Common Organisation of the Markets in Agricultural Products (Wine) (Amendment, etc.) Regulations 2021

Lord Moynihan Excerpts

Thursday 15th April 2021 Grand Committee

[Lord Moynihan (Con)]

My Lords, it has taken me a while to come to terms with the reality that my noble friend the Minister has taken responsibility for an error in his department—a very rare occasion indeed—but his outstanding speech and excellent explanation of the GIs completely carried the Committee. We fully appreciate the way he has come back to us to give us the background.

I had the privilege of serving on the European Union Committee’s sub-committee in 2007 that undertook a detailed analysis of European wine, entitled A Better Deal for All. I had the great privilege of working with Lord Plumb at the time. I stand by all the committee’s recommendations, many of which are still relevant in the context of a post-Brexit UK, but possibly more relevant to the bureaucrats in Brussels. I am also a long-standing unpaid member of the Haberdashers’ Company’s wine committee.

These are simple and straightforward regulations and, as my noble friend the Minister said, they clarify a technical error, which is welcome. However, my noble friend’s presence at the Dispatch Box on this subject provides the Grand Committee with an opportunity to hear about a key issue during the current round of trade negotiations with wine-producing countries, being ably led by the Secretary of State, Liz Truss, who is doing excellent working securing future arrangements between the UK and a number of countries producing new world wine.

The issue in this context that should concern your Lordships is the future regime for wine import certificates, first in the context of the EU and separately in the context of all wine-producing countries with which we trade. Now that we have left the EU, I can see no national interest in nor justification for the retention of wine import certificates. Freed from unnecessary bureaucracy, the retention of these forms is a cost on the Exchequer and on the industry. In fact, they are no use, so much so that my noble friend the Minister would find it difficult—I would go as far as to say impossible—to name any other bottle of potable alcohol from vodka to rum that requires them. All are well served by standard customs paperwork.

Yet the retention of wine import certificates, which is exclusively a decision for government and Parliament, is to place an onerous and costly process on those merchants and buyers—the restaurants, pubs and bars—that buy a wide selection of wines as their unique selling point and which now have to face the bureaucratic process of obtaining a physical stamp for wine imported, which has no safety benefits and above all no consumer protection advantages. After all, if there were any consumer protection gains, we would have them for imports of every other bottle of alcohol.

With safety and authenticity being guaranteed by the importer, I am a loss to understand why the Government are looking to retain these import certificates. After all, one significant advantage of Brexit consistently argued by the Government with which I was in complete agreement was to ensure a substantial reduction in unnecessary red tape, freeing Parliament to promote freer trade and erasing unnecessary bureaucracy.

I ask my noble friend the Minister just one simple question: why does he of all people—bright, questioning and perceptive as he always is—want to keep VI-1s? What is their benefit? Can it possibly be greater than the bureaucratic costs and processes that they cause? These forms require a physical customs stamp on entry into the UK, duplicating everything that is necessary in normal commercial documentation. They do not address the historical challenge of counterfeited wine since, should there be another Australian scandal, that would not be discoverable on the face of the certificate. Counterfeited wine would be stamped at the customs point, so I cannot see how possible issues of fraud are in any way covered by these certificates.

Possibly this bureaucracy is to be retained to protect English producers, but surely my noble friend the Minister and the Committee would not conceive of resorting to red tape to protect our outstanding English producers, who can succeed on merit and quality even if they currently produce less than half a percent of total wine consumption in the UK. So what do the Government see as the benefit of VI-1s?

A simplified version of the form is good for the European Union, but the answer to that challenge is to welcome the deferred date for the EU introduction, which is now the end of the year, and use that time to introduce digital forms, moving with pace from the CHIEF to the CDS system. That is the least bad outcome with Brussels and is surely acceptable to everybody in the industry. However, importing to the EU is, of course, different from the rest of the world, where surely there is no need for these forms at all. After all, most of the wine imported from Australia is in bulk. While there may be 10,000 or more suppliers in the EU supplying major retailers in the UK, only a handful export from Australia, and the majority do so in bulk.

What can it possibly be that would make the exceptionally popular and able Liz Truss so unpopular in bars and restaurants the length and breadth of the UK, not to mention the dent in popularity of my noble friend the Minister when the Bishops’ Bar reopens? The only answer I can come up with is that this is a pawn in an otherwise much larger series of trade negotiations. If so, the Minister will understandably have little to say, particularly in answer to my only question of what is the value of a VI-1 certificate. If that is the case, I totally understand and would not wish to weaken the Government’s negotiating position in the trade negotiations under way this year. If I am wrong, then I hope this House will return to the subject in due course and be united in seeking to end this unnecessary and costly bureaucracy—costly to the Government, to the wine industry in the UK and, above all, to the consumers, who will pay the price for the bureaucracy we hoped we had left behind on 31 January 2020.

Agriculture Bill

Lord Moynihan Excerpts

Committee stage & Committee: 1st sitting (Hansarad) & Committee: 1st sitting (Hansarad): House of Lords
Tuesday 7th July 2020 Lords Chamber

[Baroness Kennedy of Cradley (Non-Afl) [V]]

My Lords, I support the general aim of Clause 1 to move to a system of public payments for public good, and putting in the Bill a list of purposes for which assistance could be provided. Amendments 6 and 9 in the name of the noble Lord, Lord Addington, add to this clause that measures which would ensure enhanced public access to the countryside can qualify for financial assistance. This is welcome and necessary as, despite improvements to our beautiful countryside in recent years, in many places access is not guaranteed. This can be because the routes are inaccessible or do not exist. By introducing these amendments, landowners and others will be encouraged to support greater access to the countryside by improving rights of way, stiles, gates and signage and developing new paths along field margins. If the noble Lord, Lord Gardiner of Kimble, is not minded to accept these amendments, can he set out clearly how the Government intend to achieve the intent behind them and encourage greater access to the countryside?

[Lord Moynihan (Con)]

My Lords, I congratulate the noble Lord, Lord Addington, the noble Baroness, Lady Grey-Thompson, and others on their focus on access to and enjoyment of the countryside, and the sport and recreation policy element, which I know the Minister shares.

These amendments seek to establish a clear commitment from the Government that, under these new arrangements, public funds will be directed towards delivering improvements in public access to the countryside in a balanced way for all users, as the noble Earl, Lord Devon, rightly emphasised, particularly for those engaged in sport and recreational activities which have over the years established a good, close and effective working relationship with farmers and landowners, particularly where rights of way exist, not least to and on water. I am pleased that point was emphasised by the noble Baroness, Lady Grey-Thompson. It is also important to recognise in this context the strength of argument put forward by my noble friend Lady Hodgson on the important equestrian issues at stake. The Bill provides an excellent opportunity to bring improved public benefits. I hope farmers and landowners will be encouraged not to restrict access for any person on any inland waterway or lake which forms part of that land for the purpose of open-air recreation.

I hope the Minister will find ways to ensure fair and equitable access to our countryside for all sustainable recreational pursuits on land and water at a time when fitness and activity levels are in crisis. I hope he will also agree that we should strive to deliver a new and improved regulatory regime that drives and enhances improvement and access to the maintenance of existing public rights of way for all users of the countryside. Enhanced access to the countryside and improved protection of the existing path network have been called for today in your Lordships’ House. I hope the Minister will signal his support for these objectives, to which I add my strong support. I believe he can, because I hope he will emphasise that in Clause 1(1)(b) it is possible to deliver these aims. In future, I hope that we in this House will hold this and future Governments to the important effect that that clause should deliver in the interests of a wider sport and recreational policy and an enhanced enjoyment of the countryside.

Flood Defences

Lord Moynihan Excerpts

Wednesday 26th November 2014 Grand Committee

[Lord Moynihan (Con)]

My Lords, I declare an interest as I have recently taken on a chairmanship at Buckthorn Partners, a partnership which identifies and seeks to make investments in the mining, oil and gas services and water industries. Our main objective is to invest in clean and used water technologies with applications in the Middle East, for example in desalination-driven markets and in countries facing drought and water shortages, such as Saudi Arabia. This may seem a far cry from the subject of our debate—flood defences—and it is, as we have made no investments in the UK water industry and certainly not in flood protection. However, I adhere strongly to the principle that if there might be construed to be any doubt over a declaration of interest, then declare, declare, declare.

This week sees the culmination of a series of events reflecting on the 25 years since water privatisation, the original Bill for which I was ministerially responsible during its parliamentary stage in another place. There are good reasons for celebration. Both parties have subsequently worked closely together to ensure that one of the principal objectives of the Bill, that of ensuring that the water companies gained access to long-term capital markets to make the substantial necessary investments required of the sector, was achieved. The separation of functions in the industry between the National Rivers Authority and the industry recognised the need to ensure that the gamekeeper did not have the opportunity to turn poacher. Emphasis was placed on the equally important requirement for long-term investment in flood defences. Subsequently, with increasing rather than decreasing all-party consensus as the ideological divide over the original privatisation dissipated, a great deal of further work has been undertaken by Governments of both political complexions.

On the question of adequate flood defences, I would argue that the issue is not how much investment is made, but how effective that investment is. Only this year, the hard work of my noble friend the Minister paid off when the House recognised and acted upon the fact that water resources were under significant pressure in parts of the United Kingdom and water supply constraints were predicted to spread in the future. The need to secure future investment was realised and the importance of resisting considerable upward pressure on water bills recognised. In all aspects of the water industry, the key issue is the quality of investment programmes and this is nowhere more so than in flood defences and measures to combat coastal erosion. In that context, my noble friend Lord Deben has done outstanding work on the protection and strengthening of coastal defences, particularly on the east coast. The Minister has achieved his aim of delivering more resilient water supplies and, in the context of water management and flood protection, a new flood insurance scheme for domestic properties and a new duty for the regulator to focus on the long-term resilience of water supplies.

Consumers, with their concerns echoing in the press, simply and effectively amplified by dramatic photography, cannot understand why we apparently move from damaging floods and excess rain to drought orders in a matter of months. They rightly look to Government to provide adequate investment in flood defences, a strategy to conserve water in the summer months, and a national plan of reservoir management to safeguard this most required commodity for our survival. One reason why the Minister needed to make progress on the Water Bill a year ago was to give time to establish a new insurance scheme for those in areas of high flood risk to secure affordable insurance cover. That progress is being made on the introduction of Flood Re is to the significant credit of the Minister and his team. I would be grateful if he could update noble Lords on the precise level of progress being made.

The scale of the problem was not only one for the much publicised Somerset Levels and the countryside. It is important to place on record the impact of the 2013-14 floods here in our capital city. As cited in the evidence from London councils at the time, floods can clearly devastate the economy of our high streets, many of which contain SMEs and charity shops. They are affected by damage not just to property but also to stock, and it can take a long time to recover. The flood hazard and risk maps published by the Environment Agency just under a year ago show that more than 166,000 non-residential properties are at risk of flooding in the Thames area, nearly 76,000 of which are in London.

The broader challenge is to ensure we have coherent policies in place to cope with the inevitable effects if we do not address the need for adequate flood defences, and so I would ask the Minister to consider the following points when he comes to answer this debate. How far have the recommendations of the Pitt review, referred to by the noble Baroness, Lady Royall, been implemented, and in particular progress on flood forecasting? How prepared are we for future floods and how effective does he estimate our current level of flood defences to be? Will he give an update on his assessment of the effectiveness and life expectancy of the Thames Barrier? Have we increased the number of specialist flood rescue teams on standby, as promised, and whether the record levels of capital investment in projects on his watch are, in his view, effective and adequately audited for their effectiveness?

I conclude by picking up on the important subject of the Somerset Levels raised by the noble Baroness, Lady Royall. The Levels pose a unique challenge and I ask the Minister to give due consideration to introducing a new legislative framework for the area. I have long believed that the Norfolk and Suffolk Broads Authority, formed under the Norfolk and Suffolk Broads Act 1988, in which I declare an interest having taken the Bill through another place, has been an important example of a special statutory authority managing an area and thus affording a level of co-operation and protection similar to a national park. I believe it may be an appropriate model for the Somerset Levels and I would ask Ministers to give it due consideration in the future.

I conclude with the observation that the key to avoiding widespread damage to property from flooding is co-operation between the agencies, effective investment and flood prevention and asset resilience through regular and sustained maintenance, and investment in our flood defence assets and watercourses. Such measures are always preferable to clean-ups. I hope the Minister will be able to throw more light on the important issues raised in this debate and I congratulate the noble Baroness, Lady Royall, on having secured this timely opportunity, as we head into winter, for parliamentary consideration of the level of adequate flood defences throughout the United Kingdom.

Water Bill

Lord Moynihan Excerpts

Tuesday 8th April 2014 Lords Chamber

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

My Lords, government Amendments 1 to 12 and 18 address the subject of retail exits. The question of whether an incumbent water company should be able to exit the market for retail services to non-household customers has been discussed at all stages of the passage of the Bill through your Lordships’ House and another place. Most recently, it was raised in debate on amendments tabled by my noble friend Lord Moynihan and the noble Lords, Lord Whitty and Lord Grantchester, at Report.

Having listened extremely carefully to the thoughtful and well informed contributions to the debate on retail exits, I undertook to consider the matter further, with the aim of bringing back government amendments to respond to the views of the House. The proposed new clauses are intended to do just that.

The attached provisions reflect the key policy objectives of the previous amendments on this subject. They offer incumbent water companies the option to exit voluntarily from the non-household retail market, subject to the consent of the Secretary of State. I said before that this was not a simple matter, and indeed it is not. Enabling exit will require a number of changes to the Water Industry Act 1991—for example, to address issues around the incumbent’s duties to supply and other statutory obligations to customers.

In making this commitment, I put on the record that the only practical way of delivering this objective would be to take wide-ranging powers, and that is what the amendments seek to deliver. Although the enabling powers are, of necessity, broad, we have sought to provide as much detail of the nature of the changes to be made as possible. I recognise that your Lordships have limited time in which to undertake detailed scrutiny of these clauses. However, as I said, the broad policy has been widely discussed throughout the passage of this Bill.

Further work will be needed to consider the practical implications of exits and to develop the detailed policies that will underpin the use of these powers. Broad consultation will, therefore, be essential. Following these detailed discussions with all interested parties, there will be a further opportunity for parliamentary scrutiny under the affirmative procedure.

Several key policy issues about how an exit policy should be shaped and delivered are still to be resolved. For example, discussions in your Lordships’ House and elsewhere have mooted a number of different models for the transfer of customers from the exiting incumbent to a retail licensee. One model suggested is the transfer of customers to an associate licensee within the wider structure of a parent company. Others have suggested that incumbent companies which no longer wish to provide retail services may just want a simple route out of the retail market. Some have identified customers as an asset to be sold for profit, while others see them as a liability to be transferred. Ongoing dialogue with the industry, customers and others will be essential to inform the decisions about how exit will operate in practice. Our guiding principle must be to ensure that customers are protected and that they are no worse off as a result of the exit.

These provisions are therefore intended to provide government with the flexibility necessary to respond to the views of industry and its customers about the best way to deliver the new regulatory framework for the sector. They provide the Secretary of State with powers to put in place, through regulations, a framework which enables exits. This will entail a restructuring of the key provisions in the Water Industry Act 1991, the regulation of the industry and suppliers’ relationships with their customers.

The purpose of these provisions is to permit incumbent water or sewerage companies, with the consent of the Secretary of State, to stop providing any retail services to current or future non-household customers in their areas of appointment. The services will then be provided by one or more retail licensees. This is likely to lead to a consolidation of retail businesses. Exit will be irreversible and result in the incumbent divesting itself of some of its statutory supply duties in relation to non-household premises. However, incumbents will retain all their current responsibilities for household customers.

In summary therefore, these proposed new clauses enable the Secretary of State to make exit regulations, which would allow any incumbent water company whose area is wholly or mainly in England to apply to exit the non-household retail market for that area. The regulations may include grounds for refusing an exit application and provide for the transfer of customers to an eligible licensee. The regulations may also make provision for what happens in the area from which the company has exited after the exit has taken place. The powers make provision for the protection of both household and non-household customers affected by the exit.

Throughout the debates on this matter in both Houses, there has been a clear consensus that exit must be undertaken voluntarily. We have stated on a number of occasions that any suggestion that a provision could be used to force exit and drive legal separation of an incumbent’s retail and wholesale business risks undermining investor confidence in the sector. Amendments 7 and 9 ensure that the regulations can provide for important checks and balances as regards the conditions under which divestment and exit may, or may not, be required by the competition authorities.

We all agree that we must ensure that customers are protected. The regulations must ensure the protection of both those non-household customers that are subject to a transfer and the household customers who would remain with the incumbent. There is currently a range of statutory protections for customers in place. These are being reinforced by protections for the reformed competitive market in the Bill. For example, we are reforming the interim supply duty, or supplier of last resort, in Clauses 31 and 32. The statutory protections in the current retail market generally rest on the duties of the incumbent. These new provisions on retail exits are therefore required to enable regulations to rework the relevant statutory duties and obligations, in the event of a transfer of customers to a licensee. For example, we have provided for price regulation to be introduced for licensees, as well as regulation over the terms and conditions that they can offer to customers. We have provided for incumbent companies to be relieved of the interim supply duty, which currently requires them to serve customers when their previous supplier defaults. This role would then have to be taken up by the licensed market.

In addition, Amendments 1 to 12 and Amendment 18 enable the Secretary of State to make regulations which put in place safeguards requiring the exiting incumbent to take certain steps prior to making an application, such as, importantly, consulting its customers. The regulations may also set out the grounds on which such an application may be refused: for example, if the company could not demonstrate that exit was in the best interests of its customers. These provisions will enable us to put in place a stable and transparent framework within which exits can take place. I beg to move.

[Lord Moynihan (Con)]

My Lords, I am grateful to the Minister for providing a comprehensive solution to the issue of exit, for tabling these amendments and for his clear explanation of the Government’s intent. While the legislative drafting is more extensive than some of us had anticipated, these amendments achieve the desired effect of facilitating a clearer framework for competition. Additionally, the greater transparency on cost allocation that such a voluntary transfer mechanism brings will help to ensure that the incumbent companies are less able to adjust their cost allocations to the detriment of household customers.

This transparency is fundamental to effective economic regulation and the policing of effective markets. It will allow companies to organise their businesses in the way that they consider to be in the best interests of their shareholders and indeed their customers. Allowing exit to occur voluntarily, as confirmed by the Minister, will allow transfer mechanisms to enable more competitive third parties to enter the non-household water and sewerage retail market to the benefit of business customers, as has proved to be the case in Scotland. Above all, as demonstrated by both Oxera and Macquarie, exit will save customers unnecessary cost.

I am very grateful to the Government for confirming today that they will now consult fully on safeguards, consulting particularly with those who represent the interests of the customers, given that the powers granted through these amendments confirm the opportunity, not the obligation, for incumbent water and sewerage companies to propose transfer schemes to the Secretary of State for his consideration.

As tabled, the amendments place a considerable degree of power in the hands of Ministers, notably to adjust the powers and duties of key industry stakeholders, including Ofwat. While this could be problematic were the powers to be used to their full extent, I am confident from what the Minister has said that there is absolutely no intention to undermine the freedom of manoeuvre of the regulator.

With the clauses soon to be in the Bill, I hope, it will be important to enter into constructive discussion and engagement in order to consult widely and urgently to meet what I hope will be the reasonable deadline of market opening in 2017. I also agree with noble Lords who emphasised at an earlier stage that it is also very important to secure customer protection on retail exit.

I hope that the amendments will be welcomed on all sides of the House and by all those who have taken part in the debates over exit, with the request that the Government will give a firm and unequivocal commitment to using their new powers to facilitate efficient and orderly market entry and exit. If so, the benefits will be considerable for business customers. Once this House, in future legislation, has the opportunity to review the working of the market for business customers, I hope that it will not subsequently hesitate to move forward to deliver competition to the household sector as well.

[Lord Haskel (Lab)]

My Lords, has the Minister seen the report from the Delegated Powers and Regulatory Reform Committee? It is quite critical of these amendments. The committee found that the amendments were prepared in a hurry, and was particularly concerned that the procedure should have a strengthened affirmative procedure. I was not sure from the Minister’s introduction whether he was giving an undertaking that this would be so, or indeed whether he accepts this recommendation from the committee. The committee also found that the powers are conferred in rather permissive terms and, where regulations must make provision, the committee suggested that the regulations should be required to make provision. Again, I did not quite gather from the Minister’s introductory words whether he had taken these recommendations on board.

Water Bill

Lord Moynihan Excerpts

Monday 31st March 2014 Lords Chamber

[Lord Moynihan (Con)]

My Lords, I declare an interest as an owner of a band H property. Many noble Lords have spoken on this amendment at this stage. The noble Lord, Lord Campbell-Savours, and I spoke to a similar one in Committee, and I am pleased that the House has returned to it. I have one question for the Minister that is a matter of principle. While the rationale for the exclusions from band H properties is principally that some band H owners have higher incomes than others—that is not a proven principle but it nevertheless continues to be argued by the Government—does the Minister accept the view that the Flood Re scheme should follow the principle that those who contribute to this government scheme are afforded its protection?

[Lord Whitty]

My Lords, we are grateful to the noble Earl for tabling this amendment, and particularly for the way in which he outlined the dilemmas of this proposition. I think we all have a problem here. I hope that I do not need to make it clear that we on this side strongly support the basic concept of Flood Re and the reassurance that it will give to a lot of people who are currently worried about their future cover.

We have to recognise that the Government are not entirely on a free position on this; indeed, I congratulated the Government—that is quite rare for me—not long ago on reaching an agreement with the ABI, which I know is an incredibly difficult negotiator. Therefore, I do not think that any of us want to unnecessarily unravel the arithmetic that lies behind the Flood Re proposition as it now is. However, the wide-ranging nature of the noble Earl’s amendment means that we would be unravelling it quite substantially.

On the other hand, as noble Lords have made clear, this is not entirely a matter for the insurance industry. The structure of the project is an agreement between insurance companies but it has to be backed by Parliament and it therefore has a statutory base. Parliament has to be concerned about fairness, equity and proportionality. We therefore have to query whether the exclusion of certain properties, and such a large number of them in aggregate, is fair and equitable.

To some extent, I go along the same lines as the noble Baroness, Lady Parminter: there are different arguments relating to the different categories. Some exclusions were in the previous statement of principle and are therefore in a changed position as a direct result of the demarcation of Flood Re. Small businesses were covered by the previous arrangements, as were tenants in leasehold premises—although there have been some concessions of late, which I will come on to in the next amendment—and band H properties. The exclusion of post-2009 properties is not a new position; it was the position under the old scheme.

I shall comment on my view on each of those. First, I accept that small businesses have a different way of meeting their insurance requirements. I also accept, on the other hand, that many small businesses, boarding houses, shops and small premises were seriously affected by those floods and, under their understanding of the previous settlement, would probably expect to be covered by the replacement scheme. It is therefore quite important that we bear in mind the position of small businesses. The insurance industry claims that there is not a market failure in this area, and the Government seem to have accepted that. Maybe we ought to put businesses in a different channel because they are not dealt with in the same way as residential properties under Flood Re. The Government should not lose sight of the fact that many small businesses are under serious risk and do not feel well protected by the current situation. I hope, therefore, that the Government will be able to come back to this.

The noble Earl, Lord Lytton, the noble Lords, Lord Cameron and Lord Moynihan, and others referred to band H properties. It is a slightly odd move by the Government to exclude band H—an unusually populist, progressive move, to avoid cross-subsidy from the poor to the rich. It may be a welcome indication of things to come. However, it still leaves a number of people in difficulty. I think that the Government may have to look again at band H, but it does not make a lot of difference to the arithmetic. The number of people who are asset-rich but income-poor is relatively small and, therefore, it could not make a priority social case for re-including band H.

That leaves me with the subject matter of a subsequent group. Almost the whole of the tenanted sector and the private rented sector, even with the Government’s new concessions, are excluded from this. They all regard themselves as residencies, they all have domestic insurance in one form or another and they are all lived in by households and families. I think it is unfortunate that they are excluded. I would give my priority to that and I will come back with a further amendment. As it stands I cannot fully support the broad sweep of the noble Earl’s amendments. Nevertheless I thank him for the debate and the wide range of issues which, one way or another, the Government will have to explain to various sectors of the public.

Water Bill

Lord Moynihan Excerpts

Tuesday 25th March 2014 Lords Chamber

Moved by

[Lord Moynihan]

40: After Clause 7, insert the following new Clause—
“Facilitation of licensed functionsPower to make regulations
(1) The Secretary of State may, by regulation, make provision (including provision for the making of transfer schemes or similar arrangements) for the purpose specified in subsection (2).
(2) The power conferred by this section shall be used for the purpose of enabling any company holding an appointment immediately before the passing of this Act as the water or sewerage undertaker for any area of England and Wales to transfer such of its assets and undertaking to—
(a) an associate which holds a water supply licence with a retail authorisation; and/or(b) an associate (which may be the same company as that specified in paragraph (a)) which holds a sewerage licence with a retail authorisation;as may be necessary or desirable to facilitate the carrying on by relevant transferee(s) of the activities authorised by its (or their) licence(s).(3) For the purposes of this section, a company is an associate of the transferor if—
(a) the transferee is a wholly owned subsidiary of the transferor;(b) the transferor is a wholly owned subsidiary of the transferee; or(c) the transferor and the transferee are both wholly owned subsidiaries of another company.(4) The references in subsection (3) to a wholly owned subsidiary shall be construed in accordance with section 1159 of the Companies Act 2006.”

[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.

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[Lord De Mauley]

My Lords, that is a helpful intervention.

I thank my noble friend Lord Moynihan and the noble Lord, Lord Whitty, for their amendments. We once again have two amendments seeking to allow retail exits but with slightly different approaches. Both amendments would allow the Secretary of State to make regulations that would allow an incumbent water company to transfer its customers to a person holding a licence. Amendment 40, tabled by my noble friend Lord Moynihan, would allow for transfers to a licensed associate of the incumbent, while Amendment 54, tabled by the noble Lord, Lord Whitty, would allow for transfers to any company that holds a water supply licence. Amendment 54 does not allow for the exit of the retail sewerage market but I assume that the intention is to allow incumbent companies that provide both water and sewerage retail services to exit those markets. As with other amendments we have seen, both these amendments allow for non-household customers to be transferred through powers laid out in regulations, but do not allow us to fill in any gaps relating to who will provide retail services to new customers following a transfer or how we would treat transferred customers, including those who wish to return to the incumbent.

Allowing customers to be transferred does not mean that the incumbent has completely exited the retail market. The incumbent will still have certain responsibilities to non-household customers in its area of appointment and will therefore remain very much within that market unless certain duties are removed from it or transferred to the licensee which takes over the customers. It is a halfway house that does not benefit anyone, least of all the incumbent which wants to avoid dealing with non-household customers completely. The value of exits to incumbents would be limited unless the ultimate duty of supply is also removed. Household customers who remain with the incumbent may even end up funding this residual capacity of the incumbent to serve the remaining non-household customers.

But, as I hinted earlier, I have listened carefully to the thoughtful and well informed contributions to the debate on retail exits both today and in Committee. It is clearly an issue on which many noble Lords hold strong views. There is widespread support for enabling voluntary exit from the non-household market, subject to the approval of the Secretary of State. We remain convinced that such approval would be critical to avoid any perception that this will permit forced separation, given the impact that that could have on investment in the sector. I therefore propose to take this issue away and consider it very carefully before Third Reading. I will aim to table an amendment that will build on the objectives of Amendments 40 and 54 in the names of my noble friend Lord Moynihan and the noble Lord, Lord Whitty, respectively, which seek to provide a means for voluntary non-household exit.

I should like to put on the record now that the only practical way of delivering what the noble Lords are seeking would be to take a very wide-ranging power. Extensive changes to the Water Industry Act 1991 would be needed, not least to address issues relating to the incumbent’s duties to supply and its other statutory obligations to customers. Given this commitment to respond to the mood of the House on this important matter, I ask my noble friend to withdraw his amendment.

[Lord Moynihan]

My Lords, I thank the noble Lord, Lord Whitty, and his colleagues for their support for the series of amendments we have debated on this issue as the Bill has progressed through your Lordships’ House. I also thank very much indeed the officials at Defra who have worked on this Bill. It is highly complex and it has gained far more prominence than I believe they expected at the outset. Not the least of that is because of the appalling weather we have had over the past three months and the focus now on the Flood Re insurance proposals, which have understandably generated a huge amount of interest across the country and have resulted in a greatly increased workload for the officials. They have been responsive, helpful, polite and informative at all stages, and I am grateful for that.

I thank my noble friend the Minister for his comments. I am pleased and not a little surprised to hear that he intends to come back at Third Reading with a government amendment along lines that I would strongly support. I thank him for his consideration of the importance of exit. I hear the relevance of the consequential amendments that will be forthcoming if we do not give a fairly broad-based power to the Secretary of State, but it remains my view that in order to have a competitive and effective market, we need exit. In the circumstances, I believe that it is appropriate to grant that power through this Bill. Again, I express my thanks to the Minister and to all noble Lords who have supported me on this issue. I beg leave to withdraw the amendment.

Amendment 40 withdrawn.

Water Bill

Lord Moynihan Excerpts

Tuesday 11th February 2014 Lords Chamber

Moved by

[Lord Moynihan]

155: Clause 51, page 107, line 20, at end insert—
“( ) Within 12 months of this Act coming into force, the Secretary of State must publish and lay before both Houses of Parliament a report on the ability of businesses in areas of high flood risk to secure affordable insurance cover.”

[Lord Moynihan (Con)]

My Lords, I shall start by echoing the view that Flood Re is a welcome scheme, and I congratulate the Minister, his colleagues and the industry on introducing it. The scheme is to be supported in principle, but the devil may be in the detail. Other amendments grouped with mine allow the Committee to consider those who will be excluded from Flood Re, their ability to get insurance, and the costs of such insurance. Mine is a probing amendment but, that said, it is important in that it focuses on the significant absence of much-needed support to SMEs in the proposed Flood Re scheme.

Under the current provisions, small businesses of up to 49 employees are covered under the statement of principles. The Bill before the Committee proposes a new scheme, Flood Re, which is substantially built on the statement of principles. However, Flood Re provisions extend only to domestic properties and offer no protection at all to any businesses except a category called “micro-businesses” at risk of flooding. This is a really important distinction between SMEs and micro-businesses. My noble friend the Minister may be able to clear up exactly what that distinction is when he comes to sum up.

--- Later in debate ---

[Lord De Mauley]

I can count on the noble Lord to think of something that I did not arrive in the Committee equipped to answer. If I may, I will write to him.

[Lord Moynihan]

My Lords, I am very grateful to noble Lords on all sides of the Committee for the interest they have shown in this issue. Their contributions have demonstrated how critical it is and what should be in and what is out. I place on record my thanks to my noble friend the Minister for a very comprehensive reply on a lot of issues that have been raised on all sides of the Committee. The noble Lord, Lord Campbell-Savours, is a noble friend on this issue since I am in complete agreement with him. I do not agree with him on every occasion but I certainly do on this one. I say to him that it is not just that some householders did not buy their properties as band H properties; it is that there is no absolute correlation between personal wealth and band H occupancy, a point that I sought to demonstrate at Second Reading. If you accept that principle, surely it is wrong that band H should be automatically excluded. Indeed, the Minister, in his reply, mentioned the 45 properties that were in need of support; that is, owned by people who were not wealthy but would be automatically excluded as the Bill is drafted.

My noble friends Lord Ashton of Hyde and Lord Cathcart mentioned how complicated it would be to change the Bill to take appropriate care of small businesses. I agree that the Bill is complicated; it is complicated throughout. However, surely the thoughts of this House are with the SMEs, the pubs, the guest houses and the farms that have been devastated by the recent floods and cannot now secure affordable insurance provision. They have been hit incredibly hard. If it is not through Flood Re, surely we should be looking to deliver support for SMEs through an appropriate provision. I argue that the Bill is the right vehicle to do that.

I appreciate that my noble friend Lord Cathcart was eloquent in the detail he went into to secure his insurance for his egg business—or “an” egg business, to be fair to him. Such expertise cannot be expected to reside with every publican or small business at the centre of communities serving important commercial and social roles. We should look very carefully at this matter at a later stage.

My amendment simply allows us to study that in detail. I am very grateful to the noble Lord, Lord Whitty, for his support. I am also grateful to my noble friend Lord Campbell-Savours for highlighting the fact that this market will have markedly changed in the past three months. Of that, there is no doubt whatever. It is incumbent on your Lordships’ House and the Government to look at the extent to which that market has changed and to which we need to respond to those market changes.

While I hope that further consideration will be given to these issues—I, for one, will seek to bring them back for further consideration—for the time being, I place on record again my thanks to the Minister for his answer and beg leave to withdraw the amendment.

Amendment 155 withdrawn.

Water Bill

Lord Moynihan Excerpts

Thursday 6th February 2014 Lords Chamber

Moved by

[Lord Moynihan]

115:After Clause 23, insert the following new Clause—
“Duty to facilitate competition
(1) Section 37 of the Water Industry Act 1991 (general duty to maintain water supply system etc.) is amended as follows.
(2) In the heading, after “system” insert “and facilitate competition”.
(3) After subsection (1) insert—
“(1A) It shall be the duty of every water undertaker—
(a) to fulfil its duties under Chapter 2A of Part 3 in a way which does not prevent, restrict or distort competition in the provision of water services; and(b) without prejudice to the generality of subsection (1A)(a), to ensure that no undue preference is shown (including for itself) and that there is no undue discrimination in the relationship between its monopoly business, its competitive business and a water supply licensee.(1B) For the purposes of subsection (1A) above—
(a) an undertaker’s monopoly business comprises all of the activities carried on by it within the scope of its appointment, with the exception of its competitive business;(b) an undertaker’s competitive business comprises those activities carried on by it within the scope of its appointment, but which, in the absence of such an appointment, could only be carried on by it with the benefit of a water supply licence and the business of any associated water supply licensee; and(c) a water supply licence is a licence granted under section 17A, water supply licensee shall be construed accordingly and associated shall have the meaning set out in paragraph 11 of Schedule 2A.”(4) In subsection (2) for “duty” there is inserted “duties”.”

[Lord Moynihan (Con)]

My Lords, in moving Amendment 115, I wish to speak also to Amendments 116, 138, 139, 140, 141, 142, 143, 144 and 145.

This set of amendments brings us back to the central issue of creating through this legislation a clear, unequivocal market framework for competition. The amendments would provide a duty to facilitate competition. All participants must have access to clear and accessible prices, clearly defined and common levels of service and standard terms and conditions. As I have mentioned before to your Lordships, the Bill is based on the premise that parties within the retail market should conclude bilateral relationships subject to industry codes that will be developed. This could require some negotiation between market participants on service and price. It is this element of negotiation which I believe, if not addressed by us, will lead to the inefficient operation of the marketplace with unintended consequences.

The Bill is about regulated access and should not be blurred by a heavy dose of negotiated access. Allowing parties to negotiate could open the door for a current incumbent to discriminate against new retailers by offering them less preferable terms or poorer service levels or simply by being slow to respond to requests. This would limit the effectiveness of the market and increase costs for new entrants and customers. In my view, the relatively minor clarifications that I propose could usefully be made to the Bill. These are designed to ensure that the market can be opened in a timely way and that, once open, customers will enjoy benefits that are the same as, or greater than, for example, those which have been achieved in Scotland.

Amendments 138, 139, 140, 141, 142, 143 and 144 would ensure that Ofwat’s implementation licence modification powers are fit for purpose. In Scotland, the Water Industry Commission had a power of direction to ensure that activities that needed to be done were completed in time for market opening. For example, WICS was able to say to Business Stream, Scottish Water’s retail subsidiary, that the market would open irrespective of whether it was ready and that its customers would be reallocated to new entrants. I propose that Ofwat’s licence modification powers are made available for at least three years after Royal Assent to ensure that the entire period up to market opening is covered. I also suggest that they are clarified and strengthened, including by referring explicitly to market opening, as proposed in the group of amendments I have mentioned.

Amendment 145 would allow Ofwat to make common licence amendments in a single process. The potential retail market in England is much bigger than in Scotland. There will be more wholesalers and more incumbent retailers. The difference principally relates to the handling of the interests of the incumbent companies. In Scotland, the relevant people now have significant experience of dealing with a large number of—there are 12—active retailers. In their view, it would be sensible to ensure that Ofwat can make licence amendments that cover all companies if that is, in its judgment, the best approach. That has certainly been helpful in Scotland. However, there may also be circumstances where a more targeted approach to an individual company or a small group of companies would be better.

Amendments 115 and 116 would place a clear duty of non-discrimination on the wholesale businesses of the incumbent water suppliers. Clause 23 obligations to ensure no undue preference or discrimination would be carefully extended by these amendments. It seems to me that profit maximisation could be put forward as a reason to discriminate between suppliers. It may be worth looking at placing duties to help facilitate competition directly on incumbent businesses, making them also subject to a duty to ensure no undue preference or discrimination. This would make it easier to enforce competition law provisions, including the prohibition on margin squeeze. That would help ensure that new entrants are generally able to count on there being a level playing field.

As I had the good fortune to be the Minister responsible for taking the original privatisation Bill through the Commons, along with my noble friend Lord Howard of Lympne, I anticipate that the Minister will respond to my amendments by saying that Ofwat already has a duty to promote competition and therefore we do not need another duty. He may also say that Ofwat is the relevant competition authority for the sector and therefore we need to ensure under another piece of legislation that there is no anti-competitive behaviour in the sector, so we do not need another duty. He may have in mind the Competition Act and the Enterprise Act in that regard.

--- Later in debate ---

If I have not answered all the questions put to me by my noble friend, I will certainly come back to him. In the mean time, I would ask him to agree to withdraw his amendment.

[Lord Moynihan]

My Lords, I am deeply grateful to the Minister for his comprehensive response. I have to say that this has been a very friendly Committee stage. Reference was made earlier today by my noble friend to the importance of policy formulation in the Bishops’ Bar. No doubt the noble Lord, Lord Redesdale, and I will continue that discussion in the same venue at a later stage. Then, to top it all, I have to say that I regret the passing of the special relationship with my temporary noble friend the noble Lord, Lord Whitty, and hope that it will return very strongly when it comes to revisiting the question of exit at a later stage in our proceedings.

On a more serious note, I am grateful to my noble friend for his support of my amendments, in particular the importance that he, like me, attaches to facilitating competition. It is absolutely critical that new entrants to the market do not come up against the misplaced use of economic power by the incumbents. That is what we were seeking in these amendments. I did not anticipate that my noble friend would respond quite so quickly to the additional points I raised in that context in the second part of my speech. There were one or two other items I proposed which I hope that he will reflect on, but I would not anticipate that he could do more than that. I hope that, between now and the Report stage, we will have an opportunity to consider them in somewhat greater detail. In the mean time, however, I beg leave to withdraw the amendment.

Amendment 115 withdrawn.

--- Later in debate ---

[Lord Spicer]

My Lords, I am inspired by my noble friend Lord Crickhowell, who said that his worry was that there is a process of intervention, greater control and centralisation taking place on a wider scale, of which the water industry may be part. I do not know much about the water industry, but I do know about the electricity industry—I declare an interest as chair of the trade association for the electricity industry—as I was the Minister who took the electricity privatisation Bill through Parliament some 20 years ago. In that industry, there is certainly increasing intervention by Government and by the regulator. There is a definite trend. What happens eventually we will have to see, but I suspect the same thing is going on with water.

Therefore, my slight reservation with my noble friend’s amendment is whether it would make the process of regulation more efficient, more centralised and more bureaucratic or whether, in some way, it would do the reverse. I hope that it would do the reverse, because that is what we want to see. If she could address that point, it would be very helpful to me in judging what is going on.

[Lord Moynihan]

My Lords, briefly, I support the amendment proposed, although again I anticipate that the Minister is not going to be able to accept it. I would like to echo the comments made by my noble friend Lord Selborne about the briefing notes, which have been outstandingly helpful. In a latter edition, there was a very helpful road map which draws together some of these key issues. In the spirit of being helpful to my noble friend on the Front Bench, if the Minister is not in a position to accept the amendment on the face of the Bill, I hope that he will encourage his officials to give prominence to that road map on the website, and therefore in part meet the suggestion in my noble friend’s amendment.

My second point is that this is a matter of wider significance in Government. I hope that the Minister agrees that this is a subject that the Cabinet Office should look at carefully, not just in the context of water but in the wider context of the utilities. There is a necessity for clarity for those who do not spend many hours sitting on your Lordships’ Benches going through the detail of these Bills but who nevertheless have an equal, if not a greater, interest in the key elements of the legislation before Parliament.

[Lord Whitty]

My Lords, I congratulate the noble Baroness on producing such an important amendment. I suspect that it is beyond the Minister’s pay grade to agree that, in accepting the amendment, we would at one and the same time get Parliament to rationalise the way in which we legislate, get Ministers to ensure regulators co-ordinate with each other and get departments to make their activities comprehensible to the public. Nevertheless, these are welcome ambitions. The noble Earl, Lord Selborne, added some rationalisation of the quangos as well. I am afraid that all this is indicative of the way in which we do business. From listening to the noble Lord, Lord Crickhowell, both at an earlier stage and today, I understand that this is not a new problem—I have noticed that the Water Industry Act 1991 is seven pages longer than the Bill we are considering.

However, to be serious about this, one of the great failings of Parliament has been the failure to produce consolidated legislation in any field. After 15 or 16 years in this House, I still fail to understand why Parliament has not devised a procedure for pulling together consolidation of Acts in all areas, so the noble Baroness’s amendment has wider implications. Whether the amendment should sit in the Bill I will leave to the Minister but, much more narrowly, the proposition that for each subject matter there should be a single website address which links to all the different bits of regulation, authorities and other government interventions, is very good. It is one which has been talked about in Whitehall but hardly delivered at all. The one point where Defra could probably take this amendment on board in the context of water is regarding that single website. I think practitioners, companies and consumers would be very pleased to see such a development. I congratulate the noble Baroness, but we will see what the Minister says.

--- Later in debate ---

[Baroness Neville-Rolfe]

My Lords, we should look very carefully at this proposal for an increase in regulation. Water and sewerage are long-term matters and the great need is to have investment in resilience, with the right and proper regulatory framework. Ofwat seems to have got tougher in recent times. It is right to have a five-year timescale or we will not get the investment that is needed for resilience. The entrepreneurs involved will assume that if profits go up, perhaps because they have improved efficiency, they will immediately get a call from Ofwat reopening the five-year settlement, triggered perhaps by articles in tabloid newspapers—the sort of thing that will not be good for investment in this vital industry.

[Lord Moynihan]

I support that view. I completely understand where the noble Lord, Lord Whitty, is coming from, but there is a serious potential risk here to the confidence of the investment community in the water market. I hope that my noble friend takes that into account when considering extending the reasons for opening up price reviews.

Water Bill

Lord Moynihan Excerpts

Tuesday 4th February 2014 Lords Chamber

[The Earl of Selborne]

My Lords, I shall speak also to, I think, 32 amendments in this group. I am conscious of the fact that my noble friend Lord Crickhowell said that this Bill started hopelessly complicated, and I suspect that I stand charged by him with trying to make it ever more complicated—and I do so. This is because I am asking the Minister to ensure that the threat of moving towards de-averaging—something neither the Government nor any of us want—is not going to be advanced by the fundamental concept incorporated in the competition aspects of the Bill. That concept is the provision of a direct link between an upstream service provider, whether water or sewerage, and a retailer to non-household customers.

The position under the Bill is that the customer can contract directly with a resource provider. This may well bring lower charges to some customers, if, for example, a new entrant is able to offer a water supply at a price lower than the average price that the incumbent water company is able to charge. In a negotiated market, there will be a range of attributes that will favour one supplier over another. That is desirable and helpful. Price is one such key factor. If, as is possible here, large, non-household customers successfully negotiate on price alone—without respect to the other services that we are expecting to be provided in terms of environmentally friendly services, water savings and much else—that will favour one supplier over another. Eventually, this will result in a situation in which we will drift inexorably towards a two-tier market with the principle of average prices for all customers abandoned. It follows that smaller non-household customers and anyone located in remoter rural areas will face increased costs.

If we think that this is a remote possibility, we should bear in mind that it has actually happened already. In Wales, the Shotton case set a precedent that local costs were required to be used in a ruling in setting prices under bilateral deals. I am told that this was a one-off and that it will not happen anywhere else. However, when I hear that it has happened, and that there is a threat, I say that this is the opportunity to make sure that it does not happen again. I am sure that we shall look at other proposals as we go through the Bill to ward off the threat of de-averaging.

This is a fundamental proposal: it requires contracts to be made with the undertaker, with the other two parties participating. The purpose of the amendment, therefore, is to remove the direct link between the provider of resource services and the retailer. It would remove any opportunity for a large corporation to act in a way that was detrimental to all other customers.

Under the Bill as drafted, we could end up with non-household customers paying different prices for the same service within the same appointed area. As I have said, smaller businesses and non-household customers in rural areas are most likely to be affected. One of the charging principles that I accept in the Bill—I quote from the guidance—is the following:

“No category of customer should be unfairly disadvantaged by the way reform impacts on water charges. A fair and non discriminatory approach to sharing network costs will be critical”.

However, the guidance goes on to say:

“Ofwat has a number of tools to limit the effect of de-averaging on customer charges”,

and that it will ensure that,

“any marginal charges are introduced in a measured fashion and, above all, that they are in the overall interest of customers”.

So we are being assured that Ofwat, under the terms of the Bill—we will come to the codes and the rules later —can deal with this problem.

However, I am not entirely clear that this is the case, and I hope that the Minister can give some reassurance—remembering, of course, that already in Shotton we have seen an example of two-tier pricing that has impacted on other customers in the region. Can Ofwat really be expected to manage the impact of de-averaging to prevent any unfairness between customers, especially rural customers, when contracts for non-householders are made directly between retailers and potential upstream services?

Helpful progress was made in Committee in another place and a strong assurance was given that de-averaging would be prevented through ministerial charging guidance, which would explicitly rule it out. However, that is only a limited assurance when one recognises that if these contracts between the resource provider and the retailer were to be decided under European rather than United Kingdom competition law, the United Kingdom Government’s charging guidance would be overruled. So, much as one would take comfort from the ministerial guidance, frankly, it would not overrule European competition law.

I will say again that the purpose of the amendments is to require those with wholesale authorisation to interact with the incumbent water and sewage undertaker rather than with the retailers. I beg to move.

[Lord Moynihan (Con)]

My Lords, my name has been associated with the amendments tabled by my noble friend. He set out his eloquent and comprehensive assessment of the issue of de-averaging and said that he intends to speak further when moving his Amendment 32. There are further amendments. Your Lordships will have noticed that there is a 33rd, Amendment 61 to page 152, line 23—it is tucked away at the back—and will excuse the fact that it is not to the first part of the Bill. However, the amendment echoes the points that have been made so eloquently by my noble friend.

Of course, in many respects, these are probing amendments. However, they have at their heart the significant concern that if de-averaging were to take place some non-household customers, particularly smaller customers in rural areas, could see their charges increased markedly. This could have serious impacts on those non-householders and potential political consequences in some areas.

The prudent way through this would be to remove the direct link that exists in the Bill between the provider of the resource services and the retailer/customer, as my noble friend has pointed out.

What I would like to ask, however, is that the Minister clarify the extent of this issue. We have received advice from Scotland—the economics consultancy Oxera and Scottish Water undertook analysis into the impact on customers, were de-averaging to have taken place in Scotland. Under the Scottish Government’s rules, the policy is to rule it out. However, Oxera found that even on very conservative assumptions, many businesses could see their charges rising by at least 25% and, in a fully de-averaged scenario, some customers in Scotland could end up paying up to 10 times their current bill. That is evidence that we have received on one hand.

However, on the other hand, the Bill focuses on choice. Retail services account for something like 10% of the non-household bill—which accounts for something like 20% of the total bill—so approximately 2% of the amount would be in this sector. I would be grateful if the Minister could highlight the seriousness and impact of this issue in terms of its scale. Does he agree with the figures of Oxera put forward by our friends north of the border, who have done some outstanding work in generating competition in this sector? If so, and if that is to be borne out by the evidence, it underlines how important these amendments are.

--- Later in debate ---

[Lord Cameron of Dillington (CB)]

My Lords, as this is the first time I have intervened in Committee, I declare an interest as a farmer with abstraction licences. Even though I come from Somerset, my farmland is not yet flooded. However, if the current rains continue, it is unlikely that I will be able to say that on Report.

I want to back up the noble Baroness, Lady Parminter, who said that she could not understand why we had only a week between Second Reading and Committee. This is a very complicated Bill and I am not certain why that particular protocol has been broken on this occasion. I have never had an explanation of it. Maybe I have missed some explanation somewhere, but I think it is wrong. I hope it is not a precursor to a Commons-style approach to Bills, where arguments and the length of discussion are ridden over roughshod.

I strongly support Amendment 9 and the whole question it addresses. It is very important that de-averaging does not take place. I would have supported the noble Earl, Lord Selborne, in his amendments to ensure there are no detriments or de-averaging if I had understood that that was their intention. The noble Lord, Lord Whitty, said that he was not entirely clear what the amendments intended; personally, I could not understand them at all. Anyway, I would have supported the noble Earl had I known.

Water, like Royal Mail, should be covered by a universal service obligation that is amendable only with the permission of Parliament. Water should be a universal right—although clearly there can be exceptions, as with Royal Mail. For instance, I believe that a postman does not have to deliver to a household where he is permanently attacked by a savage dog. The water equivalent of that might be a blatant leak in a householder’s garden where the water was going to waste; there could be exceptions.

It is very important, particularly in rural areas, that de-averaging does not happen. I have heard the view expressed that de-averaging is bound to happen with the introduction of competition, especially if that competition eventually moves on to cover domestic premises. I personally hope that it will but obviously we should go softly, softly. I do not see competition as incompatible with de-averaging. It is possible to invest efficiently in the overall infrastructure and still charge your customers competitively, based on an average cost per litre, once the overall infrastructure is in place and the supply of water adequate for the demand. That obviously means we must manage the supply, the overall abstraction and the demand—preferably through universal metering but we have yet to come to those debates.

For the time being, I strongly support the thinking behind Amendment 9. Neither remote nor very remote properties should have to pay more per litre than their urban counterparts. I sincerely hope that the Minister was right, when replying to the previous debate, to say that Ofwat has the power to prevent de-averaging. I sincerely hope that it will use those powers.

[Lord Moynihan]

My Lords, I have a number of amendments in this group. Briefly, I am very supportive of the way the noble Lord, Lord Whitty, set out the principles and concerns on this. He echoed many of the points made by my noble friend on the previous group of amendments. My amendments focus less on the principles and more on the mechanisms of charging. To limit the amount of your Lordships’ time taken in Committee, I intend to pick that up in the context of Amendment 43, on restricted access, and of Amendments 99, 100 and 102, which fit more neatly into Clause 16 and the charges scheme—which I know my noble friend will address when he reaches his group of amendments, led by Amendment 44. I could discuss them here but I think it would assist the Committee to refer to the charges scheme at that point.

In closing, I urge the Minister to take very seriously the concerns on this issue raised across the Committee. As has been pointed out, he mentioned at the conclusion of the debate on the previous group of amendments that Ofwat has powers it can take to protect customers in this context. The Bill also gives Defra the option to issue charging guidance. Given the importance of this, as Members from all sides of the Committee have highlighted, I hope that due account will be taken of those views and that Defra will give serious consideration to the issuing of charging guidance in this context.

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Moved by

[Lord Moynihan]

39: Schedule 2, page 136, line 24, leave out “section 66D agreements” and insert “duties under sections 66A to 66C”

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[Lord Moynihan]

My Lords, in moving the amendment, I shall speak also to Amendments 40, 42, 56, 57 and 59, as well as indicating my support for Amendment 105 from the noble Lord, Lord Whitty, in this group.

The balance between regulation and negotiation in the water industry is crucial to this set of amendments. At the heart of the Bill is the intention to create a market where access is regulated—in other words, the rules of entry are set out very clearly, and must be adhered to by all market participants. I am concerned that in some places the Bill leaves too much too open; it appears to be based on the premise that the parties within the retail market should negotiate between themselves on service and price. In my view, that negotiation could substantially limit the effectiveness of the retail market. Allowing individual parties to negotiate in this way opens the door to current incumbents to discriminate against new retailers by offering them higher prices, less preferable terms or poorer service levels. Alternatively, and perhaps more worryingly, current incumbents could simply be slow in responding to requests for information or services from new entrants; this would be difficult to police.

As the noble Lord, Lord Whitty, suggested, in speaking to Amendment 1, some companies may change their allocations of retail costs to ensure that as little revenue as possible is at risk under the new market arrangements. The result of those changes is to reduce the amount of revenue that is open to competition and, potentially, to reduce the margin available to any new entrant. If allowed to stand, that move by the companies may reduce the level of entry into the new retail market. That would be a very serious issue indeed and, I hope, will not result from this legislation. This is an example of how companies might be expected to react when there is insufficient clarity in how the market will operate.

It is interesting to note the experience and views of the Water Industry Commission for Scotland, which opines that it could be difficult for Ofwat to put a framework in place that will allow the regulator to ensure that there is an effective level playing field for all market participants. It is likely to require relatively draconian rules to be drafted and policed. Notwithstanding those rules, some companies may choose to seek to frustrate the operation of the market or seek to get round the rules or even break them to maximise profit, which could be to the substantial detriment of all customers and, indeed, the environment. Having to negotiate on too many issues could also increase the upfront costs for new entrants, which may deter them from entering the market—or, if the new entrant does enter the market, will increase the costs that have to be passed on to customers. To be effective, a retail market, rather than relying on negotiation, needs all participants to have access to clear and accessible prices and to standard terms and conditions. In regulatory economics, I would describe this kind of access to the market as being regulated rather than negotiated.

In Scotland, the retail market is specifically designed to ensure that there is a level playing field. Scottish Water was required to separate its retail arm on a functional basis but chose to create an arm’s-length subsidiary. This has meant that the required governance code, the document that gives new entrants the confidence that they can compete on their merits with the incumbent retailer, could be less onerous than it would otherwise have been. However, the governance code still requires Business Stream to operate profitably as a standalone entity; the code also requires it to limit the access of Scottish Water’s management to its financial and operational information. Scottish Water is not allowed to know about Business Stream’s strategy for the competitive market in Scotland. Finally, under the terms of a licence condition, Business Stream is required to publish within 40 business days of offering a new tariff to any customer.

The market and operational codes are common to all market participants. The market operator, the Central Market Agency, handles all switches and aggregates supply information to determine amounts owing from retailers to Scottish Water, which is also required to seek the commission’s approval on its wholesale tariffs. All entrants have equal access to all tariffs, even those that are a result of legacy arrangements between Scottish Water or its predecessor organisations and larger businesses. The commission has taken further steps related to the reallocation of supply points from companies that exit the market to ensure that all market participants have the opportunity to compete on a level playing field.

To ensure that new entrants do not face increased barriers and costs when trying to access the retail market, I hope that the Bill can be amended so that it focuses on regulated access rather than negotiation. As such, it would require each wholesale company to publish a wholesale charging scheme; rules that support the level playing field between all market participants to be put in place; and the use of operational and market codes that are available to all participants in each area.

The Government’s response to the Defra Committee’s pre-legislative scrutiny states:

“Preventing discriminatory behaviour is critical to providing a level playing field in which new entrants can be confident that they will be treated fairly by incumbent water companies. However, the Government does not accept that a blanket requirement for incumbent companies to functionally separate their retail functions is the best solution to this”.

In the light of that, Clause 23 would impose a new general duty on Ofwat to exercise its powers and perform its duties in a way that helps to ensure that no undue preference or discrimination is shown by water and sewerage companies, including against water and sewerage supply licensees. As is usual in industry reform legislation, Clause 43 would also give Ofwat a time-limited power to drive changes to existing licences, including to companies’ conditions of appointment, when it considers that those changes are necessary or expedient in consequence of the new statutory provisions. Ofwat has published discussion papers that recognise the important role that such licence conditions play in ensuring a level playing field between existing and new entrant retailers. However, many believe that there is a deficiency in Clause 43 as currently drafted which could be exploited by companies seeking to resist any efforts by Ofwat to make changes to their conditions of appointment—for example, in order to introduce new governance codes.

There are also real risks in leaving such a vital part of a successful market to be developed and possibly challenged through secondary regulation. The burden on Ofwat could be lifted by imposing the non-preference, non-discrimination duty directly on to companies. While general competition law arguably already prohibits such discrimination, enforcing such competition law duties has been shown to be a costly and prolonged process. I am therefore suggesting amendments that, while not requiring functional separation, would make companies’ non-discrimination duties directly enforceable by Ofwat, using its existing powers under Section 18 of the Water Industry Act 1991. This would help reduce the cost of implementing the market reform and policing and of enforcing effective competition in the future.

The aim is competition; the aim is choice. The question is how we engage with a process that is clear and straightforward, while protecting consumers. The hurdle is incumbent companies. Many of them can use complex contracts with significant legal fees attached and delaying mechanisms. It is therefore very important that the aim moves towards regulated access with clarity and less emphasis on bilateral negotiations, and that that regulated access is for everybody. At that point, anyone entering the market can plug in and play. There should be no prohibitions put in place as a result of bilateral negotiation. It is for those reasons that I have tabled the amendments in my name. I beg to move.

[Lord Grantchester (Lab)]

I shall speak to Amendment 105 in this grouping and agree with many of the comments in its other amendments, in that they resonate with Amendment 105.

The proposed new clause in Amendment 105 is another technical amendment about how this market is to be made to work. We support the introduction of a market to non-household customers, but remain concerned that the market as currently drafted in this Bill is not up to the function as well as it could be. It is essential in a market to have a fair playing field, where each competitor has the same rules applying to it. I quote the Water Industry Commission for Scotland:

“To be effective a retail market needs all participants to have access to clear and accessible prices, clearly defined and common levels of service, and standard terms and conditions. Allowing parties to negotiate could open the door for a current incumbent to discriminate against new retailers by offering them less preferable terms, poorer service levels or simply by being slow to respond to requests. This would limit the effectiveness of the market and increase costs for new entrants (and customers)”.

Incumbent water companies have a very large advantage, having been in place for many years, and can offer more favourable terms to their own in-house companies than to new entrants. There are many barriers to entry that may become apparent and it is important that the new entrant has the protection with the ability to challenge any that may materialise, and not merely on pricing. This would not in any way cut across the Government’s view that a blanket requirement for incumbent companies to separate their operations by function is unnecessary.

The Minister may point out that Clause 23 may do what we are seeking. However, this clause requires Ofwat to secure merely that no undue preference, including for itself, is shown. There does not appear to be a definition of “undue preference” and it is important to show from the outset that all competitive pressures must be fair, and appear to be fair, to the new entrants. The Minister will no doubt point to the market codes that will be issued with the Bill, but evidence that has been provided to us during its passage, such as that from Business Stream, the Scottish water company, suggests that this is not enough.

I hope that the Minister is able to recognise the significance of this amendment that will ensure that the terms offered to existing licences are also offered to new licences and that the regulator is able to pay close attention to such deals. The new market situation in Scotland has highlighted this issue. Without correction, there are grounds to fear that when the market opens in 2017 it will not function as the Minister would hope. As a result fair competition may be impeded, and business will not get the kind of benefits and savings that we would like to see.

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[Lord De Mauley]

My Lords, as noble Lords have explained, the purpose of these amendments is to ensure that access to the retail market is regulated to minimise burdens and make access to the market simpler. I agree that requiring all licensees to negotiate with each of the 21 incumbent water companies to enter the market would represent a considerable burden on the market participants and undermine what we are trying to achieve with our reforms.

Schedule 4 of the Water Act 2003 inserted current new Sections 66A(2) and 66D(2) into the Water Industry Act. These placed the incumbent water company under a duty to make a water supply agreement on certain terms agreed with the licensee or determined by Ofwat. This duty has been interpreted to mean that each individual agreement between an incumbent water company and licensee must be negotiated, or imposed by Ofwat where the parties are unable to agree. Ofwat has produced guidance to facilitate negotiations, but the parties to these agreements could ignore the guidance and come to their own agreement. This is clearly a considerable barrier to entry into the retail market in particular and one that provides unco-operative incumbents with an opportunity to delay the making of agreements, about which the noble Lord, Lord Grantchester, and my noble friend Lord Selborne have rightly expressed concerns.

New Sections 66A and 66D will be repealed by this Bill, and replaced with a requirement that agreements between incumbent water companies and licensees must be in accordance with new, enforceable charging rules and codes produced by Ofwat. This will reduce burdens and costs on all parties, and speed up customer switching when the market expands to include 1.2 million potential customers. Schedule 4 creates the same requirements for sewerage arrangements.

There has been some confusion as to the wording of some parts of Schedules 2 and 4 that might lead some to assume that a licensee will be able to enter the retail market only through a complex series of negotiations with every incumbent water company in England. For example, new Section 66DA states that codes may include provisions about procedures in connection with making a Section 66D agreement. This is not the case. We need some flexibility about allowing a certain level of negotiation in some cases, particularly for the upstream markets; negotiations might address water quality and environmental conditions specific to a locality in a water company’s area. We also want licensees to have some flexibility to negotiate innovative new ways of doing things. Market codes will be able to set out the circumstances when such negotiations would be appropriate or inappropriate. I draw noble Lords’ attention to new Section 66DA(2)(c) and (d) and new Section 117F(2)(c) and (d).

My noble friend Lord Moynihan referred to functional separation and we will discuss specific amendments on that matter in a little while, and perhaps I can address that at that point. He also referred to the regime in Scotland and the fact that it provides only for regulated access. Scottish legislation is silent on the need for WICS to produce codes to make the market work. WICS took the decision to regulate access to the retail market and Ofwat and the Open Water programme are taking the same approach. It is worth noting that there is no competition in Scotland for wholesale supplies of water. The two markets are therefore clearly not directly comparable.

I am happy to tell my noble friend that paragraph 5 of Schedule 2, which inserts new Section 66E into the Water Industry Act 1991, and new Section 117L, inserted by Schedule 4, already provide Ofwat with powers to regulate these charges between incumbents and licensees, and that Ofwat may make rules about their publication.

The Bill regulates licensees’ access to the supply and sewerage systems of the quasi-monopolistic incumbents only. We see no need to regulate arrangements between licensees themselves, as they all start on the same footing. That is competition and it will be left to market forces. I hope that my noble friend will therefore feel able to withdraw the amendment.

[Lord Moynihan]

My Lords, I am grateful to noble Lords for participating in this exchange of views. I particularly thank my noble friend Lord Selborne for his apposite comments. As he is aware, the Bill anticipates a relatively large number of codes. The experience of other industries, such as the electricity industry, shows the importance of keeping codes as simple as possible. For example, a single market code could help ensure that any central market system works by applying the same rules to all companies and retailers. Similarly, to help create a level playing field, I very much hope that retailers have a single point of contact with each water or sewerage company. Each company should have a code which every retailer must follow. To me that is an essential prerequisite for operating a successful market.

It is an appropriate moment to echo the comments that have been made on all sides of the House about how constructive, supportive and helpful my noble friend the Minister has been throughout the process since the publication of the Bill, through its early consideration and in the many meetings that he has hosted to provide clarity on this complex measure. I am grateful to him for his comments. I noted that he recognised that there was at least scope for misunderstanding on some aspects of the clauses that are relevant to the amendments that I have proposed. I agree with what he said about the codes which Ofwat may issue under the new Sections 66DA and 117F. They could be used but I am concerned that the current drafting does not adequately recognise the necessary scope that he has outlined. There will be merit in considering in detail what he has said this evening and reflecting on it before determining whether we revisit this subject at a later stage in our proceedings.

I very much appreciate the support of the noble Lord, Lord Grantchester. His comments echoed very clearly the concerns that I have tried to lay before your Lordships’ House. This is an important issue. If the Bill is to be enacted and then operate effectively in the market, this is a subject which needs to be absolutely clear. If we can help to improve the position by amending the legislation in order to achieve that clarity and efficiency of operation, we will add value to the Bill. I hope that we will be able to take this away and review whether or not we will come back with an improved amendment at a later stage of our proceedings. In the mean time, I beg leave to withdraw the amendment.

Amendment 39 withdrawn.

Water Bill

Lord Moynihan Excerpts

Tuesday 4th February 2014 Lords Chamber

As it stands, it is bizarre and does not gel with any concept of a market that most of us understand. I believe that if the safeguards are there, the Government will eventually come round to doing this. I hope that they come round to it during the course of the Bill, rather than finding themselves in a situation in a year or two where it becomes obvious that some of the players in the market ought to get out and that the consumer experience would be better if they did so. The Government should think again. I hope that the Minister will have better news for us on this. I beg to move.

[Lord Moynihan (Con)]

My Lords, I shall speak to Amendments 107 and 132 in my name. I also support Amendment 98 in the name of the noble Lord, Lord Whitty. I have listened to him over the past 10 minutes and there is now no doubt in my mind that his amendment—and, indeed, this group of amendments—is the jewel in the crown of all the amendments that have been tabled so far to the Bill, and that is for a very good reason.

The Bill provides for the opening up of water retail services to competition. That is welcomed by some of the leading water companies and by the regulator, and the concept of exit is welcomed by both. Exit is welcomed north of the border and it has been welcomed by the Defra Select Committee. That is a rare alliance indeed. However, as the noble Lord, Lord Whitty, has stated, it is also welcomed by the investor community. Brought together, they are powerful voices in support of exit in the retail services market.

I shall concentrate my remarks on a number of the points raised by the noble Lord, Lord Whitty, and then summarise, as I see them, the key areas of opposition to date that the Government have put forward and offer some reflections on them.

The first and most fundamental point is that for an effective market there needs to be an ability for new entrants to enter and for existing market players to exit. Customers benefit from more effective and efficient suppliers replacing poorer performing businesses. Allowing incumbent water and sewerage companies to exit from retail services would help ensure successful development of the new retail services market and thus benefit customers. Successful entrants could more quickly acquire critical mass by buying the customers of the less successful or committed incumbent retailers. There appears to be plenty of scope for customer benefit if high-performing companies were to take on the customers of other companies.

Ofwat data have suggested that one water and sewerage company can spend up to twice as much as another providing retail services to each domestic customer. Ofwat reports significant variations between companies’ customer service standards. Simon Less, the senior visiting fellow on regulatory policy, has done some outstanding work. He has clearly made the case at the Policy Exchange that where a company considers its strength is in wholesale water activities, allowing it to sell its retail business would enable its management to focus on wholesale. Water wholesaling and retailing have quite different sets of risks. Exiting retail services would reduce a wholesaling company’s risks from, for example, bad debt. The sector would, overall, be able to access investors with a wider range of risk appetites. Allowing exit from retail services would enable mergers between retail businesses, with benefits from increasing scale and scope.

Not only is the group that I have outlined in favour of exit; let us also reflect for a moment on the Bill. This Bill principally came from Martin Cave’s review—80% to 90% of the Bill was based on this review. He, too, is supportive of this principle. It does not go as far as separation, which does concern many noble Lords. It allows, as the noble Lord, Lord Whitty, has stated, no compulsion, simply an option to exit the retail market. I mentioned that the market itself is supportive of this proposal. It is interesting that Moody’s has come out in support of the proposal. Not only Moody’s, but Macquarie Equities Research has recently published a telling and impressive review of retail exit, in which it states:

“We … see a consolidation of retail functions as positive for both consumers and shareholders. Companies will be under no obligation to exit, but will hold the option to do so … Consumers benefit as ultimately all cost synergies are passed to consumers”.

In placing a value on this, Macquarie concluded that synergies through exit could be worth up to £40 million to just two companies alone. Let me quote its overall conclusion on this:

“Under retail competition, given the size of their bills and the services they require, non-households are the area where”,

you would,

“expect to see greatest activity in providing new, tailored services for customers. Figures from Scotland, where there has been non-household retail competition since 2008, show that customers have saved £35 million.

We estimate that NPV savings for customers in England and Wales could be c. 10x that in Scotland, or £350mn.

This estimate tallies with a cross reference estimate. Total annual costs in household retail is c.£800mn and that non-household is roughly 1/2 that of household: i.e. £400mn. With a 15-20% cost reduction through consolidation we would expect to see total annual savings of c.£60-80mn per annum. If we assume that half of this is shared between consumers and companies, then the benefits of consolidation could be c.£30-40mn per annum, or c.£400mn value. …

Under current proposals, water suppliers will need to hold a ‘licence of last resort’, meaning that if they exit their retail division, they are still potentially liable to provide retail services if the new owner of the retail customers goes into administration.

This means … that water companies are unlikely to exit their retail divisions if they need to maintain the capability of running the infrastructure systems needed in case their customers need to return.

This causes two problems … : firstly in the non-household retail division, the water companies that lose market share, will end up with rising costs relative to their revenues and could potentially see losses increase and continue, and secondly in the household retail area, there can be no cost synergies between the existing 18 water and water and sewerage companies”.

Macquarie’s is a powerful voice in this debate, but I would argue that Ofwat is an even stronger voice. Cathryn Ross, at the Water Bill Committee on 3 December, said:

“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.]

What would my amendments do? They would enable incumbent water and sewerage companies to transfer their retail businesses to third parties. They would also secure the benefits of such transfers by ensuring a level playing field and consequently maximising the benefits that could flow to non-household customers. It is important to repeat that this approach does not require or compel incumbents to transfer any or all of their non-household customers. It is an option and, as the noble Lord, Lord Whitty, said, it would be subject to the approval of the Secretary of State and a restriction on its use by the competition authorities, and nothing more.

I said that in closing I would try to answer the issues which, as I understand it, underpin the Government’s position at present. The first was referred to by the noble Lord, Lord Whitty: allowing retail exit could unsettle the investment climate. I hope that the noble Lord, Lord Whitty, and I have demonstrated from both sides of the Committee that that is not a strong argument when investors and companies are actively seeking this change, suggesting that they are far from unsettled by it. As I mentioned, the rating agency Moody’s had previously suggested that this would be a positive change, and the Australian bank Macquarie, as I have quoted, also supports the change. Similarly, a recent research study report entitled “Ready for Retail?” published in Utility Week, which I have gone back to—it was quite wrongly maligned by my noble friend the Minister in his summing up at Second Reading—is a good assessment and is worth looking at closely. It highlights that of those companies that were approached, 76% supported amending the Bill to allow retail exit, so I am not convinced that allowing retail exit is going to unsettle the investment climate.

The second point put forward by the Government is that allowing only non-households to exit the retail market would create a two-tier market where householders could be left stranded with a water company that has signalled a lack of interest in providing customer service. To the extent that there is a concern here, it would be addressed entirely by allowing retail exit for all customers rather than just the non-household element. However, even if only non-household retail exit was facilitated, again this appears to be a weak argument when companies have been forced to provide these services in any event since privatisation. Since companies have no choice but to provide retail services because the licence they signed up to at privatisation requires them to provide an end-to-end, source-to-tap service, we really have no idea about whether they are interested, or not, in providing them now—absent retail exit. Indeed, there is a wide variation in the quality of customer service provided by companies, with some of them improving but still some significant gaps at the moment. This argument is really an argument against the status quo. If we have been comfortable with the current arrangements for the past 20-plus years, it seems odd to start criticising it now.

The third point is that if the Government were to go further and allow retail exit for all customers, households could be passed to a new retailer about which they knew nothing and, unlike business customers, they would have no option to switch if they were unhappy with the quality of the service they received. This point, which has been made by the Government, is true on the face of it, but it is rather a xenophobic one. First, customers have never had any choice over who provides these services because they have simply inherited their local monopoly provider. Again, why is this a concern now? Secondly, while the local branding of companies—Thames Water, Severn Trent Water and so on—gives us a warm sense of local provision by local companies, of course they are not local at all. Most of the companies are owned by Canadian or Australian pension funds, and that ownership changes hands regularly with customers none the wiser about the process. Generally the process is very positive for customers because competition in capital markets brings new investment into the sector, and investors put pressure on the management of these companies to keep costs, and therefore bills, down for customers. Surely the key point is that customers want the lowest prices and the best service, and allowing retail exit provides that most effectively. Poor performers are moved out of the market and good performers can grow their market share, even if they are not the “local incumbent”.

The fourth point mentioned by the Government is that introducing retail exit would require a change or create problems with Ofwat’s price controls. I hesitate to say it, but I think that is a redundant argument. The current price control arrangements apply to regionally specific companies and licences. Ofwat is setting both household retail and non-household retail price control. Allowing this change would be easily accommodated within Ofwat’s price control arrangements; in fact they have been designed for that purpose.