Water Bill

Lord Crickhowell Excerpts

Monday 31st March 2014 Lords Chamber

[Lord Cameron of Dillington]

My Lords, I support the amendment. I do not have quite as many questions as the noble Earl, Lord Lytton, but I have a similar sense of the injustice and unfairness that are implicit within the Flood Re scheme.

I am not quite sure what the opposite of taking a sledgehammer to crack a nut is, but perhaps it is taking a bucket to stop a flood or maybe it is using the current Flood Re scheme to deal with the domestic flood insurance problems and then excluding more than half of all UK households. I know that there is then the added problem of SMEs, but I totally accept that for the present the scheme is designed to tackle the domestic marketplace.

In my view, the proposed scheme is so hedged about with exemptions that it fails to get to the heart of the domestic flood insurance problem. Even without SMEs, most buildings will not be covered by the scheme. Exclusions include: nearly all leasehold properties; the entire private rented sector; housing association schemes, whether shared equity or let—and are these not the very people whom we are trying to protect?—council houses; homes built after 2009; and properties in council tax band H. Some 60% of all domestic properties are specifically excluded. Flood Re, in this case, is not fit for purpose. It would have been so much more simple, fair, just and equitable to have included all of the above and dealt with the problem of excess demand on funds by either capping individual payouts or adjusting the level of premium at which Flood Re cuts in. It seems unimaginative to me to exclude 60% of all properties as a way of mitigating the risk.

Incidentally, the average household premium is just under £200, so the 2.2% levy amounts to an average of £4.40, not the £10.50 being bandied about. When I met with the ABI, it seemed to have no satisfactory explanation for the difference in these figures, so I have no idea where the £10.50 came from. The reason I mention this is that, if a £10.50 premium is considered acceptable, and the real figure is actually much less, then maybe adjusting the amount of supplementary levy on the premium could also be a way of mitigating risk in the early years of Flood Re. Just to exclude 60% of the properties surely undermines the whole purpose of the scheme.

Turning to the various unjustifiable domestic exclusions, I will deal with them one by one, starting with properties in council tax band H. First, as confirmed by ABI, the inclusion of such properties would not in any way raise the cost of the scheme. If, as suggested by Hiscox, a cap of, say, £160,000 were put on any one payout from the scheme, their inclusion would not increase by one jot the risk of failure of the Flood Re scheme. Noble Lords should bear in mind that those who are being excluded are not paying the £4.40 supplementary levy or even the £10.50 towards the scheme: they will be paying nearer to £50, £60 or £70, because of the value of their house, towards a scheme that specifically excludes them. They will not all be rich; many of them will be elderly, cash poor and vulnerable.

I of course understand the politics at work here; as I said, this exclusion is an entirely political decision. If they cannot be included in the scheme, however—which, I agree, seems unlikely at this stage—I would strongly support the National Flood Forum’s proposal that they should be helped with any mitigation measures possible, either through locally targeted schemes or from the Flood Re pot once it has been built up, as in Amendment 90ZA, put forward by my noble friend Lord Krebs and the noble Baroness, Lady Parminter. They should not be totally abandoned when they are contributing so much towards the scheme itself.

Turning to post-2009 properties, apart from people in this House and some people involved in the insurance industry, I have yet to find a single person in real life who knows anything about this 2009 cut-off and the effect it may have on their insurance in 2015. Included within that group of innocents are two people who actually work in the insurance industry. I know that some of your Lordships are saying, “Look, we have to make an example here. We must stop developers building on the flood-plains and the only way to do it is to make these properties uninsurable against flood risk”. To me, that misses the point. For a start, society—that is you, me and the local planning authority—gave permission for these houses to be built. Currently, the Government are actually helping these people to buy these houses through their Help to Buy scheme. The Environment Agency only comments on 6.6% of all applications; perhaps it should have some responsibility. My point is that, if we do not want houses built, we have to stop them at source and not just take it out on the poor, unfortunate souls who—probably totally unknowingly—end up living in these properties either as owners or, worse still, as tenants, who of course are going to be doubly excluded.

Furthermore, to have a blanket exclusion on all post-2009 properties also misses the point. We are not just talking here about houses on the designated flood-plain; we are talking about all houses that represent an insurance risk. We are talking about houses that probably started flooding since 2009 for a variety of reasons. There are more and more examples now of houses flooding because of rising ground-water, even on hillsides. There are many examples of houses flooding from surface water, sometimes because of activities upstream—possibly subsequent to 2009—over which the householder had no control; for example, another development that increases the speed of run-off. There are also houses where the weather pattern has changed and, after two floods, the cost of insurance becomes unbearable. Therefore, just to have a blanket exclusion of all properties built after 2009 seems completely unnecessary and grossly unfair. It is well known that there are several examples, most notably in Hull, where there are properties side by side, one of which will be included and the other, because of this rule, will not be—you can almost guarantee that neither of the owners knew their future fate when they chose which one to buy.

Of course, the biggest exclusion is the leasehold and rented sector. I will leave my sense of injustice about those properties until we get to Amendment 89B from the noble Lord, Lord Whitty.

All in all, I realise that it is probably too late to upset the apple cart of this version of Flood Re at this stage. However, many in the insurance industry are pretty unhappy about it, largely because they know that, when the blatant injustices become obvious, they and not the politicians will get the blame. I hope that the scheme works for those lucky 40% who find themselves included, but it would have been much more imaginative to have made the scheme much more inclusive, if not all-inclusive, and to have mitigated the risk in other ways. I hope that when it comes to the various regulations bringing this scheme into effect, some thought will be given to those who have inadvertently found themselves on the wrong side of the legislator’s pen.

[Lord Crickhowell (Con)]

My Lords, we all owe a great debt of gratitude to the noble Earl for moving this amendment and to the noble Lord who just spoke for spelling out in great detail some of the shortcomings that can be identified. I think it is 37 years since I was a director of a firm of Lloyd’s insurance brokers, on the board of a large Lloyd’s underwriting agency and losing money at Lloyd’s. I do not think I must declare an interest for that, though, like others, I must declare one as living in a band H property.

I have been very uncomfortable about this scheme, based not so much on the residue of knowledge long forgotten as on the political outlay that I see arising when the whole scheme does not produce the results that most people expect. I told my noble friend Lord de Mauley on Thursday morning, when we happened to meet, that I had just received an e-mail from the chief executive of Hiscox. My noble friend asked me to send a copy of that to him—although he was copied into it, apparently he had not seen it. I said I would come back to this issue because the Hiscox e-mail raised a number of very significant issues that must be addressed. I do not have to go through them all in detail because we had very good summaries from both the noble Earl and the noble Lord, Lord Cameron.

Hiscox points out that the scheme, though clearly desirable in principle, will not solve the problem of unaffordable flood insurance that it was created to address. Nor does it take into account the changing nature of flood. Hiscox points out that of the 885,000 homes in high-risk areas more than 350,000—3.8% of the total housing stock—will be excluded. While some of those will be commercially owned properties able to buy commercial insurance, a proportion will be private buy-to-let properties. What is more, Hiscox says it is likely that this underestimates the scale of the problem. The noble Earl pointed out the uncertainties about the numbers. Hiscox indicates that 80% of its claims came from homes that it did not consider to be at flood risk. It is not just homes sitting in obvious flood plains, of the sort with which I had to deal when chairman of the National Rivers Authority. No one is more indignant about some of the planning decisions that have been taken there than I am.

The whole thing has been arrived at by negotiation between the Government and the Association of British Insurers. No doubt we will be told that this is the best deal that can be done at present. I am not sure we should be satisfied with that. Clearly quite a number of active insurers do not believe it is the best possible scheme and, for the reasons well elaborated by the noble Lord, Lord Cameron, it does not appear fair.

Water Bill

Lord Crickhowell Excerpts

Tuesday 25th March 2014 Lords Chamber

[Lord Moynihan (Con)]

My Lords, I seek to assist the House, first by defining the concept of exit that my amendment aims to address, and then by responding to the concerns raised by the Minister in Committee about this important issue.

My interest in this matter began when I was one of the Ministers in another place who was responsible for the privatisation of the water industry, working at that time with my noble friend Lord Howard and the late and much missed Nick Ridley. Our aim was to introduce competition into the industry, to improve services and water quality, and to ensure that, through access to the capital markets, the industry could undertake significant, long-term investment into much needed new infrastructure. The fact that in the six years after privatisation the companies invested £17 billion, compared to £9.3 billion in the six years before privatisation, with higher-quality water, demonstrates the benefits of that measure.

My amendment seeks to take competition further by recognising the distinction between the wholesale process of delivering key water and sewerage on the one hand, and, on the other, encouraging the 18 incumbent water companies to separate off their retail services. These retail services are customer-facing. They are likely to include water efficiency advice and implementation—including benefit sharing—water harvesting and sustainable drainage, and more efficient and effective billing and payment options.

In Scotland since April 2008, non-household customers have been able to choose their supplier and/or renegotiate the terms of their supply. During that time, levels of service have improved considerably and there has been a much clearer focus on environmental services. Some two-thirds of customers have actively opted for a better deal, and the safeguards that have been put in place ensure that no customer, household or non-household, is worse off as a result of the introduction of competition. Indeed, in Scotland, Scottish Water opted legally to separate its non-household activities from the rest of its business by creating a new subsidiary company called Business Stream.

My amendment echoes government policy to allow the most efficient companies to merge or new companies to enter the market to provide customers with better service. The amendment goes further and allows those companies that are inefficient or in favour of exiting the market to apply to the Secretary of State to leave. This proposed move away from vertically integrated, private sector monopolies is to be welcomed. It allows companies that want to specialise in major long-term infrastructure to do so. However, it also allows others—such as the Singapore company Sembcorp, which owns Bournemouth Water, one of the world-leading facility managers for large industrial companies with process management skills—the opportunity, if they so choose, to offer retail services to a far wider base of customers than they do now. For today, they can compete only under current legislation by buying every customer, one by one.

The Bill takes a leap forward from 25 years of supply-driven legislation to a focus on much needed, demand-led service. In Scotland, such legislation has worked well since its introduction in 2008. However, it is deeply concerning that, unless we amend the Bill, we will create a competitive market but we will also create a market that prevents those participants that wish to exit the market doing so. For example, if, hypothetically, the board of Thames Water and its investors wanted to exit the retail business and specialise in the very different skill sets required for its core business—major infrastructure projects, which cover more than 90% of its current business—the company would not be allowed to do so. All the incumbent companies today would have to keep offices, keep the staff, keep the IT systems, pay rates and rent, and build up a cost base to be passed on to their customers, even if the board and shareholders wanted to exit the market and, in extremis, even if the company had only a handful of customers.

Only last week, Oxera published a study on the potential cost of passing the Bill without a provision for exit, and came to the view that this measure could amount to around £190 million in NPV terms over a 10-year period. Of course, this is not surprising. If we continue to insist in this legislation that the non-household, retail divisions of the incumbents have to maintain the capability of running the infrastructure systems needed and lose market share, they will end up with rising costs relative to their revenues, they could see losses increase and continue, and no cost synergies would be possible.

Exit is based on straightforward market efficiencies. The Defra Select Committee supported exit. An increasing number of water companies advocate exit. The Scottish experience is a case study for the benefit of exit. The Water Industry Commission for Scotland has come out in support. Macquarie has published a research note and it supports exit. I quote some investors with whom I have been in touch. One says, “Companies should be allowed to exit”. A second says, “If loss-making, it will be detrimental to regulated business to be forced in keeping them”, whereas a third says that it is eminently sensible to be allowed to do so. A final one states, “Anything that promotes competitive tension to improve the customer experience is positive”.

The chief executive of Ofwat, Cathryn Ross, on 3 December last year gave the following evidence to the Water Bill Public Bill Committee:

“Our view is that retail exit for incumbents is a critically important element of a functioning, effective retail market. Particularly important is the fact that if we do not allow incumbents to exit, essentially we are mandating inefficient retailers’ remaining in the market. That will basically be baking in cost that customers will have to pay for, which we can easily avoid”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 7.]

Even in your Lordships’ House in Committee there was harmony, agreement and support between, on the one hand, my noble friend Lord Crickhowell— the first, and indeed outstanding, chairman of the National Rivers Authority, appointed during privatisation —the noble Lord, Lord Whitty, and the Labour Benches behind him, and the noble Lord, Lord Cameron, from the Cross Benches, who would in fact go one step further in enabling exit and competition between householders as well as non-householders.

[Lord Crickhowell (Con)]

I am grateful to my noble friend for giving way and for the kind things that he has just said about me. I strongly supported him when he made an immensely powerful speech in Committee. The case he has made this afternoon is equally powerful and, in my view, unanswerable. I hope that the Government, even at this late stage, will listen to that argument. I assure him and them that, if they do not, I will support him in any further action that he deems necessary to get this matter through.

[Lord Moynihan]

I am very grateful to my noble friend for those comments. Indeed, I hope that through his intervention and through the remarks that I made, and indeed through the remarks that the noble Lord, Lord Whitty, made in Committee, my noble friend will determine to join these eminent ranks in support of creating an effective, competitive market for retail services with the intent of providing low-cost improved services to non-householders, because today we are focusing on businesses.

My amendment does not seek to persuade the Minister to introduce competition at this stage to householders, although there are those in your Lordships’ House who hope that, once successfully tested in the business sector, such a transition to competition in the householder market will be fully reviewed. I am proposing that the Secretary of State begins work on preparing regulations not in haste but ready for market opening in 2017. I hope that in so doing—this emphasis is really important—the Minister will provide customer protection and take into account the need for further work to ensure that the Consumer Council for Water is able to maintain its position whereby customer confidence in the water industry is significantly higher than in any other utility sector.

I met the council’s chair, Dame Yve Buckland, and its CEO, Tony Smith, yesterday and I listened carefully to their request to work with customers directly on retail exit—an area which, they freely recognise, requires far more work to be undertaken by them. They wish to review the experience in Scotland. They want to make sure that their customers—particularly the small businesses —are consulted and protected. They are right to do so. In accepting either of our amendments, the Secretary of State will have the time and opportunity to listen to their concerns, for he will need to ensure that all consumers are protected from unnecessary increases in price and from service reduction.

Perhaps I may help my noble friend with examples of the measures available to him to protect the business customers under consideration. He can insist on the full army of tools which already exist. Default tariffs can be set through price controls, ensuring price and service protection. New codes can be drafted to contain all necessary customer protections and to keep the system as simple as possible. Powers of the Enterprise Act can be used for consumer protection should issues go awry—for example, through a failed merger.

--- Later in debate ---

[Baroness Parminter]

My Lords, along with a number of colleagues around the House, I raised serious concerns in Committee about the potential for environmental damage resulting from the upstream competition proposals being agreed in advance of reforming the water abstraction regime. I will not repeat those this afternoon. However, I am very pleased to say that the Government have clearly listened to our concerns and are proposing a number of significant amendments to address them.

First, the Government propose to report in 2019 on progress in reforming the water abstraction regime. The Government’s stated aim, following the publication of their consultation on abstraction reform last December —which the noble Lord, Lord Whitty, welcomed—is to legislate early in the next Parliament and implement abstraction reform in the early 2020s. The report will therefore give Parliament an opportunity to scrutinise the management of the interface between what should be by then the two pieces of legislation and their implementation. We can then seek to ensure that their implementation delivers the desired outcomes for both customers and the environment.

I am also grateful that specific concerns that I raised about sleeper licences and bulk trading were heard. The Government have introduced amendments to require Ofwat to consult the Environment Agency or Natural Resources Wales before they issue the codes on bulk supply agreements and before allowing a water supply agreement between relevant parties and incumbent water companies. Equally, relevant parties will be required to consult before entering into bulk supply agreements, and Ofwat will have to take into account any response from the Environment Agency or Natural Resources Wales. In that regard, I do not agree with the noble Lord on the Front Bench opposite that these government amendments are weak. I know from my conversations with Ofwat, which did not want the amendments to be tabled, that it most assuredly does not see them as weak.

In advance of the abstraction regime being reformed, the Environment Agency is already seeking to vary and remove unsustainable existing licences. It will be helped in that by the Government’s removal in this Bill of a statutory right to compensation for a water company resulting from such modifications or the revoking of a licence. The Government have therefore gone a long way towards addressing concerns that noble friends and colleagues expressed in Committee. These proposals satisfy my concern that legislating now for upstream reform in advance of reform of the water abstraction regime could lead to an unsustainable increase in abstraction. Therefore, I would not support any further amendments being tabled by the Opposition Front Bench.

[Lord Crickhowell]

My Lords, I want to probe a little on the timing. I agree with everything that the noble Baroness has just said. For eight years, as chairman of the National Rivers Authority, I had to try to deal with this problem with rather less adequate weapons than the Environment Agency now has, so I welcome the steps that the Government are taking and have taken. I also want to see rapid progress made on the competitive regime, but there seems to be a very difficult timetable. We will have a report five years out on how abstraction is going, yet there will be legislation in the next Parliament which takes us a year further forward. I do not quite see exactly how the Government envisage progress being made on these two important priorities. I confess that I have been away abroad since Committee—I have been enjoying myself in the Galapagos—so my mind has not been on this matter, but I would be grateful if my noble friend could give us a little greater clarity on the timing of these two interlocking steps, on the way in which they are likely to relate and on how the legislative timetable is likely to fit in.

[Lord De Mauley]

My Lords, this has been another important debate on abstraction reform. It gives me an opportunity to declare another interest: that of a holder of an abstraction licence. Noble Lords have once again emphasised the importance of rapid progress in reforming the abstraction regime and expressed concern about the linkage to implementation of the upstream reforms in the Bill. I thank noble Lords for the knowledge, experience and constructive challenge that they have brought to the debate on this important matter. I have listened carefully to what they have said and I am left in no doubt as to the strength of feeling.

First, I assure noble Lords that the Government are fully committed to abstraction reform. The proposals in our consultation document on abstraction reform demonstrate just how seriously we are taking this, as well as the complexity of reforming such a long-established regime. Our proposals reflect the importance of abstraction reform for people and the environment and the fact that organisations and individuals across the country are dependent on access to water to live their lives and run their businesses.

I want to see a real improvement in the quality of water bodies in all parts of the country. That means we must take action to reduce overabstraction that damages the environment now and ensure we can continue to protect the environment and ensure access to water in the more challenging conditions we will face in the future. Abstraction reform and upstream reform are both designed to help to achieve that goal. While some fear that these could be conflicting mechanisms, I can assure noble Lords that the intention is for them to be entirely complementary in both design and implementation. I hope I can provide further reassurance on this, not least through the further amendments that we have tabled to Clauses 8 and 12 and a new clause before Clause 45.

Water Bill

Lord Crickhowell Excerpts

Tuesday 11th February 2014 Lords Chamber

[The Earl of Lytton (CB)]

My Lords, I have a great interest in this group of amendments. I certainly understand the geometry that lies behind it, particularly that outlined by the noble Lord, Lord Campbell-Savours. I probably follow the noble Earl, Lord Cathcart, in this. As I understand it, Flood Re will have significant start-up costs. Also, the Environment Agency’s investigation and collation of information from the hazard risk assessments, which it is charged with carrying out, will be a draw-down on the Flood Re fund. That means that, in the early years, there may be significant sums taken out of the pot. I understand that the intention is that the Government should put in plan B configurations to deal with that eventuality. However, given the sporadic and capricious nature of severe flooding, we do not have any time to waste in putting measures together to improve resilience and protect properties where they can be protected.

I have a technical interest in this: I am a practising chartered surveyor and property valuer. I am also involved in the parish and town council sector, as is well known. I can see the rationale behind an early start for communities and individual property owners coming together to create robust schemes. We need to do that as soon as the present flood waters have died down, as I hope they will. Time is of the essence, because we do not know when the next flood will come. There is a conundrum between the build up of the pot of Flood Re on the one hand and spending funds on resilience and protection on the other. In a later group of amendments, I will say a bit more about Flood Re, which is intended to cover a very limited and narrow range of circumstances. I will explain why I think a larger problem of an entirely different magnitude is lurking here.

We need to make a start. On the basis that the economy is improving, this is exactly the time when these investments need to be made. I will be very interested to hear what the Minister has to say about the pot, how it will be funded and how we get the early years’ work put in place. Like the noble Earl, Lord Cathcart, I obviously would not want to see the pot devoted to one large project to the exclusion of all others. I am sure that would not be the case. If we do not get this right, the credibility of FR is likely to falter. I think that is something on which the Minister can elaborate.

[Lord Crickhowell (Con)]

My Lords, one of the great advantages of modern technology is that you can discover something you did not know anything about while a debate is taking place. As this debate started, I chose to look at a Defra website on obtaining flood insurance in high-risk areas. At the top of the main page, a number of participants are indicated: BIBA, the Environment Agency, Which?, ABI, the National Flood Forum and Defra. Flood Re does not appear there yet. Can the Minister say how far the department has already gone down the road that is suggested here? This website, which contains a great deal of other valuable information on the steps you could, and should, be taking, already exists. Presumably, at some point Flood Re will be fitted into the whole arrangement. My only anxiety about the Flood Re participation is that indicated by my noble friend—namely, that against the present background, I only hope that there is a surplus in the early years because the fact is that we could have a situation whereby, far from having a surplus in the early years, we have a substantial loss. However, as there is a website and as a good deal of advice is being given by the department—I think it is rather good advice—perhaps my noble friend will indicate what the department’s overall approach is and how he sees Flood Re fitting into what is already going on.

Winter Floods

Lord Crickhowell Excerpts

Thursday 6th February 2014 Lords Chamber

[Lord De Mauley]

Yes, my Lords. Somerset County Council is working with Wessex Water to ensure that proper water sampling is carried out and to co-ordinate any mitigation measures that are needed. Public Health England has issued clear advice on how to avoid any risk to health. People in the affected areas are urged to follow that advice.

[Lord Crickhowell (Con)]

My Lords, as the former chairman of the National Rivers Authority—thankful that I no longer have various responsibilities in these circumstances—may I join in the expressions of sympathy for those who have suffered the horrors of being flooded and in the tributes to the Environment Agency’s ground staff and the other emergency services who have been doing sterling work? I welcome the capital commitments that have been made and the proposed changes to the Bellwin scheme.

I would like to take up two particular points that have arisen. The first is on the local accountability question. In my Second Reading speech on the Water Bill, I said that for the NRA, the cornerstone of our activities was catchment management and the existence of our regional advisory boards, chaired by a member of the board and involving all the locally involved organisations. I have a feeling that that arrangement, which was so crucial to our successes, was discontinued at some time. Can the Minister assure me that a similar arrangement will be put in place? On the subject of dredging, may I suggest that regular dredging year by year of the lower reaches of rivers is likely to be much more cost-effective than one-off occasional action to try to relieve pinch points that should never have been allowed to develop in the first place?

[Lord De Mauley]

First, I reassure my noble friend that proper, ongoing local co-ordination is vital and is being, and will continue to be, undertaken. On his comments on dredging, I hear what he says and am conscious that he is quite right that it is not good enough to do it once: you have to do this process continually. I agree with him on that.

Water Bill

Lord Crickhowell Excerpts

Thursday 6th February 2014 Lords Chamber

[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.

[Lord Whitty (Lab)]

My Lords, last week’s de facto alliance between the noble Lord, Lord Moynihan, and me extends in part to these amendments, in that it would be sensible for the Government to contemplate positively some of the latter amendments in the group, particularly those that inhibit the degree to which incumbents can effectively square the market against new entrants. However, my agreement does not extend all the way, I am afraid, particularly to the earlier amendments in the group. We must remember that the Bill is not quite as radical as all that, and, if it were to be a bit more radical, a lot of other things should follow.

We are, actually, introducing competition immediately only in a narrow part of the market. It is an important part, and there may be subsequent lessons to be learnt, but it is going a bit far to say that Ofwat’s central duty should be extended to promote competition. It already has a duty to look after the interests of consumers, where appropriate through competition, and we are making sense of that in a way that has not been done in the past 20-plus years of privatisation. However, we are not in any way legislating in this Bill for residential properties to be subjected to competition. Some noble Lords may think that we should be doing so, and it may be that I could be persuaded of that, but the fact is that we are not doing so here. If we were, that would raise a whole range of other protections and issues that would have to be considered.

It is also true—the noble Lord, Lord Moynihan, referred to upstream competition—that a number of hesitations were expressed around the Committee last week about triggering the upstream aspect to this, particularly in relation to abstraction reform occurring first. I would not want the noble Lord’s Amendments 115 and 116 about promoting competition to give Ofwat the impression that their provisions would override the need to ensure that abstraction protection was in place before competition in the upstream area was triggered.

Therefore, I cannot support this group of amendments as a whole. The Government may wish to consider one or two of them but, at this point, many of them go too far beyond the scope of the Bill or could be interpreted as doing so.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, as a new peer—like a new entrant to the water industry—I have been trying to understand this important industry: who does what and where power lies. At Tesco, I was regulated by more than 30 bodies, so I have some experience, but I have found this sector very hard to get my head around. My last job in Whitehall, under my elegant and noble friend Lord Heseltine, was about minimising and improving regulation, occasionally with success. I also worked on land drainage and flood protection in what is now Defra when the Thames Barrier was still being built, so I have great sympathy with my noble friend the Minister today—and for the victims of the floods.

When I look at a regulated area, I always try to think of the impact on business, consumers and others affected, and take a long-term view. From all these perspectives, the scale and complexity of this Bill—all 230 pages of it—worry me. It introduces more competition, which I very much welcome in principle, but we also have a new administrative spoke in the wheel of water management—the market operator, whose role the noble Viscount, Lord Hanworth, sought on Tuesday to bring into the light of day. My amendment would introduce a new clause giving duties to the Secretary of State and seeks to do two things. I will address the second part first because I think no one can object to it. It is about transparency.

I want an explanation and/or map, not on several websites as exist at present, but in one special place that would enable a new entrant, an investor whether in water resources or stocks, to understand the system. I want everyone’s duties set out clearly and transparently in one place. How helpful it would be to find in one place not only the list of bodies that can regulate or affect water and every kind of regulation but also exactly what their powers are and where and when they will be exercised. For example, this explanatory map would explain when the Environment Agency is able to intervene—a concern my noble friend Lady Parminter expressed on Tuesday—or when we can expect the delayed reforms on abstraction to take effect. It would help with the confusion over debt-collection powers, which we have just discussed. That clarity would also reduce overlap and waste. I know from working in business that having clear responsibilities that are well documented and understood cuts waste and improves implementation and compliance. We should of course put the map on the web, perhaps in a special internet app that all of us could download. The web is where enterprising people and new entrants search. It is cheap and easy.

The first part of my amendment is more contentious because it is about changing the way regulators, public servants and their ministerial masters behave. It is a requirement to minimise bureaucracy in every aspect of water, sewerage and abstraction, from negotiating at the highest level in Brussels to creating the humblest code. If lots of agencies and departments operate a cornucopia of rules and regulations, they spend too much time asking undertakers, consumers and each other for the same information, talking to each other and sometimes rowing, writing submissions and guidance, correcting errors and even fighting judicial reviews. Much of that activity is created by confusion and sometimes by inconsistency, which the proposed process would help to prevent. The bureaucratic burdens created cost money. That is not only wasteful but has to be paid for. I suspect that in the water system, with its regulated system of returns through Ofwat, this money often comes from consumers without benefiting anyone else—or it consumes taxpayers’ money, which, with the legacy of the deficit, we cannot afford.

This amendment would require all organisations involved in the governance and administration of water to think in a clearer, simpler way and, I hope, avoid the need for future deregulation and simplification. It should have wide support. I beg to move.

[Lord Crickhowell]

My Lords, my noble friend made a formidable speech at Second Reading in which she launched her assault on overregulation. Already today, dealing with other amendments, a number of noble Lords spoke about the difficulty of following the details of this legislation. I have explained that despite my experience of trying to regulate part of the water industry, I find the Bill almost totally incomprehensible. At Second Reading, I said that it is the most incomprehensible Bill I have come across in 43 years in both Houses. This is partly because it amends two other major pieces of legislation. Indeed, when I struggled to draft some amendments and decided the task was beyond me, I got down from the shelves in the Library one of those earlier Acts and realised that it was not going to get me much further. We have also been debating a series of regulations, some of them not yet known.

Quite clearly, the subject my noble friend has raised is of great importance. It has already been suggested that following the completion of the passage of the Bill the Government must try to bring together in a simple, co-ordinated way the principal points, clauses and requirements of the Bill. That argument has been strengthened, reinforced and added to by my noble friend. Her idea that the principal matters be brought together on a single website is admirable. I do not know whether anything quite like that has ever been done in government before.

The trouble with government departments is that they tend to be very self-contained and self-sufficient. Getting them to work together in a co-ordinated way is sometimes extremely difficult. That makes the job even more difficult for the consumer because if you do not know what the legislation and regulations are and you do not even know the appropriate department dealing with it, you are likely to be lost. Following the passage of the Bill, the Government must give some very careful thought to how the public, small businesses and those who are being regulated are to be brought to understand exactly what they have to do, what benefits may accrue if they do it and what penalties may accrue if they fail to do it.

There is an urgent requirement here, and it should be a priority, but perhaps not of the Minister’s department. I think it goes wider than that. It is probably an issue for the heart of government to see how this should be done. I hope that even if the Minister cannot give an immediate, clear-cut answer—and I suspect he will not be able to—he will undertake to take this matter away to his colleagues and ask that it is looked at by those who have the authority to see that something is done on this matter.

Water Bill

Lord Crickhowell Excerpts

Tuesday 4th February 2014 Lords Chamber

[Lord Crickhowell (Con)]

My Lords, perhaps I might take this opportunity right at the start of the Committee to make two general observations. First, I cannot think of any complicated Bill which has been so admirably handled as this one has, so far, by my noble friend Lord De Mauley. He has had a series of briefing meetings trying to explain the complexities of the Bill and has taken infinite trouble to write to those of us who expressed anxieties at Second Reading or on other occasions and give us reassurance.

Having said that, this is an extraordinarily complex Bill, as the noble Lord, Lord Whitty, indicated in moving his amendment. I am told that there are competitors but in my 43 years in both Houses, I do not believe that I have ever had to follow a more incomprehensible Bill. That is because it takes two major pieces of legislation, and one or two other less relevant pieces of it, and amends them in a series of complex ways. It then introduces a whole string of regulations, some of which are not yet defined and made. Simply finding your way through the Bill to find the clauses is extraordinarily difficult. When I thought that I might put down probing amendments to bring out one or two points, I abandoned the task as I could not begin to see where I could do it.

That leads me to make one other observation. When we are confronted with this kind of legislation, I wonder whether it would not be better simply to start with a clause which says, “This Bill cancels and replaces”—or whatever the word might be—“the following Bills”, so that it presents the legislation affecting the industry in one comprehensive new Bill which everyone can follow. What worries me is that once we have completed our proceedings in this House and the Bill becomes an Act, how on earth are the general public and those who have to operate it going to discover easily what the Bill’s contents mean for them? I wonder whether the Government have yet given any thought to having a clear way in which they could present things to the public, and indeed to the water authorities and the new people who we hope will be brought into the industry. Perhaps they could build on the kind of papers that my noble friend has so helpfully presented. There is a real problem and I hope that, as we go through these proceedings, the Government will give careful thought as to how we tell the British public and those who have to implement the proceedings what is actually in the Bill.

[Lord De Mauley]

Perhaps I might quickly respond to that. First, what I should have done when I spoke first was to thank those noble Lords who have come to discuss their concerns with the Bill with me. That has been an extremely informative and helpful process. I am grateful to my noble friend for his point; he is not the first to say it. As he kindly says, we have been doing our best to help noble Lords with the Bill and I will continue to do that. I also take his point about informing the wider public. If I may, I will take that point away and see what we can do.

--- Later in debate ---

[Lord Crickhowell]

My Lords, there is something to be said for learning from experience. The fact is, we have the experience of the Water Industry Commission for Scotland, which introduced highly successful arrangements from 2008. It is very clear in its recommendations on this particular point, and in the paper sent to some of us it has taken note of the debate that took place in the other place. It says specifically:

“In our view the prudent course of action would be to remove the direct link between the provider of resource services and the retailer/customer. This would remove any ambiguity that could be exploited by a large corporation to the detriment of all other customers. It would also allow a market to develop that could help in building resilience and improving our environment”.

On the front of the paper, it simply says:

“Some of these issues were raised and debated during the Committee stage in the House of Commons but as yet the Government has not been persuaded to accept amendments on the topics of substance we discuss in this note”.

Clearly, in the light of the good experience in Scotland and the very firm advice given to us, we need to know why the Government are not accepting the advice. I shall be very interested to hear what my noble friend has to say.

[Lord Whitty]

My Lords, I speak only because the noble Earl, Lord Selborne, and to some extent the noble Lord, Lord Moynihan, have rather pre-empted my speeches on the next group. Clearly we are on the same page. The reason I did not put my name to these amendments was that I was not entirely clear what they would do. I thought it would be better to establish a principle position on de-averaging and see what the Government thought. Clearly the Scottish experience is important. Given that experience, it is incumbent on the Government to tell us why they are not legislating in that way for England and Wales, and whether the precise amendments suggested by our Scottish colleagues would work under the Ofwat regime. Clearly the principle is an important one and it is one I will come back to on the next group.

--- Later in debate ---

[Lord Crickhowell]

My Lords, we come now to one of those probing amendments which, as I said earlier, I have refrained from tabling partly because I found the Bill so complex that I was not sure I was going to get it in the right place. I am not sure that the noble Baroness has got it in the right place, because here we are debating, I thought, Clause 8, and she has referred specifically and entirely to Clause 12. I can understand why the amendment she tabled was appropriate for Clause 12; I am not entirely sure it is right for Clause 8. However, it enables me to address some of the points about which I expressed concern at Second Reading.

Once again, I thank my noble friend Lord De Mauley for the extraordinarily thorough way in which he has dealt with anxieties expressed during the preparation and passage of the Bill. He wrote me a long letter even before Second Reading because I had raised the issues during one of his briefing meetings. He wrote me another letter after I had raised the issues again at Second Reading. This is the only part of the Bill that I had serious anxieties about. I think that these anxieties are almost certainly unfounded. My noble friend’s letter prompted me to pull down from the shelves of the Library the Water Resources Act 1991, which I suppose I should have known by heart from the days when I was chairman of the National Rivers Authority. That Act gives the authority the powers that are needed in this respect.

My noble friend also drew my attention to the debates in the Public Bill Committee in the other place, to which I think the noble Baroness referred. During those sessions, Trevor Bishop, head of water resources at the Environment Agency, was questioned on this issue. He was asked about the powers that the Environment Agency has and its relationship with Ofwat. Ofwat is required under the Bill as it is drafted to consult with the Environment Agency. Mr Bishop said:

“We operate a series of tests regarding an application for a licence. First, is there proof of legitimate need? If people apply for a licence on a speculative basis, they are locking up resources that could be used for economic growth or other aspects, so that is quite important. Is it efficient, in terms of the efficient and proper use of water, which is part of our duties under the Water Resources Act 1991? Would it have a negative effect on any other abstractor and is it sustainable with regard to environmental duties? Those are the three principal tests and we would object if it failed one of those”.

Then he was asked whether the Environment Agency would have the right to veto any current extraction licences. He said:

“We grant licences, so we have the power to grant or not grant licences subject to those tests. Ofwat is not looking for the power to grant licences; what Ofwat may do, with upstream competition and also, I think, with clause 12, is encourage or even force bulk transfers of water between participants, and that could affect the use of an abstraction licence. If it does so, we would need to be consulted, because a change of use in an abstraction licence could cause a problem for another abstractor downstream by using more water, or it could actually affect the water framework directive. It is important that we are able to protect against deterioration”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 57.]

What I think the Environment Agency is saying is that, yes, it has to be consulted. It is not Ofwat which issues the extraction licences, it is the Environment Agency. Ofwat is obliged to consult the Environment Agency. I suspect the Minister may also refer to the role of the Secretary of State in giving guidance on the Bill. If there are any doubts about what the respective duties are, I suspect they could be covered in that way.

Partly as a result of the diligence of my noble friend on the Front Bench in trying to foresee all the difficulties I might raise in Committee, I have got to the point where I am almost entirely satisfied that the safeguards are there. However, I will listen carefully to what is said further in this debate. It may be that on later amendments I will have to keep my ears open, but, broadly speaking, I am satisfied. The only additional point on which I should keep my powder dry is the introduction later of the new abstraction licensing regime, and whether that will raise any issues that are not adequately covered here. We will come to that in later amendments anyway. For the time being, I am largely satisfied.

[Lord Whitty]

My Lords, I can accept quite a bit of what the noble Lord, Lord Crickhowell, has just said, but it does not deal with the totality of the noble Baroness’s amendment, which I broadly support. Amendment 74 deals with bulk transfers which may well be within the context of an existing abstraction licence—it is only change of use if it is used for some other purpose. The Environment Agency does not have a licence control except in terms of change of use. It is an Ofwat responsibility, in increasing upstream competition, to arrange for these bulk transfers. It is complicated but it seems to me that if there is a serious environmental problem, the Environment Agency and its Welsh counterpart need some powers over and above consultation—which already exists—to stop those transfers taking place. I think that is really where the noble Baroness’s amendment is aimed.

The consultation rights already exist and the noble Lord, Lord Crickhowell, has spelt this out. In most cases, under the previous regime, Ofwat and the Environment Agency have certainly in recent years reached an amicable agreement. However, there is the possibility of a clash under the new regime, and in those circumstances the noble Baroness’s Amendment 74 would be appropriate.

[Lord Crickhowell]

I am grateful to the noble Lord. I do not have the papers immediately to hand but I have it in mind that if there is a change of use, that prompts Ofwat to have to consult the Environment Agency. I may be wrong on that and no doubt my noble friend will be able to deal with it.

[Lord Whitty]

If there is a change of use—for example, if you are a landowner with an extraction licence who now, under the new regime, wants to put it into the water system—then the Environment Agency has to give a change of use certificate, and will judge that in the same way as if it was a new extraction licence. So that control is there. However, if it is simply a bulk transfer within existing use and with existing abstractors, then that break is not there. I think I am right in saying that.

--- Later in debate ---

[Lord Cameron of Dillington]

My Lords, it seems strange to be talking about possible water shortages and abstraction reform in one of the wettest Januarys since records began. I remind noble Lords that January is named after the Roman double-headed god, Janus. If one head is pointing to the climate change extreme of floods, the other is undoubtedly pointing to drought.

I am not certain that either this group of amendments or the previous group totally grip the issue of likely water shortages and the much needed reform of the abstraction regime, which should be put in place as soon as possible. One of the lessons of the disaster of the Somerset Levels is that we should not wait until disaster strikes before taking action and rushing through reforms. At one of the side meetings last week, which many noble Lords attended, we heard that improvements in water supply and demand take a long time. We heard, for instance, how the mere extension of a reservoir in Essex took 20 years to arrange—10 years to prove the case and 10 years to get the planning through. Equally, universal metering, on the demand side—which of course is worth several reservoirs and is not dependent on rain—would also take a very long time to achieve, particularly if we are to bring consumers along with us, which is very important.

To avoid the likely dire situation that we will have in the future, we should use the Water Bill to ensure that disaster does not strike some time in the future. The dire situations relate to population increases, more demand for energy—energy is a huge user of water, as I am sure many noble Lords know—and more droughts, which are very likely. All these factors require greater flexibility in the management of our abstraction regime.

There are parallels with the energy industry. Some of us were dealing with the Energy Bill at the end of last year and tried to ensure that in the next 10 or 20 years’ time there would be a sufficient balance of supply to demand within the energy industry. All the time, we were aware that 10 years ago no one had looked carefully at this balance of supply and demand. We are quite likely to face power cuts in the next couple of years—as many noble Lords are aware—because of this lack of forethought in the past decade.

During the passage of the Energy Bill, my noble friend Lord Oxburgh, who I am sorry to see has left his place, tabled an amendment to establish a council of wise men who would look at the energy industry in the long term, see what was needed and ensure that the right precautions were in place. If the water industry had a group of wise men now, they would be telling us to put a road map in the Bill to take us as speedily as possible towards overall abstraction reform in universal metering and not to wait until the next decade, which seems to be the form, to put this in place.

I agree that abstraction reform is a serious issue. There will undoubtedly be winners and losers in the process whose interests must be given voice in the democratic process. However, I am fearful that Amendment 104, which I am sure the noble Lord, Lord Whitty, will come to in a minute, might put an even greater brake on the introduction of reforms than the long drawn-out process seemingly currently envisaged by Defra. If I have misunderstood Amendment 104, I look forward to being corrected. In the mean time, I strongly support Amendment 96 in the name of the noble Baroness, Lady Parminter.

[Lord Crickhowell]

My Lords, the noble Lord, Lord Cameron, asked if it was right to discuss the possibility of drought in the middle of floods. I can assure him that it is absolutely right. My experience in the NRA was that, whenever we had a flood it was almost immediately followed by a drought, and whenever we had a drought it was almost immediately followed by a flood. It was an almost invariable rule, so I am sure that he is right that we should be addressing these issues.

When speaking to my noble friend’s previous amendment, I said that the one area to which I might want to return was reform of the abstraction licensing regime. I spoke about it in some detail at Second Reading and I do not want to repeat what I said then. It was one of the central problems that we had to deal with in my time in the NRA.

I disagree with the noble Lord who has just spoken when he says that the Government should get this issue into the Bill and that it is very urgent. My understanding is that the Government are getting on with the kind of review and detailed discussions with just the sort of people that he suggested they should be meeting. However, they have pointed out that the issue is extremely complicated and cannot be rushed. While I, perhaps on the basis of experience, have always been one of the first to criticise the timescale on which some government departments operate, I have a good deal of sympathy with the need to take adequate time on this. This view was reinforced by the fact that at one of the briefing meetings, the representative of—I think—Anglia Water told us that it was undertaking fairly basic research into the resources available in the region. It was suddenly brought home to me that we do not know a great deal about the availability of ground water resources in many of our regions. We know how much water is going down the rivers, but we still need quite a lot of information before we have the kind of policy that we all want to see.

While we must get on with it, I am not sure it is right to think that we can put into this Bill the requirements that will follow the result of this important inquiry and examination. However, my noble friend Lady Parminter is right in thinking that there should be safeguards in the Bill so that when the results of the review come through, we can be certain that the necessary steps and measures are taken. I am not sure how that should be drafted or whether the noble Baroness has got the drafting quite right, but I sympathise with her desire to write safeguards into the Bill so that we are not left with a great gaping hole when we get the results of the very important review that is under way. I will therefore listen with great care and interest to what the Minister says in reply to this debate.

[Earl Cathcart (Con)]

My Lords, I declare that I farm in Norfolk, I live in a band H property, I have a bore hole for domestic use and I have spent about 30 years working and underwriting in the London insurance market.

I want to talk about two aspects. One is bringing all abstraction licences in line with today’s rules, conditions and requirements, and the other is abstraction charges.

At Second Reading I said that,

“it is cackhanded to be bringing in upstream competition in water trading before the existing water abstraction system has been reformed, given that the Environment Agency says that many rivers are already overabstracted and overlicensed”.—[Official Report, 27/1/2014; col. 1025.]

Just about everybody agrees that reform is sorely needed. The question is when it should take place. Many are impatient for reform, and I include myself, but the Government, in their handout, Upstream Competition and Abstraction Reform, say:

“We should not rush this: if we get it wrong, there will be real consequences for a range of business and industry, including farmers, food manufacturers and the power sector, as well as the environment”.

Quite so—they do not want to throw the baby out with the bathwater. The handout goes on to say that any abstraction reform will take place “in the early 2020s”. That could be 10 years away, which, to say the least, is disappointing.

Is there anything that we can put into this Bill that will help improve the current system? I believe that there is. My noble friend Lord Crickhowell mentioned Trevor Bishop, who is head of water resources at the Environment Agency. When he gave evidence to the Commons Committee, he said:

“Most of the damage due to over-abstraction is because the licences were passed a long time ago”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 63.]

The older licences are still allowed to abstract, regardless of whether water is abundant or scarce, but there are restrictions on newer licences. The hands-off flow condition allows the Environment Agency to reduce or stop abstraction altogether if river and ground water levels fall, but this does not apply to the older licence holders—the vast majority of total abstractions. This puts newer licence holders and, indeed, the environment at a disadvantage. Surely, the first step should be to bring all licences up to date with modern requirements, especially the hands-off flow condition and, indeed, any other condition deemed necessary. I would like to see a provision in the Bill similar to the proposed new paragraph (c) in Amendment 74 in the previous group, which says that if the variation,

“cannot be achieved by agreement”,

the authority can vary the licence by order or terminate it. This would bring all licences in line, protect the environment and give flexibility to vary all licences as and when necessary. It would also bring this in now rather than waiting for 10 years

The next thing is abstraction charges. I looked at the Environment Agency website, which lists eight charging regions in England and one in Wales. There are two charges: the standard charge and the environmental improvement charge. The environmental improvement charge is different for water companies and for non-water companies, which I presume includes energy companies. The standard charges are not standard at all—they vary region to region. Of the eight regions in England, the Anglian and Northumbrian regions are charged the most, at about £28 per 1,000 cubic metres of water, while the north-west region is only charged about £12.50 per 1,000 cubic metres of water—less than half. Why is there this variation when it is called a standard charge? The Minister might say that the Anglian region, being in an environmentally sensitive area, attracts the highest charge in the country to cover the costs of managing the resources available. However, here I got muddled, because that is surely an environmental issue, and any extra charge ought to be levied under the environmental improvement charge, not the standard charge. Can the Minister explain?

I move on to the environmental improvement charge for non-water companies. Again, the Anglian region pays the most, at £13.71 per cubic metre of water, which is what one might expect, given that it is an environmentally sensitive area. The lowest environmental charge is 62p, for the Yorkshire region, while two regions—the Midlands and Northumbrian regions—pay no environmental improvement charge at all. Why? I do not understand the logic behind the charging and would like the Minister to explain.

Water Bill

Lord Crickhowell Excerpts

Tuesday 4th February 2014 Lords Chamber

[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.

[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)]

My Lords, I am very grateful to the noble Lord, Lord Whitty, for moving his amendment and to my noble friends for speaking to theirs, as well as for the debate as a whole on retail exits and for an understanding of the concerns of noble Lords.

Amendment 98, tabled by the noble Lord, Lord Whitty, and Amendments 107 and 132, tabled by my noble friends Lord Selborne and Lord Moynihan, take two different approaches to enabling incumbent water companies to exit the non-household water and sewerage retail markets. Amendment 98 would provide for such exits through regulations produced by the Secretary of State, and Amendments 107 and 132 through transfer schemes produced by incumbent water companies and approved by the Secretary of State.

For completeness, I should be clear from the outset that new entrant licensees may enter and exit both the retail and upstream markets whenever and however they wish. It could be as simple as surrendering their licences to Ofwat, and their customers could then be distributed to other licensees through the supplier of last resort regime introduced by Clauses 31 and 32. Alternatively, they could sell their customers or their infrastructure to other licensees ahead of surrendering their licences. These companies operate only in the competitive part of the market, serving non-household customers who will be able to switch to another retailer if they are unhappy with the service they receive.

However, these amendments deal with the thorny issue of retail exits by incumbent water companies, the quasi-monopolies appointed in each area of England and Wales. We have heard a range of arguments for retail exits at Second Reading, during the passage of the Bill in another place and now this evening. This is a complex issue with far-reaching ramifications for both customers and investors. It is clear that the intention, at least of Amendment 98, is to allow exit only from the non-household market, leaving household customers with the incumbent companies. However, this partial form of exit would leave many questions unanswered about the future relationship between the incumbent water companies and their customers in both the household and non-household sectors. We want our market reforms to lead to real improvements in services for all customers, including of course household customers, and we do not consider that making such a change at this time would be in the overall interest of customers. Before making potentially far-reaching changes to the relationship between all customers and their water companies, we would need to ensure that they were effectively engaged. The Consumer Council for Water, the independent organisation responsible for making sure that the customer voice is heard, supports the Government’s approach to retail exits.

We want to see a successful non-household retail market. The Bill sets a framework for new-entrant retailers to enter the market on an equal footing with the retailers of the incumbent water companies. We expect Ofwat to use its regulatory powers to make sure new entrants can be confident they are competing on a level playing field. Clause 23 introduces a shared obligation between the Secretary of State, Welsh Ministers and Ofwat to take steps to reduce the likelihood of incumbents discriminating in favour of their own retail businesses or associate licensees. However, retail exits are not about delivering a level playing field. They are about some incumbents wanting to exit because they do not want to participate in a competitive retail market and would prefer to stop offering services to any non-household customers in their area. While we might expect there to be a more active market in England from 2017, a scenario in which incumbent companies lose most or all of their customers is highly improbable. Incumbents sitting around while customers disappear is, in our view, an unlikely scenario.

The point we are making is that this is evolution not revolution. Many non-household customers may choose to stick with the incumbent supplier because the incumbent supplier improves its services as a result of these reforms. Where customers choose to switch, we anticipate a growth market where innovation and competition lead to benefits, both environmentally and in customers’ bills.

Incumbent water and sewerage companies are given clear responsibilities for a reason. Their unique status as virtual monopolies requires some commitments from them in return. This means that following a retail exit, the incumbent might still be required to provide retail services to any non-household customers that move into the area, or when new non-household developments are completed, or if the market failed. Incumbents are the default supplier of first and last resort regardless of whether they are able to hive off their existing non-household customers to a licensee. Allowing partial retail exits would also open the door to forced separation. We have already discussed the risks relating to separation.

It was incumbent water companies themselves and their investors that persuaded us of the risks to future investment should separation be forced onto the sector. They told us that forced separation would increase risk to investment and push up costs to customers if they had to renegotiate their finance packages as a result of restructuring their businesses. Neither companies nor their investors have told us that they have reversed their view on this.

Amendment 132 would prevent the new Competition and Markets Authority—but not Ofwat—using these provisions to force separation as a remedy to address issues to do with discrimination. We doubt that such a mechanism would be appropriate. More importantly, for the reasons I have explained, we believe integrated companies that are able to provide services to customers within their area of appointment are the right approach for the time being.

Let us be clear: any decision on separation should be made by Ministers and Parliament. We are not prepared to take the risk of any restructuring, or even the potential for it, destabilising investment or increasing costs or even supply risks to customers. While all these amendments envisage the Secretary of State permitting exits, this will also be open to challenge. I have already said that there are very good reasons for not allowing exits yet.

I hope that noble Lords will appreciate that there is more to this matter than simply allowing some incumbents to exit the market. We are not ruling this out for the future but we have a responsibility to consider all the impacts on household customers and on choice in the competitive markets before putting provisions into law.

The noble Lord, Lord Whitty, and my noble friend Lord Moynihan, suggested that we should allow failing companies to exit. The focus of many comments has been the exit of failing companies. Advocates for exit assume that the large players will swallow up the small. These are the companies, however, that customers value for the quality of their service and are often the most efficient suppliers of retail services. Do we really want to see consolidation that loses these efficient and valued companies?

My noble friend Lord Moynihan referred to Macquarie. I simply say to him that its figures need to be looked at with some care. It assumes complete exit, including from the household market, and that there would be no risk of separation. That is not the model proposed by these amendments and it raises some significant issues about the protection of household customers.

It has been suggested that an OFT report—Orderly Exit, published in December 2012—supported the case for allowing retail exits. That report is about designing continuity regimes to allow orderly exits from the provision of public-facing services without interrupting the delivery of services to customers when a business becomes insolvent or otherwise fails. It is not about allowing a company to decide whether it wants to continue with some of its statutory obligations and to get out of others because it no longer feels it wants to compete. The regulatory regime for incumbent water companies already provides for orderly exit in cases of insolvency and for enforcement purposes.

The deadline for the retail market opening in April 2017 is challenging but achievable under the conditions set out in the Bill at present. That would be put at risk if we were to legislate for further structural changes to the industry at this time. Given what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.

Water Bill

Lord Crickhowell Excerpts

Monday 27th January 2014 Lords Chamber

[Lord Crickhowell (Con)]

My Lords, I have not followed developments in the water industry closely since handing over my responsibility for the National Rivers Authority in 1996. As a consequence it came as a shock to read several sections of the White Paper, Water for Life. Paragraph 17 states,

“we need a new approach that mobilises local groups and draws on new sources of funding. Therefore this White Paper takes forward the new ‘catchment-based approach’ to water quality and diffuse pollution launched earlier this year”.

In paragraph 21 we read:

“The White Paper explains how we will learn lessons from around 70 catchment scale pilot projects, and provide intensive support to 25 of them, as a precursor to rolling out this approach across the country”.

In my last chairman's report for the NRA in 1996 I commented about the role of our regional advisory boards, and said that,

“equally important has been the system of catchment management planning and consultation that we established. I cannot emphasise too strongly our belief that these two features must remain as cornerstones of the new agency arrangements”.

I went on to say that,

“it was a great relief that in the last month of our existence we finally received approval to proceed with a trial of statutory water quality objectives in eight catchments. I very much hope that it will be possible to proceed rapidly with the introduction of SWQOs on a wide scale … it has taken too long to get this far”.

In genuine bewilderment, I ask: what on earth has been happening over the interval of more than 17 years? How is it that what was absolutely central to the work—and, I would add, success—of the NRA is now presented as the new catchment-based approach? How is it that after we had finally attained the approval of statutory water quality objectives in eight catchments, after delays that I attributed to,

“the lengthy timescale of government consideration”,

lessons are now to be learned on pilot projects? Do the 10 pilot catchments that we are told the Environment Agency is hosting embrace the eight we had approved all those years ago? I suppose I must at least welcome the fact that our cornerstone is again to be placed back in position.

I intend to comment on only three aspects of this very thick and complex Bill. The first is the duty to secure resilience. Ofwat is required to balance all its duties. They include the existing sustainable development duty, to which is to be added a new resilience duty, making sustainable development as central to the work of the economic regulator as it is to the work of the environmental and quality regulators. If I have understood this correctly, this is a very welcome step forward, at least from the situation with which I had to deal. I described that situation on 22 November 1994 in a speech to the parliamentary environment group, when I said:

“It now seems clear that when the Water Act was passed insufficient thought was given to the relationship between the regulators, of which the NRA is one, and Ofwat. It was not widely foreseen that the Director-General would see it as his duty to stand between customers, by which he meant those who paid water bills, and the environmental regulators, and to argue strongly that the pace of regulation was too hot. Still less was it foreseen that the Director-General would strongly press the case that so substantial were the demands of the European Union that no other additional regulatory requirements should be permitted”.

The vigorous, though always courteous, arguments that I had with Mr Byatt, the director-general, were made worse by the fact that initially the estimates of costs that he obtained were flawed and exaggerated. Wisely, Ministers accepted our arguments and approved expenditure that allowed for a large number of the most urgent cases. In my speech, I said that,

“before the next review there is an urgent need to find a better way to conduct this debate”.

Things then did move on and, since 2005, Ofwat has had a statutory duty to contribute to the achievement of sustainable development.

The debate continued and, after the 2011 review by David Gray, the Government issued statutory guidance to Ofwat in a strategic policy statement. This provided a strong steer to the regulator on its interpretation of the sustainable development requirement. Clause 24 of the Bill requires Ofwat to act in accordance with any such statement issued by the Secretary of State. The position is also to be strengthened by the new resilience duty designed to deal with long-term pressures.

The water industry has welcomed the new requirement as it enables it to plan and manage its finances taking account of long-term needs, with the knowledge that these are now much more likely to be approved by Ofwat. Clearly, these changes and their practical consequences need to be examined very closely in Committee; but I am green with envy that the regulators in future are unlikely to face the difficulties that confronted Ian Byatt and myself.

Another subject will need even more thorough examination and has been referred to by a number of noble Lords: water abstraction. In the NRA, we were confronted with huge difficulties as we tried to deal with historic abstractions, often providing essential supplies while doing devastating damage to rivers and the fisheries and wildlife they sustained. The Government say they are,

“reforming the abstraction management system to make it more flexible and resilient to climate change and population growth”,

and have sought to refute the suggestion that,

“the requirement in the resilience duty to respond to environmental pressure could lead to over-abstraction to meet demand … where water resources are under pressure”.

The water companies’ statutory right to compensation for losses resulting from modifications and revocations of their abstraction licences is to be removed, with companies apparently compensated through the Ofwat review process. Similar changes are being made by the Welsh Government. The Environment Agency regulates abstractions, and Ofwat is required to consult the agency before issuing a water supply licence. So far, so good. But—and it is a big but—very good though all this sounds, there are a number of complications, some of which have been referred to by the noble Lord, Lord Whitty, on the opposition Front Bench. The upstream reforms set out in the Bill will make it easier for new players to enter the water sector, possibly using new water sources. What impact will that have on abstractions? The Government are considering how to bring exempt abstractors into the licensing regime. Furthermore, over a longer period the Government intend to reform the abstraction regime to make it more flexible and resilient to the challenges of climate change and population growth. Those reforms are not part of the Bill and consultation is taking place. Information about the amount of groundwater available for abstraction is not reliable, and fresh research is being undertaken.

The Government say we should not rush these reforms and they are right, but it is going to make examination of this part of the Bill in Committee difficult—with the cake half cooked, so to speak. I raised some of these issues at one of my noble friend Lord De Mauley’s briefing meetings, and he has taken the trouble of sending me what he describes as a comprehensive response. It is comprehensive and, as I suspect we will hear most of it in Committee when he deals with any amendments to this part of the Bill, I will say at this stage only that phrases such as,

“confident that the regulatory framework, correctly applied, is fully capable of managing these risks”,

and,

“confident that there is no practical risk of an unsustainable increase in abstraction”,

coupled with the information that:

“The Welsh Government has taken the decision not to implement all of the upstream reforms at this time”,

suggest to me that these are matters that need to be probed thoroughly. That view is reinforced by the admission that:

“Abstraction reform is complex both in economic and environmental terms”.

We are also told that:

“The upstream reforms will require careful planning and close working between the water industry, regulators and customer representatives. To allow sufficient time for this, the main upstream reforms will not be implemented in advance of the next Price Review which will set charges for 2020-2025”.

I can imagine what Lady Thatcher would have snapped at me if had proposed a policy with that timescale. “That is longer than the duration of either world war”, she would have said. It will be a long time before any of us who are still alive will know whether we have got it right or wrong.

Perhaps it is because many years ago I was an insurance broker and Lloyd’s underwriter that I feel uncomfortable about the flood insurance clauses and the idea of a levy-funded pool for high-risk households, worthy though the aims may be, and of course I share the sympathy that others have expressed for all those who suffered the horrible fate of being flooded. There is the objection first raised by Lloyd’s that it was not aware of any UK precedent for this proposal to require UK businesses to enter into particular contracts, very likely to be loss-making.

To my mind, it is one thing for insurers and policyholders in general to contribute to the costs arising from properties that are only very rarely likely to be flooded, or to provide against exceptionally severe events, but quite another to provide for those who live in properties on flood plains where building should never have taken place. Time and again I have observed developers, with the consent of reckless planning authorities, ignoring advice about the probability of flooding, going ahead with large projects in places where they should never have taken place and then complaining that flood defence precautions were inadequate. Definitions of “high flood risk” and “very high flood risk” and a huge amount more are to be covered by regulations. The Government may be laying a minefield for themselves, and I worry that the scheme may be overtaken by events.

Against that background, I have been astonished to read about possible plans for two new towns in the south-east—one at Yalding, a village through which I drive every time I visit my older daughter and her family in Kent. My astonishment arises not from the fact that Yalding has just been flooded but because it has quite frequently been flooded in the past. It does not take much observation to form the view that it will be very hard to prevent it being flooded again in the future. Can anyone seriously be planning to put a new town on that flood plain? If they are, is it going to be equipped with canals and boats and named New Venice?

Finally, I wonder whether it is wise to pass legislation that is as dependent as is this Bill on future consultation and future unknown regulations.