Water Bill

Lord De Mauley Excerpts

Tuesday 4th February 2014 Lords Chamber

[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.

--- Later in debate ---

[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.