to some customers, if, for example, a new entrant is able to offer a water supply at a price lower than the average price that the incumbent water company is able to charge. In a negotiated market, there will be a range of attributes that will favour one supplier over another. That is desirable and helpful. Price is one such key factor. If, as is possible here, large, non-household customers successfully negotiate on price alone—without respect to the other services that we are expecting to be provided in terms of environmentally friendly services, water savings and much else—that will favour one supplier over another. Eventually, this will result in a situation in which we will drift inexorably towards a two-tier market with the principle of average prices for all customers abandoned. It follows that smaller non-household customers and anyone located in remoter rural areas will face increased costs.
If we think that this is a remote possibility, we should bear in mind that it has actually happened already. In Wales, the Shotton case set a precedent that local costs were required to be used in a ruling in setting prices under bilateral deals. I am told that this was a one-off and that it will not happen anywhere else. However, when I hear that it has happened, and that there is a threat, I say that this is the opportunity to make sure that it does not happen again. I am sure that we shall look at other proposals as we go through the Bill to ward off the threat of de-averaging.
This is a fundamental proposal: it requires contracts to be made with the undertaker, with the other two parties participating. The purpose of the amendment, therefore, is to remove the direct link between the provider of resource services and the retailer. It would remove any opportunity for a large corporation to act in a way that was detrimental to all other customers.
Under the Bill as drafted, we could end up with non-household customers paying different prices for the same service within the same appointed area. As I have said, smaller businesses and non-household customers in rural areas are most likely to be affected. One of the charging principles that I accept in the Bill—I quote from the guidance—is the following:
“No category of customer should be unfairly disadvantaged by the way reform impacts on water charges. A fair and non discriminatory approach to sharing network costs will be critical”.
However, the guidance goes on to say:
“Ofwat has a number of tools to limit the effect of de-averaging on customer charges”,
and that it will ensure that,
“any marginal charges are introduced in a measured fashion and, above all, that they are in the overall interest of customers”.
So we are being assured that Ofwat, under the terms of the Bill—we will come to the codes and the rules later —can deal with this problem.
However, I am not entirely clear that this is the case, and I hope that the Minister can give some reassurance—remembering, of course, that already in Shotton we have seen an example of two-tier pricing that has impacted on other customers in the region. Can Ofwat really be expected to manage the impact of de-averaging to prevent any unfairness between customers, especially rural customers, when contracts for non-householders are made directly between retailers and potential upstream services?
Helpful progress was made in Committee in another place and a strong assurance was given that de-averaging would be prevented through ministerial charging guidance, which would explicitly rule it out. However, that is only a limited assurance when one recognises that if these contracts between the resource provider and the retailer were to be decided under European rather than United Kingdom competition law, the United Kingdom Government’s charging guidance would be overruled. So, much as one would take comfort from the ministerial guidance, frankly, it would not overrule European competition law.
I will say again that the purpose of the amendments is to require those with wholesale authorisation to interact with the incumbent water and sewage undertaker rather than with the retailers. I beg to move.
Lord Moynihan (Con)
My Lords, my name has been associated with the amendments tabled by my noble friend. He set out his eloquent and comprehensive assessment of the issue of de-averaging and said that he intends to speak further when moving his Amendment 32. There are further amendments. Your Lordships will have noticed that there is a 33rd, Amendment 61 to page 152, line 23—it is tucked away at the back—and will excuse the fact that it is not to the first part of the Bill. However, the amendment echoes the points that have been made so eloquently by my noble friend.
Of course, in many respects, these are probing amendments. However, they have at their heart the significant concern that if de-averaging were to take place some non-household customers, particularly smaller customers in rural areas, could see their charges increased markedly. This could have serious impacts on those non-householders and potential political consequences in some areas.
The prudent way through this would be to remove the direct link that exists in the Bill between the provider of the resource services and the retailer/customer, as my noble friend has pointed out.
What I would like to ask, however, is that the Minister clarify the extent of this issue. We have received advice from Scotland—the economics consultancy Oxera and Scottish Water undertook analysis into the impact on customers, were de-averaging to have taken place in Scotland. Under the Scottish Government’s rules, the policy is to rule it out. However, Oxera found that even on very conservative assumptions, many businesses could see their charges rising by at least 25% and, in a fully de-averaged scenario, some customers in Scotland could end up paying up to 10 times their current bill. That is evidence that we have received on one hand.
However, on the other hand, the Bill focuses on choice. Retail services account for something like 10% of the non-household bill—which accounts for something like 20% of the total bill—so approximately 2% of the amount would be in this sector. I would be grateful if the Minister could highlight the seriousness and impact of this issue in terms of its scale. Does he agree with the figures of Oxera put forward by our friends north of the border, who have done some outstanding work in generating competition in this sector? If so, and if that is to be borne out by the evidence, it underlines how important these amendments are.
Lord Crickhowell
My Lords, there is something to be said for learning from experience. The fact is, we have the experience of the Water Industry Commission for Scotland, which introduced highly successful arrangements from 2008. It is very clear in its recommendations on this particular point, and in the paper sent to some of us it has taken note of the debate that took place in the other place. It says specifically:
“In our view the prudent course of action would be to remove the direct link between the provider of resource services and the retailer/customer. This would remove any ambiguity that could be exploited by a large corporation to the detriment of all other customers. It would also allow a market to develop that could help in building resilience and improving our environment”.
On the front of the paper, it simply says:
“Some of these issues were raised and debated during the Committee stage in the House of Commons but as yet the Government has not been persuaded to accept amendments on the topics of substance we discuss in this note”.
Clearly, in the light of the good experience in Scotland and the very firm advice given to us, we need to know why the Government are not accepting the advice. I shall be very interested to hear what my noble friend has to say.
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.
Lord Whitty
“( ) The rules must include provision for and in connection with ensuring that there are no variations between charges, or the amount of charges, imposed by a water undertaker under different section 66D agreements in consequence of the location at which the duty or duties to be performed by that undertaker under such agreements fall to be performed.”
Lord Whitty
My Lords, some of the issues covered by Amendment 9 have been discussed in the previous group. I do not entirely disagree with the Minister’s response on common carriage, in terms of how water gets delivered and having as broad a range of potential new retailers as possible. However, the outcome seems to be that if you have de-averaged prices, you have discrimination between users. Whether all the structural amendments—some in this group and some in the previous group with the amendment of the noble Earl, Lord Selborne—would be necessary to prevent that, the Bill ought to enunciate that principle. At the end of the day, we do not want a market where the easiest route leads to suppliers cherry picking and to a two- or three-tier market for the final delivery of water to businesses, public authorities and so forth—the non-domestic retail market.
In one sense, Scotland shows us what the benefit to business, and the knock-on effect to the domestic side, has been. It has been not in differentiated prices but in better service, in driving water efficiency both in the delivery and use of water, in better means of dealing with waste water, in better water treatment in specialist cases and in disposal of water and waste. If you put competition wholly on the price side, you will not get those advantages. It will be easy for a supplier, on the supply side, to have a more accessible or more cheaply accessible source of water at the upstream level to bring to its business consumers or, on the demand side, to have a group of businesses and other institutions taking advantage of its terms because they are all fairly close together and all have similar requirements, and therefore there are economies of scale in actually supplying that institution.
I do not think that the Government envisaged—and nor did we on this side—the increasing competition in the retail sector as being primarily about wholesale price. Reassuring noises have been made about Ofwat having the ability to ensure that de-averaging does not take place. The natural drive of the market, however, is likely to make it quite attractive. Unless Ofwat has a clear line, which this amendment would give them, that the wholesale price and therefore the retail price of wholesale water would not be differentiated by location, we will get some differentiation of outcome. We will get cherry picking and we will get distortion. It will hit particularly the more remote rural areas and rural businesses in those areas; it will hit particularly businesses in rundown parts of the inner city, where not many of them are inclined to negotiate deals with the company; and it will hit businesses where it is difficult to see how a new arrangement would work.
Unless there is an overall presumption that there should be no de-averaging then it is quite easy to see how the market would end up with that. It may be that Ofwat’s powers would be exerted to prevent that, but this Bill does not require Ofwat to do so. The terminology that de-averaging would exist only if there was an “overall benefit” to consumers makes it quite difficult to assess. You have an example of de-averaging which clearly might benefit the immediate consumers who are benefiting from that de-averaged price, but how do you then assess its effect in the short and medium term on consumers as a whole? It is quite a difficult judgment for Ofwat. If the outcome the Government want is that which has been delivered in other quasi-utility markets—largely it has been—why not actually tell Ofwat to deliver that? Surely it would be easier.
I hope that the Government take this slightly more seriously. It will not necessarily unravel their whole approach to competition in this Bill. It is simply giving Ofwat an explicit duty that will deliver an outcome the Government say they want. The Government should not fundamentally object to this amendment. It may require a bit of back-up along the lines the noble Earl, Lord Selborne, has suggested already, but it requires at least the principle to be reflected in the Bill. Otherwise, we will get cherry picking and we will get discrimination, which is unlikely to drive the kind of efficiencies that we have been praising the Scottish system for delivering. I beg to move.
Lord Cameron of Dillington (CB)
My Lords, as this is the first time I have intervened in Committee, I declare an interest as a farmer with abstraction licences. Even though I come from Somerset, my farmland is not yet flooded. However, if the current rains continue, it is unlikely that I will be able to say that on Report.
I want to back up the noble Baroness, Lady Parminter, who said that she could not understand why we had only a week between Second Reading and Committee. This is a very complicated Bill and I am not certain why that particular protocol has been broken on this occasion. I have never had an explanation of it. Maybe I have missed some explanation somewhere, but I think it is wrong. I hope it is not a precursor to a Commons-style approach to Bills, where arguments and the length of discussion are ridden over roughshod.
I strongly support Amendment 9 and the whole question it addresses. It is very important that de-averaging does not take place. I would have supported the noble Earl, Lord Selborne, in his amendments to ensure there are no detriments or de-averaging if I had understood that that was their intention. The noble Lord, Lord Whitty, said that he was not entirely clear what the amendments intended; personally, I could not understand them at all. Anyway, I would have supported the noble Earl had I known.
Water, like Royal Mail, should be covered by a universal service obligation that is amendable only with the permission of Parliament. Water should be a universal right—although clearly there can be exceptions, as with Royal Mail. For instance, I believe that a postman does not have to deliver to a household where he is permanently attacked by a savage dog. The water equivalent of that might be a blatant leak in a householder’s garden where the water was going to waste; there could be exceptions.
It is very important, particularly in rural areas, that de-averaging does not happen. I have heard the view expressed that de-averaging is bound to happen with the introduction of competition, especially if that competition eventually moves on to cover domestic premises. I personally hope that it will but obviously we should go softly, softly. I do not see competition as incompatible with de-averaging. It is possible to invest efficiently in the overall infrastructure and still charge your customers competitively, based on an average cost per litre, once the overall infrastructure is in place and the supply of water adequate for the demand. That obviously means we must manage the supply, the overall abstraction and the demand—preferably through universal metering but we have yet to come to those debates.
For the time being, I strongly support the thinking behind Amendment 9. Neither remote nor very remote properties should have to pay more per litre than their urban counterparts. I sincerely hope that the Minister was right, when replying to the previous debate, to say that Ofwat has the power to prevent de-averaging. I sincerely hope that it will use those powers.
Lord Moynihan
My Lords, I have a number of amendments in this group. Briefly, I am very supportive of the way the noble Lord, Lord Whitty, set out the principles and concerns on this. He echoed many of the points made by my noble friend on the previous group of amendments. My amendments focus less on the principles and more on the mechanisms of charging. To limit the amount of your Lordships’ time taken in Committee, I intend to pick that up in the context of Amendment 43, on restricted access, and of Amendments 99, 100 and 102, which fit more neatly into Clause 16 and the charges scheme—which I know my noble friend will address when he reaches his group of amendments, led by Amendment 44. I could discuss them here but I think it would assist the Committee to refer to the charges scheme at that point.
In closing, I urge the Minister to take very seriously the concerns on this issue raised across the Committee. As has been pointed out, he mentioned at the conclusion of the debate on the previous group of amendments that Ofwat has powers it can take to protect customers in this context. The Bill also gives Defra the option to issue charging guidance. Given the importance of this, as Members from all sides of the Committee have highlighted, I hope that due account will be taken of those views and that Defra will give serious consideration to the issuing of charging guidance in this context.
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
Lord Moynihan
Lord Moynihan
My Lords, in moving the amendment, I shall speak also to Amendments 40, 42, 56, 57 and 59, as well as indicating my support for Amendment 105 from the noble Lord, Lord Whitty, in this group.
The balance between regulation and negotiation in the water industry is crucial to this set of amendments. At the heart of the Bill is the intention to create a market where access is regulated—in other words, the rules of entry are set out very clearly, and must be adhered to by all market participants. I am concerned that in some places the Bill leaves too much too open; it appears to be based on the premise that the parties within the retail market should negotiate between themselves on service and price. In my view, that negotiation could substantially limit the effectiveness of the retail market. Allowing individual parties to negotiate in this way opens the door to current incumbents to discriminate against new retailers by offering them higher prices, less preferable terms or poorer service levels. Alternatively, and perhaps more worryingly, current incumbents could simply be slow in responding to requests for information or services from new entrants; this would be difficult to police.
As the noble Lord, Lord Whitty, suggested, in speaking to Amendment 1, some companies may change their allocations of retail costs to ensure that as little revenue as possible is at risk under the new market arrangements. The result of those changes is to reduce the amount of revenue that is open to competition and, potentially, to reduce the margin available to any new entrant. If allowed to stand, that move by the companies may reduce the level of entry into the new retail market. That would be a very serious issue indeed and, I hope, will not result from this legislation. This is an example of how companies might be expected to react when there is insufficient clarity in how the market will operate.
It is interesting to note the experience and views of the Water Industry Commission for Scotland, which opines that it could be difficult for Ofwat to put a framework in place that will allow the regulator to ensure that there is an effective level playing field for all market participants. It is likely to require relatively draconian rules to be drafted and policed. Notwithstanding those rules, some companies may choose to seek to frustrate the operation of the market or seek to get round the rules or even break them to maximise profit, which could be to the substantial detriment of all customers and, indeed, the environment. Having to negotiate on too many issues could also increase the upfront costs for new entrants, which may deter them from entering the market—or, if the new entrant does enter the market, will increase the costs that have to be passed on to customers. To be effective, a retail market, rather than relying on negotiation, needs all participants to have access to clear and accessible prices and to standard terms and conditions. In regulatory economics, I would describe this kind of access to the market as being regulated rather than negotiated.
In Scotland, the retail market is specifically designed to ensure that there is a level playing field. Scottish Water was required to separate its retail arm on a functional basis but chose to create an arm’s-length subsidiary. This has meant that the required governance code, the document that gives new entrants the confidence that they can compete on their merits with the incumbent retailer, could be less onerous than it would otherwise have been. However, the governance code still requires Business Stream to operate profitably as a standalone entity; the code also requires it to limit the access of Scottish Water’s management to its financial and operational information. Scottish Water is not allowed to know about Business Stream’s strategy for the competitive market in Scotland. Finally, under the terms of a licence condition, Business Stream is required to publish within 40 business days of offering a new tariff to any customer.
The market and operational codes are common to all market participants. The market operator, the Central Market Agency, handles all switches and aggregates supply information to determine amounts owing from retailers to Scottish Water, which is also required to seek the commission’s approval on its wholesale tariffs. All entrants have equal access to all tariffs, even those that are a result of legacy arrangements between Scottish Water or its predecessor organisations and larger businesses. The commission has taken further steps related to the reallocation of supply points from companies that exit the market to ensure that all market participants have the opportunity to compete on a level playing field.
To ensure that new entrants do not face increased barriers and costs when trying to access the retail market, I hope that the Bill can be amended so that it focuses on regulated access rather than negotiation. As such, it would require each wholesale company to publish a wholesale charging scheme; rules that support the level playing field between all market participants to be put in place; and the use of operational and market codes that are available to all participants in each area.
The Government’s response to the Defra Committee’s pre-legislative scrutiny states:
“Preventing discriminatory behaviour is critical to providing a level playing field in which new entrants can be confident that they will be treated fairly by incumbent water companies. However, the Government does not accept that a blanket requirement for incumbent companies to functionally separate their retail functions is the best solution to this”.
In the light of that, Clause 23 would impose a new general duty on Ofwat to exercise its powers and perform its duties in a way that helps to ensure that no undue preference or discrimination is shown by water and sewerage companies, including against water and sewerage supply licensees. As is usual in industry reform legislation, Clause 43 would also give Ofwat a time-limited power to drive changes to existing licences, including to companies’ conditions of appointment, when it considers that those changes are necessary or expedient in consequence of the new statutory provisions. Ofwat has published discussion papers that recognise the important role that such licence conditions play in ensuring a level playing field between existing and new entrant retailers. However, many believe that there is a deficiency in Clause 43 as currently drafted which could be exploited by companies seeking to resist any efforts by Ofwat to make changes to their conditions of appointment—for example, in order to introduce new governance codes.
There are also real risks in leaving such a vital part of a successful market to be developed and possibly challenged through secondary regulation. The burden on Ofwat could be lifted by imposing the non-preference, non-discrimination duty directly on to companies. While general competition law arguably already prohibits such discrimination, enforcing such competition law duties has been shown to be a costly and prolonged process. I am therefore suggesting amendments that, while not requiring functional separation, would make companies’ non-discrimination duties directly enforceable by Ofwat, using its existing powers under Section 18 of the Water Industry Act 1991. This would help reduce the cost of implementing the market reform and policing and of enforcing effective competition in the future.
The aim is competition; the aim is choice. The question is how we engage with a process that is clear and straightforward, while protecting consumers. The hurdle is incumbent companies. Many of them can use complex contracts with significant legal fees attached and delaying mechanisms. It is therefore very important that the aim moves towards regulated access with clarity and less emphasis on bilateral negotiations, and that that regulated access is for everybody. At that point, anyone entering the market can plug in and play. There should be no prohibitions put in place as a result of bilateral negotiation. It is for those reasons that I have tabled the amendments in my name. I beg to move.
Lord Grantchester (Lab)
I shall speak to Amendment 105 in this grouping and agree with many of the comments in its other amendments, in that they resonate with Amendment 105.
The proposed new clause in Amendment 105 is another technical amendment about how this market is to be made to work. We support the introduction of a market to non-household customers, but remain concerned that the market as currently drafted in this Bill is not up to the function as well as it could be. It is essential in a market to have a fair playing field, where each competitor has the same rules applying to it. I quote the Water Industry Commission for Scotland:
“To be effective a retail market needs all participants to have access to clear and accessible prices, clearly defined and common levels of service, and standard terms and conditions. Allowing parties to negotiate could open the door for a current incumbent to discriminate against new retailers by offering them less preferable terms, poorer service levels or simply by being slow to respond to requests. This would limit the effectiveness of the market and increase costs for new entrants (and customers)”.
Incumbent water companies have a very large advantage, having been in place for many years, and can offer more favourable terms to their own in-house companies than to new entrants. There are many barriers to entry that may become apparent and it is important that the new entrant has the protection with the ability to challenge any that may materialise, and not merely on pricing. This would not in any way cut across the Government’s view that a blanket requirement for incumbent companies to separate their operations by function is unnecessary.
The Minister may point out that Clause 23 may do what we are seeking. However, this clause requires Ofwat to secure merely that no undue preference, including for itself, is shown. There does not appear to be a definition of “undue preference” and it is important to show from the outset that all competitive pressures must be fair, and appear to be fair, to the new entrants. The Minister will no doubt point to the market codes that will be issued with the Bill, but evidence that has been provided to us during its passage, such as that from Business Stream, the Scottish water company, suggests that this is not enough.
I hope that the Minister is able to recognise the significance of this amendment that will ensure that the terms offered to existing licences are also offered to new licences and that the regulator is able to pay close attention to such deals. The new market situation in Scotland has highlighted this issue. Without correction, there are grounds to fear that when the market opens in 2017 it will not function as the Minister would hope. As a result fair competition may be impeded, and business will not get the kind of benefits and savings that we would like to see.
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.
The Earl of Selborne
“(e) principles for determining the provisions that should or should not be incorporated into arrangements of the sort contemplated in paragraphs 5 and 8 of Schedule 2A together with a procedure for making and modifying such arrangements”
The Earl of Selborne
My Lords, in moving Amendment 41, I wish to speak also to Amendments 46, 58, 63 and 114.
We now come to Ofwat’s duties. Amendments 41, 46, 58 and 63 all seek to ensure that Ofwat does, indeed, have the powers and the authority under the Bill to deal with some of the issues we have already addressed. Amendment 114, which I will come to, seeks to ensure that no detriment is caused.
Amendment 41 seeks to amend Schedule 2 to the Bill by adding to the four subjects on which Ofwat may issue codes in regard to Section 66D agreements. I remind the Committee that the four provisions in the Bill allow a code to make provision about,
“procedures in connection with making a section 66D agreement … procedures in connection with varying or terminating a section 66D agreement … the terms and conditions of a section 66D agreement, including terms as to the duration of such an agreement … principles for determining the terms and conditions that should or should not be incorporated into a section 66D agreement”.
Thus the Bill sets out Ofwat’s responsibilities vis-à-vis these Section 66D agreements. Amendment 41 proposes a fifth subject for which a code should make provision and refers to the,
“principles for determining the provisions that should or should not be”,
in the Section 66D agreements.
Amendment 46 relates to the rules under new Section 66E on the reduction of charges payable under a Section 66D agreement. The amendment seeks to add the proviso that the case for reduced charges must be based on reduced costs—therefore, discounts would be allowed only where overall costs are reduced. In other words, the amendment seeks to keep the level playing field we have discussed on earlier amendments. Amendments 58 and 63 seek to introduce the same provisions for sewerage undertakers.
The thrust of these amendments is to ensure that Ofwat is under a clear obligation to set charging rules in a way that helps to incentivise water efficiency and the efficiency of other services of environmental, social and economic benefit. It is essential that Ofwat has sufficient powers to prevent discrimination against new entrants by incumbents offering them less profitable terms, poorer service levels or simply being slow to respond to their requests. There are many and insidious ways in which you can see off competition and Ofwat must have the powers to enable it to regulate and monitor these special agreements very carefully. I am confident that the Minister will say that this is already adequately covered in the Bill. However, in so far as these amendments would further strengthen the legislation and Ofwat’s hand—we have all agreed throughout our deliberations this afternoon that Ofwat is the key to this—surely they would be helpful in preventing any such discrimination.
Amendment 114 is the so-called no-detriment amendment. It seeks to put on Ofwat a specific duty to ensure that no detriment is caused to wholesale business as a result of retail activities. The amendment ensures that the wholesaler, for example, has no incentive to discriminate unfairly in favour of retailers who are less active in providing environmentally desirable services. I referred to that in an earlier amendment. We can see that if a retailer is actually managing to reduce the demand for water it might no longer necessarily be to the wholesaler’s advantage to give that particular retailer the same sort of service as somebody who was less assiduous in selling such services.
The no-detriment provision ensures that the wholesaler is indifferent to the efforts of retailers to improve water efficiency or provide other value-adding environmental services. The operation codes will go some way to setting out the rules of engagement between wholesalers and all retailers. The no-detriment provision will give added protection as it will remove all incentive to discriminate. Extending the duty of non-discrimination to Ofwat, which I accept is already there under the terms of the Bill, will ensure that no undue preference or discrimination takes place. It should help to establish that Ofwat indeed has all the duties that we would require to facilitate competition directly. I beg to move.
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
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
“Separation of retail and wholesale activities
Any company granted a water supply licence under section 17A of the Water Industry Act 1991, prior to the passing of this Act, must establish separate legal identities for its—(a) retail activities, and(b) wholesale activities,within one year of the passing of this Act.”
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 Whitty
My Lords, clearly I am going to withdraw my amendment because the noble Lord indicated in his opening paragraphs that it is in the wrong place to achieve what I thought it might achieve. However, the subject is worthy of further consideration. It is true that Ofwat has a power of functional separation in Schedule 1 but it is only one way round. The amendment would provide for it to be both ways round. It would give some flexibility to Ofwat, but only on functional separation.
On ownership separation, this is such an odd market that at some point some Government will have to consider this. The proposed clause, as drafted and as intended, did not say that we would do it, but it would give Ofwat reserve powers to do it in relation to either one company which was engaged in anti-competitive behaviour—which is wider than simply the relationship between its own wholesale and retail internal pricing system—or across the board.
The power exists and is used by both the European and British competition authorities in almost every other sector—we have required breweries to give up their pubs and banks to give up their retail branches—but water is more protected because it has a sector-specific structure of regulation which has built up, for understandable reasons, from the old nationalised structure into a regionally based oligopoly. It has attracted a serious amount of investment, but at a cost. Part of the cost is inflexible and the Bill seeks to introduce a greater degree of flexibility. I accept that, but, ultimately, you would not necessarily want the structure for all time.
Therefore, although I do not advocate wholesale intervention at this point, Ofwat, as the sector-specific competition authority, needs stronger powers than it currently has. My proposed new clause clearly would not give it those powers, and even if it did the Minister would not accept it. We have a problem with the nature of the industry. It has had some fairly bad publicity recently in terms of its levels of profitability, its method of gearing and the way that it treats its customers. There is considerable room for improvement. One potential stick for that would be to give Ofwat wider powers. Indeed, a future White Paper may well address this issue more radically than we are doing today. In the mean time, I shall withdraw my 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”.”
“(1A) Subsection (1A) is repealed.”
“26 In section 52 (the domestic supply duty) (as amended by Schedule 7), in subsection (4A)—
(a) after paragraph (a) there is inserted “and”;(b) paragraph (c) and the “and” preceding it are repealed.”
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).”
Baroness Parminter
“( ) In relation to any agreement for the supply of water in bulk between a water undertaker and a qualifying person—
(a) the Authority and any party to an agreement shall at any time if so requested provide such information as the Environment Agency or NRBW may require in relation to the volume and source of any water to be abstracted or supplied and the timing of such abstraction or supply under the agreement; (b) the Environment Agency or NRBW may at any time certify to the Authority that it is necessary or expedient for the purpose of—to vary or terminate an agreement, the Authority must seek a variation or termination of that agreement;(i) conserving, redistributing or otherwise augmenting water resources in England and Wales;(ii) securing the proper use of water resources in England and Wales; and(iii) securing the conservation of flora and fauna which are dependent on an aquatic environment;to vary or terminate an agreement, the Authority must seek a variation or termination of that agreement;(c) if the Authority is satisfied that the variation or termination cannot be achieved by agreement between the parties within a reasonable time it must by order vary or terminate that agreement accordingly.”
Baroness Parminter
My Lords, I shall speak also to Amendment 76. The amendments seek to give the strongest safeguards to the bulk transfer of water in advance of—and, indeed, in the absence of—reform proposals for the water abstraction regime, which we will discuss in subsequent amendments.
The Bill incentivises existing licence holders to sell their water to water companies even when the catchment is over-abstracted. It is welcome that the Commons amended the Bill to require applicants for new water supply licences to consult with the Environment Agency as well as with Ofwat. It is on the existing licences being traded as a result of the reforms making it easier for bulk transfers that I wish to focus with these amendments.
Clearly water companies have responsibilities about deterioration outlined in the water framework directive but, as the head of water resources at the Environment Agency said in evidence to the House of Commons, Clause 12 could even force bulk transfers of water between existing participants that could affect the use of abstraction licences.
To protect the scarce resources, the Environment Agency and NRBW need the strongest role at the beginning of the trading process. At present the Environment Agency can only intervene once damage has occurred. That is too late, and especially so for the controls that we are proposing for a new market. In the Commons, the Government gave statutory consultee roles to both the Environment Agency and NRBW when Ofwat makes an order for bulk supplies. My amendment would give those bodies the right to compel Ofwat to intervene in or terminate a bulk supply agreement which it deems would cause unsustainable abstraction.
The issue is whether the statutory consultee role for the Environment Agency and NRBW when Ofwat makes an order regarding a bulk supply agreement means that Ofwat has to act on what these bodies say, or whether it is just advice or input on whether the supply is necessary or expedient which Ofwat can choose to ignore. Surely we need the Environment Agency and NRBW to be able to require Ofwat to intervene to vary or terminate a bulk supply agreement before unsustainable abstraction takes place. That is what both these amendments seek to achieve. I beg to move.
Lord Crickhowell
My Lords, we come now to one of those probing amendments which, as I said earlier, I have refrained from tabling partly because I found the Bill so complex that I was not sure I was going to get it in the right place. I am not sure that the noble Baroness has got it in the right place, because here we are debating, I thought, Clause 8, and she has referred specifically and entirely to Clause 12. I can understand why the amendment she tabled was appropriate for Clause 12; I am not entirely sure it is right for Clause 8. However, it enables me to address some of the points about which I expressed concern at Second Reading.
Once again, I thank my noble friend Lord De Mauley for the extraordinarily thorough way in which he has dealt with anxieties expressed during the preparation and passage of the Bill. He wrote me a long letter even before Second Reading because I had raised the issues during one of his briefing meetings. He wrote me another letter after I had raised the issues again at Second Reading. This is the only part of the Bill that I had serious anxieties about. I think that these anxieties are almost certainly unfounded. My noble friend’s letter prompted me to pull down from the shelves of the Library the Water Resources Act 1991, which I suppose I should have known by heart from the days when I was chairman of the National Rivers Authority. That Act gives the authority the powers that are needed in this respect.
My noble friend also drew my attention to the debates in the Public Bill Committee in the other place, to which I think the noble Baroness referred. During those sessions, Trevor Bishop, head of water resources at the Environment Agency, was questioned on this issue. He was asked about the powers that the Environment Agency has and its relationship with Ofwat. Ofwat is required under the Bill as it is drafted to consult with the Environment Agency. Mr Bishop said:
“We operate a series of tests regarding an application for a licence. First, is there proof of legitimate need? If people apply for a licence on a speculative basis, they are locking up resources that could be used for economic growth or other aspects, so that is quite important. Is it efficient, in terms of the efficient and proper use of water, which is part of our duties under the Water Resources Act 1991? Would it have a negative effect on any other abstractor and is it sustainable with regard to environmental duties? Those are the three principal tests and we would object if it failed one of those”.
Then he was asked whether the Environment Agency would have the right to veto any current extraction licences. He said:
“We grant licences, so we have the power to grant or not grant licences subject to those tests. Ofwat is not looking for the power to grant licences; what Ofwat may do, with upstream competition and also, I think, with clause 12, is encourage or even force bulk transfers of water between participants, and that could affect the use of an abstraction licence. If it does so, we would need to be consulted, because a change of use in an abstraction licence could cause a problem for another abstractor downstream by using more water, or it could actually affect the water framework directive. It is important that we are able to protect against deterioration”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 57.]
What I think the Environment Agency is saying is that, yes, it has to be consulted. It is not Ofwat which issues the extraction licences, it is the Environment Agency. Ofwat is obliged to consult the Environment Agency. I suspect the Minister may also refer to the role of the Secretary of State in giving guidance on the Bill. If there are any doubts about what the respective duties are, I suspect they could be covered in that way.
Partly as a result of the diligence of my noble friend on the Front Bench in trying to foresee all the difficulties I might raise in Committee, I have got to the point where I am almost entirely satisfied that the safeguards are there. However, I will listen carefully to what is said further in this debate. It may be that on later amendments I will have to keep my ears open, but, broadly speaking, I am satisfied. The only additional point on which I should keep my powder dry is the introduction later of the new abstraction licensing regime, and whether that will raise any issues that are not adequately covered here. We will come to that in later amendments anyway. For the time being, I am largely satisfied.
Lord Whitty
My Lords, I can accept quite a bit of what the noble Lord, Lord Crickhowell, has just said, but it does not deal with the totality of the noble Baroness’s amendment, which I broadly support. Amendment 74 deals with bulk transfers which may well be within the context of an existing abstraction licence—it is only change of use if it is used for some other purpose. The Environment Agency does not have a licence control except in terms of change of use. It is an Ofwat responsibility, in increasing upstream competition, to arrange for these bulk transfers. It is complicated but it seems to me that if there is a serious environmental problem, the Environment Agency and its Welsh counterpart need some powers over and above consultation—which already exists—to stop those transfers taking place. I think that is really where the noble Baroness’s amendment is aimed.
The consultation rights already exist and the noble Lord, Lord Crickhowell, has spelt this out. In most cases, under the previous regime, Ofwat and the Environment Agency have certainly in recent years reached an amicable agreement. However, there is the possibility of a clash under the new regime, and in those circumstances the noble Baroness’s Amendment 74 would be appropriate.
Lord Crickhowell
I am grateful to the noble Lord. I do not have the papers immediately to hand but I have it in mind that if there is a change of use, that prompts Ofwat to have to consult the Environment Agency. I may be wrong on that and no doubt my noble friend will be able to deal with it.
Lord Whitty
If there is a change of use—for example, if you are a landowner with an extraction licence who now, under the new regime, wants to put it into the water system—then the Environment Agency has to give a change of use certificate, and will judge that in the same way as if it was a new extraction licence. So that control is there. However, if it is simply a bulk transfer within existing use and with existing abstractors, then that break is not there. I think I am right in saying that.
Baroness Northover
My Lords, I thank my noble friend Lady Parminter for tabling these amendments. Clause 8 plays an important role in achieving a more resilient water industry by encouraging the bulk transfers of water, or bulk supply agreements, between incumbent water companies and between incumbent water companies and inset appointees. We recognise my noble friend’s concern that an increase in bulk supply agreements might lead to unsustainable abstraction, particularly in advance of broader reform of the abstraction regime. We are therefore grateful for the opportunity to explore these issues in further detail today.
We would like to assure the Committee that we are serious about reforming the current abstraction system so that it is fit to face future challenges, and noble Lords are quite right to focus on this point. We are committed to putting in place an effective system that better reflects available water resources and we published our proposals for consultation in December. My noble friend Lord De Mauley will talk about our approach to abstraction reform in more detail shortly, as my noble friend Lady Parminter noted; as my noble friend Lord Crickhowell noted, Clause 12 may also appear to be relevant here.
I shall focus on Clause 8, which introduces new provisions to regulate more effectively bulk water supply agreements by introducing codes and charging rules that will govern these agreements. By enabling incumbent water companies to use water resources more flexibly and efficiently, increased water trading can both build resilience and increase the sustainable use of water resources. It can be particularly useful for water stressed areas and in times of drought. My noble friend Lady Parminter is right that we need to avoid any damage from unsustainable abstraction happening in the first place. Tackling damage after it has occurred can be a slow, difficult and expensive process. We therefore want to ensure that adequate safeguards are in place in introducing this reform to the bulk supply regime. We believe that these safeguards are already in place.
The Environment Agency and Natural Resources Wales are the regulators responsible for protecting and improving the environment and they will continue to control the impacts of abstraction through abstraction licensing. As my noble friend Lady Parminter noted, it has been agreed that Ofwat must consult the appropriate environmental body before ordering, varying or terminating a bulk supply agreement. However, I note her current disquiet at this. My noble friend Lord Crickhowell was more encouraged by the arrangement and is, as he put it, almost entirely satisfied by the correspondence from my noble friend Lord De Mauley, and I trust that my noble friend Lady Parminter has also seen this correspondence. If she has not, we will make sure that she receives it. I note also that the noble Lord, Lord Whitty, is less reassured, and I am sure that this issue will be considered further in the later group, as I have indicated. We all share the concern to ensure that we have a resilient system which does not cause damage.
I remind noble Lords that water companies have statutory environmental duties as well, including a duty under Regulation 17 of the Water Environment (Water Framework Directive) (England and Wales) Regulations 2003 to have regard to river basin management plans when deciding whether to enter into bulk supply arrangements. River basin management plans set out the environmental objectives for the water bodies within a river basin district and how they will be achieved. Each water company also has a duty under Section 37A of the Water Industry Act 1991 to produce a water resource management plan every five years that sets out how it aims to balance demand and supply over the next 25 years.
As I say, my noble friend Lord De Mauley will be addressing abstraction in greater detail in the next group, and in the mean time, I hope that my noble friend will be content to withdraw her amendment.
Baroness Parminter
I thank the Minister for her comments and I thank my noble friend Lord Crickhowell and the noble Lord, Lord Whitty, for their contributions in exploring this debate. It has become clear that the focus is not the new licences, which are covered by effective safeguards, but the issue of bulk trading where the licences have already been issued. It is about whether the new safeguards that have been put in, which give statutory consultee status to the environmental bodies, are sufficient. Ofwat has to consult those bodies, but it is not obliged to act in accordance with what they say. In the absence of the aligned timetables for the abstraction reform proposals and the proposals for the upstream composition, I remain concerned that we need the strongest safeguards. If we are not given satisfactory responses to the issue that we will be discussing imminently, I reserve my right to come back to it. On that basis, I beg leave to withdraw the amendment.
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
Baroness Parminter
“( ) Before laying a draft of an instrument in accordance with subsection (1), the Minister must publish and present to Parliament draft legislation for reforming the law in respect of water abstraction.”
Baroness Parminter
My Lords, we now touch on the issue of the absence in the Bill of any abstraction reform proposals. Amendment 96 seeks to address the issue of the non-alignment of the proposals for upstream competition, which are within the Bill, and those for abstraction reform, which are not. Without the proposals for abstraction reform running in parallel with those that create a market for trading water, there is a significant risk to our scarce water resources. I will not repeat what I said at Second Reading, but suffice it to say that the House of Lords EU Sub-Committee on Agriculture, Fisheries, Environment and Energy and the Environment Agency both concur with the Government’s own view that at present,
“significant volumes of water are licensed but unused”.
If this water is used as the result, for example, of increased trading in a reformed system, that could cause environmental deterioration.
The upstream competition briefing paper which the Government have helpfully provided for us states that they are aiming to legislate for abstraction reform early in the next Parliament. My amendment would merely give statutory backing to that commitment by this Government and would tie future Governments to abide by it. Requiring the Minister to draft public legislation to reform water abstraction will give clarity to parliamentarians about the shape of the abstraction reform proposals prior to their scrutiny of the regulations that will govern the new market in upstream competition, which the Government say could come into force by 2019. I hope that the Minister will agree that this amendment is one way—I accept that it is only one way—of reflecting the Government’s stated commitment to delivering reform in a timely and coherent way. That can be secured only by aligning the proposals for upstream reform, which are in the Bill, with those for reform of the abstraction regime, which are not. I beg to move.
Lord Cameron of Dillington
My Lords, it seems strange to be talking about possible water shortages and abstraction reform in one of the wettest Januarys since records began. I remind noble Lords that January is named after the Roman double-headed god, Janus. If one head is pointing to the climate change extreme of floods, the other is undoubtedly pointing to drought.
I am not certain that either this group of amendments or the previous group totally grip the issue of likely water shortages and the much needed reform of the abstraction regime, which should be put in place as soon as possible. One of the lessons of the disaster of the Somerset Levels is that we should not wait until disaster strikes before taking action and rushing through reforms. At one of the side meetings last week, which many noble Lords attended, we heard that improvements in water supply and demand take a long time. We heard, for instance, how the mere extension of a reservoir in Essex took 20 years to arrange—10 years to prove the case and 10 years to get the planning through. Equally, universal metering, on the demand side—which of course is worth several reservoirs and is not dependent on rain—would also take a very long time to achieve, particularly if we are to bring consumers along with us, which is very important.
To avoid the likely dire situation that we will have in the future, we should use the Water Bill to ensure that disaster does not strike some time in the future. The dire situations relate to population increases, more demand for energy—energy is a huge user of water, as I am sure many noble Lords know—and more droughts, which are very likely. All these factors require greater flexibility in the management of our abstraction regime.
There are parallels with the energy industry. Some of us were dealing with the Energy Bill at the end of last year and tried to ensure that in the next 10 or 20 years’ time there would be a sufficient balance of supply to demand within the energy industry. All the time, we were aware that 10 years ago no one had looked carefully at this balance of supply and demand. We are quite likely to face power cuts in the next couple of years—as many noble Lords are aware—because of this lack of forethought in the past decade.
During the passage of the Energy Bill, my noble friend Lord Oxburgh, who I am sorry to see has left his place, tabled an amendment to establish a council of wise men who would look at the energy industry in the long term, see what was needed and ensure that the right precautions were in place. If the water industry had a group of wise men now, they would be telling us to put a road map in the Bill to take us as speedily as possible towards overall abstraction reform in universal metering and not to wait until the next decade, which seems to be the form, to put this in place.
I agree that abstraction reform is a serious issue. There will undoubtedly be winners and losers in the process whose interests must be given voice in the democratic process. However, I am fearful that Amendment 104, which I am sure the noble Lord, Lord Whitty, will come to in a minute, might put an even greater brake on the introduction of reforms than the long drawn-out process seemingly currently envisaged by Defra. If I have misunderstood Amendment 104, I look forward to being corrected. In the mean time, I strongly support Amendment 96 in the name of the noble Baroness, Lady Parminter.
Lord Crickhowell
My Lords, the noble Lord, Lord Cameron, asked if it was right to discuss the possibility of drought in the middle of floods. I can assure him that it is absolutely right. My experience in the NRA was that, whenever we had a flood it was almost immediately followed by a drought, and whenever we had a drought it was almost immediately followed by a flood. It was an almost invariable rule, so I am sure that he is right that we should be addressing these issues.
When speaking to my noble friend’s previous amendment, I said that the one area to which I might want to return was reform of the abstraction licensing regime. I spoke about it in some detail at Second Reading and I do not want to repeat what I said then. It was one of the central problems that we had to deal with in my time in the NRA.
I disagree with the noble Lord who has just spoken when he says that the Government should get this issue into the Bill and that it is very urgent. My understanding is that the Government are getting on with the kind of review and detailed discussions with just the sort of people that he suggested they should be meeting. However, they have pointed out that the issue is extremely complicated and cannot be rushed. While I, perhaps on the basis of experience, have always been one of the first to criticise the timescale on which some government departments operate, I have a good deal of sympathy with the need to take adequate time on this. This view was reinforced by the fact that at one of the briefing meetings, the representative of—I think—Anglia Water told us that it was undertaking fairly basic research into the resources available in the region. It was suddenly brought home to me that we do not know a great deal about the availability of ground water resources in many of our regions. We know how much water is going down the rivers, but we still need quite a lot of information before we have the kind of policy that we all want to see.
While we must get on with it, I am not sure it is right to think that we can put into this Bill the requirements that will follow the result of this important inquiry and examination. However, my noble friend Lady Parminter is right in thinking that there should be safeguards in the Bill so that when the results of the review come through, we can be certain that the necessary steps and measures are taken. I am not sure how that should be drafted or whether the noble Baroness has got the drafting quite right, but I sympathise with her desire to write safeguards into the Bill so that we are not left with a great gaping hole when we get the results of the very important review that is under way. I will therefore listen with great care and interest to what the Minister says in reply to this debate.
Earl Cathcart (Con)
My Lords, I declare that I farm in Norfolk, I live in a band H property, I have a bore hole for domestic use and I have spent about 30 years working and underwriting in the London insurance market.
I want to talk about two aspects. One is bringing all abstraction licences in line with today’s rules, conditions and requirements, and the other is abstraction charges.
At Second Reading I said that,
“it is cackhanded to be bringing in upstream competition in water trading before the existing water abstraction system has been reformed, given that the Environment Agency says that many rivers are already overabstracted and overlicensed”.—[Official Report, 27/1/2014; col. 1025.]
Just about everybody agrees that reform is sorely needed. The question is when it should take place. Many are impatient for reform, and I include myself, but the Government, in their handout, Upstream Competition and Abstraction Reform, say:
“We should not rush this: if we get it wrong, there will be real consequences for a range of business and industry, including farmers, food manufacturers and the power sector, as well as the environment”.
Quite so—they do not want to throw the baby out with the bathwater. The handout goes on to say that any abstraction reform will take place “in the early 2020s”. That could be 10 years away, which, to say the least, is disappointing.
Is there anything that we can put into this Bill that will help improve the current system? I believe that there is. My noble friend Lord Crickhowell mentioned Trevor Bishop, who is head of water resources at the Environment Agency. When he gave evidence to the Commons Committee, he said:
“Most of the damage due to over-abstraction is because the licences were passed a long time ago”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 63.]
The older licences are still allowed to abstract, regardless of whether water is abundant or scarce, but there are restrictions on newer licences. The hands-off flow condition allows the Environment Agency to reduce or stop abstraction altogether if river and ground water levels fall, but this does not apply to the older licence holders—the vast majority of total abstractions. This puts newer licence holders and, indeed, the environment at a disadvantage. Surely, the first step should be to bring all licences up to date with modern requirements, especially the hands-off flow condition and, indeed, any other condition deemed necessary. I would like to see a provision in the Bill similar to the proposed new paragraph (c) in Amendment 74 in the previous group, which says that if the variation,
“cannot be achieved by agreement”,
the authority can vary the licence by order or terminate it. This would bring all licences in line, protect the environment and give flexibility to vary all licences as and when necessary. It would also bring this in now rather than waiting for 10 years
The next thing is abstraction charges. I looked at the Environment Agency website, which lists eight charging regions in England and one in Wales. There are two charges: the standard charge and the environmental improvement charge. The environmental improvement charge is different for water companies and for non-water companies, which I presume includes energy companies. The standard charges are not standard at all—they vary region to region. Of the eight regions in England, the Anglian and Northumbrian regions are charged the most, at about £28 per 1,000 cubic metres of water, while the north-west region is only charged about £12.50 per 1,000 cubic metres of water—less than half. Why is there this variation when it is called a standard charge? The Minister might say that the Anglian region, being in an environmentally sensitive area, attracts the highest charge in the country to cover the costs of managing the resources available. However, here I got muddled, because that is surely an environmental issue, and any extra charge ought to be levied under the environmental improvement charge, not the standard charge. Can the Minister explain?
I move on to the environmental improvement charge for non-water companies. Again, the Anglian region pays the most, at £13.71 per cubic metre of water, which is what one might expect, given that it is an environmentally sensitive area. The lowest environmental charge is 62p, for the Yorkshire region, while two regions—the Midlands and Northumbrian regions—pay no environmental improvement charge at all. Why? I do not understand the logic behind the charging and would like the Minister to explain.
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.
Baroness Parminter
I thank my noble friend the Minister for his detailed comments and the numerous colleagues around the House who joined in this debate. We face an inadequate abstraction regime that will be reformed at some point in the future and a Bill here and now that will introduce upstream competition proposals that could exacerbate the problems of abstraction. While I thank the Minister for his comments, I do not feel he adequately answered why the Government are not prepared to put wording in the Bill reflecting our concern that there is insufficient clarity at the moment about the timetabling of this issue. My noble friend Lord Crickhowell was kind enough to say he had great sympathy with that point.
I accept that the wording I proposed might not be right. We certainly do not wish to put any barriers on the proposal for reforming the retail market. I am sure everyone in this House agrees that we want to press ahead with that now. However, in the relationship between the abstraction reform proposals and the upstream competition there needs to be clearer timetabling within the Bill. I say to the Minister that we will return to this issue on Report, and in the absence of a sequencing being put in the Bill we will look again at further safeguards that will be required to prevent more deterioration to the environment. Those safeguards will be along the lines mentioned in my previous proposed amendments, which my noble friend Lord Cathcart was kind enough to say that we should look at more seriously, particularly paragraph (c) in Amendment 74. As I said, we will come back to this matter but on that basis I beg leave to withdraw the amendment.