Water Supply (Amendment to the Threshold Requirement) Regulations 2011

Lord Taylor of Holbeach Excerpts

Tuesday 22nd November 2011 Grand Committee

Moved By

[Lord Taylor of Holbeach]

That the Grand Committee do report to the House that it has considered the Water Supply (Amendment to the Threshold Requirement) Regulations 2011.

Relevant document: 32nd Report from the Joint Committee on Statutory Instruments.

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

My Lords, we cannot perhaps expect quite the passion in this debate that we had with the previous statutory instrument, but I do not wish to pour cold water on contributions that noble Lords may make.

The water supply licensing regime introduced by the Water Act 2003 was an attempt to introduce limited retail competition into the water sector. It permits new entrants known as licensed water suppliers to enter the market and enables non- household customers using at least 50 megalitres of water a year to switch from their existing monopoly supplier to an alternative water supplier. To give some idea of scale, an Olympic-sized swimming pool contains approximately 2.5 megalitres of water.

There are currently seven licensed water suppliers that eligible non-household customers can switch to. A licensed water supplier is permitted to purchase water from the incumbent water company and supply those customers who are eligible to switch away from their existing supplier. The size of the non-household market is approximately 1.1 million customers and, of those, an estimated 2,200 are currently eligible to switch their water supplier. However, since the introduction of the WSL regime in 2005 it has become increasingly more apparent that the WSL is not working effectively; only one non-household customer has managed to switch its supplier.

The Independent Review of Competition and Innovation in Water Markets, carried out by Professor Martin Cave and published in 2009, considered that better value for water and sewerage services could be obtained through enabling greater competition. The report identified a number of reasons why the WSL regime had been ineffective and made a number of recommendations for a step-by-step approach towards the introduction of competition. Professor Cave recommended increasing the size of the contestable market as the first step. This would be achieved through a reduction in the threshold at which non-household customers could switch suppliers.

These regulations amend the Water Industry Act 1991 by reducing the customer eligibility threshold from 50 megalitres to five megalitres. This will significantly increase the size of the contestable market from 2,200 to 26,000 non-household customers in the area of those water companies that are wholly or mainly in England. The regulations represent a low-risk way of extending the market without the need for further investment. Further market reform changes as identified by Professor Cave will be considered in the water White Paper, which will be published by December. At this stage, we are expecting that lowering the threshold will stimulate interest in the market, reinvigorate new entrants’ efforts to gain market share and incentivise existing water companies to improve services or risk losing customers. The potential benefits associated with lowering the threshold could take the form of lower bills through keener prices, improved customer service and lower consumption due to increased water efficiency. The regulations will not impose any costs on business and do not have an impact on micro-businesses. I commend the regulations to the Grand Committee.

[Baroness Parminter]

I think it is right that the Government are accepting the recommendations of the Cave report, but it is very disappointing that the impact assessment makes it clear that no guaranteed or quantifiable environmental benefits in terms of reducing water use will result from there regulations. It is all about “could” and “might be”; nothing is guaranteed and there are no quantifiables in that.

The impact assessment also makes it quite clear that, without further reforms to the water supply licensing regime, the uptake on supply switching is going to be very limited. The Minister pointed out that there is a market of 26,000, but the assessment makes it clear that, without further reform, the potential is just two or three companies per annum. It strikes me that this statutory instrument on its own is pretty unimpressive and I wonder why it has been brought forward before the White Paper, given that the White Paper is going to be coming forward fairly shortly. I am sure that some form of further legislative reform will take place following that. I should like to know why these regulations—and the cost of bringing them to this House and into the market—has been brought forward on their own, given its limited potential.

[Lord Knight of Weymouth]

My Lords, I am grateful to the Minister for setting out so clearly what the statutory instrument does and to the noble Baroness for making some useful comments, with which I agree, about the impact assessment. This is a perfectly harmless statutory instrument, so I am very content with it. Like the noble Baroness, I am not sure that it is going to have a massive impact but, given that the Cave review recommended that this should happen, that the Cave review did a good job and that we look forward to the Government’s comments in the White Paper, I am certainly happy to give this statutory instrument my blessing.

I would not want to burden anybody with having to work out any more impacts but, especially given that this is a Defra statutory instrument, the rural impact would be particularly interesting. It would be interesting to know whether any thought has been given to including rural impacts in general. When I was reading through the impact assessment, I thought that it might make a difference in some urban areas because in urban areas the market is more likely to be active. In the rural parts, however, if it makes any difference at all or if there is enough of a market operating, I shall be quite surprised. If the Minister has any comments on that, I shall be delighted, but this is a pretty straightforward statutory instrument. We welcome competition in the water industry; we hope that it benefits consumers and that the department and the regulator will make sure that that happens. I am happy to give it a positive nod.

[Lord Taylor of Holbeach]

I thank noble Lords for their contributions. I am particularly grateful to my noble friend Lady Parminter for pointing out that she felt that the environmental potential of changes in the market had not been properly stated in the impact assessment. Impact assessments are of course designed to report on measurable impacts. One of the difficulties in this case is that we cannot predict the impact of a reform of this nature. I can say that since non-household competition was introduced in Scotland in April 2008, more than 45,000 customers have renegotiated the terms of their supply, enjoying the range of benefits that come from a competitive market.

One element to which I tried to draw the Grand Committee’s attention was that among the services that can be offered to companies in this category is advice on reducing water consumption. It is not very easy to quantify and you cannot rely on it in an impact assessment. However, I should have thought that it would be one of the strongest reasons why some companies would look to change supplier. The reason will probably not be price. In some ways it is more difficult to compete on price in water than it is in almost any other area. However, there could well be competition on service. Water efficiency is a big gain from a freer market.

The noble Lord is absolutely right to say that we need a White Paper and that this is only a beginning. I cannot pretend that it is only the beginning of a reshaping of the water market in the UK along the lines of the review that Professor Cave produced. However, we are right to introduce this statutory instrument at this stage. I hope that we will learn from the way that the market improves through this statutory instrument things that we can then include in the legislation that will follow the White Paper.

It is difficult to quantify the impact on rural areas. The impact assessment does not have a special chapter just because it comes from Defra. We might consider that. It is something of which the noble Lord, Lord Knight, might try to persuade us. If the process allowed us to flag up our own special interests, it would be very good to do so. There are one or two large consumers of water in rural areas who might well benefit from this proposal. There could then be an assessment of the impact on rural areas and rural businesses; I should like to think so.

I thank my noble friends. I think we have pointed out areas that we will probably debate in greater detail and with, I have little doubt, somewhat more vigour when we come to consider other aspects. Meanwhile, I commend these regulations to the Committee.

Motion agreed.