Kew Gardens (Leases) (No. 3) Bill [HL]

Earl of Selborne Excerpts

Report stage (Hansard): House of Lords
Wednesday 5th June 2019 Lords Chamber

[Lord True (Con)]

My Lords, I hesitate to intervene, particularly after what my noble friend on the Front Bench said. I assure the House that I will not inflict a Second Reading speech on noble Lords.

I proposed the Bill kindly taken up by the Government, which has become the Kew Gardens (Leases) (No. 3) Bill. Therefore, in some senses, I am a guilty party. I apologise for the fact that, because the Bill was taken up at short notice, I could not be present either at Second Reading or in Committee. Having read the proceedings carefully, I express my thanks to all those noble Lords who have demonstrated their love for Kew and their concern for it and its importance as a world heritage site and a world scientific centre. The words used by Peers on all sides of the House have been wise and shown a duty of care. My noble friend on the Front Bench has been wise in negotiating and listening to come forward with a compromise, which I hope will satisfy the House.

I have been in the two buildings mentioned by my noble friend in the debate on the previous amendment. There is no doubt that they have a better longer-term purpose. Something was said about how people may construe the intentions of Parliament—indeed, those of all concerned. When I had the honour some years ago of being the leader of the local authority, I walked the grounds with Mr Deverell, the truly outstanding director of Kew. We discussed this problem and these propositions, which eventually led to the Bill. With the benefit of those private discussions over a number of years, I can assure the House that never at any stage was any intention expressed, either in private or in public, by those involved with Kew that would lead towards the kind of concerning developments rightly raised by some Members.

With that assurance, added to what I know of Kew’s intentions and the benefits that this Bill could secure for Kew, I will not trespass any further on the House’s patience. I apologise for not being present to support a Bill I proposed in my name and support wholeheartedly. I support the amendment moved by the noble Lord, Lord Whitty. Let us hope that the Bill goes forward and becomes law, to the benefit of this great institution.

[The Earl of Selborne (Con)]

My Lords, it would clearly be helpful to add the amendment to the Bill. When I chaired the trustees, Ken Livingstone was the Mayor of London. We talked with him about resurrecting river access to Kew. Of course, it is no coincidence that palaces such as Kew, Hampton Court and Greenwich are where they are; it is because of their historical connections with the river. In a way, Kew has rather turned its back on the river. Perhaps this point is more appropriate to Amendment 1 than this one, but I can well imagine a situation in future where somebody might come up with an inspired proposal to lease a landing stage, perhaps somewhere where the car park is near the river, to facilitate a sustainable way of getting to Kew. That would almost certainly require Amendment 1 not to pass; indeed, it was not agreed. Secondly, that would require oversight to make sure that there was no adverse impact on the world heritage site or the universal values at Kew. We are right to give the trustees and Defra a degree of flexibility. It is very difficult to predict the bright ideas that might come up in future; it is not for us to try to second-guess them. However, the proposal of the noble Lord, Lord Whitty, would be a very effective backstop.

Kew Gardens (Leases) (No. 3) Bill [HL]

Earl of Selborne Excerpts

2nd reading (Hansard): House of Lords
Tuesday 7th May 2019 Lords Chamber

[The Earl of Selborne (Con)]

My Lords, I should first declare that I have served two separate terms as a trustee of Kew, the second as chairman.

The Minister has explained how the Crown Lands Act 1702 prevents Kew granting leases of more than 31 years. It is not often that we delve so far back in history, and I should like to put this desirable Bill into a further historical context. It was Sir Joseph Banks in the 18th century who did most to set Kew Gardens on its way to becoming an important scientific establishment. However, after his death, and for many years in the mid-19th century, there were fierce rows between the directors—first, Sir William Hooker and then his son Sir Joseph Hooker—and their political boss, the first Commissioner of Works.

The row was about whether Kew’s role was essentially as a botanic garden and scientific institution or whether it was to be a public park. The row got so fierce that eventually Prime Minister Gladstone had to intervene; wisely, he went with Sir Joseph Hooker. By 1900, the Royal Botanic Gardens were transferred from the Commissioner for Works to the Board of Agriculture, as MAFF—now Defra—was then known. Kew’s role in botanical investigations, taxonomy, plant sciences and, not least, economic botany, were promoted to underpin government policies, as well as to support farmers and horticulturists. As the Minister explained, Defra continues that legacy of looking to Kew for scientific underpinning on policy issues.

The National Heritage Act 1983 transferred direct responsibility for Kew Gardens from the Ministry of Agriculture, Fisheries and Food to a board of 12 trustees. The first chairman was my noble friend Lord Eccles. I suspect that the director at the time found the imposition of a trust board more onerous than the occasional meetings held with Ministers and officials previously. From 1 April 1984, when the Act came into force, the funding from government sources as a percentage of total spend started, frankly, to decline. This is partly because the role of Kew has expanded as it becomes ever more relevant. Not only does the quality of the science itself attract increased expenditure and, one hopes, increased funding, but its international importance has also increased and continues to do so. One has only to read the report from the United Nations that came out this weekend to note that biodiversity will at last be on the G8 agenda. Botanic gardens around the world, not least Kew, will have an important contribution to make.

I must, in all fairness, confess to mission creep. I remember when the noble Lord, Lord Whitty, was the Defra Minister responsible for Kew and I was chairing the trust, he gently rapped me over the knuckles for taking on yet more commitments. This was over the mycology collection, which was going to be lost—something we felt could not be tolerated. Of course, there was no funding for it so we had to commit ourselves to raising the money. I always recognised that the noble Lord, Lord Whitty, was quite right to draw attention to the commitments that we were making.

This week we hear about the United Nations report on global threats to biodiversity. To meet the increased need to broaden the funding of Kew, a foundation was set up in 1990 as a charity with the sole object of raising funds for projects not covered by grant aid or self-generated money. We heard from the noble Baroness, Lady Kramer, about how far the envelope has been pushed on admissions. I recognise her point about how difficult it is to attract people from different ethnic backgrounds when there is such a need for self-generated money.

The Kew Foundation remains highly successful in raising funding, particularly for key buildings and core projects but, inevitably, as we heard from the Minister, some buildings in need of repair cannot be described as core buildings. Considerable sums of money will be needed to maintain them adequately. A wider range of commercial options including, for example, long leases, would reduce maintenance liabilities and running costs while in no way impacting on this UNESCO world heritage site. The case has been made clearly by previous speakers, so I need do no more than say that the Bill will be of great assistance to Kew and that I give it my full support.

Invasive Non-native Species (Amendment etc.) (EU Exit) Regulations 2019

Earl of Selborne Excerpts

Tuesday 22nd January 2019 Lords Chamber

In respect of the other regulations that we have coming, including the conservation of habitats and species regulations, which are clearly going through the scrutiny processes of the House, when I read the Explanatory Memorandum to those regulations, the words “limited and informal” reappeared. Perhaps I can give the Minister notice, so that we can have some better order in our discussion of these matters, that it would be very helpful if the department would publish all the limited and informal consultation responses that there have been before we have unlimited and formal debate on the regulations in the House in due course.

[The Earl of Selborne (Con)]

My noble friend in his helpful introductory remarks reminded us that this country produced its own strategy for invasive non-native species first in 2008. That was followed in January 2015 by the EU invasive alien species regulation. When the second strategy was published later the same year, the document stated that the EU regulation,

“represents a step change in approach and requires Member States to implement a range of measures for the prevention and management of”,

invasive non-native species, from which I think we can infer that the EU regulation of January 2015 upped our act and that of other member states.

Of course, invasive non-native species, whether terrestrial, freshwater or marine, can have devastating commercial effects. The question on which we have to satisfy ourselves in scrutinising the regulation and hearing that the EU regulation is destined to be retained is: are there opportunities, now that we will be separated by Brexit—if that is to happen—because we can define the area from which we expect to be protected from invasive non-native species? We are no longer thinking just about continental Europe and this country. Rather than wait for the list to be amended in future, is there an opportunity that would not have been available under the previous administration to start looking at the list of invasive non-native species from a totally GB perspective?

[Baroness Parminter (LD)]

My Lords, I thank the Minister for his opening remarks and for agreeing to a meeting with myself and the Labour Front Bench prior to the introduction of this statutory instrument, given that it is the first of what we know will be many for Defra. As might be expected in those circumstances, we on these Benches regret the necessity of these statutory instruments should we exit the EU. However, we support the statutory instrument’s intent because controlling non-native invasive species is important for those of us who care passionately about biodiversity loss, which non-native invasive species are a primary means of achieving, and the cost to the public purse.

I will touch on a number of points for clarification. First, the preamble of the invasive alien species regulation, which frames the overall intent and ecological context of the regulations as they stand and therefore guides the implication of any future policy decisions, is not included in this statutory instrument. Can the department say why? I imagine the Minister will say that it is because of the expectation of a forthcoming environment Bill, on which we have heard warm words from the Secretary of State about the inclusion of overarching environmental principles. Of course, this House cannot see that Bill at the moment and therefore cannot be assured that critical matters in the preamble to this statutory instrument, such as the precautionary principle, will be a fundamental building block in it.

That point is particularly important given a letter sent by the noble Baroness, Lady Goldie, to my noble friend Lady Bakewell of Hardington Mandeville—she cannot be in her place today—in which the noble Baroness said: “Policy and decision-makers are likely to want to have regard to supporting material, such as recitals and preambles, to assist them in addressing questions of how policy might be made and how decisions might be taken in future”. Therefore, we as a House are beholden to ask the Minister to explain precisely why the preamble was removed from the regulations.

Secondly, as the Minister stated, there is a clear transferral of functions from the EU’s committee on invasive alien species and the forum, both of which are independently constituted bodies for the specific purpose set up in the regulations. It would be helpful if the Minister could say a few more words about who in our domestic setting will take on those duties because they are particularly rigorous in terms of both scientific expertise and data processing capacity. I would appreciate more information about that.

Equally, the Minister kindly made it clear that there will be a ministerial duty to ensure close co-operation with European partners and other countries on non-native invasive species. As he rightly said, both flora and fauna are not singularly in our country, but are transported on the wind and via other mechanisms to and from the European mainland, so we need that level of co-operation. Critical in that is the European Union’s invasive alien species information system. Clearly, the Minister cannot say at this stage whether we will have access to that critical system, which collates information about non-native invasive species from across the continent, but the department is obliged to say what domestic route we might take to replicate that remarkable database if we do not.

Governance is also an issue. The Minister was very clear that the responsible authorities will have a duty to report, but the overarching question is: who will they report to? He mentioned the office for environmental protection, which is as yet unconstituted because it will be introduced under the forthcoming Bill, and said that the responsible authorities have a reporting duty. As it stands, that office has no capacity to hold the Government to account; therefore, the systems currently in place for the European Commission to hold the Government to account will not be replicated in the processes and procedures in this statutory instrument. Equally, as other noble Lords may comment on, we are not expecting the office for environmental protection any day soon, given that we have not even had the legislation yet. So there is a question about how we are going to manage the reporting in holding the Government to account in the meantime.

Finally, because there are not significant costs to private companies, there has not been an impact assessment for this statutory instrument. Yet the Explanatory Notes make it quite clear that there will be a cost to the Government and public bodies, although it is below the plus or minus £5 million threshold. Given that this is the first statutory instrument—there will be many—there will clearly be significant costs to the Minister’s department in delivering the new mechanisms and bodies to deliver the levels of safeguards we need for our environmental protection in this country. I hope the department has—I am sure this is not the right term—a running tally of costs, given that there is no impact assessment that we can see. It is important that we know the costs to the Minister’s department, which does not have a significant budget, and that it will have the resources in future to deliver the services that our environment requires.

Environment: 25-year Plan

Earl of Selborne Excerpts

Monday 29th January 2018 Lords Chamber

[The Earl of Selborne (Con)]

My Lords, I refer to my farming and environmental interests set out in the register. Like other speakers, I welcome this 25-year plan but, like the noble Lord, Lord Cameron, I speculate about whether we can be confident of a successful outcome in 25 years’ time.

I want to my limit my remarks to the concept of natural capital accounting, which is central to this plan. We have to recognise that to deliver on protecting our natural capital and enhancing our ecosystems, we must first have an agreed understanding in the public and private sectors of just what we mean by natural capital, how we monitor it and how one restates one’s accounts to take it into account. We need agreement on how national, regional and local priorities, however local, for restoring and enhancing ecosystem services can be determined. They have to conform clearly to the overall strategy, as set out in this paper. There also has to be recognition that no implementation plan can succeed unless there is widespread ownership of the plan involving the managers of the natural resource in question as well as others with an interest in the outcome.

The concept of developing policy objectives informed by natural capital got a major boost under the last Labour Government when they commissioned the United Kingdom national ecosystem assessment. It was published at the beginning of the coalition Government in 2011. It provided a comprehensive overview of the state of the natural environment in this country and offered a new way of estimating our national wealth. The underestimation of the value of natural processes such as water filtration or air purification can be appreciated if you try to calculate the cost of providing these ecosystem services would by industrial means.

Since that report, there have been many helpful studies on how we should take account of the full value of ecosystem services in our decision-making, not least from the Natural Capital Committee. But as the committee itself stated in its advice to the Government on the draft 25-year plan last September, as already mentioned,

“there are significant gaps in current knowledge and a lack of joined up approaches to data collection, measurement and monitoring of the UK’s natural assets … many different agencies are responsible for the collection of data (e.g. the Forestry Commission, Environment Agency, Met Office, Natural England, and Joint Nature Conservation Commission). This leads to both gaps and duplication in the data collected and inconsistencies in approaches to analysis”.

If the 25-year plan is to benefit from using natural capital accounting and monitoring, there simply must be a concerted attempt by Defra to align all these. Defra’s job here is to knock heads together.

If the plan is to deliver in 25 years’ time, there needs to be a robust evidence base, as has just been stated. We are still awaiting definitive guidance from the Office for National Statistics on the development of national natural capital accounts, without which you cannot measure overall progress on natural capital improvement. Much of our natural capital is, inevitably, owned and managed by the private sector, so the plan will need to mobilise sustained private sector initiatives.

We have already heard much about agriculture—not surprisingly as it is the sector that manages 70% of our land, and so is clearly a highly important industry in delivery of the plan. But even the largest farms will invariably benefit from following the guidance of the Lawton report of 2010, which suggested that working in larger blocks, with neighbours, to deliver enhanced ecosystem services at a parish or landscape scale is going to be much more effective. Providing bigger, better and more joined-up habitats will deliver better results for biodiversity enhancement. As the water companies and farmers have demonstrated, as referred to in the report, you simply cannot contemplate flood control and water purification without operating at this scale and larger.

The recent development of farm clusters, a number of which have now been set up, has the great virtue of being run by farmers or land managers. The members know what it is feasible to deliver in terms of environmental enhancement and, with suitable encouragement, can select and deliver agreed local improvements to ecosystem services. I say “agreed”, because it is no good the farmers just charging off and saying, “This is what we want to deliver”. One should say in parenthesis that delivering food or timber is an ecosystem service and very desirable, but clearly we want to move on to other services.

Getting a considerable number of land managers to consult their neighbours and the relevant agencies, and to agree among themselves what programmes can be delivered, will take a bit of organising. In other words, a part-time, paid convenor is required for each cluster. Therefore, I strongly recommend to Defra that the funding of such convenors would prove a highly effective way of ensuring delivery of many of the land-based objectives in its 25-year plan.

Brexit: Environmental and Climate Change Policy

Earl of Selborne Excerpts

Thursday 20th October 2016 Lords Chamber

[The Earl of Selborne (Con)]

My Lords, the whole House will be grateful to the noble Baroness, Lady Parminter, for giving us this opportunity for a timely debate, and timely it is. I agree with her that full parliamentary scrutiny will be very important as we implement national regulations in place of EU directives as time goes by. I also agree with her that the EU directives have indeed provided a historic framework. That is not to say that they are by any means perfect or indeed cannot be improved with national, regional and local emphasis. I may refer to that a little later.

However, it is clearly essential for the Government to plan carefully for environmental and climate change policy in the context of the new industrial strategy—the strategy which the Prime Minister assures us will get Britain firing on all cylinders again. We are expecting the 25 Year Environment Plan soon. It will be a framework document setting out the Government’s environmental vision and their thoughts on implementation. The 25 Year Environment Plan and strategy was originally proposed in the Natural Capital Committee’s State of Natural Capital report, published last year, with a government response in September 2015. That response was positive. It said that the plan would:

“Help individuals and organisations at local, regional, national and international levels to understand the economic, social and cultural value of nature, the impact that their actions have on it, and to use this knowledge to make better decisions and facilitate the design of sustainable financing models”.

We all agree with the high-flown sentiments but they simply must be reconciled with sustainable economic growth and sustainable financing models. That is the important thing to pick up there.

After the outcome of the referendum, Professor Dieter Helm, who chairs the Natural Capital Committee, wrote to the new Secretary of State, Andrea Leadsom, to remind her of the manifesto commitment to improve the natural environment within a generation, and of the 25 Year Environment Plan. The letter said:

“Following on from the referendum, you are now in a position to take a strategic view of how our environment is managed to maximise the total value of all the benefits it provides—including clean air and water, flood protection, carbon storage, biodiversity, health benefits and recreation—and, in the process, maximising sustainable food production and supporting rural communities. This is the path to maximising sustainable economic growth”.

Again, I think he got the right emphasis on ensuring that we have sustainable economic growth without which you will not get environmental enhancement. The Secretary of State replied positively in August, committing the new Administration to the production of the 25 Year Environment Plan. She said that,

“we must maintain the momentum and enthusiasm”

for the plan. We have, therefore, the prospect of a new industrial strategy and a 25-year environmental plan, both against the background of leaving the European Union with both opportunities and threats in so far as the environment is concerned. I see it as a once-in-a-generation opportunity to plan how we can deliver sustainable economic growth.

We start with some valuable assets to help plan our way forward. Yes, the EU directives and regulations—or most of them—are certainly part of those valuable assets. The work of the Natural Capital Committee is going to stand us in very good stead, going right back to the UK National Ecosystem Assessment, which was commissioned under the Labour Government and published in 2011. This was the beginning of taking into account natural capital, and pointed to a new way of estimating our natural wealth. Natural capital should provide the basis for financial support for environmental outcomes, but with the “polluter pays” principle providing the regulatory underpinning.

Some, but not all, of our ecosystems are still in long-term decline. However, just to look at some of the brighter prospects, freshwater quality has improved —we all know about fish coming up the Thames—and sulphur deposition has declined. I took some comfort from the National Flood Resilience Review, with its helpful pointers on how to deliver integrated catchment management. This has not yet been delivered, and there is much work to be done.

We are familiar with examples of long-term decline: the loss of soil carbon in arable systems and the reduction in insect pollinators, which are important to so many crops. While marine fisheries have levelled out, they have levelled out in terms of historic takes at levels that are way below what they were in the past.

Brexit has far-reaching implications for land management. We should remember that 75% of the United Kingdom is land. Pillar 1, which is most of the take from the CAP that comes to this country, is about £3 billion annually. It is a basic payment scheme, and some would say that there is very little compliance required. Pillar 2, which delivers the agri-environmental schemes, is only about a sixth of the funds. Therefore, I think everyone agrees that we have to move towards refocusing the Pillar 1 expenditure on ecologically sustainable farming systems. I mentioned soil status, for example, that delivers for the farmer, for society and for the environment.

I hope that we remember the economics of farming at the moment. Most farmers—I could not give an exact figure—rely on the basic payment scheme to stay solvent. If you remove Pillar 1 payments too rapidly—and they will have to be removed ultimately—you are going to find small farms, particularly in the uplands and marginal lands, going bankrupt. We should remember the inexorable trends in farming at the moment: one in 10 dairy farms has closed in the past three years, but the number of dairy cows has increased by 113,000. We are seeing farms getting larger, with higher capital, and more intensive. That is necessary if you are requiring farming to compete with low commodity prices globally and to meet a cheap—or anyway, a cheaper—food policy than natural costs would allow.

I do not think that sustainable intensification is an oxymoron: some people find the two words incompatible. Some of the farms that have won prizes for conservation have also been extremely successful, and intensification does lead to releasing land. We have to be quite clear that we are expecting farms to be globally efficient and, at the same time, we have to make sure that we have in place a suitable policy for supporting the environment.

Integrated catchment management is something we talk about a lot, but its implications are never very effectively understood. If you can get the land manager who is responsible for the land involved, then it is going to be much more effective than having somebody from the water company who is a remote character telling everyone who is involved. Since the report of Professor John Lawton, where farmers were encouraged to get together in clusters, there have been examples—voluntary, of course—where farmers have worked together at the regional scale, or the landscape scale, to deliver environmental benefits. That is the only way we are going to achieve integrated catchment management.

Natural Environment

Earl of Selborne Excerpts

Thursday 15th January 2015 Lords Chamber

[The Earl of Selborne (Con)]

My Lords, the whole House will be grateful to my noble friend Lady Bakewell of Hardington Mandeville for giving us an opportunity to hold what I predict will be a wide-ranging debate on the natural environment. I would like to look at the implications of environmental change in the widest sense, not just climate change, remembering of course that the United Kingdom’s natural environment is the product of centuries of management. Whether it is agricultural land, woodland, forest, heaths, moors, coasts, green spaces or urban areas, all are products of our management. The only area of wilderness in the United Kingdom is perhaps the flow country of Caithness and Sutherland, an area of blanket bog. If we look at the steady loss of biodiversity in most habitats, it is evident that we have much to do to stabilise wildlife populations.

Increasingly, we are recognising the importance of protecting ecosystem services on which we ultimately depend, whether for food production, flood prevention, pollination of crops, air purification, raw materials recycling and much else. The United Kingdom National Ecosystem Assessment was carried out between mid-2009 and early 2011. It was the first analysis of the United Kingdom’s natural environment in terms of the benefits that it provides to society and its continuing prosperity. This assessment should set the agenda for future consideration as to how we monitor, conserve and enhance ecosystem services.

A particularly interesting issue, although it is difficult to grapple with, is the extent to which we rely on or could benefit from the correlation between human health and the environment. It is a statement of the obvious to say that we benefit from a contact with nature, but it is not easy to measure the relationship between green space and the health of population levels. Here, if anywhere, is an area where much more research is needed on the positive aspects. There is much research on the negative consequences: it is easy to demonstrate that degraded and contaminated environments impact adversely on our health, particularly our mental health.

Another aspect that states the obvious and of which we are all well aware is that since the Second World War there has been a dramatic change in United Kingdom land use. It is because our national priorities changed with the intensification of agriculture, urbanisation and transport development. Some 90% of semi-natural vegetation has been converted to arable use. You cannot change the use of land without dramatic and major impacts on ecosystems, and therefore the delivery of ecosystem services. Unless you are very careful you will cause the disruption of flood regimes, river basins and coastal wetlands. These are the issues with which we must deal. They are related not just to climate change but also to land use and the impacts of an expanding economy, which of course we welcome.

It is easy to cast gloom and doom over the natural environment, but we should also remember some positive aspects during the period since the war, about which I have been talking. There are the Clean Air Act 1956, the Wildlife and Countryside Act 1981, and EU directives such as the 1979 birds directive and 1992 habitats directive. These have all played an important role in helping us to take our responsibilities more seriously and with a degree of continuity.

In reference to the Clear Air Act, while cleaner air can be described as a success story, it remains at the regional level a serious issue, especially in urban areas. Ambient air quality has improved but diffuse sources of atmospheric pollution remain a challenge. As our Motion today identifies, transport is a major source of pollutants, as are power generation and industrial emissions. Air quality needs to go up the environmental agenda. The Government could lead the way in raising the priority attached to air quality in all government departments. In another place the Environmental Audit Committee calculated that poor air quality will reduce average life expectancy in this country by an average of seven to eight months, and that up to 50,000 people a year may die prematurely because of poor air quality.

On our record on national biodiversity loss, there is good news. Some species have done really rather well. There is the reintroduction of the red kite, a bird with which we are now all familiar; at one time, it was isolated in Wales. There are also buzzards, deer, badgers, otters and some non-specialist butterflies, for example. They have all expanded their range. These tend to be generalist species. The specialist species have done far less well. Since 1995, 70% of butterfly species, 50% of bird species and 28% of plant species have declined in abundance. Those are sobering figures and need to be considered against a background of some over-optimistic targets to which we have signed up, at national and international levels. As a result of the Earth Summit in Rio de Janeiro, we became a signatory to the Convention on Biological Diversity. There were also millennium development goal 7.B and the EU targets for 2010. All have been a history of failure to meet targets. They had good intentions, but without thinking through how we might reduce our impacts we will never meet these targets. At present we are signed up to the Aichi targets, which were set in Japan, for 2020, but it would be a brave person who predicted that we were going to meet them.

The key to this will be when we ultimately work out how we determine the ownership and distribution of property rights for natural capital assets, which is a highly contentious issue but one on which the Natural Capital Committee, which provides advice to government on the state of England's natural capital, is giving advice. If we could get into our national consciousness and the balance sheets of each and every company in the country an assessment of what impact for better or worse they are making on our natural capital, it would be something of a game-changer. There would be lasting benefits to the United Kingdom if we could demonstrate the value to society of our natural capital and reward those who protect and enhance the desired ecosystem services. This does not have to be done with new subsidies or grants from government; it can be done by adjusting the tax system to reward those who are looking after future generations.

I return to transport, which is mentioned in the Motion. My second game-changer would be to look at the development of hydrogen. We are already there: we have cars, buses and boats fuelled by hydrogen. The problem is, of course, the high cost of fuel cells and the absence of a refuelling infrastructure. The Government recently announced an £11 million investment in United Kingdom hydrogen vehicle infrastructure and £2 million of funding for public sector hydrogen vehicles. I think it is quite realistic to think that in 10 years’ time hydrogen will be competitive in price with petrol and diesel. It will certainly reduce pollutants in the air and, provided the electricity which produces the hydrogen is from renewable sources, it will make a contribution to a reduction in greenhouse gases. There is a challenge: if in the run-up to the general election any political party can commit itself to travel only by hydrogen-fuelled vehicles, it will be doing us a service.

Water Bill

Earl of Selborne Excerpts

Tuesday 25th March 2014 Lords Chamber

Moved by

[The Earl of Selborne]

2: Schedule 1, page 126, line 29, at end insert “for the purpose of, or in relation to, its participation in arrangements made by the undertaker for the introduction of water into its supply system”

[The Earl of Selborne (Con)]

My Lords, in moving the amendment, I shall speak also to 33 amendments grouped with it. We return to the potential risk of de-averaging of charges, on which I moved a plethora of amendments in Committee. I think that there was some mystification around the Chamber as to the purport of the amendments. I hope that the amendments this time round will not come as such a mystery, because we rehearsed in Committee the potential risk of de-averaging of charges. There was general agreement that de-averaging was to be avoided, but I think that we still need to test whether the Bill gives the sort of protection that my noble friend the Minister assured us it did in Committee.

The reason why I think that the Bill currently presents a real possibility of non-household customers paying different prices for the same services within the same appointed area is because of the nature of the link between upstream and downstream. The customers who would be most adversely affected by de-averaging of charges would most probably be smaller businesses and non-household customers in more remote rural areas—at this moment, I should declare my interest as a farmer and therefore, by definition, living in a rural area. As I said, the problem arises from the direct link in the Bill between the retailer and the provider of resources. Such a link was allowed in the Water Act 2003 for water in a different form and reappears, modified, in the Bill. The link is introduced for the first time for sewerage services.

The danger is that, if a new entrant retailer can access a new source of water more cheaply than the incumbent and offer it to selected customers with the focus on price, and price alone, there will be no incentive to improve on or even match the incumbent in providing, for example, water efficiency services that might be beneficial to the customer but which might involve an upfront cost for either the retailer or the customer. In other words, if you can offer a simple “buy it cheap” service for specific customers, you have immediately blown a hole in the averaging regime.

The Bill creates perverse incentives which direct the focus of retailers away from helping customers to play their part in reducing levels of water abstraction and, more generally, in building water industry resilience. The Minister told me in Committee, and I am sure that he will repeat, that the amendments would allow incumbents to dictate the future direction of upstream markets. I disagree. As noble Lords will see, the amendments mention participation and allow—indeed, encourage—incumbents to look for innovative solutions, but not at the price of cherry-picking or allowing people to purchase water or sewerage services on price alone.

The Government agree and say in their guidance on draft charging principles that de-averaging must be prevented. I cite their advice:

“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”—

I repeat, sharing network costs—

“will be critical. For example, rural customers must … be protected”.

That we can all agree on. De-averaging is not desirable and must be prevented. The issue is whether the Bill as drafted will lead inexorably to two-tier charging, whatever guidance the Government might be giving on charging at the moment. The guidance goes on to say:

“Averaging of charges is common practice in sectors that have much greater scope for contestability than the water sector does. Ofwat has a number of tools to limit the effect of de-averaging on customer charges. They will use these to ensure that any marginal changes are introduced in a measured fashion and, above all, that they are in the overall interests of consumers”.

My problem is that I am simply not persuaded that Ofwat will indeed have the tools to limit the effect of de-averaging on customer charges. Given the proposed link between retailers and potential upstream service providers, I cannot understand how Ofwat will be able to manage the impact of de-averaging to prevent any unfairness between customers, especially rural customers. The problem is, of course, that once you have allowed that direct link between upstream and the retailers, you have to justify in law any interpretation of the rules in court.

I mentioned in Committee what is perhaps an obscure case, but nevertheless a legal precedent, the Shotton case in Wales, where the precedent was set that local costs were required to be used in a ruling in setting prices under bilateral deals. My noble friend the Minister assured me that this precedent could be ignored, but I remain convinced as I have the feeling that legal precedents are legal precedents. An even more serious threat would be if this were determined under a European law and the United Kingdom Government might not be able to prevent the de-averaging of charges if a link is allowed, as the Bill allows, between the wholesale and retail markets. There is a threat and it is incumbent on us to be absolutely certain that we are not widening the scope for de-averaging by the way in which the Bill is drawn up.

--- Later in debate ---

The necessary safeguards are already in place. The Bill will put in place a robust, binding framework for the regulator as to how charges will be set, and when they may or may not be averaged. We are confident that these tools are fit for purpose. Customers will be protected, and that includes rural customers; our charging principles are explicit on that. I have said before that this view is supported by competition experts, to which my noble friend Lady Parminter referred. For these reasons, I hope that my noble friend will be reassured and feel able to withdraw his amendment.

[The Earl of Selborne]

I am most grateful to my noble friend the Minister and, indeed, others who have participated in this short debate. I agree with my noble friend Lord Deben that “de-averaging” is about the ugliest word one could imagine. The fact that it was not in any of the amendments, of course, rather confused those who did not know what the thrust of the amendments might have been.

I hear what the Minister says about these amendments derailing the whole competitive base of the Bill. I do not agree with that. It is perfectly possible to keep the undertaker as part of the competitive agreement while introducing competition at both ends of the spectrum. The real issue is whether we are satisfied that Ofwat does indeed have the powers to prevent the insidious creep of the removal of the averaging of charges. Clearly, most of the advisers take the view that it does and Ofwat itself thinks it does. I only hope that they are right.

There will be an opportunity, on a later amendment, to look at some rather more specific proposals as to how averaging might be protected. For the moment, however, I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

--- Later in debate ---

Moved by

[The Earl of Selborne]

30: Schedule 2, page 141, line 32, at end insert—
“(c) the costs which would be incurred by a water undertaker in performing any of the duties to which the section 66D agreement relates are also recorded”

[The Earl of Selborne]

My Lords, here we come to two much more specific and modest proposals to address the potential threat of de-averaging.

In Schedule 2 on page 141, in proposed new Section 66EA of the Water Industry Act 1991, there are rules set out which make provision about the reduction of charges. These provide for the circumstances in which discounts can be allowed. Amendment 30 would additionally allow a discount only where overall costs to the network are reduced. This should prevent a discount in price which discriminates against other participants on the network. Highly desirable discounts—for example, for direct debit, for advance payments or paperless billing—which are available to everyone would in no way be precluded. If, however, a discount is offered to a customer which effectively loads costs on to other users, then this must be unacceptable. The thrust of the amendment is an attempt to ensure that the charges are not slanted in favour of one customer at the expense of another. Likewise, Amendment 37 makes the same provision for discounts on sewerage services. The sewerage undertaker must be able to offer discounts to all on the network who are sharing the facility, or to none.

Amendments 59 and 60 propose a change to the proposed rules about charges schemes. As drafted at present, subsection (6) of proposed Section 143B of the 1991 Act says:

“The rules may make different provision for different cases, including different provision in relation to different, or different descriptions of, persons, circumstances or localities”.

I accept the case for different rules for persons and circumstances. However, I am very concerned that localities should also be a reason for different rules. That seems to be a hostage to fortune. It will hamper the ability of Ofwat to prevent geographic difference in charges, which could lead once more to charges for rural customers being higher than for urban ones. Amendments 59 and 60 would therefore explicitly rule out different rules for different localities. I beg to move.

[The Lord Speaker (Baroness D'Souza)]

Page 141, line 32, at the end insert the words as printed on the Marshalled List, with the proviso that the last word in that amendment is “reduced” rather than “recorded”.

--- Later in debate ---

[The Earl of Selborne]

I am grateful to my noble friend for those observations. I am pleased that he at least agrees with the sentiments behind my amendments. However, I remain worried that where discounts are allowed by Ofwat for a section of the customer network, this could in certain circumstances impact unfavourably on others. If that occurs to non-householders or house- holders in rural areas, as so often could be the case, I fear that that is a slippery slope.

My noble friend said that the proposal to limit the reasons for having different rules might stifle innovation. Again, I simply do not understand why that should be the case. It is simply a proposal to try to ensure that we do not use the remoteness of a locality as an excuse to charge people more than their urban counterparts where, of course, service costs are, indeed, cheaper.

However, I suspect that I will not persuade my noble friend to change his mind. Therefore, I beg leave to withdraw the amendment.

Amendment 30 withdrawn.

--- Later in debate ---

A national affordability scheme is a limited measure which would, however, drive all companies to take up their responsibility to look after their more vulnerable consumers rather more than they have done hitherto. I beg to move.

[The Earl of Selborne]

My Lords, I am sure that we are all sympathetic to the proposal of the noble Lord, Lord Whitty, to protect vulnerable consumers from the escalating costs of water. Clearly, it is difficult for some people to budget for something that accounts for 5% of their income.

However, before we look at setting up another national scheme, we need to understand why water can account for such a large proportion of people’s budgets. The first thing we have to do is recognise that as well as the “can’t pays” there are the “won’t pays”. The “won’t pays” are those who recognise that it is impossible for them to be deprived of water. People have a right to water whether or not they pay their bill. The expense incurred by water companies chasing those who will not pay but are perfectly capable of doing so in the small claims courts often leads to a long, inefficient drag on resources. It would be interesting to know the national figure for those who fail to pay when their income level is deemed perfectly reasonable. Perhaps the Minister has that figure available.

When the Science and Technology Select Committee looked at this issue some six years ago, it was not unusual to find that 10% of consumers from high-income streams did not pay their bills, which shocked me. We came up with a proposal which was accepted by all the members of the committee but not by the Government of the day, or subsequent Governments—namely, that we should follow the Australian practice of reducing to a trickle the water supply of those who could perfectly well pay their bills but did not do so and therefore unloaded costs on to those who were less able to pay their bills. The technology exists to do this but I am afraid that this practice is not considered acceptable. Rather rude remarks were made about their Lordships contributing to the great unwashed. I thought that that was a rather unfair observation. Nevertheless, we need to give the water companies every encouragement to chase those who will not pay. That would help those who cannot pay, who this amendment seeks to help.

[Baroness Byford (Con)]

My Lords, my noble friend has beaten me to the point that I wish to raise. Over the years, during consideration of whichever water Bill, we have had this debate on how you cope with those who are well able to pay but who choose not to do so. My noble friend is quite right: for various reasons, water is never cut off while, unfortunately, electricity can be. It is an unusual situation in that the water industry is the only one in which that position still exists.

I have some questions for the noble Lord, Lord Whitty, on his amendments. First, how would he balance that situation with what he is proposing? Secondly, does he have his own definition of what minimum standards might be, because he has clearly said that it would be for the Government of the day or officials to come up with them? It would be a good idea if the Official Opposition had some direct input themselves into that. Thirdly, the noble Lord said, “We can refer the matter to secondary legislation”. I have sat here on many occasions when we have all said, “Secondary legislation is all right but we do not have any control of it”. We have control of the Bill at this stage and it is essential to deal with this matter in the Bill rather than leave it to secondary legislation, if that were possible.

This is an important issue. When we were considering the Water Bill many years ago, it was difficult to decide who would qualify for being a special case and the circumstances that would be taken into account. I hope that the noble Lord, Lord Whitty, will put a little more meat on the bone, other than what he has done so far in these two amendments.

--- Later in debate ---

[Baroness Parminter]

I thank the noble Lord, Lord Oxburgh, for raising this issue, which I, along with other colleagues around the House, moved an amendment on in Committee. I am not going to repeat the argument that I and others made at that time, but there has been new information since then. In preparation for Report, Water UK contacted all water companies, asking for their views on this issue. They all saw the requirement to seek permission from the Secretary of State for metering as an unnecessary constraint. They think that the water stress status should not be a requirement for metering; rather, they should be able to decide what to put in their water resources planning framework on the merits of the case, including what customers want.

Wessex Water and Northumbrian Water have gone on the record separately on this issue, Wessex Water saying:

“In our WRMP we considered the pros and cons of compulsory metering, even though being in a non-water-stressed area we couldn’t introduce it. Our analysis showed that metering on change of occupancy was a better approach as it gave greater long-term water savings whilst retaining customer acceptability. Metering on this basis will be put in our WRMP and business plans, even though we can’t introduce it”.

This seems to me to be a reasonable amendment. All it does is give companies the right to speak to their customers and manage their businesses to their benefit and that of increasingly scarce water resources. I respond to the noble Lord, Lord Cameron, by saying that it is not just Cross-Benchers who are prepared to swim against the tide; the Liberal Democrats are well used to being out of step with the other two main political parties, and on this occasion I am happy to join fellow Cross-Benchers to support them on this important issue.

[The Earl of Selborne]

My Lords, I think those on the Conservative Benches should support the noble Lord, Lord Oxburgh, as well—as indeed I am sure many of us do. I agree very much with the noble Lord, Lord Cameron, who says that we simply have to value our natural resources. We in this country are totally out of step with the whole movement towards valuing natural capital and understanding the extent to which our natural resources underpin our economy and our quality of life. It makes obvious sense, therefore, that we should all be aware of our footprint, and if we think that we have the right to buy water at a rate that reflects some old rateable value as opposed to our actual consumption, we are simply denying our responsibility to understand our long-term impact.

As I understand it, this amendment is tabled more in order to demonstrate that the water companies can already do what the amendment seeks that they do, so I expect that the Minister will say that it is unnecessary, but it is certainly not unnecessary if it demonstrates what is obvious. I cannot understand why anyone should say that it is against the tide of the day; it is my understanding that every party supports the idea that we should value our natural resources properly, and who could say, therefore, that water should be exempt from that process?

[Baroness Northover]

My Lords, I thank the noble Lord, Lord Oxburgh, for laying this amendment, and I think I thank the noble Lord, Lord Cameron, for his contribution, with all his liquid metaphors. I was pleased to speak at the WaterAid reception last night, which he attended, so I assure him—I think he knows it—that we recognise the importance of water, whether it is in developing countries or in the United Kingdom.

We have thought carefully about metering in bringing this Bill through Parliament. Our position on metering seeks to strike a balance between the benefits that metering brings and the consequences that it can have for customers and their bills. We agree that metering is a fair basis for charging, but we are also concerned about the potential impacts on struggling customers. As the noble Lord, Lord Oxburgh, has observed, any customer can request a meter. The company must then fit a meter for free. That customer has a year to decide whether to revert to paying according to the rateable value if it turns out that they are worse off.

We are already seeing increasing levels of metering across the country. Next year will see the number of metered households reach 50%, with a trajectory towards 80% by 2040. Where there is a credible economic case, any company may install meters across all or part of their area. The only restriction is on imposing metered charges on customers without their consent. Companies could, as the noble Lord, Lord Oxburgh, suggests, install a complete street or neighbourhood at the same time; and to answer my noble friend Lady Parminter, companies can put in meters throughout.

The evidence shows that the case for imposing metered charges on all customers in an area can be made in water-stressed areas where there is an insufficient supply of water to meet projected demand. The amount of available water varies around the country. When it makes social, environmental and economic sense to do so, charging all customers according to a meter is already a possibility, but in areas where water resources are not under pressure, imposing meter charges is restricted because of our concerns about affordability.

There are two sets of costs that must be considered here. First, the investment cost of installing meters across an area can put up bills for all the customers in that area. Secondly, imposing metered charges across an area can increase the bills of some of the worst off in society. This is not something that anyone wishes to do in areas that have sufficient water to meet demand.

The balance will doubtless change over time. With climate change and population growth, the case for universal metering in particular areas will no doubt shift. That is why we revised the water stress designation last year: to take better account of long-term climate projections and information about environmental pressures. We wanted to ensure that the designation of serious water stress is forward looking. It is also updated on a regular basis, and we will continue to keep the situation across the country under review. I hope that that does something to reassure noble Lords.

The noble Lord, Lord Oxburgh, asked me to clarify the circumstances in which companies can install meters, and he made the point that a number of organisations were not clear about the situation. I hope I have answered his question, but for the avoidance of doubt let me do so again for the record. Water companies are able to install meters wherever there is a good case for doing so. There is a variety of reasons why they may choose to do this, including to improve leakage detection and enhance their understanding of consumer behaviour. A number of companies already do this. What the companies are not allowed to do is to impose charges by reference to that meter without the householder’s agreement. The exception to this rule is in areas of serious water stress, for the reasons that I have mentioned. It is not the installation of meters, therefore, that is restricted; it is making people pay a metered charge without their consent in other areas. I hope that answers the noble Lord’s question.

The noble Lord also mentioned the complexity of the legislation in this area. We agree that the prescribed conditions regulations, which govern the restrictions around metering, are complex and hard to follow. I am glad to be able to confirm that under the Government’s Red Tape Challenge, we have a commitment to consolidate these regulations by April 2015.

Water companies can install meters wherever it makes sense to do so, but it is the householder who decides whether they wish to be charged by reference to it in the areas where that is permitted. There is flexibility to allow universal metering in the wider interest of water efficiency in areas of serious water stress. This is a careful balance. I hope that the noble Lord will be willing to withdraw his amendment, although I am sure he will do so with great reluctance.

Water Bill

Earl of Selborne Excerpts

Thursday 6th February 2014 Lords Chamber

I do not expect the Minister to answer today my latter reflections, which are based on what I anticipate his response will be. Of course, I may be wrong and he may be fully in favour of my amendments, which, he will have noticed, reflect the experience in Scotland. On that point, we should sincerely welcome the outstanding contribution made by WICS, not only in opening up competition but in providing a clear set of criteria for us to discuss, consider and use as first-rate experience from which we can amend the Bill. In the light of those comments, I look forward to hearing the responses from other noble friends and the Minister. I beg to move.

[The Earl of Selborne (Con)]

My Lords, I support my noble friend Lord Moynihan. Although he described these proposals as modest, they are important in complementing the provisions in the Bill facilitating competition. After all, the Bill introduces a completely new concept of competition at both the wholesale and retail levels. We are right to be extremely suspicious of the attitude that companies will take to try to use their undoubted advantages as incumbents in order to secure their markets, which, at the moment, are unchallenged.

If noble Lords think that I am a bit paranoid about this, let me take an example from outside the water sector, in the field of communications. This morning, on a previous group of amendments, we prayed in aid Ofgem; I should also like to pray in aid Ofcom. Take the example of BT and broadband, which is an area that involves public funds but may perhaps not be an exact analogy with the water sector. BT is able to use public funds in order, as the Public Accounts Committee in another place has demonstrated, to see off new entrants. In a number of cases, a lot of work has been done to bring broadband to remote communities, but there has been a lack of transparency from incumbents until the last possible moment. They come into those areas—surprise, surprise—with a directly competitive service, having identified where the competition is going to come from. Of course, all other areas remain neglected until they attract competition, too. In other words, it is possible, in any number of insidious ways, for an incumbent to retain a competitive advantage. The company can sometimes just be bad at providing the data and not answering communications.

These amendments place a duty on an undertaker to facilitate competition and they strengthen Ofwat’s powers. In ways which we cannot entirely predict, but which we can assume will be used, companies will be rightly keen to retain their share of the market. We should assume that anything done to strengthen the ability of new entrants to operate without discrimination against them must be welcome. Without in any way casting aspersions on the existing undertakers, we should recognise that anything that can be done to demonstrate that they are required to facilitate competition would be well within the spirit of the Bill and complement the existing provisions. I cannot see how these proposals could do anything but help.

[Lord Crickhowell (Con)]

I rise to make a very brief comment, prompted by the remarks of my noble friend on the likely possibility of incumbents seeking to defend their positions. I seem to recall that, in reply to my noble friend Lord Moynihan in our previous debate, the Minister told us that the water companies had said that they were against what was proposed. I remember thinking, like Mandy Rice-Davies, “Well, they would, wouldn’t they?”. It was just an indication of the kind of attitude that one is likely to get from incumbents—perfectly naturally—in trying to defend their existing position.

--- Later in debate ---

[Baroness Parminter]

I rise to support the intention of Amendment 120, if not the intention of Amendment 122, which is grouped with it. The issue of bad debt and the implications of what that means for the affordability of all our bills is an important one.

At Second Reading I asked the Minister why the Government, unlike the Welsh Government, are not implementing the bad debt provisions in the Flood and Water Management Act 2010, alluded to by the noble Lord, Lord Whitty. If they were to do so, it would help company debt recovery and bring down household bills. The response I received was that the Government were wedded to the idea of a voluntary scheme, with a database that the water companies were helping to fund, which would be brought in, probably via regulations, in the next month or so. I may be wrong, but I suspect that, with only an intervening 10 days between Second Reading and now, that is the answer that we will get again and that the Government will not wish to support these amendments.

Therefore I ask the Government, if they are determined to stick with the voluntary approach, whether they will set a reasonable review period to evaluate whether or not the voluntary scheme for landlords is effective. All the evidence to date, from the voluntary schemes of companies such as Northumbrian Water and others, shows that they do not work. It seems to be a reasonable request, if the Government are not prepared to move ahead with a mandatory scheme, for them to give an indication to the House of a reasonable review period, so that if the scheme is found to be ineffective—as most of your Lordships believe it will be—the regulations can be changed to make it compulsory.

[The Earl of Selborne]

My Lords, I have a lot of sympathy with the thrust behind the attempt of the noble Lord, Lord Whitty, to deal with those who will not pay as opposed to those who cannot pay. Some six or seven years ago I had the privilege of chairing a report of the Science and Technology Select Committee on water management. We were appalled by the number of affluent people in South East Water’s area who had worked out that they could never be deprived of their water supply as it is illegal to turn off the water, so they simply did not pay for it.

The cost of taking someone to a small claims court is a difficulty. Where there is a change in population, such as happens in some areas more than others, the cost of trying to trace defaulters can be more than the cost of the debt. The two amendments proposed by the noble Lord, Lord Whitty, seek to deal with this. I suspect that it would be better to deal with this in secondary rather than primary legislation, as was originally intended. Nevertheless, I believe that my noble friend on the Front Bench should encourage the thrust of these amendments, to make sure that those who can afford their water perfectly well should be induced to pay for it, and that the water companies should be assisted in this, particularly by those with information on who is responsible for paying the bill. Landlords are often in a position to provide that information. All assistance should be given in this case. It is galling to know that people who cannot manage their affairs but are living an affluent lifestyle are advised by debt managers, “Well, don’t bother about the water bill”.

[Baroness Byford (Con)]

My Lords, over the years that we have been debating water bills, this has been a constant theme. I think that all of us in the Chamber, on whichever side we may have been sitting at a particular time, have agreed that it is a problem that needs to be resolved. What I am not quite clear about is whether Ofwat with its new responsibilities has the power to tackle what is being proposed by the noble Lord, Lord Whitty, and whether that would then make his amendment unnecessary. However, I am still sympathetic to what the noble Lord said about those who can pay and will not pay. I rather gained the impression from Ofwat when it gave a presentation recently that it had the power to make adjustments to individual water companies. I might be wrong, but I would be glad of some clarification.

--- Later in debate ---

[The Earl of Selborne]

My Lords, I want to give the Minister a little encouragement. We all recognise that this is a hopelessly complicated Bill that has been many years in gestation. On a number of occasions, we have complimented Defra, rightly so, on its briefing notes—yet another has come out today. Start putting those on a website, and you will have a work of reference that will be of enormous assistance.

One of the things in previous decades that has led to confusion has been the fact that the three different regulatory authorities—the Environment Agency, Ofwat and the Drinking Water Inspectorate—have different agendas and, before these new duties of resilience came in for Ofwat, there was no reason why Ofwat and the Environment Agency should ever agree. As I said at Second Reading, I never really felt that I was going to feel sorry for the water companies, but on that aspect I did because they were being dragged in two different directions.

If you really want to manage water in an appropriate way, you should do it by catchments, but unfortunately you cannot organise Great Britain, or even England and Wales, by catchments. That is, alas, not the way that local government, or any government, works. In the Bill, we are trying to promote sustainable management of water. That means starting at the estuary and working uphill, and if that can be done by catchment, so much the better. You try and get all the different bodies together, preferably with voluntary agreement—I agree with my noble friend who moved this amendment that, if you can do that without regulation, so much the better—but of course there must of course be a regulatory framework, and no one is disputing that.

The reason that I have some small words of comfort for my noble friend on the Front Bench is that I think that the Bill, complicated though it is, goes a long way towards bringing the two main regulatory authorities—the Environment Agency and Ofwat—to a common agenda. If we asked in Scotland, where there is yet another regulatory authority, I think they would say that their relationships with Ofwat—on roughly the same agenda, but with a completely different competitive background for the past five years—can now only improve. That is important as some catchments straddle the Scottish and English border. If ever there was a case for ensuring that we work to a common agenda, it must be for those people in the catchment area of the River Tweed.

Water Bill

Earl of Selborne Excerpts

Tuesday 4th February 2014 Lords Chamber

[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.

--- Later in debate ---

Moved by

[The Earl of Selborne]

5: Schedule 1, page 125, line 29, at end insert “for the purpose of, or in relation to, its participation in arrangements made by the undertaker for the introduction of water into its supply system”

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

Moved by

[The Earl of Selborne]

41: Schedule 2, page 136, line 36, at end insert—
“(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.

--- Later in debate ---

[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.

Amendment 41 withdrawn.

--- Later in debate ---

Moved by

[The Earl of Selborne]

44: Schedule 2, page 139, leave out lines 31 to 38

[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.

Amendment 44 withdrawn.

Water Bill

Earl of Selborne Excerpts

Tuesday 4th February 2014 Lords Chamber

Business customers are sceptical about the new legislation because many were disappointed in 2005. After the false start of 2005, we have an obligation to get the legislation right and to ensure that the market works well for business customers. We should not take any risks to create a second false start. Coming back again in 2020-plus to have a third go at making this work should not be an option. I strongly support the case for exit.

[The Earl of Selborne (Con)]

My Lords, after those two speeches, there is not much more to be said. For 24 minutes, we have had a very powerful exposé of the astonishing contradictions of a Bill which is here to promote competition and which is trying to implement Professor Martin Cave’s recommendations. The OFT said of orderly exits in the report that successful markets require a right of exit.

In this specific market everyone, including the EFRA Select Committee, has taken a very firm view, which has been forcefully put by the noble Lord, Lord Whitty, and my noble friend Lord Moynihan. The only argument that I have read that puts the contrary view has been the Government’s response to the EFRA Select Committee. That response has been so efficiently demolished that I do not think I need to repeat the argument.

I drew a crumb of comfort from the Minister’s response at Second Reading. He slightly opened the door when he said that it was just possible that the Government might wish to think further on this. We need the ability in the Bill to allow exit at a future date, sooner rather than later. It needs to be in the Bill, because there will not be another water Bill for some time. I hope the Minister will look with approval on these amendments. I do not mind which of the two is accepted; it is the principle which needs to be accepted.

[Lord Crickhowell (Con)]

My Lords, this has been a remarkable brief debate. I thought that the noble Lord, Lord Whitty, introduced the amendment in a very low key, charitably commenting on the Government’s position. That powerful speech was followed by what I was going to say was a lecture, but certainly a speech, that ought to be read by every civil servant in the department, because it was one of the most impressive speeches—lectures—about market economics and their realities that I have heard for a very long time.

I know my noble friend on the Front Bench knows something about business and will have listened with care. I beg him on this occasion to listen to the realities of the market rather than the detached views of civil servants, who, by their training and nature, may not be as equipped to deal with market realities as my noble friend Lord Moynihan clearly is.

It was only really when I heard the speech of the noble Lord, Lord Whitty, and even more so when I heard my noble friend Lord Moynihan’s speech, that it seemed we were going to deal with this point about uncertainty. I simply cannot believe that people advance that as a serious argument. All the evidence suggests that if you want to have market confidence—the confidence of investors and of the people who advise them—you need to have a clause of this kind. Far from an uncertainty, it is an absolutely essential requirement in order to give the market confidence. On that ground alone, I believe that this amendment simply has to be taken seriously by the Government. I hope that, rather than advancing any arguments that have been put in his papers before the debate, my noble friend makes a very cautious response, takes away my noble friend Lord Moynihan’s speech and demands that his department consider it adequately and fully before we come back again on Report.

--- Later in debate ---

Moved by

[The Earl of Selborne]

108: After Clause 21, insert the following new Clause—
“Right to discharge water
(1) A sewerage undertaker may discharge water from a relevant pipe or from a drainage system constructed pursuant to section 114A of the Water Industry Act 1991 into any inland waters, whether natural or artificial, or any tidal waters.
(2) In this section “relevant pipe” has the same meaning as in section 158 below.
(3) A sewerage undertaker shall pay compensation to the owner or occupier of any land who suffers damage by reason of the exercise by the authority of any right under subsection (1) above.
(4) This section is without prejudice to any enactment the purpose of which is to protect water against pollution.”

[The Earl of Selborne]

My Lords, Amendment 108 refers to the rights to discharge and its purpose is to support the installation of sustainable urban drainage systems, or SUDS. It is generally recognised that SUDS are part of the long-term solution towards the sustainable use and drainage of water. They improve surface water management and reduced the risk of flooding, and they may include rain gardens, permeable paving, swales and the like. They are designed to collect water and release it slowly back into the environment.

Clause 21, which we have just agreed, clarifies the function of a sewerage undertaker under the Water Industry Act 1991 to include the building and maintenance of SUDS features, so we are here to promote SUDS and the Bill does that. However, there is a problem. To install a SUDS scheme an undertaker, a water company or a drainage company has at present to negotiate the right of discharge. Without such a right or with the prospect of costly negotiations and litigation—there has been plenty of that—there is little incentive to deliver SUDS schemes as opposed to surface water sewers.

The amendment would remove this uncertainty, which has led to litigation and to a lack of incentive for the installation of SUDS. It helps sewerage undertakers to deliver SUDS schemes. We are of course awaiting secondary legislation, which is a separate issue, on the maintenance and the issues with local government on SUDS. That apart, this deals with a much more fundamental issue. It would resolve the legal uncertainty that has arisen since 1989, when a previous water Bill removed the right of sewerage undertakers to discharge. The amendment would therefore restore the legal position to where it was before 1989, when sewerage undertakers had a statutory right, as highway authorities still have, to discharge pure water into any watercourse. I emphasise that it has to be pure; no one is suggesting that there should be a licence to pollute in any shape or form.

At the moment traditional pipe discharges, which are inferior in many respects to SUDS, as I have explained, can be acquired by compulsory purchase powers. However, again, under the Bill we are not extending compulsory purchase powers to SUDS. I am not suggesting that they should be but that once you have the right to discharge, these powers will give an incentive for SUDS to be installed. That incentive is greatly needed, and I beg to move.

[Lord De Mauley]

My Lords, I am grateful to my noble friend for raising the importance of sustainable drainage systems and I agree with him on this. I can confirm—my noble friend referred briefly to this—that we plan to bring forward the secondary legislation needed to implement Schedule 3 of the Flood and Water Management Act 2010 by April this year, and to commence it at the earliest possible opportunity.

I appreciate, also, that the issue of the right to discharge water is important for sewerage undertakers. However, this is not, by any means, a straightforward issue and there are more interests which would need to be taken into consideration, including the impact on landowners and bill payers. The amendment would allow the discharge of water without express consent. It suggests that compensation should be paid if there is any damage but that no permission needs to be sought. Interference with third parties’ land rights would need careful and detailed consideration.

Current case law suggests that there is no general right to discharge without compensation under the Water Industry Act 1991, for sewerage undertakers or others. Private parties who wish to discharge water on to other parties’ land or into other parties’ assets such as lakes, canals or rivers have to negotiate an agreement to discharge water with the owners.

As my noble friend knows, a challenge to the existing case law on whether there is a right to discharge has been made and will go before the Supreme Court in May. I am sure noble Lords understand that it would not be appropriate to comment on that case. In the circumstances, I ask my noble friend to withdraw his amendment.

[The Earl of Selborne]

I am grateful to my noble friend. The fact that this has led to such protracted, expensive and time-consuming litigation demonstrates that the law was left in an ambiguous situation—to put it at its kindest—after 1989. The issue clearly has to be resolved but whether the Supreme Court is the right organisation to do so is another matter. I think it would be more appropriate for it to be done by an appropriate Act of Parliament. This is not asking for something particularly unusual. As I said, highways authorities have the right to discharge at the moment. Before 1989, sewerage undertakers had the right to discharge. If landowners found themselves inconvenienced, it would only be in the sense that they were reverting to a situation to which they had been quite accustomed.

I have heard what the Minister says and accept that, with a case in the Supreme Court, he is constrained from discussing the detail. I therefore beg leave to withdraw the amendment.

Amendment 108 withdrawn.