Natural Environment
Lord Whitty Excerpts(9 years, 4 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty (Lab)
My Lords, I, too, thank the noble Baroness for initiating this very wide-ranging debate. I thank her also for giving us a quick preview of what would be the Queen’s Speech of a Liberal Democrat Government—some of which sounds vaguely attractive, and I might support it.
The title of this debate ranges from the very local to the international, and we do not know where to begin. The noble Baroness began, as I rather suspected she might, with the situation in Somerset and the Somerset levels and the disastrous, distressful floods. There was a terrible impact on both the people there and the environment. However, as the noble Earl, Lord Selborne, said, the key thing about the Somerset levels is that they are not, in a strict sense, a natural environment. They have been created by manmade measures over the centuries: intricate water management, successive different forms of farming putting pressure on the system, deforestation, local pollarding of trees and so forth, and ever-changing farming practices. They all put pressure on the system. All those efforts gave an economic base to the area and the landscape that we love, but the levels are not a natural environment. They need to be protected, but we need a different system of human management for such areas.
The storms of last year which caused the floods in Somerset and elsewhere were a unique event and were unprecedented in their form. While one cannot ascribe any individual extreme weather event to climate change, climate change means that we are going to get more of them. The likelihood is therefore that the UK and the world will face greater storms, floods, droughts and other disasters, and we need human management to deal with that. In order to protect our environment, we need a change in intervention. As in 19th century Sicily, unless there is change, things cannot remain the same. We therefore need to recognise that the challenge of global climate change will mean a lot of new, local interventions. I do not want to be too despondent, but the world has largely failed on climate change. The conference in Paris this year may be the last-chance saloon to stop average global temperatures going over the 2 degrees level.
There are some fairly worrying indications. The fall in the oil price means that people and markets are switching back to fossil fuels. The development of shale gas and shale oil has displaced coal in America. On balance, this is a positive thing, but it has reduced the price of coal, which is being exported to markets at a low cost, as is US oil. The net result is that the price of fossil fuels, relative to nuclear and renewables, is changing. The problem is not just in places like China, where coal-fired power stations are coming on stream every month, or India where the explicit objective of the new Government’s policy is to exploit to the full India’s domestic coal resources—most of which are lignite, the worst form of coal. It is also true within Europe, where Polish and German lignite is now being used to a greater degree: even green Germany is opening new coal-fired power stations.
In aggregate, the global subsidies for coal far outweigh those for renewables or nuclear energy. The markets and, in some cases, government policy, are moving in the wrong direction. Over the years, the UK Government have, commendably, taken the lead in both establishing targets and introducing policies designed to offset this. However, most of those policies have not delivered to the extent that they should. The noble Baroness mentioned issues of energy efficiency in residential and other property, but so far the measures are faltering. The ECO is not working as it should, nor is the Green Deal, and take-up of the RHI is very limited. A report which I was partly responsible for found that there are very few pressures in the commercial and industrial sectors for increasing the environmental efficiency—and therefore the energy use—of commercial buildings, old and new.
As the noble Baroness said, we need intensified policies in all of these areas. We also need them on land management: how we use land and water. We need to plant more, appropriate trees on many of our hillsides; we need more effective water management by catchment; we need to reform the abstraction regime for water in our uplands. We cannot defer this, as we have done for many years. Some of these interventions, and some on the energy side, will be seen by some as detrimental to the natural environment, but that will only be in the short term. In the long term, they will protect our natural environment.
I am not saying that we should give up trying to mitigate the rise in carbon and greenhouse gas emissions. That objective is still there, but we need to recognise that a significant rise in global temperatures—probably over 2 degrees—is now almost inevitable. We therefore need to look at adaptation in the way that we have looked at attempts to mitigate. On the mitigation side, the Climate Change Committee has indicated that the next Budget will require us to cut, between now and 2025, by another 28%. We succeeded in meeting the first budget targets only because of the recession. The underlying change is nowhere near close to achieving those ends. That means that even in the UK—which is leading in this area—we are not likely to make our contribution to reducing carbon.
We therefore need to focus as well on mitigation. That will need capital expenditure by both public and private sectors. We know that the way in which projects are assessed in the private sector tends to focus on the short term. We know that the immediate fiscal problem with regard to public expenditure is limiting the amount of public investment in things such as flood defence, resilience of infrastructure and the whole area of protection of our countryside. Unless we put the money in and give some priority to that form of investment, we will neither protect what we call our natural environment nor avoid the major problems that are facing us through the process of climate change.
EU: Counting the Cost of Food Waste (EUC Report)
Lord Whitty Excerpts(9 years, 6 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty (Lab)
My Lords, I was a member of the Select Committee, serving under the very effective leadership of the noble Baroness, Lady Scott. It was a fascinating task and she very deftly explained both the main points of what we have covered and what has happened since. I shall try just to underline one or two points.
My first point is what a big deal this is. On some estimates, the amount of food waste in the industrialised countries exceeds the total first production of the whole continent of Africa. This is an incredible waste of human effort and environmental and economic cost. I say, “On some estimates”, because we very rapidly found that the estimates in this field are rather difficult, which limits the degree to which the EU can play as effective a role as it perhaps ought. We found that measurement of food waste at different stages of the chain and between different countries was pretty incompatible. Until that is resolved, the EU level probably has to be aspirational, exculpatory and a matter of learning from best practice. Best practice in this area largely rests in the United Kingdom and, to some extent, in the Netherlands.
The next point I will emphasise is the key role of the retailers in the supply chain. Clearly, the retailers have done a lot to cut their own waste at their stage in the process and they are taking it further and helping out on aspects such as food redistribution, but it is also true that they bear a heavy responsibility for what happens at both ends of the chain. Their contracting deals with farmers and small producers inevitably lead to some wastage at that level.
It is part of the general imbalance between the great supermarket chains and farmers and other small producers that leads to alterations in contracts, including premiums for particular, very highly specialised specifications for vegetables and other materials. The way that contracts are actually carved up leads to waste at that level. That is something that needs to be addressed, particularly in the same context as the grocery code and the role of the grocery code adjudicator. At the moment, the adjudicator’s responsibilities do not really include a responsibility for ensuring that the contracting arrangements between the retailer and the provider do not create unnecessary waste, and I think they probably should.
Retailers also have a responsibility to the consumer. They fulfil some of it; I have certainly learnt from the labels on consumer goods and food that I have bought in supermarkets and which I have started reading since we have been engaged in this. It has changed my habits somewhat, as to storage, packaging, how long I think I can keep fruit and what should and should not be in the fridge. If I, who have some responsibility in this area, do not know how to behave in relation to my consumer responsibilities, and need to be told by a retailer, the retailer needs to shout even louder to the vast majority of the population. They are taking on that role, but they need to do more of it. It is undermined, to some extent, by some of the ways they market themselves, particularly with what are called BOGOF deals—where you are tempted to buy more than you need and half of it goes off—and other forms of incentive. That is the downside of the positive role of retailers in this area and it one that they need seriously to address.
Another point I underline is the role of WRAP in this area. Universally within the supply chain, here and across Europe, there is great recognition of the role that WRAP has played. We were rather dismayed to hear that the resources available to WRAP had been cut significantly and that there was some expectation that it would have to draw in its horns in this area. Can the Minister indicate what the latest development is on that front? The role of WRAP in the delivery of, for example, the Courtauld initiative with industry and in other initiatives that have taken place has been exemplary. It is one which needs to be retained and generalised across Europe.
We touched on another couple of things in terms of waste disposal for what is wasted. One of the problems with this was raised in debate on the Deregulation Bill yesterday. It is the differential approach to the labelling of waste between local authorities and the need for the public to understand therefore what should be put in what bin, and whether to have differential disposal of food waste because it can be used in different ways from other forms of waste. In some local authorities that is allowed and in some it is not, which seems completely barmy.
There was also some anxiety that in the waste hierarchy, which we considered would continue to be a useful tool, some of the incentives for moving food waste into waste for energy meant that other options such as animal feed, recycling and so forth appeared less attractive, even though they were higher up the waste hierarchy. While I am strongly in favour of anaerobic digestion, for example, and other forms of waste for energy, I think that area needs to be looked at because it distorts the way in which waste is disposed of.
My final point is about food redistribution, which the noble Baroness, Lady Jenkin, has just spoken about. Food banks are a feature of our life; we touched on them in the previous debate. Undoubtedly the shifting of waste food from the retail end—and increasingly, I hope, from the catering end because caterers as well as retailers need to take some responsibility in this area—into food banks is important. We saw in the Netherlands an example where fresh food was being used more substantially in that area. At the moment, if you go into supermarkets and see what is put into food banks, it is all food in tins and other packaging. In this country, there is in most cases a problem of providing fresh food. In the Netherlands, they seem to have cracked that; admittedly, we were in the middle of an intensive agricultural area. Nevertheless, for nutritional purposes as well as for food waste minimisation, food which was fresh and may have just passed its sell-by date could be diverted into food banks and other forms of food redistribution.
We learnt a lot from this exercise and a lot of things need to be followed through. I suppose that, at the end of the day, we did not think that the EU could help a lot in setting mandatory targets at this stage. However, we believe that the issue of food waste needs to be addressed by retailers here in particular and by the food chain as a whole, with support from the Government, in particular for WRAP, and by converting all of us into consumers who do not chuck quite so much away without consideration.
Water Bill
Lord Whitty Excerpts(10 years, 1 month ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Marks of Henley-on-Thames (LD)
My Lords, I support Amendment 13, which was spoken to by my noble friend Lady Parminter and to which I have added my name. I do so as a member of the Delegated Powers and Regulatory Reform Committee of which the noble Lord, Lord Haskel, who has already spoken, is also a member—other members are in their places today—to explain why that committee takes the strong view that a strengthened procedure, often called the super-affirmative resolution procedure, is important, at least on first exercise in the case of these regulations.
The context in which these amendments fall to be considered is that they are a wide-ranging set of amendments which represent a radical change of direction in the Bill. The Bill itself introduces considerable change in the way that the water industry operates, that industry being of great importance to the UK economy as a whole and to individuals. Although these amendments on retail exit are concerned with non-household supplies, as my noble friend has already stated, they are nevertheless of wide public importance.
The noble Lords, Lord De Mauley and Lord Moynihan, and my noble friend Lady Parminter have all explained the political context and impact of these amendments. I will confine what I say to the three reasons why a strengthened procedure is so important. First, there has been very limited time for the consideration of this scheme as a whole, as the noble Lord, Lord De Mauley, frankly recognised. The amendments are introduced in this House at Third Reading in response to amendments introduced earlier, notably by the noble Lords, Lord Moynihan, Lord Whitty and Lord Grantchester. However, in legislative terms, the amendments come, in this House at least, not even at the 11th hour: it is a minute to midnight. It is not, I suggest, satisfactory, and it is certainly not desirable, for nearly 11 pages of amendments to be introduced at such a late stage in the passage of the Bill without the time for lengthy and informed scrutiny of the detail of the proposed scheme. The amendments are complex and demand detailed scrutiny after all interested parties have had ample opportunity to consider them and to comment on them. The timing of their introduction has simply not permitted this to happen and the use of a simple affirmative procedure, as is proposed, would be likely to lead to a draft set of exit regulations being laid before Parliament for approval in unamendable form.
Secondly, quite regardless of the issue of timing, this is, I suggest, a case for a super-affirmative procedure in any event. The amendments would introduce into the Bill the power to make regulations which would effectively amount to an entire new legal framework to enable relevant undertakers to withdraw from the new market arrangements. If those provisions become part of the Bill without a super-affirmative procedure, then Parliament will have, as your Lordships well know, no opportunity to consider and report on the individual details of the proposed regulations and, in practical terms, no opportunity to invite detailed revision of their provisions. With the super-affirmative procedure set out in our amendment, there will be an opportunity for a committee of either House to consider the draft regulations in detail and to recommend changes to the draft for the Secretary of State to consider. The procedure proposed is similar to that in Section 102 of the Local Transport Act 2008, which the Delegated Powers and Regulatory Reform Committee recommended as a model. There is no rush to introduce these exit regulations, particularly not when they are potentially of such importance. They should not be the subject of delegated legislation without a full opportunity for Parliament to consider their detail.
Thirdly—this was touched on by the noble Lord, Lord Haskel—our committee was extremely concerned by the degree to which the amendments establish, not a list of requirements to which the Secretary of State must adhere in presenting the regulations, but a menu from which he can largely pick and choose at will. I have no objection to the fact that the power to make regulations in the first place, in subsection (1)(a) of the new clause proposed in Amendment 1, is permissive and not mandatory. It may be that the Secretary of State decides against exercising the power to make such regulations at all, although that is of course unlikely. However, if he makes such regulations, it is surely right that he should be required to incorporate all the safeguards of which the noble Lord, Lord De Mauley, spoke, which are essential to protect customers, to ensure proper consultation with interested parties, to safeguard the public interest and to secure appropriate parliamentary scrutiny. Yet the amendments as drafted are almost entirely permissive in respect of such matters.
I will trespass on your Lordships’ time for a moment or two to look at a couple of examples. Amendment 1 provides that exit regulations,
“may include provision for protecting customers”,
affected by a relevant undertaker’s withdrawal. Amendment 2 provides that:
“Provision under subsection (1)(a) may require a relevant undertaker … to consult”.
Amendment 4 states that:
“Exit regulations about the transfer of a part of a relevant undertaker’s undertaking may include provision for the making of a scheme to transfer property”.
These are all matters on which this House would wish to be given the opportunity for detailed consideration.
General directions are of general application. I will address two points on Amendment 9. Subsection (1) states:
“Exit regulations may make provision for the Secretary of State to publish … a statement setting out general directions for the”,
regulators. Subsection (4) states:
“Exit regulations may make provision for the Secretary of State, before publishing a statement under the regulations, to consult”.
These are all matters which I would expect, and I suggest your Lordships would expect, to be requirements. They are matters which concerned the Delegated Powers and Regulatory Reform Committee. The list goes on. The central point is that it is vital for Parliament to have the opportunity to consider the proposed exit regulations individually and to recommend changes to particular regulations before they become law without being restricted by the limitation inherent in a simple affirmative resolution procedure.
Lord Whitty (Lab)
My Lords, first, I apologise to the Minister that, due to a misreading of the Order Paper, I was not here to hear his first couple of minutes.
The Minister gave us a fulsome presentation of the changed position of the Government, which explained in considerable detail how these new powers would work. Those of us who sat through Committee and Report will know that the Government were faced with a pretty widespread view across the House that they needed to change their mind on retail exit. The noble Lord, Lord Moynihan, headed a series of debates which eventually brought the Government to change their mind and present these new clauses that are before us today.
It is of course a pity in many senses that this comes so late. Given this stage of the Bill, which has gone through both Houses of Parliament, it is difficult to deal with such a complex set of amendments. I am sure that when the noble Lord, Lord Moynihan, put amendments in this direction on the Order Paper at an earlier stage, and certainly when I did so, we did not expect to create quite such a substantial job-creation scheme for parliamentary counsel, but the Government have done a major job here and it would be churlish to quibble too much about it. However, there are problems with it. We all welcome deathbed conversions, but the central problem here is the lateness of the conversion. I wish that we were a stage earlier in the proceedings, when we could have tried to make minor amendments to the proposed clauses.
I echo the points made by the noble Lord, Lord Marks, in particular that there are several points in this, from the first new clause onwards, particularly in the very first line and the reference to protecting consumers, where “must” really ought to be substituted for “may”. With a bit more time, the Government might have come to that conclusion themselves in the instructions that they gave to counsel. However, we are where we are, and this is a major concession by the Government to the House. In a sense, the whole process has been a vindication of the way in which the House considers complex legislation and minds are changed—and we have the result here before us.
Lord Curry of Kirkharle
Perhaps I may respond to that as I work through my argument.
Secondly, identifying the properties that will be subject to this special treatment will require the wisdom of Solomon and might create division and resentment among other property owners who are not able to benefit from the resilience measures used.
Thirdly—here I have some sympathy with the comments made by the noble Baroness, Lady Parminter—Flood Re needs a strategy for the amount of reserves that will be appropriate and need to be built up to cover flood risk. A strategic approach to the amount of surplus required is important. It will be very difficult to determine what the reserve should be to cover flood risk over a period of years, but it is essential that a reserve is established to maintain adequate funds to cover significant flood risk.
Finally, my most important point—I respond here to the comments made by the noble Lord, Lord Campbell-Savours—is that, as a policyholder, I do not want to continue contributing to a fund that has established a significant surplus. Once the surplus has been determined and achieved, I would hope that the Government and the ABI would have a mature discussion about reducing the contributions to the fund so that they do not establish an ever-increasing fund which may never be used. It would benefit the insurance companies if they did not need to continue collecting funds to contribute to this reserve. Resilience measures are essential and should be taken as properties are restored after flooding, but it is not the role of the fund to provide the resources to do that.
Lord Whitty
My Lords, I can see the immediate attractiveness of the amendment but I share some of the reservations of the noble Lord, Lord Curry. If we are going to do this, we have to be more precise than the provisions in the amendment. The noble Lord rightly said that Flood Re will need a strategy for its surpluses and the limitations on the degree of cross-subsidy it can require from policyholders more generally. There will be a limit as to what is acceptable in that regard. It will also need a strategy to ensure that resilience and mitigation measures are adopted by those at the highest risk. If this amendment means that, and if it is a relatively small part of such surpluses—by which I mean a very small part—I can probably go along with it. If, however, it is as open-ended as it appears—and we know what the demands for flood mitigation as climate change and population pressures increase are likely to be—the temptation for insurance companies outside the system, the Government and the population to try to raid the Flood Re surplus for those purposes will begin to increase as well.
Despite the initial attractions, I do not think I can support the rather open-ended nature of the amendment as it stands. However, as we move forward and review the scheme, I hope that the Government and the administrators of Flood Re, along with other stakeholders, will find ways of ensuring a maximal take-up of resilience measures by those who own properties at risk and their insurance companies.
Lord De Mauley
My Lords, I thank my noble friend Lady Parminter and the noble Lord, Lord Krebs, for Amendment 14. I am glad to be able to return to your Lordships, having considered the proposals in more detail. As I have said previously, reserves that build up during the lifetime of Flood Re will be used primarily to pay flood claims in the bad years. It will not be easy to identify surplus funds and any decision about Flood Re’s reserves will require a judgment about the level of cover needed for the unpredictable risks it bears. Any commitment by Flood Re to spend a proportion of its reserves in a certain way, such as on betterment or resilience, would potentially increase the amount of capital it needs to hold on an ongoing basis, thereby having an impact on the cost of the scheme and ultimately the levy.
However, it is entirely right that there should be clarity on the principles regarding how surplus reserves would be dealt with, should that situation arise. This is not about small reserves that could provide one or two years’ comfort for Flood Re, but significant additional capital implying that Flood Re is excessively capitalised. It is important to recognise that this is not a situation that we anticipate occurring in the first few years of Flood Re’s life, as reserves will build up only gradually, if at all.
We have previously set out that during Flood Re’s life, we would expect the levy and eligibility thresholds to be set in such a way as to manage down excess reserves. I agree with my noble friend Lady Parminter that it should be open to Flood Re to spend some surplus money on resilience measures if it is appropriate to do so as part of its commitment to support households to prepare for risk-reflective pricing. Flood Re will have a duty to deliver value for money. One of the benefits for both households and insurers of installing property-level resilience measures is that, properly fitted, they can reduce the cost of future claims. Research suggests that for some homes, installing resilience measures can reduce the cost of subsequent flood claims by more than 70%. While we recognise that there is still work to be done to improve the evidence base, a point that the insurance industry raised in the Public Bill Committee on the Bill in the other place, I strongly agree that investment in resilience measures from whatever source could have a role to play in reducing the overall cost of claims over the lifetime of the scheme.
I recognise, too, that it would be helpful to provide greater clarity about how Flood Re will support policy- holders to prepare for transition to risk-reflective prices. We therefore propose that the secondary legislation, which will itself be subject to the affirmative procedure, will set out in more detail the points that Flood Re’s transition plan should cover, including that Flood Re could encourage and incentivise policyholders to make their properties more resilient to flooding. We will also expect Flood Re to consider in broad terms the process for managing any surplus during the lifetime of the scheme, either as part of the transition plan or in its wider governance framework. Parliament will have an important role to play in holding Flood Re to account for its use of resources and the delivery of its purpose, and its directors will be directly accountable to Parliament for that.
In relation to any reserves at the end of Flood Re’s life, as I have previously explained, Clause 71 allows the Government to require Flood Re to transfer a sum of the reserves to government, following consultation with Flood Re. It will ultimately be for the Government of the day, in consultation with Flood Re and Parliament, through affirmative resolution, to decide on the treatment of any reserves. I reassure your Lordships that there is no presumption about how reserves might be disbursed.
Lord Whitty
My Lords, I am grateful to my noble friend Lord Campbell-Savours for tabling the amendment and, more particularly, for reminding the House and the Government that at the end of Report there was still considerable confusion over inclusions and exclusions in Flood Re and, as the poignant examples that my noble friend has alluded to make clear, a considerable amount of alarm out there about the potential exclusion from insurance of leaseholders in particular but also of other groups of people who are not clear whether they are included or excluded. As the noble Earl, Lord Lytton, has just said, it is a question not just of insurance but of current and future mortgage and other loans that one can raise on the property, and it therefore has very profound effects.
As the noble Earl said, whether we need a review every year is one matter, but it is incumbent on the Government to say that we need this continually under review, and the only formal reference to review is every five years. This confusion and alarm need to be cleared up a lot sooner than in five years’ time. I hope the Minister can at least give some reassuring words to my noble friend that that will indeed be done.
Lord De Mauley
I thank the noble Lord, Lord Campbell-Savours, for his amendment and I thank him even more for reminding me that, in my excitement over my earlier amendments, I have so far omitted to declare my interests, and I should do so. I own a farm, through which a tributary of the River Thames runs, I have an extraction licence, a bore hole, a house which was flooded in 2007 and a minority stake in a lake. I am glad to put that on the record.
As I explained in previous debates, Flood Re will be subject to regular review. We expect these formal reviews will take place at least every five years. These formal reviews will need to consider the effectiveness of Flood Re in discharging its purpose and functions. Importantly, the reviews will also need to consider the levy and premium thresholds, particularly in relation to its capital model, which we debated in detail earlier in relation to the amendment from my noble friend.
The reviews will also need to consider Flood Re’s effectiveness in managing the transition to risk-reflective pricing over the operation of the scheme. As I said earlier, the secondary legislation will set out in more detail the points that Flood Re’s transition plan should cover. Flood Re will have to lay its accounts in Parliament on an annual basis, and its responsible officer will be directly accountable to Parliament. The Comptroller and Auditor-General will examine Flood Re’s economy, efficiency and effectiveness as well as its propriety and regularity.
It is also important to note that there is nothing to preclude the formal reviews taking place more frequently, which the noble Lord, Lord Whitty, asked me to confirm, should concerns be raised; for example, if it is seen that excessive surpluses are being built up.
I hope that it is clear that Flood Re is going to be regularly reviewed and closely scrutinised, but we need to strike a balance and, in particular, I am concerned about significant risks to the certainty and stability of Flood Re income if it is under constant review. Flood Re, the insurance industry and policyholders need to have some degree of certainty about its operation and Flood Re must be allowed to plan for transition accordingly. Insurance is a long-term business. An annual review of the scheme would be resource intensive and I am not clear what added value it would bring in addition to the current arrangements for parliamentary scrutiny.
In addition to the formal review process which will be carried out at least every five years, as I have described, both the Government and the Association of British Insurers have committed to monitoring the market for flood insurance and will publish the results of that monitoring.
Lord Whitty
My Lords, I thank the Minister for these amendments and for his explanation. I will not oppose any of these amendments, as he is no doubt gratified to hear. I will make two points, one of disappointment and the other of praise.
The disappointment is that among amendments brought forward by the Government at this stage are not those that relate to clarifying the position on abstraction reform and on providing some greater assurance on affordability of water bills. Whoever is in government in the next couple of years must address those two issues with some degree of urgency. It is a pity that we did not manage that in the Bill.
My praise, like the Minister’s, goes to his officials, who undoubtedly gave us a lot of information at the beginning of the Bill and put up with all our idiot child questions throughout the Bill. We made considerable progress, even today. I thank the Minister and the noble Baroness, Lady Northover, for their patience.
Water Bill
Lord Whitty Excerpts(10 years, 1 month ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“Onshore oil or gas activities: effect on water environment
In Part 1 of Schedule 5 to the Environmental Permitting (England and Wales) Regulations 2010 (environmental permits) after paragraph 13 there is inserted—“Onshore oil or gas activities: effect on water environment
13A. Without prejudice to the operation of regulation 35(2) and paragraph 5(1)(d) of Schedule 10 and of regulation 35(2) and paragraph 7(j) of Schedule 20, the regulator shall refuse an application for the grant or variation of an environmental permit or for the transfer in whole or in part of an environmental permit if—(a) the regulated facility to which the application for, or transfer of, the environmental permit relates is to be carried on as part of an onshore oil or gas activity; and(b) the regulator is not satisfied that the applicant or the proposed transferee has made or will make adequate financial provision for preventing or mitigating pollution of the water environment, by ensuring all of the following—(i) operation of the regulated facility in accordance with the environmental permit;(ii) compliance with any enforcement notice or suspension notice or prohibition notice or mining waste facility closure notice or landfill closure notice which may be served on the applicant or transferee by the regulator under these regulations; (iii) compliance with any order of the High Court which may be obtained against the applicant or transferee under regulation 42 for the purpose of securing compliance with any of the notices listed in sub-paragraph (ii);(iv) compliance with any order of any court issued under regulation 44 against the applicant or transferee; and(v) recovery by the regulator of its costs upon any exercise of its power against the applicant or transferee under regulation 57;(c) for the purpose of this paragraph “onshore oil or gas activity” means any activity for the purpose of exploration for or extraction of onshore oil and gas;(d) for the purpose of this paragraph “adequate provision by way of financial security” means financial provision which is sufficient in value, secure and available when required.””
Lord Whitty (Lab)
My Lords, this subject may be familiar to the cognoscenti because it has been before this House in Committee and was discussed in the Commons. I am bringing the amendment back because it is an issue that the Government will have to face up to at some point, whether in this Bill or elsewhere, and the sooner the better. It concerns the effect on water supply and water quality of fracking for shale gas or oil.
I have been looking at earlier debates on similar amendments, and the Government’s responses here and in another place seem to reflect that they have assumed that this is an anti-fracking amendment. It is not. Indeed, it assumes that there will be significant development of shale gas over the next period, and that such development will eventually and inevitably use significant amounts of water, and may have detrimental effects on the quality of water and ecosystems if not effectively regulated. It makes no judgment on the broader issue of shale gas and fracking and its effect on overall energy strategy. We could have a debate on energy strategy today; if noble Lords want my view, it is that while there will be a significant development of shale gas in the UK and in Europe, it is unlikely to result in the kind of transformation in prices, energy supply and energy mix that we have seen in the United States. In terms of its effect on climate change and the carbon market, it rather depends. If shale gas leads to a faster reduction in the use of coal and oil for generations, then it will be positive. If it slows down the adoption of nuclear and renewable technologies, it will be negative.
Either way, there are concerns about the immediate environmental and resource effects of fracking processes—primarily, and in the context of this Bill, in relation to water. These effects occur in three broad ways. The first is the possible pollution of water systems and aquifers by chemicals that are released in the fracking process, and the release of methane. Secondly, there is the substantial effect on the level of abstractions and supplies of water needed in the fracking process itself. Fracking companies will need huge supplies of water—clean water, rather than direct abstraction—and that will have an effect on the levels of water resources available, sometimes in our most overstretched river catchment areas. That will therefore have an effect on total supplies and indeed on the cost of water. Thirdly, there are the effects of the operation of cleansing the water that is used in the fracking process prior to its re-entry into the water system, and its effect on the robustness and the operation of water treatment plants. On all three fronts, things can go wrong, and it certainly means that there are significant changes in both the water catchment structure and in availability and on the delivery of clean water.
I am not scaremongering. It is perfectly possible to regulate the fracking process to minimise pollution and to avoid drastic damage. It is possible to license the use of water and the supply of water resources so as to avoid any major curtailment of overall supplies. However, it is also true that the effects will not be contained by regulation operation by operation, and that there will be aggregate effects and potentially significant damage to ecosystems and detriment to the water systems over time. The amendment would recognise that and would try to ensure that the fracking operators, as a condition of their licence, made provision for possible future damage to the water supply system and the costs of clean-up. History shows us the necessity for this. Previous generations of different forms of energy sources—coal and nuclear, for example—show that substantial potential damage was done to the environment, in terms of subsidence or whatever, to the landscape and to public health but that liabilities or potential liabilities were not met by the entity actually doing the damage, whether that was the state in the nationalised period or the private owners of coal mines. The cost has in effect been met by taxpayers.
Lord Whitty
I thank the Minister for that detailed reply. I thank the noble Lord, Lord Cameron, for his support and the noble Baroness, Lady Parminter, and the noble Lord, Lord Shipley, for their interventions. I accept that it is slightly odd to put this in the Bill. However, water is a big part of the fracking operation and fracking has a significant effect on water. In all that the Minister said, he did not say when he would come forward with the kind of structures that he promised in the previous debate and which are underlined now.
I recognise that one cannot differentiate in relation to conventional oil and gas operations onshore. We have had plenty of those in this country; we operated onshore oil extraction in Dorset for decades. One cannot differentiate in terms of the relative regulations.
I accept, too, that the issue is wider than that of water. However, somewhere we need to see the Government make progress in creating the arrangements that the Minister has now twice referred to—namely, an obligation to ensure financial resilience and possibly the creation of separate funds to ensure that they could meet the effects of clean-up. I am sure that the Minister is right that this requires substantial consultation. I certainly agree that ideally we should consider the effect of fracking holistically on all environmental issues across the board, as the noble Baroness, Lady Parminter, said.
I hope the noble Lord is right that we can move fairly rapidly on this as a large number of relatively small-scale operations could arise in a lot of locations. In view of the damage that could be caused, one has to question the ability of the regulatory authorities to enforce standards on all those operations at all times. The care that the operators will exercise will be proportionate to their financial stake in the operation and their bottom line. Therefore, it is important that they make financial provision to cover that before these operations reach scale. That is what this amendment is about. I accept that it is not entirely appropriate, but I think the Government have accepted that something needs to be done in this regard and I hope that they will introduce an appropriate measure in legislation or regulation as soon as possible.
In the mean time, I beg leave to withdraw the amendment.
Lord Whitty
My Lords, I, too, do not object to these amendments and I congratulate the Minister on getting through them in six minutes flat. Many of them will be substantial improvements to the Bill, particularly the ones which iron out a few things in relation to Ofwat in terms of the changing competitive regime. I very much welcome that. However, the noble Baroness will be aware that, in its second riposte, the Delegated Powers Committee said that it is not entirely satisfied with the provision for only the first instance of definition being by affirmative regulation. The Government will have to have an answer to that. In general, it is sensible for Ministers to swallow hard and accept all the recommendations of the Delegated Powers Committee, otherwise it ends in trouble down the line.
The only other thing I would ask about is Amendment 90T, which relates to hybridity. I do not really want to have a debate on hybridity now, but the Delegated Powers Committee raised the issue, and I am not sure that the Government’s response fully meets the point, because it effectively says that, whether it is hybrid or not, we are going to ignore it. I am not sure that is a satisfactory response, but if the Delegated Powers Committee will buy it, I will not object. Otherwise, we welcome these amendments.
The Earl of Lytton (CB)
My Lords, this is the first time that I have spoken at this stage of the Bill and I, too, must declare that I live in a band H property. However, I also have a professional interest in parts of the Bill by virtue of being a chartered surveyor. I certainly welcome the proposals for the affirmative resolution procedures outlined by the noble Baroness and agree that the disclosure of council tax information is necessary. However, I have one query, which relates to Amendment 90CD. Could the noble Baroness confirm that the normal process of disclosure will generally relate to the identity of the property and its council tax band rather than the identity of the chargepayer, the latter being something that is normally held by the billing authority? If I have missed some point about the disclosure, and where the identity of the individual can be discovered, perhaps she would put me out of my misery.
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.
Lord De Mauley
My Lords, I thank the noble Earl, Lord Lytton, for his Amendments 89 and 90. He raises issues which I know are of concern to people and I thank all noble Lords who have spoken on all sides of the argument.
Amendment 89 to Clause 51 would require that all properties included in the calculation of the levy are eligible for the scheme. It is important to remember that while many homes in the United Kingdom are at some risk of flooding, Flood Re is designed to address an affordability issue for the 1% to 2% at the highest risk of flooding. The levy will provide Flood Re with a funding pool which will be combined with the premium income from those policies which are to be ceded to Flood Re. This will be used for the purposes of the Flood Re scheme, including the purchase of reinsurance and payment of claims. The purpose of having a pool, as is the case for much of our taxation, is that costs are shared by many so that those most in need can benefit. If everybody who paid the Flood Re levy stood to gain, there would be fundamental implications for the required amount of the levy. Alternatively, if the levy was limited to flood-prone households, the pool would not be large enough to have a significant impact on prices and therefore on the affordability of flood insurance.
The insurance industry has been clear that low-risk and no-risk householders have historically subsidised flood insurance for those at a higher risk of flooding and that the move to risk-reflective pricing will over time remove this cross-subsidy from the market. The levy simply replicates and formalises this existing cross-subsidy. Indeed, the ABI has assured us that the levy can be introduced without having an impact on bills in general for householders at a low risk and no risk of flooding, for those in band H or for those with properties built after 1 January 2009—that is, those outside the pool.
If I understand the noble Earl’s intention correctly, I think he is particularly concerned to ensure that those properties which are not eligible for the scheme—such as band H properties, properties built after 1 January 2009 and certain leaseholders on commercial policies—either stand to benefit from Flood Re or do not pay the levy. While I understand that cross-subsidising something from which you will receive no benefit might be perceived as unfair, I have explained why there always have to be some net contributors to make a pooling system work, and this includes the overwhelming majority of households at low risk or no risk of flooding. We discussed the rationale for the scope of Flood Re at length in Committee, and I explained that we think that we have got the balance right. The Government’s approach was widely supported in the response to the 2013 consultation. This approach means that those who are most in need of support will receive it to enable a smooth transition to the free market.
The noble Earl commented on the complexity of the scope of Flood Re. The proposed criteria reflect the current situation for purchasing a domestic insurance policy. We are not seeking to change the circumstances under which insurance is purchased through Flood Re. We must remember that Flood Re is designed to help those people at the highest flood risk, which we estimate could be around 500,000 households. I have heard some very fanciful numbers being bandied around, and they all miss this point. I am not saying that the Government are not still listening to the debate. We will monitor the market, as will the ABI, and we will publish our findings. Should the evidence point to specific issues with insurance for particular sectors, we will discuss with the insurance industry what might be possible.
Lord Whitty
“Flood Reinsurance Scheme: report on the inclusion of leaseholders
(1) The Secretary of State must prepare and publish a report on the basis of the inclusion and exclusion of leasehold and tenanted properties in the FR Scheme.
(2) The report shall include a breakdown of—
(a) the total number of leasehold and tenanted properties which are in the risk areas covered by the FR Scheme;(b) the number of leasehold and tenanted properties where the land is controlled by large multisite commercial operators;(c) the number of leasehold and tenanted properties which are owned by smaller landlord operators; and(d) the cost of including in the FR Scheme properties in paragraph (a) and each of paragraphs (b) and (c).(3) The Secretary of State must lay a copy before Parliament within 6 months of this Act coming into force.”
Lord Whitty
My Lords, I will try not to repeat too much of what was covered in the earlier amendment of the noble Earl, Lord Lytton, but there is obviously some overlap.
Of all the exclusions from Flood Re, that of leasehold and tenanted residential properties was, certainly out there, the most unexpected and, on the face of it, the least logical and most inequitable. As the argument about it has gone on, it has also become the most complex and confusing. Leasehold and tenanted buildings in a flood-prone area are faced with exactly the same risks as the freehold properties next door. That is where we start from. The families and individuals who live in these properties face exactly the same problems. These are residential properties; generally, no business is conducted from them. They are people’s homes. Yet the Flood Re project, which was the product of bilateral negotiations between the Government and ABI without any direct engagement with landlords, leaseholders or tenants, now appears to regard these properties and that risk as being different in kind to that of the freehold buildings in the same street. The rationale for that is that letting a property—whether long or short-term—is regarded as a business. The risk must be the same and the families will not be very different, yet they are treated entirely differently.
Since the original proposition for Flood Re, its terms have been, shall we say, “elaborated”—that is, amended in some respects or, to put it more bluntly, confused. For example, the ABI made it clear—this is a clarification, in a sense, but it confuses the issue—that contents insurance paid for by tenants and leaseholders would be part of the scheme and included in Flood Re, but obviously not the landlord’s buildings insurance paid for by the landlord. That makes the arithmetic a bit more complicated. Clearly, the £10.50 levy on other households—they presumably pay the full buildings and contents insurance—does not apply to that group. That leaves a lot of grey areas. For example, one of the most serious problems for leaseholders and tenants will often be that the flood damage has caused depredation to the fittings and furniture, some of which—in the case of fittings, most of which—will be covered by the buildings insurance of the landlord. Of course, landlords have contents insurance so it is not necessarily the same position as that apparent distinction creates. The effect is that the whole situation is more blurred and complicated.
The Government have also complicated the system. Just recently, they apparently conceded that properties of three or fewer leases are in the scheme, provided that the freeholder lives on the premises. Anything more than three, or where the freeholder happens to live down the road, is outside the scheme. There is also a rumour, though it does not seem to be substantiated, that the ABI and Government were also looking at the possibility of distinguishing between small landowners or single-property landlords and large, commercial operations. Where does that all leave us?
Let us take a typical street in a low-lying riverside area of a market town. For the purposes of making us all at home and in deference to the Minister’s patience in dealing with all the complications of the Bill, let us call it De Mauley Street. In De Mauley Street, No. 2 is a family house with three generations living there from two to 80. No. 4 looks and is very similar but is divided into four flats, one of which is occupied by the landlord at least occasionally. No. 6 is a house divided into four leasehold flats that have jointly bought the freehold and administer it as a leaseholder-owned company. No. 8 is, let us say, owned by a school teacher resident in London who bought the premises for her retirement and is letting it out as four student flats. No. 10 is a four-flat block owned by a commercial leasing company with four leaseholders. I am tempted to add a No. 12 that is a mixed property, but that would complicate it too far.
Under the original proposition, No. 2—the family home—is covered but nobody else. Under the ABI concession on contents insurance, No. 2 is covered and all the rest are, but for leaseholder-paid contents insurance only; everything else is not covered. Under the Government three-leases concession, Nos. 2 and 4 are clearly covered, provided you can prove that the landlord actually lives at No. 4, but only the tenant-owned contents in No. 8 is covered. As I understand it, No. 6 would also be covered because the leaseholders jointly own the freehold and therefore one of them lives on the premises. In Nos. 8 and 10, only the tenants’ contents insurance will be covered. We are already in a very confused position.
If there were a cut-off defined by size of landlord, nos. 2, 4, 6 and 8 would be covered but not No. 10. If there happened to be a social landlord in the same street—there would probably not be in De Mauley Street—nobody would be covered because social landlords are not. Incidentally, I am not sure because we have not touched on it what the position is on mixed blocks. With the right to buy, some of the social landlord’s property may well be owned by private leaseholders, who presumably ought to be covered and may well assume that they are—but are not. We have a bit of a pig’s ear of a situation here. None of it is very logical. The properties are pretty much identical, the risk is the same and they thought they were all included under the pre-existing arrangement of the statement of principles.
The long-term implications of this are particularly severe. Particularly with small landlords and their tenants, if they cannot get insurance then they cannot get a mortgage or raise money for improvements. Hence the buildings deteriorate. The only way they could raise money would be to raise rents or the service charge, so tenants and leaseholders suffer directly. The area starts going downhill because the buildings appear more dilapidated and more obviously at risk. The tenant and leaseholder experience suffers, the landlords suffer and the number of new landlords prepared to invest and buy property diminishes in those areas. This is not a situation that the Government find easy to defend, but I think even the insurance industry is beginning to find some difficulty in defending it.
Having said that, as I said earlier in the previous debate, we recognise that the actuarial calculations for Flood Re are delicate and depend on various assumptions. I do not intend to unravel those calculations at this point by this amendment, but it is important that Parliament understands the position so this is a relatively modest amendment. It does not require Flood Re, the Government or the ABI to do anything directly. However, because the scheme has to have statutory backing and because to give that statutory backing Parliament needs to be convinced that it is logical, equitable and proportionate, Parliament needs to understand the consequences of including or excluding different combinations of property.
The amendment therefore seeks to find that out. It does not seek to delay the process—well, not by much. However, it proposes that before we finalise the statutory instrument on this—and it will need a final statutory instrument—the Government report back to Parliament on: the number of leasehold and tenanted properties included; the number excluded; the number where the landlord is in business in a large way; the number where a landlord is in business only in a very small way—probably with a single property; and the cost that would arise from including each of those categories in the Flood Re proposition. I am leaving the dividing line between large and small largely up to the Government, but we need to have a clear one.
The information that that report would show to Parliament would mean that we, and interested parties, could have a meaningful discussion before the consultation started—or within the consultation—on the statutory instrument, which I am assuming, because this is supposed to start in 2015, would have to be within a very few months. Without that information, we in Parliament are in danger of giving the go-ahead to what appears to every rational observer to be a seriously inequitable, complicated and illogical scheme, which we are about to back by legislation. I do not need to tell Ministers that that situation is probably judicially reviewable.
This amendment therefore asks the Government to give us the facts before we finally go down the road. In a way, it is not delaying this legislation going through, but it would allow us to face up to the facts before the final statutory instrument is carried. At the moment, frankly, we do not have those facts. The Minister referred to fanciful figures. A number of very reputable insurance companies and others have bandied about a number of different figures. I do not know the total number that fall into each of these categories nor, I suspect, does the Minister or the ABI. However, we need to know—at least approximately—and we need to know the cost consequences for them, for the scheme and for those in the rest of society who are subsidising this scheme what the effect would be. Therefore, we do need that information. This amendment would allow the Government, without holding everything up, to get that information and to report back to Parliament. In my view it is pretty obvious that Parliament needs to know. I beg to move.
Lord Cameron of Dillington
My Lords, this is a very mild amendment to which I certainly would have added my name if I had become aware of it in time. There is no doubt that the exclusion of the leasehold and rental sector is the worst lacuna of the current Flood Re scheme. I understand the original political thought process—that professional landlords should not be helped to overcome their flood insurance problems by those who live in band A properties, for example. Of course, that political thought process is a fairly simplistic and stereotypical understanding of the average landlord. This is an important fact: 78% of all landlords own a single dwelling for rent.
As noble Lords know, there are many professions where a dwelling goes with the job. In my part of the world, farm work is the most common example. Many farm workers and tenant farmers buy a house to retire to, and, of course, they let it while they are still working, largely to help with the mortgage. It is perfectly sensible retirement planning and the Government should encourage it. Furthermore, perhaps it is a typical English aspiration, but many people currently living and working in cities have a dream of buying a house in the country and retiring there—similar to the farm workers who I have just mentioned—and they will let it in order to help pay the mortgage on it.
This Bill does not recognise these dreams of ordinary—well, the noble Lord, Lord Whitty, mentioned schoolteachers, but it could have been anyone really: secretaries, nurses, anybody. It does not, to borrow a phrase from Yeats, tread softly on their dreams. They are excluded from this scheme. Surely these are the people for whom this scheme should be designed—people whose mortgage companies will insist on full insurance, including flood insurance. But what about those who cannot afford a house, in the country or elsewhere, and buy a flat? I cannot think of a more appropriate person to benefit from this scheme. However, along with 60% of the other households, they will almost certainly be excluded from this scheme while at the same time contributing to it.
I will not give the rest of the speech on leaseholders and flat owners because that has already been very well covered by the noble Lord, Lord Whitty. However, it seems strange to exclude householders whose only error has been to choose to live in a flat rather than a full-blown house. It seems unjust to me. A much more sensible cut-off point for the application of Flood Re would have been owners of, say, two, three or four let properties. However, all that apart, this amendment will at least ensure that we have a full understanding of the sort of owners, leaseholders and tenants whose property is being excluded and what they could have contributed to the scheme if they had been included. As I say, I think that this is a very mild amendment, merely touching on a problem that is a major shortcoming in the Bill. I hope that the Minister will look kindly on it.
Lord Whitty
My Lords, I recognise some of the things that the Minister is saying, but the fact is that that is not the perception out there. I do not mean the perception of somebody who has read only a few articles in their local paper or the national press; I mean the perception of the representatives of small landlords. They do not think that is the position. They do not think it is easy for them to get insurance for properties within the risk area. The representatives of the Council of Mortgage Lenders are extremely worried about being asked by owners of leasehold and tenanted properties to advance mortgages against properties that it is difficult to insure. It is not even the perception of the managing agents, who by and large have the larger properties, who also think that they are in some difficulty. As it happens, I met all three groups first thing this morning. They remain unconvinced about what is essentially the Government’s line.
If you look at this from the point of view of the leaseholders and the tenants—let us leave aside short-term tenants for the moment, although I echo the point raised by the noble Lord, Lord Cameron of Dillington, whose support I am very grateful for on this, that most tenanted properties are actually owned by a landlord who has a single property—they have a difficulty in raising insurance in the first place, and certainly for property within a flood risk area they will find even greater difficulties now.
Probably the most acute difficulty, though, is for those who are in long leases and are leaseholders because of the nature of the freehold relationship to their property, but who for all other intents and purposes regard themselves as home owners. They have a long mortgage on the leasehold property, they conduct all their affairs, including their insurance, on their own part of that property, and they do not regard themselves as being any different in status, vulnerability or risk from the people next door who are freehold owner-occupiers.
There are many people in that situation in many parts of the country, including some that are subject to serious flood risk. For them, the message is going out, “The next-door neighbour is covered but you are not, because you own”—as the noble Lord, Lord Cameron of Dillington, said—“a flat and not a house”. They may be on a very long lease, but, nevertheless, they are differentiated in this respect.
As I say, this amendment does not seek to rectify, turn over or redefine the boundaries; it simply asks that Parliament should know what the situation is before it finally signs off this scheme. It may be that everything the Minister has said is upheld in the feedback, but we have had representations from both landlords and leaseholders of property who, whether they have a property with 12 flats or three flats, have the same problem and do not believe that they are going to be covered. They think that the Government and the insurance industry are letting them down because they are not covered.
At least Parliament should know what the situation is. That is all my amendment asks. If the Government are not prepared at least to accept that they will formally report back on this to Parliament before the next stage, or before an SI is produced, for the sake of all those people out there who think that they are being treated inequitably, illogically, unfairly and non-transparently, I have to ask the opinion of the House on this amendment.
Lord Whitty
My Lords, I have some slight difficulties with this amendment. I understand the concept and, in a sense, I want the outcome. The role of the insurance companies’ relationship with householders—whoever they may be, in the light of the previous debate—in improving the resilience of their properties is an important dimension of this scheme. Some of it is deliverable through the normal relationship between insurance companies and their premium payers, in the sense that a condition of the insurance or of the level of excess on the insurance can be that they put in such-and-such a resilience measure or that they meet certain standards in the property. The insurance companies can in some circumstances go further than this and make a grant towards them. The problem with the amendment is that it feels too open-ended.
To answer the question about whose money it is, the money is contributed by the rest of us. It is the £10.50, or whatever it turns out to be, that the rest of the population puts into looking after high-risk properties. There is therefore a need for due diligence that that money does not go to diffuse purposes. If this amendment would lead to significant sums of money in surplus years being used in a different way, then issues of accountability arise. A more tightly worded amendment would probably meet with my approval, but people reading this could think that, if you have a surplus of £500 million after 10 years, you should be spending it directly on grants to householders in risk-prone areas to improve individual or communal flood defences. I do not think that is what is meant, but the wording could be susceptible to that meaning. I therefore support the general concept, but I do not think this amendment achieves it in a way that is easily defensible to home owners who are contributing to the financing of this scheme.
Lord De Mauley
My Lords, I thank my noble friend Lady Parminter for her amendment, which deals with a very important subject. I thank all other noble Lords who spoke to it.
Actions taken by government, communities, individuals and businesses to reduce levels of flood risk are indeed the best and most cost-effective way to secure affordable insurance and value for money from Flood Re in the long term. In addition to the substantial levels of investment in flood defences that I referred to in an earlier debate today, we are also taking action to ensure that households are supported to improve their property-level resilience. For example, grants of up to £5,000 are available for households and businesses that have flooded this winter, and applications open tomorrow. In addition, there are community projects in which we are investing more than £4 million over two years in order to learn about the most effective strategies to drive community resilience to flooding. Nevertheless, I recognise my noble friend’s intention to see Flood Re’s role reflected in the Bill.
Reserves that build up during the lifetime of Flood Re will primarily be used to pay flood claims in the bad years. Flood events are by their nature unpredictable, so while it may be possible that Flood Re would have a number of good years in which it built up reserves, it is equally possible that a run of bad years with heavy flooding could wipe out any reserves built up within Flood Re. As such, it is not easy to identify surplus funds, and any decision about Flood Re’s reserves will need to involve judgment about the level of cover needed for the unpredictable risks it bears.
Added to this, as an authorised re-insurer, Flood Re will be required by the Prudential Regulation Authority to hold certain minimum levels of capital. Any commitment by Flood Re to spend a certain portion of reserves in a certain way—for example, on betterment or resilience—would necessarily increase the amount of capital it is required to hold on an ongoing basis, having an impact on the cost of the scheme and ultimately the levy.
It may well be that, in due course, the Flood Re administrator decides that investments of the sort my noble friend would like to see present the best way of Flood Re fulfilling its obligations to manage the transition and act in the public interest. However, these are choices that are difficult to make before the scheme is established or has any sort of track record. Nothing in the Bill precludes this.
Alternatively, in due course, Flood Re may decide, in consultation with government, that the best use of any surplus is to reduce the level of the levy, thereby helping to deliver affordability for all policyholders, not just those in Flood Re. We would not, at this stage, wish to see Flood Re’s hands tied in legislation that could have an unpredictable and undesirable effect.
We have always been clear that there should be a gradual transition to more risk-reflective prices. We expect the transition plan to set out how Flood Re intends to support households to adapt to the withdrawal of support from Flood Re over time. We will not designate Flood Re unless we are satisfied with the industry’s proposals for the scheme, including the transition plan.
It is important for Flood Re to retain flexibility in the way it discharges its public interest duty and plans for transition in order to ensure that it is in a position to balance these requirements against its core financial obligations. However, my noble friend’s amendment draws attention to the need to offer more clarity about what might happen in the event that a surplus is accumulated, particularly in relation to managing the transition.
I should say that I have considerable sympathy for the points made by the noble Lord, Lord Campbell-Savours. I have first-hand experience of where exactly the type of sensible resilience measures he has suggested cost no more than putting things back exactly as they were before the flood so the insurance claim could cover them. He also referred to advice, which is clearly an important part of that. A number of sources of independent advice are available today. The National Flood Forum can direct flood victims to appropriate measures. Furthermore, we are continuing to discuss with the industry whether any of the reserves could be used to fund surveys.
As I have said, I am very grateful to my noble friend and the noble Lord, Lord Krebs, for bringing this to my attention. I would like to take the opportunity to discuss their proposals with them further before Third Reading. Although I cannot of course guarantee that I shall be able to bring something back, I may be able to clarify the Government’s position further. I hope that I can persuade my noble friend to withdraw her amendment.
Lord Whitty
“Appeals on removal from the Flood Reinsurance Scheme
(1) The Secretary of State shall by order establish a right of appeal for a household which has been removed from the Flood Reinsurance Scheme.
(2) The Financial Conduct Authority shall be responsible for the hearing and administration of appeals under subsection (1).
(3) An order under subsection (1)—
(a) shall be made by statutory instrument; and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.(4) An order under subsection (1) must be made before the Flood Reinsurance Scheme has been implemented.”
Lord Whitty
My Lords, Amendment 90DA is relatively straightforward. Clause 63 provides for reviews and appeals against premises being deemed not eligible to be entered in the register of those covered by Flood Re. As it is written, Clause 63 indicates that when the register is drawn up there is a list of which households are either in or out, according to the risk assessment at the time.
This is a 25-year scheme and things will change over 25 years. My amendment is designed to add to the provisions of Clause 63 and appeal against the removal from that list at a later stage. It is really a tidying-up. However, removal from the list could arise for a number of different reasons. It could be because the insurance sector had decided that the risk had changed; but that could be because the Committee on Climate Change—the noble Lord, Lord Krebs, is no longer in his place—had advised of a change and that there was less risk in that particular area. It could be that the Environment Agency’s map had changed. It could be that the aggregated data from the insurance companies showed that that type of property was at less of a risk than it was assumed to be at the beginning of the scheme, bearing in mind that we are potentially 25 years on. It could be that resilience had been provided on some other basis—for instance, a flood defence scheme may have been built down the road—or that the catchment management in that area had significantly improved and diverted the flood away from that property to somewhere else. In an urban area, it could be that there had been major investment in the drainage system, which meant that the property was significantly less susceptible to surface flooding. There are all sorts of reasons why, objectively, the flood risk might diminish. Regrettably, in the light of the macro information from the Committee on Climate Change, it is more likely that a property will be drawn into the list than drawn out of it; but there will be such exclusions.
There could also be exclusions that are more esoteric to the insurance industry, in the sense that if insurance companies were insisting, as a condition of continued insurance, that that resilience measure should be introduced at the expense of the householder, one way or another, and the householders were not prepared to provide for that level of resilience expenditure, then either the offer, or renewal, of insurance would be taken away or the excess would be put at a level which the premium payer was not prepared to pay.
There are all sorts of reasons why a property might end up being removed from that list. If that is the case, there has to be the equivalent appeal against that in a situation where one is excluded from the list from the word go. As I read it, Clause 63 provides only for exclusion from the register in the first place; it does not provide for removal from the register. My amendment seeks to correct that gap. I beg to move.
Baroness Northover
My Lords, I thank the noble Lord, Lord Whitty, for this amendment. As we have previously discussed, a rigorous regulatory and dispute resolution regime for the insurance industry already exists, to ensure that insurers treat their customers fairly. Flood Re will not change the direct relationship between the insurer and the householder. Where households do not feel that a complaint has been treated fairly, they can contact the Financial Ombudsman Service, which offers a free dispute resolution service for people who wish to complain about how their insurance company has treated them. While the Financial Ombudsman Service is equipped to deal with individual complaints, the Financial Conduct Authority has a statutory objective to protect the wider interests of consumers and ensure that firms are giving a fair deal to their customers.
We need to remember that Flood Re is a voluntary scheme: insurers are not obliged to use it. We therefore maintain that there is no need for a specific appeal mechanism for Flood Re per se. Flood Re is not based on a register of properties; it is a voluntary scheme and so there are no grounds for an appeal mechanism.
However, the noble Lord is emphasising concern about who might be excluded from Flood Re over time. As was said in the other place, the memorandum of understanding agreed between the Association of British Insurers and the Government last year talked about genuinely uninsurable properties. As my honourable friend the Parliamentary Under-Secretary of State for Water, Forestry, Rural Affairs and Resource Management said, there will be no such thing as a genuinely uninsurable property at the start of Flood Re. However, there might be a case that over time, if householders choose to take no action to tackle their flood risk, Flood Re might seek to find a mechanism whereby they no longer benefit from the public subsidy. We have reflected further on that issue, working closely with the ABI. I can reassure noble Lords that our focus is on supporting households to become more resilient, not on excluding them from the Flood Re scheme.
As householders with policies ceded to Flood Re will be benefiting from subsidised insurance, important signals to them about flood risk—for example, the price of insurance and the levels of excess charged—will be lost. We have therefore agreed with the industry that Flood Re will provide information to insurers to pass to householders about flood risk, Flood Re itself and how to reduce the likelihood and impact of flooding. An amendment to that effect has been tabled.
We are continuing to explore with industry how people could be incentivised, perhaps, for example, by Flood Re paying for a survey after a property has flooded a number of times. My noble friend mentioned that. This would depend on Flood Re having sufficient reserves. Another incentive could be to increase the excess after repeated flooding.
There are a number of practical considerations to work through. However, there is a clear commitment between the Government and the insurance industry to putting in place an incentive-based approach rather than an exclusionary approach. I hope that noble Lords will also agree that the approach we have outlined strikes a fair and appropriate balance between supporting householders at high flood risk and the affordability of the scheme as a whole, and that the amendment will therefore be withdrawn, bearing in mind what I said at the beginning about the direct relationship between the insurance company and the householder and the means of redress that they can avail themselves of.
Lord Whitty
My Lords, I thank the noble Baroness for that reply but I am not sure that it entirely meets the point. As a former chair of Consumer Focus, I am very familiar with the steps that people can take to obtain redress from financial services agencies, including the insurance industry. I am perhaps slightly less sanguine about the effectiveness of it but that is a different matter. However, the fact is that the Bill provides for a register and, in Clause 63, provides for people to appeal against a body being excluded from that register in the first place. Unless I am completely misunderstanding the issue and what the noble Baroness said, I took it she accepted that there was a possibility of someone being excluded in one of the situations that I described—namely, when the insurance company’s request that the householder introduced some resilience measures at their own expense as a condition of continuing to have that insurance could lead to their exclusion from the list. All I am saying is that if there is an appeals process at the beginning, why is there not one all the way through? I may have misunderstood something that the noble Baroness said and the purpose of Clause 63.
Baroness Northover
Perhaps I can clarify at least one point in relation to Clause 63 and the register. Clause 63 relates to the flood insurance obligation. It is not relevant to Flood Re. However, I am happy to write to the noble Lord to clarify this area.
Lord Whitty
That would be useful for all concerned, so I will shut up. I am very grateful for the Minister’s offer to write to me. I beg leave to withdraw the amendment.
Water Bill
Lord Whitty Excerpts(10 years, 1 month ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“( ) Granting a retail or restricted retail authorisation for supply to non-domestic sector customers must be done in such a way and on such terms that it does not disadvantage domestic customers.”
Lord Whitty (Lab)
My Lords, I hope noble Lords are not leaving because Amendment 1 is such a complicated amendment. It is one of the most straightforward amendments on the Marshalled List today.
As the House will know, we on this side have supported the objective of introducing a degree of competition into the retail end of water supply for the non-domestic sector. However, our support for that—and I think a lot of people’s support for that—was on the clear understanding that there would be safeguards to ensure that there was no disadvantage or detriment to domestic consumers as a result of the competition operating within the business or non-domestic sector. That has of course proved to be the case in Scotland, but the Scottish structure is not exactly the same as the English structure, and we felt that it was necessary to make explicit that there should be no disadvantage. In principle, the Government appeared to agree. We therefore asked the Government to make that proviso clear in the Bill but the Minister said that that was not necessary.
Since Committee, we have pressed the department on how the existing safeguards would work and where those existing safeguards appear. According to replies from the department, the safeguards that it is relying on are twofold. First, they can be found in the Water Industry Act 1991. There is a similar reference there but that is in the context of a piece of legislation in which no competition was envisaged. It was in the context of monopoly regional supply and is therefore not completely effective in dealing with the entirely changed situation that the Bill would introduce.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, I start by reiterating the interests that I declared in Committee. I am the owner of a farm, through which a tributary of the River Thames runs; I have a bore-hole, which supplies farm and tenanted properties; and I have a property that flooded in 2007.
I thank the noble Lord, Lord Whitty, for moving his Amendment 1 on the important issue of protecting householders. The Government take this issue very seriously. We are very keen to ensure that household customers remain fully protected following our reforms to the non-household market. I am confident that we have achieved this. The Water Bill introduces reforms that will enable us to manage future pressures as efficiently as possible while ensuring that customer bills are kept fair for the long term.
Mechanisms are already in place to prevent business customers’ bills being subsidised by household bills. Ofwat’s policy of setting different retail price caps for household and non-household customers in the current price review means that households will not subsidise the competitive market. We also expect household customers to benefit from the efficiencies and innovations that competition will foster.
It is also important to remember that the Secretary of State, Ofwat and the Consumer Council for Water have a shared duty to protect customers. They must have special regard to people who are unable to switch suppliers—that is, household customers—when carrying out their statutory functions. I am therefore confident that household customers will be protected against any negative outcomes resulting from the expansion of the competitive market.
This brings me to government Amendments 57 and 58. I was grateful to the noble Lords, Lord Whitty and Lord Grantchester, for highlighting in Committee the important work that is done by the Consumer Council for Water. The noble Lords tabled an amendment to require incumbent water companies to consult the Consumer Council for Water on their draft charging schemes. In Committee, I explained that the Consumer Council for Water already does this, but I agree that it is a good idea to place into legislation the central role of the Consumer Council for Water, ensuring that the consumer voice is heard. That is why I am bringing forward Amendments 57 and 58 today. The Consumer Council for Water already plays a fundamental role in working with the companies to ensure that their charges schemes meet stringent, research-informed safeguards on behalf of customers. We want to see this continue.
I hope that our amendments illustrate that the Government are listening. I am grateful that we have continued to collaborate in a positive way throughout this process and am delighted to see real improvements coming forward. I ask the noble Lord, Lord Whitty, to withdraw his amendment.
Lord Whitty
My Lords, I think that the Government have gone slightly further than previously in referring to there being no disadvantage in relation to the cost of water. Indeed, we will return to the affordability issue later today. The Minister did not deal completely with the issue of non-price disadvantage. The servicing of consumers could suffer from the introduction of a degree of competition if too much of a company’s effort was focused on the business end and led to a diminution in service as well as a disadvantage in price. The Minister has probably said enough for me not to press this point today or in this Bill, but the department and Ofwat will need to be quite clear as to their intentions in that and in their beefing-up of existing mechanisms designed to protect household consumers. I therefore welcome the Government’s amendments and will support them when we reach that point. I shall withdraw this amendment with some slight regret, but the Minister has been relatively helpful. It has been a good start.
Lord Whitty (Lab)
My Lords, I, too, have an amendment in this group which argues for retail exit, but adds a few provisos. The noble Lord, Lord Moynihan, has once again made a tremendous speech in favour of his amendment, which I would certainly support. I will not repeat the full range of his arguments. If he has not convinced all noble Lords, I am sure that I will not manage it, but it sounded pretty convincing to me. It boils down to the fact that if this Bill provides for orderly entrance to the market it needs to provide for orderly exit as well for a proper market to function.
In a sense it is pretty straightforward, and I find it difficult to understand why the Government have hitherto been resistant to this. In Committee the Minister’s objections were largely about investors’ uncertainty, which I never really bought. I felt that most investors in these fields would be more inclined to support a system of regulation which allowed them to exit from failing parts of the business rather than be put off by it. Indeed, that has been borne out by a number of potential investors writing to us since the Committee stage, including the one to which the noble Lord, Lord Moynihan, referred.
Since Committee, the Minister seems to have shifted to a concern for consumers, both business and domestic, who might be left stranded in certain circumstances. Indeed, as has been said, the Consumer Council for Water has expressed concern on that front. Amendment 54 attempts to meet those objections by making explicit some of the matters to which the noble Lord, Lord Moynihan, referred and puts a proviso and a brake on the implementation of those before they have been thoroughly examined. Of course, Ofwat already has the duty to ensure continuity of supply, so the likelihood of anyone being left stranded is remote. The requirement in my amendment is that the regulations should provide safeguards for all classes of consumers. It also provides a brake in the sense that the Secretary of State would have to approve any specific withdrawal. If the amendment of the noble Lord, Lord Moynihan, were to be accepted by the Government and the regulations drafted under it, we would certainly support that.
The Government have to think carefully now. In Committee there was a fair degree of support for the principles of these amendments. Given that widespread support, the support of the regulators, the support of many of the companies within the industry and the support of potential investors in the industry, the Government need to think where they are going to take it from here. Basically, they have three choices. They can accept the amendment of the noble Lord, Lord Moynihan, and promise to tidy it up a bit—and I hope incorporate parts of my amendment—for Third Reading; they can resist the amendment but promise to come back with something on Third Reading, which may be a more attractive proposition; or they can resist the amendment outright, in which case the noble Lord, Lord Moynihan, would have the support of these Benches if he decided to press it.
The ball is well and truly in the Minister’s court and I hope that he makes the right decision.
Lord Whitty
“Abstraction reform
(1) The Secretary of State may by order appoint a day on which section 1 is to come into force.
(2) The Secretary of State may only make an order under subsection (1) if—
(a) new primary legislation on the licensing of abstraction has been passed; and(b) 5 years has expired since the passage of any legislation under paragraph (a).”
Lord Whitty
My Lords, in moving Amendment 41 I will also comment on the government amendments in this group. I am pleased to see that the Government have at last recognised the importance of this issue and brought forward some amendments of their own. I will listen carefully to what the Minister says, but my first take on them is that, although they are very welcome, they are unclear in certain respects and do not yet go far enough.
This issue is one where economic and environmental regulation overlap. One of the central provisions of the Bill will allow and indeed encourage the eventual development of competitive markets, including in upstream water bulk supplies. That will not happen instantaneously—the Government have indicated that it will probably not happen until after 2020—but the legislation which will govern it happening is already the legal basis for that extension of competition into upstream areas. I am not opposed in principle to that, but there is a very basic problem. All competition, at least in the early stages, requires a surfeit of supply. However, difficult though it has been to believe over the past few weeks, there is a serious shortage of upstream water, in particular at key points in the summer. The level of water abstractions in the majority of our rivers in England—it rains rather more in Wales so I will confine this to England—is such that they have been overabstracted and at times are running dangerously low. This is the result in large part of overabstraction in the upstream areas and a shortage of water in the summer months. The reform of the abstraction regime has been talked about for a long time. Some limitation of abstraction rights is an essential prerequisite to introducing multiple suppliers with competition upstream.
Past legislation has given some powers to the Environment Agency and to the Welsh authorities in this respect, but most of the abstraction rights were embedded in the 1960s—so they are already 50 years old—at a point when there was much less concern about there being a limited supply of water. When the EA is carrying out its functions and rationalising, restricting and, in some cases, possibly taking away abstraction rights, that legislation requires compensation to be paid. That is paid out of the Environment Agency’s grant in aid and, in effect, out of Defra’s budget, so it has been very careful in using its powers. This Bill, rightly, makes one major step forward in removing from the water companies—which are the biggest, although not the only, abstracters—the right to such compensation. Although we note that the companies can, subject to Ofwat approval, recoup any loss from attenuation of abstraction rights by charging the consumer, this is a very welcome change as it means that the Environment Agency can be more aggressive in pursuing the restriction of abstraction rights in general, including those of water companies.
A further distortion and danger is that in many of the catchment areas, current abstraction rights are at a much higher level than the actual level of abstraction. Indeed, on average, 40% of the theoretical abstraction levels are actually drawn in most years. However, even with people taking up under half of their abstraction rights, several of our catchment areas are under severe pressure. If we have new entrants into the upstream area, some of that unused abstraction will undoubtedly, one way or another, be transferred to those new entrants. The logic is that we need a reformed abstraction regime, putting a cap on abstractions and allowing the restriction of or attaching conditions of time or place to the abstractions that are relevant to individual catchment areas. We need to do that before we introduce upstream competition.
It is clear from the amendments the Government have tabled that they recognise that. Indeed, the earlier Defra White Paper recognised that. Yet the Bill does not provide for any future legislation on abstraction reform as it does for upstream competition. The consequence of that is that if the Bill stays as it stands, even if the government amendments are adopted, we will be able to move to competition upstream, which would almost certainly have the consequence of greater use of dormant and underused abstraction rights and therefore more pressure on our catchments. It is true that in the very long run effective competition will lead to greater efficiency upstream, but the immediate effect of introducing competition would be more drawing-down and more abstractions, and there is no adequate limit on the totality of those in the abstraction regime as it stands.
Of course, Defra is currently consulting on changes to the abstraction regime. It is quite a good consultative paper, I have to say, although it was issued well after the Bill entered the parliamentary process. What I am trying to guard against is the possibility that down the line abstraction reform has not happened and yet the number of people using water upstream for commercial purposes has increased. The government amendments give some greater powers to the Environment Agency and the NRBW to check on this, and they institute a five-year delay, but the provisions are fairly weak.
It is not enough to consult with the regulators without giving them effective legislative backing for intervening and for restricting or putting qualifications on abstraction rights. That is why we say that reform should be in place and enforced before we move to introduce upstream competition. The government amendments and the five-year gap do not mean that abstraction legislation will be in place. They call for a report to Parliament. I do not want to be too cynical in your Lordships’ House but we know that plenty of reports to Parliament never actually see their way through to explicit legislation or regulation.
The department clearly recognises the problem and has been prepared to move a bit with the amendments in this group, all of which I can support, but they are necessary but not sufficient. The Government could say to me today that they will strengthen their approach and include a requirement to have legislation in place before the upstream competition provisions are triggered. They could still bring that forward at Third Reading. Indeed, that is probably the best way of proceeding. I hope the Minister will say that but in the mean time this is such a serious issue that I have to ask your Lordships to seriously consider my amendment. I beg to move.
Baroness Parminter
My Lords, along with a number of colleagues around the House, I raised serious concerns in Committee about the potential for environmental damage resulting from the upstream competition proposals being agreed in advance of reforming the water abstraction regime. I will not repeat those this afternoon. However, I am very pleased to say that the Government have clearly listened to our concerns and are proposing a number of significant amendments to address them.
First, the Government propose to report in 2019 on progress in reforming the water abstraction regime. The Government’s stated aim, following the publication of their consultation on abstraction reform last December —which the noble Lord, Lord Whitty, welcomed—is to legislate early in the next Parliament and implement abstraction reform in the early 2020s. The report will therefore give Parliament an opportunity to scrutinise the management of the interface between what should be by then the two pieces of legislation and their implementation. We can then seek to ensure that their implementation delivers the desired outcomes for both customers and the environment.
I am also grateful that specific concerns that I raised about sleeper licences and bulk trading were heard. The Government have introduced amendments to require Ofwat to consult the Environment Agency or Natural Resources Wales before they issue the codes on bulk supply agreements and before allowing a water supply agreement between relevant parties and incumbent water companies. Equally, relevant parties will be required to consult before entering into bulk supply agreements, and Ofwat will have to take into account any response from the Environment Agency or Natural Resources Wales. In that regard, I do not agree with the noble Lord on the Front Bench opposite that these government amendments are weak. I know from my conversations with Ofwat, which did not want the amendments to be tabled, that it most assuredly does not see them as weak.
In advance of the abstraction regime being reformed, the Environment Agency is already seeking to vary and remove unsustainable existing licences. It will be helped in that by the Government’s removal in this Bill of a statutory right to compensation for a water company resulting from such modifications or the revoking of a licence. The Government have therefore gone a long way towards addressing concerns that noble friends and colleagues expressed in Committee. These proposals satisfy my concern that legislating now for upstream reform in advance of reform of the water abstraction regime could lead to an unsustainable increase in abstraction. Therefore, I would not support any further amendments being tabled by the Opposition Front Bench.
Lord De Mauley
My Lords, it is difficult for me to respond to that point without knowing the strengthening that the noble Lord has in mind. I am, of course, perfectly prepared to meet him and discuss that between now and Third Reading.
Lord Whitty
My Lords, I thank the Minister for his very comprehensive description of the position and I reiterate that I support the government amendments as a significant move in the right direction. However, they are flawed in one serious respect which I will come on to.
The Minister referred to complementarity between the abstraction reform regime and the new competition regime. I am absolutely in favour of complementarity and I think that both are very important for environmental reasons and for reasons of preservation and effective delivery of our water resources. Therefore, in principle, we are not divided. However, the provisions in this Bill are asymmetrical. We have quite detailed provisions on upstream competition. Nothing I have said affects retail competition. Upstream competition is provided with all the legislative framework that you will need—there will need to be some more regulation, but in effect it is there. The abstraction reform has only just started on its consultative phase. Both the noble Baroness, Lady Parminter, and the Minister have said that they intend to legislate in the next Parliament, which is nice to hear but we do not quite know who will run the next Parliament and it is not normal to pre-empt the Queen’s Speeches of the next Government, even if they happen to be the same one. In any case, the timescale is out of kilter.
The essential flaw in the Minister’s position is that all he is referring to is a report in five years’ time after the passage of this Bill, whereas my amendment says that legislation should be introduced in roughly that time and before we trigger upstream competition. That means that they are complementary; that means that the timescales are in line. The danger is that if we miss that early in the next Parliament commitment, they will be seriously out of line; and if we wait for the parliamentary report before we legislate, they will also be seriously out of line. Therefore, that essential commitment to wait until legislation is there is missing from the otherwise admirable amendment that he is proposing today.
This is so important that all parties need to be reassured that we have complementarity as an objective but complementarity along both tracks in the way in which we proceed. It is therefore with some regret that I would like to test the opinion of the House on this matter.
Lord Whitty
“National affordability scheme
(1) The Secretary of State must, by order, introduce a National Affordability Scheme for water.
(2) The National Affordability Scheme must include an eligibility criteria, determined by the Secretary of State, in consultation with—
(a) the Water Services Regulation Authority; and(b) the Consumer Council for Water.(3) An order under this section—
(a) shall be made by statutory instrument, and(b) may not be made unless a draft of the order has been laid before and approved by a resolution of each House of Parliament.”
Lord Whitty
My Lords, in moving Amendment 55 I will also refer to Amendment 56 in this group.
The Bill covers a wide range of dimensions of our water supply industry and its economic and environmental effects. However, it completely fails to address the social problems of those who face growing water bills and difficulty in facing growing pressures on their low-income budgets or their family responsibilities. It is estimated that for 11% of our population water bills account for more than 5% of their income, and for 23% of the population they amount to 3% of their income. That is a pretty significant cost. We have to accept that how people pay for water in this country is singularly irrational but also singularly unprogressive.
Lord De Mauley
My Lords, I thank the noble Lord, Lord Whitty, for explaining his amendments and I thank all noble Lords who have contributed to this debate. It will not surprise those of your Lordships who sat through Committee on this Bill to learn that I will not be supporting the noble Lord’s amendments.
I shall deal, first, with the Opposition’s national affordability scheme. The Government take the view that companies are best placed to work with their customers to develop local solutions concerning affordability. After all, it is those customers who foot the bill. That is why the Government’s approach is focused on company social tariffs. The companies’ own business plans show us that by 2015-16 most will have put a social tariff in place voluntarily following a process of engagement with their customers. I am struggling to see the advantage of a national affordability scheme in comparison with the guidance and framework for social tariffs which is already in place and which has, as my noble friend Lady Bakewell said, now been in place for a year.
The Government’s social tariff guidance sets minimum standards in a light-touch way. It does so taking into account the reality of diverse regional circumstances. The minimum standards set in the guidance allow water companies to talk to their customers—the ones, as I said, footing the Bill—and to innovate. Imposing more specific minimum standards on water companies would limit their scope to address the unique circumstances of their respective areas. It would disincentivise companies from coming up with something more creative and more targeted. We should not ignore how different the affordability issues facing the water sector are in different parts of the country.
Our social tariff guidance provides a clear steer on the factors that must be taken into account in the development of a social tariff. However, it leaves final decisions for companies to take in the light of local views and local circumstances, rather than seeking to impose schemes from the top down. The most important requirement of our guidance is for effective customer engagement in the development of a social tariff. The Government believe that some customers should not have to subsidise others without being properly consulted.
All the companies have begun that process of consulting with their customers on whether a social tariff is right for their area and, if so, what form it should take to address local needs. The guidance requires that the companies must work closely with the CCW to ensure that their proposals align with customers’ views of what is acceptable. Undertakers will need to be able to demonstrate that they have listened to customers and organisations representing customers. The social tariff guidance applies to both the companies and Ofwat. Where a company brings forward a social tariff that complies with this guidance, there is a clear presumption in favour of approval by Ofwat.
It is crucial that those who are struggling to pay their water bills get assistance, but the difference between what is suggested and what we have in place is our recognition that local people should have a say. Local factors should be, and are being, taken into account.
I turn now to Amendment 56, which concerns billing information. First, I thank noble Lords for raising a very important point about the WaterSure scheme As noble Lords are by now aware—but sadly many customers are not—the scheme is a mandatory safety net for low-income customers. It is available for customers who have a meter and, for reasons of ill health or because they have a large family, use greater than average amounts of water. I have said before that it is unfortunately a feature of all such means-tested benefits that take-up fails to match eligibility. People who are eligible simply do not sign up. Through informing people that WaterSure exists, I am confident that we can increase uptake. That is why it is important that billing information includes details about WaterSure.
However, that is already happening, and it has been happening for years. The Consumer Council for Water has confirmed to me that information on WaterSure and other similar schemes operated by companies is included with bills. CCWater works closely with each water company on the information provided on household bills to ensure that customer interests are met. Its very practical advice is that customers are likely to be put off by too much additional information on the face of the bill. Taking the other suggestions in the amendment, such as requiring all water companies to provide information about tariff structures and the lowest available tariff, I must confess that I find this requirement rather bizarre. What tariffs are we talking about? This is not the energy sector. Water companies simply do not have complex tariffs. In fact, as I pointed out in Committee, the situation is quite the reverse. There are just two tariffs: charging by a meter, or by the rateable value of a customer’s home.
Water companies provide advice to customers on whether or not they might benefit financially from the installation of a meter. They have to fit one free of charge, if asked. The recent publication of water companies’ business plans has demonstrated how this system can work to claw back benefits for customers using the price review process. By taking account of lower financing costs, Ofwat estimates that the next price review could significantly reduce pressure on bills from 2015 by between £120 million and £750 million a year. Most water companies are proposing flat or declining customer bills from 2015 to 2020.
The amendments are well intentioned and raise important questions about the water sector and help for those who are struggling to pay. I thank the noble Lord for bringing the issues again before the House, but I believe the amendments will not help. I have explained my reasons The Government are absolutely committed to helping hard-pressed customers where we can, and I hope that I have demonstrated that adequately today. On that basis I ask that the noble Lord withdraw his amendment.
Lord Whitty
My Lords, I thank the Minister for that, and I thank everybody else who has taken part in this debate, even though there was a marked lack of enthusiasm for the exact proposition that I put before the House. I think that there was also some degree of misunderstanding, but I shall clear up one or two points.
The noble Earl, Lord Selborne, rightly raised the issue of the impact on bills because of people who will not pay their debt, as well as those who cannot pay their debt. In some water companies, the level of debt is horrendous. We are bringing before the House later tonight—probably, if we make it—a couple of amendments that will address precisely that problem. On the one hand, a lot of the unpaid bills arise in private rented property. There was a provision in the 2010 Bill that would have allowed the Government to introduce secondary legislation to require landlords to indicate who was responsible for those bills. In areas such as the Thames Water area, this is a huge part of the company’s unpaid debt. The present Government, however, declined to implement that part of the Bill on the ground that it was too much of a burden on landlords. The alternative is that landlords themselves should be responsible for the bill and recover it through the rent, which is another way of approaching it. We are attempting to address that problem and the costs of debt which get transferred on to the rest of the consumers.
To put it at its mildest, some companies are rather more aggressive than others in chasing the debt among the “won’t pay” element. We have another later amendment referring to Ofwat. If a company was clearly at a higher debt level than the average due to its own failure to pursue the debt, Ofwat could, in the next price review, refuse to cover it in the price settlement. Therefore, there would be pressure at the company end and pressure on landlords to produce the names of the people they regard as being responsible for their bills. There are things that we will do. My noble friend Lord Grantchester will be pursuing this later for those who can stay. We are addressing that dimension as it has an impact on bills. The noble Earl, Lord Selborne, is absolutely right, as he was in his report six years ago.
The proposition for a national affordability scheme is to push along the developments that people are saying, again, are already happening. The noble Baroness, Lady Bakewell, spoke eloquently about the range of social tariffs and similar schemes being provided by Wessex Water. I am also a customer of Wessex Water and I am pretty satisfied with it in that regard, as in others. Not many companies are as advanced on that front as Wessex Water, and some are well behind. Even in Wessex, if there are only 14,000 on the various tariffs—in, effectively, most of Somerset, Dorset, Hampshire, what was Avon and parts of Wiltshire—those who are eligible to be covered by the scheme are not taking it up.
It is true that with all quasi-means-tested benefits there is a lower take-up than the optimum, but this is far worse than in other fields. It is important to give a kick not only to the introduction of schemes but to companies to ensure that those who are eligible know about them and apply for them. My proposition is not that the companies should not be innovative and creative and relate the schemes they operate within their own areas to the kind of demography and costs they face.
In reply to the noble Baroness, Lady Byford, I would say that you cannot specify a national figure because the average charges differ company by company. So you would probably have a minimum level, which was a proportion of the average scheme, company area by company area. We have deliberately left that for the Minister to pursue in defining the minimum standards of a national affordability scheme. It would allow for the maximum flexibility, both geographically and creatively, of the schemes the companies could go for.
The record of the companies so far, and the failure of Ofwat to pursue them, is the reason why we need a push at national level to get them all involved. There could be a variety of schemes, from a discount to a particular tariff based on a proportion of the average or, in the metered sector, to the level of usage required, as the WaterSure scheme does. There is all the scope in the world in my proposition for different schemes to apply in different areas as long as they meet the minimum requirement. At the moment, however one defines the minimum requirement, eight companies are not, as of today, offering such schemes, and those that do have attracted to them only a small proportion of those who are potentially eligible. That is why we need a kick-start to this, and the national affordability scheme would allow for that kick-start.
I hope that the House will recognise that some of the criticism of what I am proposing is misplaced. Obviously, I have failed at successive stages of the Bill to carry across the argument, but I hope that I have now spelled out clearly what the position is.
On the information scheme, I recognise that most companies provide some information on tariffs and that there will be more tariffs. The exposition of the noble Baroness, Lady Bakewell, of the position in Wessex shows that many schemes are particularly geared to classes of consumer. If all consumers were told about those, that would be useful. We do not have the 2,000 or so tariffs which exist in the energy sector, so I was a little surprised when the Minister described as bizarre our proposition that we should inform consumers of what tariffs are available and what is most likely to suit their needs. That is exactly what has recently been put into the energy regulations at the behest of the Prime Minister. I am therefore surprised that the Minister takes a different view on water. It would be simpler and easier to do than in energy and I see no reason why water companies should not take on the obligation of informing their consumers, via their bills, of what options are available.
I am sorry that the Government seem unable to take up this scheme, even though it gives them maximum flexibility in how they implement it. The issue is so important, and there is such a huge lacuna in the totality of what is covered by the Bill, that it would be remiss of me not to attempt to take the opinion of the House. I think the Government are in the wrong place. If they had come up with an alternative proposition, I would obviously have considered it. However, there is not even that on the table, and I therefore wish to test the opinion of the House.
Baroness Parminter
My Lords, I, too, thank the Government for listening so assiduously to the concerns that I and colleagues around the House raised in Committee. The Government have listened very carefully to those concerns, and I particularly welcome the new amendment which outlines that the resilience duty includes promoting the efficient use of water. This powerful commitment to water efficiency is testament to the tenacity of my noble friend Lord Redesdale. It also delivers the Liberal Democrat party policy agreed five years ago to reform Ofwat’s remit to put water resource efficiency at the heart of water company plans.
I also sincerely thank the Minister and the Bill team for accepting my genuinely strongly felt concerns about the necessity of the Government taking account of social and environmental matters when formulating the strategic guidance with which the regulator has to conform. Their amendment to Clause 24 reflects that and I am extremely grateful.
Lord Whitty
My Lords, I, too, welcome all the government amendments in this group. However, I do not understand why they have not gone the full hog towards what the noble Lord, Lord Redesdale, the noble Baroness, Lady Parminter, and I were arguing to begin with, which is that if you give Ofwat a responsibility or a primary duty for sustainable development, these things would naturally flow from that. These are criteria that are applied to other regulators. Everything that has been said in this debate and in the White Paper, including everything said just now by the noble Baroness, shows that you need to have a holistic approach to the management of water. This is not about just one dimension or aspect, but about the cost to consumers and to business, about providing infrastructure for the country, about water quality for consumers, about whole ecosystems and catchment areas, about maintaining water resources against climate change pressures, about resilience and about efficiency.
Resilience and efficiency have now been written into this, but not very much of the rest. I, too, admire the noble Lord, Lord Redesdale, for the pressure that he has brought to bear regarding water efficiency—he has won a notable victory here—but this still baffles me, and my amendment reiterates the need to provide a broader primary duty. The Government have obviously recognised some aspects of upgrading that responsibility because they have, rightly, taken up the earlier amendment tabled by the noble Baroness, Lady Parminter, that changed,
“may have regard to social and environmental matters”,
to “must” in respect of the Minister’s statement. They recognise sustainability in general and that it is an important part of how we manage in the context and framework within which Ofwat works.
As there are multiple regulators in this system, it has traditionally been assumed that Ofwat is primarily an economic regulator, the Environment Agency primarily an environmental regulator and the Drinking Water Inspectorate primarily a quality regulator. However, they actually overlap: the Environment Agency has serious economic responsibilities in its remit, very specifically about water resources, while Ofwat has a secondary sustainability duty and now, as a result of the amendments on resilience, broader aspects of its responsibilities relate to sustainability. I appreciate the references to resilience. When sustainability was being pushed in the Commons, the Government came up with the resilience criteria, and when it was being pushed in the Lords, they pleased the noble Lord, Lord Redesdale, with the water efficiency criteria.
Baroness Byford
My Lords, I apologise that I was not able to play a large enough part in Committee. However, I wonder whether the noble Lord, Lord Whitty, can tell me what Ofwat does not have. My understanding, having had earlier briefings from Ofwat, was that it already had a sustainable development plan duty, which the Bill will further introduce and strengthen. What is missing from the responsibilities that Ofwat already has? I am a little confused.
Baroness Byford
I am sorry; I did not think that that was necessary at this stage—I hope I am correct. That is my question for the noble Lord, Lord Whitty. I am slightly confused about what is expected of Ofwat in terms of its sustainability duties. I thought that that was written in and already exists. Hence I am not sure where the amendment of the noble Lord, Lord Whitty, would take us.
Lord Shipley (LD)
My Lords, I contributed to the Bill in Committee but that was all on the Flood Re insurance aspects and did not relate to this part. However, in listening to the debate on sustainability and resilience, I was struck by the points about whether the Bill was worded strongly enough as regards the importance of sustainability. I recall the reply in Committee from the Minister, my noble friend Lord De Mauley, when he made it absolutely clear that Ofwat has had a stand-alone statutory duty to contribute to the achievement of sustainable development since 2005. In response to what the noble Lord, Lord Whitty, has said, I would like to turn it a different way round and say that this is actually about the outcome produced, and whether sustainability is strongly enough part of the Bill.
I pay tribute to the work of my noble friend Lord Redesdale in this respect. With this amendment, the Government have delivered the outcome that we want. The question is whether Amendments 61, 62 and 63 are sufficient to meet the arguments that were put forward in favour of the word “sustainability” at that stage. I think that these amendments are sufficient, and I have two reasons for concluding so. First, the resilience duty now requires the promotion of increased efficiency in the use of water. Additionally, the amendments made on Report in the House of Commons mean that the resilience duty includes a requirement that the sustainable management of water resources should be promoted as part of that resilience duty. In practice, therefore, the sustainability test is now being met.
Secondly, the Blueprint for Water coalition of environmental groups, which includes the World Wide Fund for Nature, the RSPB and the Wildlife Trusts, makes it clear in its comprehensive briefing for this Report stage that the Bill satisfies its previous call for Ofwat’s secondary sustainable development duty to be raised to a primary duty. I find its support for the Government’s position reassuring in this respect.
With the other proposals relating to abstraction reform, together with Ofwat’s existing trading and procurement code, which includes a sustainability clause, I think that the Government have made their case and should therefore be supported. Again, I pay tribute to the role of my noble friend Lord Redesdale and his advocacy on this issue. His efforts in Committee have produced the amendment that we are debating today.
The Deputy Speaker (Lord Geddes)
My Lords, perhaps I can be of assistance to the House, particularly the noble Lord, Lord Whitty. Paragraph 8.137 of the Companion to the Standing Orders says quite clearly:
“On report no member may speak more than once to an amendment, except the mover of the amendment in reply or a member who has obtained leave of the House, which may only be granted to … a member to explain himself in some material point of his speech”.
My interpretation is that provided the noble Lord, Lord Whitty, gets the leave of the House, he is able to answer—if he so wishes, of course.
Lord Whitty
I am not sure whether the leave of the House is divisible business. With the leave of the House, I will explain to the noble Baroness, Lady Byford, that the sustainable development duty under the current Ofwat remit is a secondary duty. For several other regulators, including Ofgem, it is now a primary duty. That is what my amendment seeks, and it would cover social, environmental and economic matters, not simply resilience and water efficiency.
Baroness Northover
My Lords, I thank my noble friends Lord Redesdale, Lady Parminter and Lord Shipley and the noble Lord, Lord Whitty, for their thanks for the government amendments. I hope that noble Lords around the House are pleased that there has been so much positive engagement between Committee and Report. The noble Lords who have spoken are right to emphasise the importance of the environmental context of everything we are doing here. I am very glad that my noble friend Lord Redesdale can go from here to a meeting to celebrate what has been achieved.
Turning to Amendment 64, tabled by the noble Lord, Lord Whitty, I make it absolutely clear that we agree that sustainable development must be at the heart of all that the regulator does. I hope that that reassures him and is also of interest to my noble friend Lady Byford. That belief is at the heart of the Government’s statutory guidance to Ofwat, the strategic policy statement. That guidance requires the regulator to report on an annual basis on its contribution to the Government’s sustainability objectives. I am pleased to be able to say that Ofwat is making such a contribution.
Much of the broader debate about Ofwat’s sustainable development duty dates from the 2009 price review. Much has changed over the past five years. Ofwat has made good progress; for example, it has taken active steps to correct the perceived bias towards capital investment. The current price review is very different from previous price reviews. For the first time, there is a balance between capital and operational solutions as a result of Ofwat’s new approach, which now looks at total expenditure rather than at capital expenditure and operational expenditure in silos.
Ofwat has been working with water companies and Infrastructure UK to halt the up-and-down cyclical investment that has affected the sector for many years. This change in approach has had tangible outcomes; for example, Ofwat has recently given permission to water companies to bring forward £100 million of investment into 2014 to smooth the investment profile and benefit the water-supply chain.
All of this is reinforced by what we have been doing to move the horizon from the short-term view of the next five years to a sustainable long-term focus. That is why the Bill will introduce a new duty of resilience that deals directly with the long-term pressures facing the water industry. The new resilience duty encourages investment in additional water storage. It pushes the sector to tackle unsustainable abstraction. It places the focus squarely on the responsible management of water resources. Importantly, it promotes the reduction of pressure on water resources, and reducing demand for water.
Noble Lords will also be aware that the new duty was amended in another place to be absolutely clear and unambiguous about what that means. It is about managing water resources sustainably. We have now made further amendments to be absolutely clear that the resilience duty means that Ofwat is expected to promote efficient water use by companies. I thank my noble friends again for their welcome of this.
We recognise the importance of preparing the water sector for the future. We recognise the need for a strategic response to climate change. We recognise the demand on resources that future population growth will cause. It is because we agree with the aims of the noble Lord, Lord Whitty, that we have addressed this at all these levels. The changes that the Bill introduces, and the changes we are already seeing in the regulation of the sector, show how much this debate has moved forward. I hope, therefore, that noble Lords will accept the Government’s further amendments—it sounds as if everybody welcomes those—and that the noble Lord opposite will be willing not to move his amendment.
Lord Whitty
“Primary duty of sustainable development
(1) Section 2 of the Water Industry Act 1991 (general duties with respect to water industry) is amended as follows.
(2) In subsection (2A)—
(a) omit the “and” at the end of paragraph (c);(b) after paragraph (d) insert “; and(e) to contribute to the achievement of sustainable development.”(3) In subsection (3) omit paragraph (e).”
Lord Whitty
My Lords, in view of the response from the Minister and the fact that it may be returned to in the next Water Bill, I will not move my amendment.
Lord Whitty
“Duties of undertakers to furnish the Secretary of State and Authority with information
(1) In granting, reviewing or renewing licences under this Chapter, the Authority will be required by the Secretary of State to take into account broader issues when conducting or reopening a price review and such broader issues may include for any licensee or applicant licensee—
(a) their corporate structure and financial structure;(b) the total amount of investment in England and Wales;(c) the total amount of dividends paid to owners and shareholders;(d) their taxation structure;(e) their company and group overall performance; and(f) their corporate social responsibility strategy.(2) Licensed water undertakers must furnish the Authority and the Secretary of State with information on the above and publish such information in an annual return or otherwise.”
Lord Whitty
My Lords, I think this is the last business of tonight for us. Amendment 78 deals with an area which has overshadowed the debate on the Bill and the public commentary on the water industry. It is concern about the overall structure of the industry as it stands, and is likely broadly to stand for a considerable time, despite the attempt to introduce a degree of competition in a small sector of the market.
Nearly 30 years after privatisation, the water industry consists primarily of huge private regional monopolies whose public reputation is variable, according to area, but in some cases is pretty low. Relatively recently, commentaries on the totality of the way in which the water industry operates have been pretty scathing.
I am the first to acknowledge that since privatisation we have achieved a very significant amount of investment in the water industry, and much of it has been very effective in delivering the service. In that context, there have been some investments that it would have been sensible to pursue that, because of the combination of company interests and boundaries and Ofwat’s priorities, have not been made, including interconnection between the various water areas; nevertheless, there has been very substantial investment. It has been in a context where company behaviour and the regulatory structure have focused primarily on capital investment in large-scale improvements and maintenance and relatively little on water efficiency matters and related subjects.
In terms of the finances of the companies, we have seen very substantial increases in their capital value. In some cases, they have gone dramatically through successive changes of ownership to the benefit of their past and present shareholders, but not noticeably to that of British consumers and British business. We have seen very substantial payouts of dividends to those successive owners. Indeed, in the last full financial year, more than 90% of profit was paid out in dividends. We see very low levels of UK taxation, partly because of the structure, and that is again anomalous in the eyes of many commentators and the public. This results, in most cases, from a very high level of gearing. The investment has been largely paid for, and is increasingly largely paid for, out of money raised on the markets.
At the point of privatisation—the noble Lord, Lord Moynihan, is no longer in his place, but he was there at the time—I do not think that that was envisaged by its proponents. I was not one of them, but nevertheless I do not think it was what they envisaged would happen. It was envisaged that there would be a series of UK companies, probably financed by the Stock Exchange, whose investment would largely be funded through equity off the balance sheet rather than through going to the market, whose ownership structures would be based primarily in Britain and would be transparent and open and which would therefore pay UK taxes proportionate to their turnover and profits.
Instead, we have ownership which is, in many cases, overseas, which is not a problem in itself depending on the behaviour of the companies which are so owned. Dividends, to which I have referred, are paid, and UK taxes are going downwards. Largely, the investment the companies have benefited from has been financed from international markets. Issues arise, the most obvious being that if money is being financed through the markets, you have to cost it in the price reviews. The biggest failure of regulation in the past two or, perhaps, three price reviews has been that the regulator allowed a significantly higher level of capital cost than actually applied in the markets. That enhanced profits, at no great expense to the company, and allowed for dividends to be paid in the way I have described.
Lord De Mauley
My Lords, I thank the noble Lord, Lord Whitty, for moving his amendment. We have heard about asking water companies for information, much if not all of which is already freely available in their annual reports and accounts. I have said before that the amendment would, to that extent, simply duplicate existing powers.
What we are really talking about is Ofwat’s ability to examine what companies are doing to ensure that they are not profiteering at the expense of their customers. Although I disagree with the amendment before us, I most certainly agree with the principle that water companies must be effectively regulated. I believe that the regulator is doing its job robustly.
The focus of the amendment is, in particular, on reopening a price review. In fact, Ofwat already has the power to reopen the price review in two ways. It can do this under the “substantial effects” clause of a water company’s licence or by making an interim determination. It is clear that Ofwat has the power to revisit price determinations, if it so wishes. In fact, in October last year, Ofwat consulted on whether or not it would be right to utilise this power with respect to Thames Water. However, given the fundamental importance of regulatory stability in the water sector, it rightly utilises these powers with caution. Ofwat considers carefully whether any intervention it might make would be in the overall interests of customers.
Of course, it must be right that Ofwat does this with the bigger picture of stable economic regulation firmly in mind. The objective of setting prices for a five-year cycle is to create a period of stability during which companies are able to invest and deliver the outcomes that they have agreed with the regulator. They have a period during which they are allowed to receive the benefits of that settlement and then, at the end of the period, prices are adjusted to capture those benefits for customers.
That is what is currently taking place through the price review process. Ofwat believes that by taking account of the current low cost of borrowing it will be able to limit price increases from 2015 to 2020 by between £4 and £25 a year. Accordingly, I am unable to see what purpose the proposed annual returns will fulfil. We should look to the future and look at what Ofwat is doing. Let us be clear about the direction of regulation in the water sector. Ofwat is already taking action to improve standards of corporate governance across the sector. It is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance. Ofwat recently published new principles relating to board leadership, transparency and corporate governance. These set out clear standards for the sector and a clear timetable for their introduction. The response from the water companies has been positive and I welcome this. Ofwat is also consulting on principles for holding companies covering risk, transparency and long-term planning. It has made it clear that the companies’ licences may need to be brought up to date to reflect these reforms and it is already discussing this with the companies. Further reporting burdens will not contribute positively to this process. I hope that the noble Lord will agree to withdraw his amendment.
Lord Whitty
My Lords, I did not really expect the Government to fall over themselves to accept this amendment today. However, I am glad that I have raised the issue because I think that the Minister is right that Ofwat is now taking greater cognisance of the broader picture. The early years of Ofwat regulation were undoubtedly seriously light touch, even though it required an enormous amount of information from the companies. My aim here is not to duplicate the provision of information but to allow Ofwat to use that information and, if it was inadequate, to require more from the companies. The overall picture is very difficult to justify. The level of borrowing, the level of dividends and the level of taxation, taken as a whole, is very difficult to justify to the British people over a set of companies which is supposedly regulated tightly, and which plays such an important part in their lives. I therefore think that we need to find some mechanism which does not transgress the lines that the Minister set down about regulatory stability and Ofwat acting primarily in the interests of customers; I do not wish to upset either of those objectives.
However, there is an oddity about the structure of this industry that, at some point, some Government or regulator is going to tackle. I am very appreciative of Ofwat’s latest moves in the general direction of tightening up and looking after consumers better. The reason for me saying that is not that when we finish here I am going to the Ofwat reception over the road. I think that it is improving and broadening its role without imposing pernickety regulation. In fact, it is getting rid of some regulation in terms of provision of detailed information.
Ofwat is moving in the right direction, but it is a big problem. I would have hoped that the Government could have recognised it a little more explicitly, because I think it may come up at some point and bite whichever Government are in power when something goes seriously wrong with one of these companies. We have been close to that once or twice in the past 30 years, and I do not think that current Ofwat powers, and certainly past Ofwat practice, were up to dealing with that.
I thank the Minister for his reply. I will not return to this issue, but I suspect that somebody else will at some point in the next few years. I beg leave to withdraw the amendment.
Water Bill
Lord Whitty Excerpts(10 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“Onshore oil or gas activities: effect on water environment
In Part 1 of Schedule 5 to the Environmental Permitting (England and Wales) Regulations 2010 there shall be inserted after paragraph 13—“Onshore oil or gas activities—effect on water environment13A (1) Without prejudice to the operation of Regulation 35(2) and paragraph 5(1)(d) of Schedule 10 and of Regulation 35(2) and paragraph 7(j) of Schedule 20, the regulator shall refuse an application for the grant or variation of an environmental permit or for the transfer in whole or in part of an environmental permit if—
(a) the regulated facility to which the application for or transfer of the environmental permit relates is to be carried on as part of an onshore oil or gas activity; and(b) the regulator is not satisfied that the applicant or the proposed transferee has made or will make adequate financial provision for preventing or mitigating pollution of the water environment, by ensuring all of the following—(i) operation of the regulated facility in accordance with the environmental permit;(ii) compliance with any enforcement notice or suspension notice or prohibition notice or mining waste facility closure notice or landfill closure notice which may be served on the applicant or transferee by the regulator under these Regulations;(iii) compliance with any order of the High Court which may be obtained against the applicant or transferee under Regulation 42 for the purpose of securing compliance with any of the notices listed in sub-paragraph (ii);(iv) compliance with any order of any court issued under Regulation 44 against the applicant or transferee; and(v) recovery by the regulator of its costs upon any exercise of its power against the applicant or transferee under Regulation 57;(c) for the purpose of this paragraph “onshore oil or gas activity” means any activity for the purpose of exploration for or extraction of onshore oil and gas;(d) for the purpose of this paragraph “adequate provision by way of financial security” means financial provision which is sufficient in value, secure and available when required.”.”
Lord Whitty (Lab)
My Lords, before we get on to this afternoon’s main business of flood insurance, I have down one amendment, relating to environmental regulation, which concerns the effect that fracking will have on the water supply system. This has been a major concern in another place for a number of Members of Parliament, who have local problems about the impact that any major expansion of fracking might have on watercourses and water supplies.
I do not intend, this afternoon, to open up the whole debate on the importance or otherwise of fracking, what its effects might be and whether we could repeat, in the UK and Europe, the experience of the United States. For what it is worth, I doubt that it will be transformational, but it will be important and will produce some significant gas and oil in this country. That will need to be tightly regulated by the Environment Agency, the HSE and local planning systems. In particular, water supplies and watercourses will need to be protected and, if anything goes wrong, fracking companies will have to be seen to be clearly liable.
On the relationship between fracking and water supplies, there are three main issues. First, there could be pollutants released, potentially, into water systems and aquifers by the fracking process—that is, the chemicals contained in the fluids that are used in the hydraulic fracturing process. There are also naturally occurring contaminants which could be released from the shale itself, including naturally occurring radioactive contaminants. There could also be fugitive emissions released into ground-water, particularly of methane. All of those could have serious effects on water quality, ecology, habitats and water supply. To a greater or lesser extent, all have been experienced in the United States, although on a limited basis.
Secondly, if the fracking industry develops on any scale, for the purposes of shale extraction fracking will also require major abstraction of water from the system. As we have already stressed in previous days in Committee, the urgency of reform of the abstraction system needs to take into account the impact of mass fracking on abstraction levels and hence on already stressed catchments. This is linked to amendments we discussed the other day. For example, if fracking companies take up the headroom in existing licences in particular catchments, then a lot of catchments could be in serious trouble, if they are not already.
Thirdly, there is the requirement for the cleaning and treatment of the water that has been used in fracking, which will need to be decontaminated.
Amendment 154 really focuses on the first of these effects, and to some extent the third, but all three are important for the water system and need to be taken into account. It is vital that we protect ground and surface water. For example, in the south of England, 70% of the water supply depends on healthy aquifers. This includes drinking water as well as water for industrial and agricultural use. Frankly, the American experience, though variable, is not completely reassuring. In another place, my colleague Joan Walley quoted an example from Pennsylvania, where methane was found in 82% of drinking water samples. We need to be reasonably confident that our regulators, the Environment Agency and the Drinking Water Inspectorate, will operate a much more effective regulatory regime here in the UK than has been operated in certain parts of the United States. Even so, and with a fairly high degree of confidence in our regulators, disasters—or at least leakages—may well happen.
We have a history of earlier energy sources to instruct us: the legacy of coal mining and, in a somewhat different vein, the earlier phases of the nuclear industry. Not only can pollution occur, we have seen the inability of the organisations that produced the pollution to finance the decontamination and the clear-up, which have required very substantial sums. We all support the “polluter pays” principle in theory, but we also have to ensure that the polluter can pay. In both coal and nuclear, it has in effect fallen to the taxpayer to pay for the clear-up over the past few decades, and that is still going on.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, as the noble Lord, Lord Whitty, has explained, Amendment 154 would require onshore oil and gas operators to provide financial security when applying for an environmental permit so that funds would be available to deal with any water pollution incident caused by the operator. The amendment would impact on both the conventional and unconventional oil and gas sectors. It would address any pollution that they caused to the water environment but not any other damage that might be caused by their activities.
We want a successful industry in this country—an aspiration supported at Second Reading—to provide us with an important source of gas for our future, but it is vitally important that it is safe. We already have a well established UK conventional onshore oil and gas industry that has happily coexisted with local communities, in some cases for half a century or more. This has been achieved not least because the industry has maintained a good record of environmental responsibility and competence. The existing controls and the application of good operational practice have served us well to prevent pollution from onshore oil and gas activities and to tackle in an appropriate way any problems that emerge.
The Department of Energy and Climate Change assesses as a matter of course whether a company has sufficient funding for its planned operations prior to awarding any licence. It also checks at the drilling stage and, where relevant, at the production stage that the company has appropriate insurance. Similar financial competence checks are also carried out by the Environment Agency as part of the permitting process. In the event of serious damage to surface or ground-water, the Environment Agency and Natural Resources Wales have powers, under the Environmental Damage (Prevention and Remediation) Regulations 2009 and the equivalent Welsh regulations, to serve a notice requiring that the polluter pays to clear up the pollution. If a significant environmental risk becomes apparent, the Environment Agency has the authority to stop the activity. These powers apply to a wide range of operations and activities undertaken by different industries. I do not think that it would be appropriate to create any specific provisions for the oil and gas industry.
However, the Government are aware that there are widely felt concerns about the capacity of companies exploring for shale gas to tackle any liabilities that might arise. This is the concern that the noble Lord, Lord Whitty, is pointing to. Therefore, I am pleased to inform your Lordships that the Department of Energy and Climate Change and the shale gas industry are working to put in place a robust scheme that would cover liabilities even if the relevant operator is no longer in business. They are also in discussion with leading insurers about proposals to build expertise and capacity in the insurance market to facilitate the development of products specifically appropriate for unconventional operations, which in turn could facilitate the development of an industry-wide scheme. In addition, while we already have a robust regulatory framework in place, I can confirm that it will be reviewed and refined as appropriate as we move towards the production phase. The question of the noble Lord, Lord Oxburgh, will be addressed in that process. This regulatory review will include the question of environmental liabilities in the wider sense, not solely relating to water.
I am sure that noble Lords will agree that these two initiatives, taken together, constitute a sensible approach towards ensuring that liabilities are covered in a comprehensive and proportionate way, rather than taking what might be a rigid legislative approach on a piecemeal basis. I hope that this news provides the reassurance that the noble Lord, Lord Whitty, needs that the Government are taking the right steps to ensure that liabilities are dealt with appropriately, and that he will feel able to withdraw his amendment.
Lord Whitty
My Lords, I thank the Minister for that. It is a degree of reassurance. I thank the noble Lord, Lord Oxburgh, for expanding the area of concern into the issues of the effect that bringing sea-water on land for use may have on watercourses and the possibility of contamination of the sea-water itself.
There is the potential for such a widespread effect on the water system that I feel justified in bringing this amendment before the House. I am pleased to hear the Minister say that the industry, the insurers and the Government are looking at a scheme. This obviously recognises the very widespread concern in the country about the possible impact of fracking which, he is right to say, is wider than the issue of the effect on the water supply system.
I am still slightly concerned that we might get into a situation where, if the industry develops to the degree that many of its advocates suggest is possible, we end up with a substantial problem—a problem that could end up on the taypayer’s desk or bank account. In the nuclear industry we have provided for such a possibility for current operations, although obviously there is a huge legacy that has not been provided for and a huge bill for the taxpayer as a result. We have done the same on a much lesser scale in relation to landfill. We could probably also establish a regime in relation to fracking to ensure that this liability was covered. However, the Minister has indicated that there is some progress. I will watch this space, as I am sure will others. At this time, I beg leave to withdraw the amendment.
Lord Whitty
My Lords, in her opening remarks, the noble Baroness was correct to set this matter in the broader context of where we are now, and have been in recent years, with instances of serious flooding in Somerset this week, possible serious flooding in Surrey by the end of the day, that which occurred in Keswick not long ago; and the resources that are needed to ameliorate that position in the long term which are, essentially, the resources that the Government are putting in. We will no doubt return to that issue at some stage in these proceedings. However it raises the question of whose responsibility this is. I have slight reservations about these amendments in that regard. The public authorities and the Government have responsibility for ensuring that adequate resources are available for flood defence and catchment management to mitigate the impact of flooding and insurance and reinsurance schemes can help through their normal operations. However, insurers can insist on mitigation or flood recovery measures along the lines mentioned by my noble friend Lord Campbell-Savours as a condition of renewal or extension of policy cover or as a deduction, if you like, from compensation. That is a normal insurance operation.
These amendments seem to be saying that Flood Re would take on some public responsibilities and social objectives and have executive responsibility for delivering flood limitation measures. It is important and right that Flood Re should co-operate with the public authorities, landowners and everybody else in this area, so in that sense I support Amendment 156B. However, it is also important that we do not transfer the risk from public authorities and property owners to an insurance system which, at the end of the day, is viable only if it takes a cut from all policyholders, including those whose properties are not at all at risk of flooding.
This is a difficult issue. The noble Baroness referred to public money. In one sense public money is involved because we are legislating for the system and the Treasury will, therefore, regard the expenditure involved as public money, but it is not really public money—it is the policyholders’ money. At the end of the day, you cannot place too many responsibilities on the Flood Re operation when it is dependent on individual households and businesses paying into it for insurance purposes.
It may well be that a surplus is generated and that the assessment of who pays for flood defence is looked at more broadly. Clearly, there are limitations on public expenditure and expenditure on better flood defence and catchment management could be met by those who are the most direct beneficiaries of it. You could argue that insurance companies themselves benefit from fewer claims as a result of more effective flood defence, but that is a slightly wider argument than placing the statutory responsibilities for which these amendments ask on to Flood Re itself. I think that that is slightly going round the back door.
As I say, I am slightly torn on this issue because I agree with a lot of what the noble Baroness and the noble Lord, Lord Shipley, said. However, I think that we would probably place too much responsibility on Flood Re if we adopted all these amendments.
Lord De Mauley
My Lords, I am grateful to my noble friend Lady Parminter for her amendments regarding flood resilience and Flood Re’s role in that matter, and to all noble Lords who have spoken. Regarding Amendments 154A and 154B, I agree with my noble friend Lord Shipley that we need to tackle the root cause of the difficulties with the availability and affordability of flood insurance—the flood risk that households face. The coverage of the tragic events of the past couple of months, which my noble friend Lady Parminter mentioned, have brought the full impact of this home to us all. I thought that the letter read out by the noble Lord, Lord Campbell-Savours, set out the problem very well.
Households benefiting from Flood Re need to understand both their flood risk and the likely impact of the withdrawal, over time, of the subsidy on their future premiums. I hope that noble Lords will be reassured to hear that we have agreed with the Association of British Insurers the principle that insurers will be required to provide such information to customers when a property is ceded to Flood Re and at the point of a claim. I hope that the statutory requirement for the Flood Re scheme to manage, over the period of the operation of the scheme, the transition to risk-reflective pricing of flood insurance for household premises also offers some reassurance.
The ABI has now come forward with draft proposals for ensuring that the correct incentives are in place to drive uptake of resilient repairs after a flood, particularly for those properties subject to repeat flooding. We are still agreeing the detail of this approach and I hope to have more to say on Report. Encouraging households to become more resilient over the period of the scheme will help to reduce the impacts of subsequent flooding.
Turning to Amendment 156A, the subsection that my noble friends seek to amend has been drafted in such a way to provide firm pointers as to what the Flood Re scheme administrator would need to have regard but is also intended to allow for a degree of flexibility that may be needed as the scheme is finalised. I assure noble Lords, in the strongest terms, that the Government are absolutely committed to taking forward Flood Re, together with the insurance industry, and that both parties are working very hard to achieve this.
We expect the administrator to act responsibly in its management of the scheme throughout its life and we have every intention of ensuring that it discharges its functions in a proper manner, supported by the duties we will place in secondary legislation. The regulations made under Clause 54 will be subject to public consultation and we are currently considering carefully the Delegated Powers Committee’s recommendation that regulations made under this clause should be subject to the affirmative procedure. I trust that this assurance puts on the record our intentions in this regard.
As regards Amendment 156B, my noble friends are right that co-operation between Flood Re and flood risk management authorities will be important, in particular should Flood Re wish in the future to commit any of its resources to supporting flood risk mitigation measures. Clause 54 provides for Flood Re to share information held by it with the Environment Agency, its equivalents in devolved Administrations and any other bodies specified in regulations. It also provides for Flood Re to have a duty to act in the public interest, so where it is in the public interest for Flood Re to co-operate with other risk management authorities, it would be expected to do so.
Under the Flood and Water Management Act 2010, flood risk management authorities have a duty to co-operate with each other in the exercise of their flood and coastal erosion risk management functions. This is because the causes of flooding can cross organisational boundaries and responsibilities. For example, flood risk management schemes to protect one area may make the problem worse elsewhere if there is not a partnership approach to developing solutions. Flood Re will not have an operational role in designing or implementing flood risk management schemes. As I think the noble Lord, Lord Whitty, suggested, that would be beyond the scope of Flood Re and would require different skill sets. Flood Re will therefore not have the same degree of interaction with the risk management authorities that they will have with each other. I am not convinced that there is a need to extend the requirements based upon the Flood Re body.
Perhaps I may say to my noble friend Lord Cathcart that while directly managing flood risk is not the purpose of Flood Re, it is nevertheless vital that Flood Re does not just deliver affordable flood insurance. It should also contain the right incentives for householders and insurers to put in place the necessary measures to become more resilient, since otherwise the effective price limits in Flood Re may remove some of the financial incentive to take such action. He has suggested—the noble Earl, Lord Lytton, also asked about this—that Flood Re will need to build up its reserves, which is of course right, but it will have access to the proceeds of the levy and be able itself to take out reinsurance. Can I offer to meet noble Lords before Report, on which occasion I shall of course be happy to provide an update? Perhaps I could also address the point made by my noble friend Lord Crickhowell at this stage. I shall come back on Report to noble Lords with more details of how those who flood repeatedly might be treated. For the reasons I have outlined, I hope that I can persuade my noble friend to withdraw her amendment.
Earl Cathcart (Con)
My Lords, I congratulate my noble friends Lord Moynihan and Lady Parminter on tabling Amendment 155, as it has given us a good chance to debate flood insurance for businesses, whether in Flood Re or in another mutual set up specifically. We are all under pressure to include small businesses under the Flood Re scheme. That is quite understandable. If I had a business in a flood risk area, I would want to insure it under the Flood Re scheme. I know that the Association of British Insurers and the Government looked at whether businesses could be included within the Flood Re scheme, but found that it threw up more problems than it solved. This is best illustrated with an example.
I am a free range egg producer on my farm in Norfolk, and when it came to buying insurance for the business, I was presented with a long shopping list of types of cover relevant to my business: property; business interruption; loss of profits; contractors “all risks”; terrorism and malicious attack; livestock, including theft, worrying, death after straying, accidental or malicious death; deterioration of stock, in my case probably due to bad feed or electrical failure; perils and fatal injury; livestock in transit; disease, in my case probably something like bird flu or salmonella; goods in transit; motor, for lorries, trucks, vans or cars; employers’ liability; public liability; product liability or environmental liability; legal and professional expenses.
The list goes on, but I hope that gives your Lordships a flavour of the range of commercial insurance on offer. I, of course, had to cherry pick the cover that was most relevant to me. For instance, I did not buy livestock or goods in transit cover, because this is the responsibility of third parties with whom I have a contract. Also, I have no vehicles in that business, so motor insurance was not an issue. However, salmonella is an issue for my business, but because the insurance is so costly I chose not buy it. I hope that I got that one right. I have to choose not only the type of cover that I think is appropriate to my business but how much cover to buy for each category, the cost and the level of excess necessary to reduce that cost. The excess across my shopping list varies from £100 to £20,000.
Although there are hundreds of egg producers up and down the country with identical businesses to mine, I very much doubt that there is another that has commercial insurance exactly the same as mine. They will all be different, and that is the problem: all businesses, whether a corner shop, a pub, a guest house, a property investment company, a hotel or guest house, a manufacturing company or an engineering firm, will buy commercial insurance to suit their particular circumstances. The whole point of a mutual, whether Flood Re or one geared specifically to small businesses, is that the conditions are common to all. The price, the excess, the cover and the conditions must be standardised. This can be done for homeowner insurance—it is pretty bog-standard—but sadly, as I have tried to illustrate, not for commercial insurance. You just cannot standardise it. If it were standardised, virtually all commercial members of that mutual would end up with a policy that did not give them the cover that they wanted.
It would be good if everything could be included in Flood Re, whether owner-occupied houses, rented homes or small businesses, but the line must be drawn somewhere. It has been agreed that those with homeowner insurance, buildings and contents, will be included and that commercial insurance will not be. If I had a property in a flood-risk zone that was deemed to have commercial insurance with it and was therefore excluded from the mutual, I would ask my broker to split my insurance cover into two separate policies: one for the bog-standard homeowner cover, buildings and contents, to ensure inclusion within the Flood Re scheme, and the other to include all elements that made my cover commercial, such as owner’s liability or public liability cover. That might be a way forward for many of those finding themselves excluded from the Flood Re scheme because of the commercial element of their policy.
Flood Re will help up to 500,000 homeowners who cannot currently buy flood cover, but I am sure that with a little bit of inventiveness, many, although I am afraid not all, small businesses, including buy-to-let and leasehold properties, can buy their insurance in such a way as to be included in the scheme.
Lord Whitty
My Lords, my noble friend and I have two amendments in this rather complicated group. The group as a whole is beginning to get us into the area of who should be in and who is out of Flood Re, and we have some groups of amendments later that touch on the same issue. Before the Bill leaves this House, we must be clear who is in, who is out, and why.
My Amendment 160 would require the Secretary of State to report on the numbers of properties in flood-risk areas that were eligible, and those that were not, for inclusion in Flood Re. It would include looking at the specific exclusion as it stands of council tax band H and post-2009 new build. The report would look at how much it would cost to bring them in and who would bear the cost if they were brought into Flood Re, in terms of both premiums and the effect on the non-risky properties’ cross-subsidy.
We all have some sympathy with those groups that are excluded. However, we must be careful, as this is a delicate arithmetic deal between the Government and the ABI. I understand that negotiations were hard and long. As far as businesses are concerned, it is obvious that this must be addressed somehow. We have all seen the effects of flooding in recent weeks and the past few years, on small businesses and farms, on the Cockermouth high street a year ago and on the seafronts at Dawlish and Aberystwyth in recent weeks. We also know that the businesses that are hit—the shops, boarding houses and small businesses—are key to the prosperity of those local economies. It must be frustrating for small businesses, and those advocating their case, like the federation, because they were covered in some way under the statement of principles under the old scheme. However, the old scheme was a different sort of scheme. It was a deal struck by the ABI, agreeing that it would continue to cover—even then, it was not offering new cover—small businesses as well as households if the Government committed themselves to a certain level of expenditure on flood defence.
This is a different sort of deal; it is actuarially based. While we have all received representations on behalf of businesses, the approach now has a different basis. Even so, it is complicated. Some micro-businesses operated out of the owner’s house could be covered because they pay council tax rather than business tax. However, others will not. There are good reasons for this. The noble Earl, Lord Cathcart, described the bespoke way in which businesses negotiate their insurance as distinct from the more generalised way in which households are covered. It is difficult to see how businesses could be included in Flood Re as it stands without serious reconfiguration of the whole arithmetic. Therefore, while I have sympathy, I would not go so far as to press the Government on this front. However, I am in favour of knowing more about this. Therefore I support the proposition of the noble Lord, Lord Moynihan, that we look at this and report on it and see whether that might lead us to some other form of provision in parallel with Flood Re.
Some of the other boundary issues are even more complicated, particularly in relation to leasehold properties and the issue of whether landlords and tenants are included. The noble Earl, Lord Lytton, has dealt with one element of this and others are dealt with later on. Some of the government literature refers to leasehold properties. However, in general, the ABI and the Government do not think that leasehold properties are included. The situation with single landlords and tenants is not clear, although commercial providers of leasehold property are not included. The differentiation here is more the nature of the insurance than the nature of the property. While the property may be defined as being in risk or not, in a landlord/tenant situation, the tenant probably takes out the contents insurance, which is covered, whereas building insurance, which is the landlord’s responsibility, is not covered. That is quite a complex position, and it would also be true for multiple leasehold property. A future mortgage on such property is dependent to some extent, as the noble Earl, Lord Lytton, said, on there being ongoing insurance on the property. Leaseholders and the owners of the property may be faced with a double whammy if they are not careful.
As I said, I am not in favour of widening the group at this time because of the delicate arithmetic involved. We must address some of these issues in the Bill but for the moment I cannot support the amendments proposed by the noble Earl, Lord Lytton, nor the proposals of the noble Baroness, Lady Bakewell of Hardington Mandeville, on mixed hereditaments. I am not sure whether Amendment 160A in the name of the noble Lord, Lord Shipley, which would effectively delete the exclusion of post-2009 properties, is in this group. That is in a rather different category because people have been building in high-risk areas when they have known that they were going to be excluded under the old agreement, let alone the new one. I therefore have less sympathy for that group than I might have for the others.
Lord Whitty
“(8) Prior to making any regulations under subsection (5), the Secretary of State shall require the Committee on Climate Change to provide current and projected estimates of the number of properties that would be eligible for—
(a) inclusion in the Flood Reinsurance Scheme;(b) the value of levy required under section 53; and(c) the likelihood of additional levy or contributions being needed from time to time.”
Lord Whitty
My Lords, I shall also speak to Amendment 158. As we have discussed, actuarial calculations for the establishment of Flood Re have had to be pretty robust and tight, reflecting the level of risk assessed by the insurers and by the Government at this time, but we also all know that flood risk will change over time. We cannot, therefore, establish Flood Re on a totally static basis; it needs to be a dynamic process. The reality is that the numbers at high risk of flood damage are likely to increase, particularly, but not solely, because of the effects of climate change. The Committee on Climate Change and its Adaptation Sub-Committee are the key adviser to the Government on the numbers likely to be at risk of flood.
Over the next few years, Flood Re is supposed to operate in an area in which the Committee on Climate Change has already indicated there will be a significant increase in the numbers at significant risk of flood. The definition of “significant” in this context is one in 75 years. At the moment, that relates to about 370,000 properties. The information that Defra put into the basis of the impact assessment derived from the Committee on Climate Change statistics. I am not sure whether it is the database to which the noble Lord, Lord Krebs, referred or some other, but given that we are working on a 25-year timescale it said that this figure will have increased by the 2020s to between 475,000 and 825,000 and by the 2030s to between 525,000 and 1 million. That is a pretty big increase. By the end of the 2030s, the end of the 25-year period, it is potentially three times what we are talking about now.
Obviously, some mitigation will happen, but regrettably the level of flood defence expenditure fell—it is now rising again, but it fell—and the figures that have been used in these calculations show that there is a gap between the required expenditure and what is likely to be needed of about £500 million over the period of 20 years. That means that we have a significant problem in defining what is at risk in 10 or 20 years and therefore where Flood Re has to get to in terms of its financial arithmetic and the number of properties that it is going to cover. The Committee on Climate Change can advise on the likely change in crude numbers—indeed, it already has. It can apply probabilities to that, it can indicate what degree of mitigation, at what likely cost, is likely to offset this and it can look at the change in the nature of the risk and the areas to which it applies. It is important that both the Government and the administrator of Flood Re get strong, independent assessments of this changing and growing risk.
Indeed, this goes beyond climate change; there are the interrelationships between climate change, population growth, distribution of population, development pressures, water resource pressures, ecological consequences and so forth. The Committee on Climate Change and the Adaptation Sub-Committee are the authoritative bodies to do that and their role should be written into the Bill. My Amendment 156 does that and Amendment 158 would then require the Secretary of State to take notice of the advice from the Committee on Climate Change when setting targets under Clause 58 and more broadly. I beg to move.
Baroness Northover
My Lords, I am grateful to the noble Lord, Lord Whitty, for drawing attention to his wish to ensure that that the policies set out in the legislation respond to the demands that climate change may bring in future—in particular, by including a formal role for the Committee on Climate Change. I was not entirely sure whether the noble Lord, Lord Krebs, accepted that formal role.
We fully agree that climate change and adaptation to it are vital. The noble Lord, Lord Whitty, added the additional factor of population growth. He rightly challenges us on the uncertainty of the future and we are very much aware of the need to plan for the future in this regard.
The Committee on Climate Change and, in this respect, its Adaptation Sub-Committee play a very important role in providing independent advice to the Government. The information and analysis provided since the committee’s inception have helped to shape the debate on climate change. Although the evidence of climate change is becoming increasingly compelling, it is clear that we need to do more to understand and plan for its impacts. This is a challenging task, given how interrelated and unpredictable those effects are. We have seen how variable the jet stream has been over the past few years, for example, and how it has brought us drought and flood.
Although, clearly, dealing with the current devastating flooding is the immediate absolute priority, we also need to reflect on our management of flood risk and assess our preparedness for climate change. The Government published the UK’s first national adaptation programme report in July 2013, which sets out the action that we propose to take. There is great expertise in this country, not least in your Lordships’ Chamber, which we can access and are accessing, as well as learning lessons from elsewhere.
Specifically in relation to Flood Re, I assure noble Lords that climate change projections were considered alongside other risk factors during the design of the policy and that the effects of climate change will continue to be considered during future levy-setting discussions. I remind your Lordships that in the memorandum of understanding with the industry that has been used to craft the Bill—I mentioned it in relation to a previous group—we have recognised the importance of the programme of flood defence and have committed to a specified amount of expenditure for 2015-16. However, we believe that advising on the scope and financial parameters for the transitional Flood Re scheme is a role for the insurance industry and would be outside the current remit of the Committee on Climate Change.
To clarify, the number of policies that would be eligible for Flood Re is based solely on the cost of the flood risk component of any policy, which is set by the insurers. This assessment of flood risk will indeed change over time, as the noble Lord, Lord Whitty, acknowledged, and it would not be possible for the Committee on Climate Change to provide any estimates without detailed knowledge of industry pricing models. Similarly, the value of the levy required and the likelihood of the need of any additional contribution by insurers is based on a number of financial parameters that could change year on year. Those include the level of premiums received, the cost of reinsurance and the amount of levy collected.
The Government and the Association of British Insurers have worked hard to determine the value of the levy required and the likelihood of the need for additional contributions, based on industry data and assumptions that were subject to independent review by Professor Stephen Diacon. In addition, extensive modelling, using a model that was quality-assured by the Government Actuary’s Department, has been carried out by the Government using there data, as part of both the pre-consultation and post-consultation impact assessments.
Looking forward, the Environment Agency will continue to collect and analyse data on flood risk, which will feed into the Government’s ongoing assessment of the scheme. In addition, as Flood Re is directly accountable to Parliament, detailed audited information about Flood Re’s ongoing operation will be reported to Parliament regularly.
I turn now to the proposed role of the Committee on Climate Change in advising the Secretary of State on setting the target number in relation to the flood insurance obligation. Clause 58 gives the Secretary of State the power periodically to set a target for the proportion of properties on a register of properties at greater flood risk that relevant insurers are collectively required to issue with insurance policies. The register, to be created by the Environment Agency and its counterparts in the devolved Administrations, will be based on the flood risk maps published by those bodies.
The number of properties indicated as subject to flood risk may change with time, as a consequence of climate change or through better information and mapping. The Secretary of State would set an overall target for the number of registered properties that the industry as a whole needs to cover. In setting this target, the Secretary of State would consider evidence on existing take-up rates of insurance and other relevant data. This could include advice from the Committee on Climate Change, should the Secretary of State wish.
The setting of the target number is a decision regarding the appropriate breadth of support that should be given by this financial support mechanism. Again, we believe that advising on the target number would be outside the committee’s current remit and, for reasons discussed in relation to Flood Re, would not be the most appropriate use of its resources or expertise.
Although, for the reasons that I have set out, we do not feel able to accept these specific amendments, I would like to return for a moment to the wider spirit behind them. We absolutely recognise that climate change is a most important consideration for the management of future flood risk and we value the expertise of the Committee on Climate Change. We are pleased that the independent Adaptation Sub-Committee will be publishing a revised climate change risk assessment report in summer 2016. We will consider that evidence and any implications for flood risk management carefully once the report is received.
Noble Lords know about various measures that we are putting in place to reduce the risks of flooding and coastal erosion, so I will not expand on that right now. I hope that the noble Lord will have been reassured by what I have had to say, setting what we are doing here in the context of our deep understanding of the potential implications of climate change and the unpredictability of measuring it into the future. I hope that he will withdraw the amendment.
Lord Whitty
My Lords, I thank the Minister, who clearly recognises the issue. I also thank the noble Lord, Lord Krebs, who, I thought, accepted the additional responsibility—although slightly conditionally. The conditionality was that the financial information, at least in broad terms, would be available to the committee.
I am a bit disappointed by the Minister’s reply. She recognises clearly the importance of climate change in defining the nature and scope of the problem. The Government have an authoritative independent committee available to them to feed into their deliberations, along with the administrator of Flood Re, but she is saying, “Actually, the Minister might or might not take notice of what the Climate Change Committee says, but, in any case, it is not the role of the Climate Change Committee and the Adaptation Sub-Committee to talk about financial risk assessment”. That is not what we are saying, though. To feed in to the risk assessment, you need the most authoritative input that you can get, in order that the financial structure can be changed to reflect those increased risks, changed probabilities or changed distribution of risk. I would have thought that it would be useful to the Government to have it written into the Bill that they have an authoritative input on this from the Committee on Climate Change.
In response to the noble Lord, Lord Ashton, I am not looking for this input before we get Flood Re off the ground. I will be looking for an ongoing input. The administrator of Flood Re, as well as the Government, is going to look increasingly for this kind of authoritative input. At the end of the day Flood Re is—despite its statutory base and its reporting to Parliament—a private body informed by the expertise of the insurance industry, but that expertise is itself informed by the best information that can be got on risk. In my view, the best information that can be got is probably from the noble Lord, Lord Krebs, and the noble Lord, Lord Deben, who is no longer in his place. I would have thought they would be the best and most authoritative sources to be relied on. I am surprised that they are not prepared to get that reflected in the Bill. For the moment, I withdraw my amendment.
Lord Whitty
My Lords, I broadly support most of these amendments, but I have a few queries. I support the first two amendments, Amendments 156C and 156D, unequivocally. It should be part of the role of Flood Re to help raise awareness, both among policyholders and in the community at large, and it will need to do so in conjunction with the Environment Agency, local authorities and so forth. However, clearly, the insurers also have a responsibility, as is reflected in these amendments. This will help both the beneficiaries and the insurers to move to a more systematic, cost-reflective basis for the whole system over time. It is also true that the administrator should be required to produce a plan for the operation of that scheme, as provided for in Amendment 156D. There must also be an overall longer-term plan for transition over the 25 years of the plan, as is proposed by the noble Lord, Lord Krebs, and the noble Baroness, Lady Parminter.
I am less sure that we should stipulate a five-year review period in legislation. In a sense, the scheme is always under review and will be changed in the light of new advice or new experience of flood conditions. Tying this down to every five years may not be the most sensible thing to do. Part of that assessment would be to indicate what measures would be needed to reduce long-term costs, as provided for in Amendment 156F. Insurers may encourage both individual and collective schemes of mitigation. As I have said before, this may involve mitigation by the policyholders, as a condition of that policy, or as a “cream-off” from compensation received in order to renew the policy. The noble Lord referred to Flood Re’s assessment of the need to invest in order to save in the longer term. I understand all of that. I am, however, a little worried by the term “subsidising”, which is included in Amendment 156E. I am not sure who is subsidising whom in this context. If the noble Lord means measures such as these, I think that is appropriate, but I would not use that term, as it might suggest a cross-subsidy over and above what is already provided for in the scheme.
Even after the noble Lord’s gallant attempt at explaining Amendment 156G, I do not follow it fully. As I understand it, the objective is to keep the levy cost down for those outside the scheme and the means would be some sort of quota-sharing agreement. I bow to the greater expertise of those involved in the insurance industry to tell me whether that will work. Subject to those queries and my slight lack of comprehension on the last amendment, the noble Lord, Lord Krebs, and the noble Baroness are in the right territory with these amendments.
Lord De Mauley
My Lords, I concur with the noble Lord, Lord Krebs, in Amendment 156C that it is important that householders whose policies are ceded to Flood Re are aware both of the flood risk in their vicinity and of the transitional nature of the scheme. Knowing about flood risk is vital so that households can take simple steps, such as signing up to free flood warnings, as well as investigating longer-term options for managing their flood risk, and can understand the likely impact on their future premiums of the withdrawal of the subsidy from which they are benefiting.
We will work with insurers and Flood Re to support people at flood risk to plan for and adjust to risk-based pricing. I hope that noble Lords will be reassured to know that we have agreed with the ABI that insurers will be required to provide information to customers about their flood risk, Flood Re and the actions that they can take to manage this, both when a property is ceded to Flood Re and at the point of a claim. Of course, raising awareness of flood risk remains primarily a matter for risk management authorities, such as the Environment Agency, so it will be important to ensure that any action by insurers on behalf of Flood Re complements their work.
Turning to Amendment 156D, I understand that by changing the phrasing of the power in Clause 54(3) from “may” to “shall”, the notion that Flood Re is a transitional measure is strengthened. I point to the Government’s stated policy objective in the June 2013 public consultation that,
“there should be a gradual transition towards more risk-reflective prices”,
and to the existing provisions in subsection (2) of the clause, which may require the administrator to have regard to the transitional nature of the scheme in discharging its functions. We have been clear that there should be a gradual transition to more risk-reflective prices and that we are committed to ensuring that the scheme retains incentives for flood risk to be managed. The Government will not designate the scheme until we are satisfied with the industry’s proposals. As I have already said today, the regulations designating the scheme will be subject to public consultation and we are currently considering the recommendation of the Delegated Powers Committee that regulations made under this clause should be subject to the affirmative procedure. While I recognise that the shift from a permissive power to a firm expectation could be claimed to underscore Flood Re’s duties in this regard, I believe that there is sufficient clarity in Flood Re’s role to manage the transition to risk-reflective pricing and for that to be achieved through the current drafting of the Bill.
Turning to Amendment 156E, from my noble friend Lady Parminter, I can confirm that it is, as she said, our firm intention that the policy will be reviewed every five years by the Government. This review will assess the level at which the levy and the eligibility thresholds are set to ensure that the policy objectives of Flood Re continue to be delivered, including the transition to risk-reflective pricing. The plan will be a public document and Parliament will be able to use existing powers to call Flood Re’s staff to answer any questions. On the point made by the noble Lord, Lord Whitty, in the case that Flood Re’s finances are out of kilter or the scheme is not operating effectively, that review will be brought forward. We are working with the ABI to define this process. The amount of the levy and the thresholds will be set out in secondary legislation. We intend those instruments to have a review period, always accepting that they might be reviewed early if circumstances require it. In addition, as I have just said, we are taking a power to make Flood Re’s responsible officer directly accountable to Parliament for the scheme’s value for money and for propriety and regularity. There are powers to require Flood Re’s audited accounts to be laid before Parliament and provided to the Comptroller and Auditor-General to examine and compare against Flood Re’s published transition plan.
I now turn to Amendment 156F, which would require the Flood Re scheme administrator to set out how it intends to manage the transition to risk-reflective pricing by investing in flood risk mitigation measures. Actions taken by households, communities, businesses and Government to reduce flood risk are the best and most cost-effective way to secure affordable insurance for households at risk of flooding in the long term, and I recognise the noble Lord’s intention to see this reflected in the Bill. As I said earlier, Flood Re will have a duty to have regard to the need both to act in the public interest and to ensure economy, efficiency and effectiveness in the discharge of its functions. It may well be that the Flood Re administrator decides in due course that investments of the sort that the noble Lord would like to see present an appropriate means of complying with these requirements where there is a clear case for doing so. Nothing in the Bill precludes this. However, we think that it is important for Flood Re to retain flexibility in the way that it discharges its public-interest duty and plans for transition, in order to ensure that it is in a position to balance these requirements against its core obligations as a reinsurer. Accordingly, we do not think that it would be appropriate to mandate Flood Re to subsidise flood risk mitigation measures.
Finally, Amendment 156G would limit the maximum proportion of the cost of a claim that an insurer could reclaim from the Flood Re scheme to a specific amount, as part of the Flood Re scheme’s management of transition to risk-reflective pricing. I understand that the intention is that this would restore an element of risk-reflective pricing to insurance policies in Flood Re. This could create a financial incentive for households and insurers to put in place the necessary measures to manage their flood risk. However, price is one, but not the only, signal to households for achieving that and our proposals for ensuring that households have the necessary information to make informed choices about managing their risk should also act to drive resilient behaviours. While superficially attractive, sharing an element of the risk between Flood Re and households would also have the effect of creating a more complex system to administer, thereby adding to the overall costs of the scheme. Having listened to what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.
Lord Campbell-Savours
My Lords, there is an element of confusion both outside and inside this House as to where the words which define the exclusion of leaseholders are to be found. I understand that Defra put out a notice in which it excluded leaseholders, but can the Minister tell us where this provision is made? The public are confused. The assumption when anyone reads this Bill that freeholders are included will be interpreted by flat-owners who have purchased their freehold but manage their blocks through leasehold companies—companies which have been established to manage the freehold, owned by the residents who have 999-year leases—to mean that they are also included. They will assume that because they are freeholders they are included. My understanding from my reading, although, as I say, I have not found the authoritative piece of literature, is that they are not included. In other words, people out there who believe they are included—freeholders of blocks of flats; not corporate interests but individual share-of-freehold owners—will think that they are included when they are not. That needs to be sorted out.
I cannot understand why they are excluded. Indeed, I would argue that they are probably less of a risk to insurance companies, even though they may well live in buildings on flood plains, because very often you find blocks of flats where no one is living on the bottom floor at all and the first flat in the block is on the first floor, above the area at risk of being flooded. If I am correct in what I am saying, will the Minister tell us why share-of-freehold owners in blocks of flats are being excluded when, in fact, they are freeholders and when, as I say, people reading the Bill will presume that they are included?
Lord Whitty
My Lords, I think my noble friend Lord Campbell-Savours is going back to a point that I raised earlier—namely, that the Flood Re parts of the Bill may have been produced relatively late in the Commons. However, the dividing line between what is included in terms of property and what is not is not as clear as it should be. My noble friend has just identified a group for whom this issue is particularly confusing, but in any case the distinction is not in the text of the Bill. As I said earlier, there is slight confusion about the various bits of paper that Defra has produced on this matter, so we need clarity one way or the other as to which groups are included and which are not. We have heard various bits of clarification from the Minister today. I think that most of those should end up in the Bill before we finalise it and I look to the Government to come forward with amendments on Report or at Third Reading to make sure that the position is clear.
I am afraid that I confused the amendment of the noble Lord, Lord Shipley, in this group with an amendment in an earlier group and commented on it earlier. However, whereas I have great sympathy with a lot of the other excluded groups, I have virtually none with those who built on and developed land in high-risk areas after 2009 because it was already clear from the previous agreement between the Government and the ABI that new insurance would not be given for those developments. Like the noble Earl, Lord Cathcart, I do not think we should give those people leeway retrospectively. If we shift the deadline now, somebody will argue for a deadline at a later stage to allow yet more development in inappropriate places, and that will skew the insurance figures and the whole calculation behind Flood Re. Therefore, I do not support the noble Lord on this occasion.
Lord De Mauley
My Lords, my noble friend’s Amendment 160A seeks to make all houses built and occupied before its introduction eligible for Flood Re. This amendment would move the cut-off date for inclusion of properties in the scheme to the start of Flood Re, rather than from 2009, and would also bring band H households in scope of the scheme.
I apologise to noble Lords as I suspect that I may be repeating what I said earlier today and, indeed, we may repeat it yet again later. First, I reiterate why we intend that properties built before 1 January 2009 and those in council tax band H and the equivalents would not be eligible for the scheme. However, before I do that, I shall respond to my noble friend Lord Shipley and a number of other noble Lords who asked what state the property must have been in at 1 January 2009 in order to qualify. It must have been in possession of a council tax band, which would imply that it was habitable at that date. I hope that is helpful.
The 2009 cut-off date recognises that new housing development should be located to avoid flood risk, or where development in a flood risk area is necessary, it should be designed to be safe, appropriately resilient to flooding and not increase flood risk elsewhere, in line with the national planning policies in place. This date therefore reflects the fact that homes built since 2009 should already be insurable at affordable prices. As the noble Lord, Lord Whitty, said, that marker has been in operation for several years, and it has been maintained under the Flood Re proposals.
The noble Lord, Lord Shipley, asked about surface water mapping. The new mapping has shown that the total number of properties affected by surface water flooding is lower than previously thought.
Band H properties are not included in the scheme because, as I explained in some detail earlier today, Flood Re is designed to target support to those who need it most.
The noble Lord, Lord Campbell-Savours, raised the issue of leasehold properties. As we have discussed, commercial policies are out of scope of Flood Re, which is designed to support households. We believe that this approach is fair and practical, and it was supported in the public consultation. However, the leasehold sector presents a more complex situation, where the contents policy is classified as domestic, but a buildings policy could be classified as either commercial or domestic and could cover multiple dwellings. As I said, I recognise the strength of feeling on this issue, particularly in light of the ongoing extreme weather conditions, and I feel we need to take time to consider it in more detail, although, without evidence of market failure, it would be difficult to justify action. However, we will examine the evidence further with the ABI and I hope to provide an update on Report.
Water Bill
Lord Whitty Excerpts(10 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Crickhowell (Con)
I rise to make a very brief comment, prompted by the remarks of my noble friend on the likely possibility of incumbents seeking to defend their positions. I seem to recall that, in reply to my noble friend Lord Moynihan in our previous debate, the Minister told us that the water companies had said that they were against what was proposed. I remember thinking, like Mandy Rice-Davies, “Well, they would, wouldn’t they?”. It was just an indication of the kind of attitude that one is likely to get from incumbents—perfectly naturally—in trying to defend their existing position.
Lord Whitty (Lab)
My Lords, last week’s de facto alliance between the noble Lord, Lord Moynihan, and me extends in part to these amendments, in that it would be sensible for the Government to contemplate positively some of the latter amendments in the group, particularly those that inhibit the degree to which incumbents can effectively square the market against new entrants. However, my agreement does not extend all the way, I am afraid, particularly to the earlier amendments in the group. We must remember that the Bill is not quite as radical as all that, and, if it were to be a bit more radical, a lot of other things should follow.
We are, actually, introducing competition immediately only in a narrow part of the market. It is an important part, and there may be subsequent lessons to be learnt, but it is going a bit far to say that Ofwat’s central duty should be extended to promote competition. It already has a duty to look after the interests of consumers, where appropriate through competition, and we are making sense of that in a way that has not been done in the past 20-plus years of privatisation. However, we are not in any way legislating in this Bill for residential properties to be subjected to competition. Some noble Lords may think that we should be doing so, and it may be that I could be persuaded of that, but the fact is that we are not doing so here. If we were, that would raise a whole range of other protections and issues that would have to be considered.
It is also true—the noble Lord, Lord Moynihan, referred to upstream competition—that a number of hesitations were expressed around the Committee last week about triggering the upstream aspect to this, particularly in relation to abstraction reform occurring first. I would not want the noble Lord’s Amendments 115 and 116 about promoting competition to give Ofwat the impression that their provisions would override the need to ensure that abstraction protection was in place before competition in the upstream area was triggered.
Therefore, I cannot support this group of amendments as a whole. The Government may wish to consider one or two of them but, at this point, many of them go too far beyond the scope of the Bill or could be interpreted as doing so.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, my noble friend Lord Moynihan’s Amendments 115 and 116 would introduce a new duty on incumbent water companies to “facilitate competition”. This would sit alongside their primary duties to supply water and provide sewerage services to their appointed areas. Amendments 138 to 145 would change Ofwat’s powers to amend licences to introduce the market reforms set out in the Bill.
One part of the proposed new duty on incumbents would require them to act in a manner that did not “prevent, restrict or distort” competition. I think we can all agree that it is essential that incumbent water companies play by the rules of the market so that customers benefit from competition. That is why the Competition Act 1998 already prohibits business from making agreements that involve the prevention, restriction or distortion of competition, or from abusing a dominant position in the market. Both incumbents and licensees are subject to an overarching competition law regime that deals with the concerns that the amendments seek to address. As my noble friend thought I would say, Ofwat is able to enforce the Competition Act 1998 in the water sector because it has concurrent powers with the Competition and Markets Authority.
In some of our debates on Tuesday, noble Lords made comparisons with Scotland, as did my noble friend today, but I note that a facilitating competition duty was not imposed on Scottish Water, although it, too, is subject to the aforementioned Competition Act. It is worth noting here that WICS does not have the same powers as Ofwat under the Competition Act, which may explain some of the differences in the way Scottish Water is regulated.
Incumbents will be subject to enforceable licence conditions, market codes and charging rules which will ensure that they operate fairly in the competitive markets. I question why the amendments do not require licensees to be under the same or a similar duty because both licensees and incumbents operate within the retail market and some licensees are associates of incumbents.
Baroness Parminter (LD)
My Lords, I welcome the fact that the Water Bill places the Government’s strategic priorities and objectives on a clearer statutory footing and requires Ofwat to carry out its functions in accordance with it. New Section 2A(3) to be inserted by Clause 24 makes it clear that, “In formulating a statement” the Government “must have regard to” Ofwat’s duties, but only,
“may have regard to social and environmental matters”.
The government briefing note on sustainable development and the resilience duty that was issued last month confirms that the Government are strongly committed to sustainable development, balancing the equally important needs of society with those of economic growth and environmental protection. Before lunch we debated how this is articulated in the duties for Ofwat, but it is equally important that it is articulated clearly in the duties placed on future Governments. That is why I believe that the word “may” should be changed to “must”, so that Governments must take into account social and environmental matters when formulating future policy steers.
Statements of strategic priorities will replace the existing social and environmental guidance currently issued to Ofwat. In future, the Secretary of State will issue a single consolidated statement setting out social, environmental and economic policy priorities. My noble friend the Minister kindly confirmed in a letter to me on 17 January that the Government intend to continue to provide guidance on social and environmental matters within that single consolidated policy statement. Given that the Government have said that they will provide guidance on such matters, I feel that the use of the word “may” insufficiently reflects that commitment and the need for future Governments to take account of these matters when formulating the crucial strategic policy that will guide Ofwat. I beg to move.
Lord Whitty
My Lords, I support these amendments. New Section 2A(3) to be inserted by Clause 24 seems to differentiate between Ofwat’s duties regarding strategic priorities and social and environmental matters. We attach “must” to the former and “may” to the latter, but the Secretary of State ought to have regard to both. This is not the usual theological argument between “may” and “must”. Those of us who have been around the block on this legislation have come across that argument a number of times and have completely failed to understand parliamentary counsel’s advice. The provision clearly differentiates the status of the two duties. It does not differentiate and downgrade the social and environmental objectives for Ofwat, which some noble Lords might think would be sensible, as Ofwat is primarily an economic regulator. This is for the Secretary of State. It is the Secretary of State’s duty to balance all these issues out. He should therefore have regard to both duties and if it is “must” for the former it should be “must” for the latter. The provision does not say, “give priority to”; nor does it say, “If you have regard to these duties, you do not necessarily need to carry out exactly what they prescribe”. However, it is the duty of the Minister to balance all these things out. If the legislation gives less status to one than to the other, the outcome of the balancing seems to be predictive.
I do not think that is right. All parts of the policy need to be looked at. I think “must” is probably the appropriate modal verb but both duties need to be in the same form. They are both important and the Secretary of State, whoever that might be, needs to have regard to both. I therefore support the intention of the amendment.
Baroness Northover (LD)
My Lords, I thank my noble friend Lady Parminter for her amendment. She notes that Clause 24 on setting strategic priorities and objectives for Ofwat requires that the Secretary of State “must” have regard to Ofwat’s duties but “may” have regard to social and environmental matters. She would like to change “may” to “must”. I am also familiar with the debates to which the noble Lord, Lord Whitty refers, having delivered a “must” to the noble Lord, Lord Ramsbotham, yesterday at Third Reading of the Children and Families Bill.
The Government are keen to hear and understand my noble friend’s concerns. However, we think that the new power to set strategic priorities and objectives for Ofwat will ensure that social and environmental matters will continue to be addressed. The purpose of Clause 24 is to strengthen and clarify the existing guidance-giving powers. It enables the Secretary of State to issue a single consolidated statement setting out social, environmental and economic policy priorities in the round to help Ofwat to balance all the relevant considerations appropriately when making regulatory decisions.
The Government’s principles of economic regulation require that Ofwat regulates within a clear framework of policies and duties set by the Government. Under the new power, Ofwat must carry out its relevant functions in accordance with the statement. The new powers stipulate that, in issuing the guidance to Ofwat, the Secretary of State must have regard to all Ofwat’s duties. These are set out in Section 2 of the Water Industry Act 1991 and include protecting the interests of consumers, promoting economy and efficiency by companies in their work and, as we have already discussed, contributing to the achievement of sustainable development. These duties encompass the regulator’s essential purposes and it is right that, in giving a steer on policies and objectives, the Government should be bound by them. We note that the duties clearly embrace both social and environmental matters. In addition, the new powers under Clause 24 stipulate that when formulating a statement the Secretary of State may have regard to social and environmental matters. We hope that this serves to provide additional reassurance that such matters will continue to be addressed through the strategic priorities and objectives. As a further check, Clause 24 also requires that we consult widely on the statement of strategic priorities and objectives. Following this, the statement will be subject to parliamentary scrutiny. When we consulted on the existing strategic policy statement last year, the social and environmental content received a warm welcome from both environmental NGOs and consumer groups. I thank my noble friend Lady Parminter for her own tribute to this.
We have great sympathy with my noble friend’s objectives but we are not persuaded that such a change to the Bill is required. I therefore ask her to withdraw her amendment.
Lord Whitty
“National Affordability Scheme
(1) The Secretary of State must, by order, introduce a National Affordability Scheme for water.
(2) The National Affordability Scheme must include an eligibility criteria, determined by the Secretary of State, in consultation with—
(a) the Water Services Regulation Authority; and(b) the Consumer Council for Water.(3) An order under this section—
(a) shall be made by statutory instrument, and(b) may not be made unless a draft of the order has been laid before and approved by a resolution of each House of Parliament.”
Lord Whitty
My Lords, Amendment 119 deals with the affordability question. As my noble friend said on the last amendment, roughly 11% of household consumers of water have problems paying their water bill, amounting to 2 million households. As the Minister said, at present there are two fairly crude systems of pricing water for households. One is based on the seriously outdated—or putative—rateable value of your house and the other is metered by volume. The Minister drew comfort from the fact that this does not lead to complicated tariffs, as there are for the energy sector. To some extent I agree with him—we do not want to overcomplicate this—but in neither the metered nor the non-metered sector for residential consumers is any regard paid to the circumstances of the household or the affordability of the bill. The existing formulae do not allow for that.
Until very recently, and absolutely until the 2010 Act, Ofwat took the view that we should not have varied tariffs, social tariffs or any tariffs that departed from those two basic approaches. It has been very resistant to introducing social tariffs until recently. The 2010 Act provided the option for companies to make social tariffs available to consumers. The Water Sure scheme is a more broadly based scheme, available across companies, for those on benefits with large families and those who have medical needs. The take-up of the option to introduce social tariffs has been hitherto pretty limited—only three companies have so far introduced them. If the Minister has any more recent figures I would be grateful for them, but my understanding is that about 70,000 people have taken up Water Sure and rather fewer have taken up the social tariffs available from individual companies. That is, at best, fewer than 150,000 out of the 2 million potential beneficiaries of a social tariff approach. The Government of course have also recognised the very particular situation with South West Water, but that is based on government expenditure, not on the structure of tariffs.
The industry now tells us that in a couple of years’ time all companies will have social tariffs and that those social tariffs will benefit low-income, vulnerable households. I hope that by the date we stipulate here, 2015, there will be social tariffs right across the board. However, first Ofwat and then the companies have been very slow in pushing this option. The take-up indicates that its availability is not well known and that the ease with which people take up social tariffs is pretty limited. We need to provide an incentive, or a push, on this front over the next year or so in order that all companies take it up and that the take-up among consumers is wide, in order to provide, if you like, a safety net. We recognise the desirability of companies taking notice of the configuration of their own consumers and the particularities of their region, and therefore it is better that companies are left to decide their own schemes which will suit their own circumstances. But they must have widespread eligibility, and be easily taken up and understood. At the present rate of progress it looks unlikely that anything like the potential 2 million households that would be helped by social tariffs will be on them by 2015. We need a national approach to this that will set minimum standards.
Lord De Mauley
My Lords, I thank the noble Lord, Lord Whitty, for Amendment 119, which would insert a new clause into the Bill to place a requirement on the Government to introduce by secondary legislation what is described as a national affordability scheme, with eligibility criteria set by government.
Keeping bills affordable while ensuring continued investment in essential water and sewerage services are the driving principles behind this Bill. I thank the noble Lord for giving us the opportunity to debate these important points. However, while I am in full agreement with him that we must consider the impacts of bills on hard-pressed households, I am not persuaded by his proposal.
First, the concept of a scheme with nationally mandated eligibility criteria simply ignores the reality of the water industry, which is structured on a regional basis. Different water company regions have different customer bases. Average incomes and the cost of living vary substantially from region to region, as do the costs of supplying water and sewerage services. A top-down, centralist approach could take no account of these regional variables. A centrally mandated set of eligibility criteria would have a completely different impact on households living in otherwise identical circumstances, depending on which region they happened to be in.
This is why the Government’s approach is focused on company social tariffs. We have issued statutory guidance that requires the companies to work with their customers to develop local solutions. These must be tailored to local circumstances and acceptable to customers who foot the bill. Companies have been able to introduce social tariffs since April 2013—for slightly less than a year. In the past year, three have done so. The noble Lord, Lord Whitty, feels that the pace of change is too slow, but by 2015-16 the majority of water companies will have a social tariff in place.
Legislating for this change will not make it happen any faster. Given the requirements to develop nationally mandated eligibility criteria, it could actually slow the pace at which social tariffs are rolled out. That could delay the point at which some hard- pressed households receive the help that they need. As the noble Lord said, I have mentioned before that all incumbent water and sewerage companies have already developed packages to help customers with affordability problems. These include customer assistance funds, support tariffs, debt advice and water efficiency measures. Social tariffs have provided a valuable additional tool.
The second important point in relation to this proposal is that it remains far from clear how it is intended to fund this scheme. This is not a minor point of detail; it is the key point, which needs to be addressed. In discussions in another place, there were two suggestions for how such a scheme could be funded. Broadly speaking, these can be characterised as either some form of cross-subsidy from ineligible customers, or some form of tax on profits. These are materially different approaches with very different implications, so it is right to seek to get to the bottom of what is being proposed.
A nationally mandated affordability scheme funded by cross-subsidy would be a tax on all water customers ineligible for help. This would be a very blunt instrument. We must not forget that a great many households that are ineligible for help with their water bills are nevertheless living on very modest incomes. It would be hard on them to argue that they should have to foot the bill without being properly engaged in the development of a locally appropriate scheme.
Alternatively, some have proposed that a national affordability scheme could be funded by some form of windfall tax on company profits. In a price-capped sector such as water, this would be an odd thing to do. The recent publication of water companies’ business plans has demonstrated how the price review can work to claw back benefits for customers. By taking account of lower financing costs, Ofwat estimates that the next price review could significantly reduce pressure on all customers’ bills by between £120 million and £750 million a year. Most water companies are proposing flat or declining customer bills from 2015 to 2020. This is in advance of Ofwat’s efficiency challenge. The spectre of a tax on profits would seriously undermine the regulatory stability on which this system is founded, unnerving investors and pushing up costs for all customers.
I agree with the noble Lord, Lord Whitty, that it is vital that those who are struggling to pay get help. However, I believe that the current approach of regional affordability measures meets the realities of the sector. I therefore ask the noble Lord to consider withdrawing his amendment.
Lord Whitty
My Lords, on this amendment, the noble Lord has misunderstood the nature of the proposition and downplayed the nature of the problem. He says that all companies will have social tariffs in a couple of years. I hope that that is true and that it means that the majority—even pretty well all—of the 2 million people who have affordability problems will have been helped by those schemes.
Lord De Mauley
I ought to interject. I did not say that all companies within a couple of years would have social tariffs. I said that the majority of water companies will have a social tariff in place by 2015-16. All incumbent water and sewerage companies have already developed packages to help customers with affordability problems. I went on to say that these include customer assistance funds, support tariffs, debt advice and water efficiency measures.
Lord Whitty
My Lords, that is even less reassuring than what I thought the Minister said in the first place.
The Minister’s criticisms fall into two categories. The first is that this is a top-down proposition. It is not: it is a framework for companies to introduce social tariffs and other measures that help affordability within their own structures, subject to some minimum standards. It is not an imposition from the centre of exactly how to do that. It is, however, a failsafe if they fail to do it. The reality is that both the regulator and the companies have hitherto been quite resistant to such propositions. The noble Lord is right to say that, strictly speaking, 2013 was the first point at which they could consider them, but that was because of the three-year delay since the 2010 Bill and, before the 2010 Bill, deep resistance within the industry to any such concept. Therefore, we have form here and it is not sensible to be complacent that in 18 months’ time the companies will have sorted all this out. I do not believe they will. That is why they need a push and a framework that sets minimum standards of eligibility and operation.
The Minister’s second criticism concerns the funding of this proposition. He said that it could be funded out of a tax on profits. I have not proposed a tax on profits and I think the noble Lord’s brief misunderstands what was said in another place about this. It is fairly evident to me—and my noble friend Lord Hanworth has pointed this out on many occasions—that actually most water companies could afford to be a bit more generous to their consumers in relation to profits, dividends and the tax that they currently pay, but that is not in any sense an advocacy of a windfall tax, so let us get that out of the way. The other funding proposal is by cross-subsidy. In one sense, social tariffs are by definition a cross-subsidy. Therefore, if the Minister hopes that all companies will come up with social tariffs or equivalent schemes, the objection is just as valid to his proposition as it is to mine. Therefore, there is no additional cross-subsidy compared with the preferred outcome of the Government on this.
Lord De Mauley
I thought I had made the point that we accepted that there will be some sort of cross-subsidy but that, in our view, it would be better if that was organised on a regional basis because one could take into account regional circumstances.
Lord Whitty
Yes, but my proposition allows for that. It gives a push to companies to develop their social tariff schemes on a regional basis provided they meet minimum standards. I am not precisely defining what the national affordability scheme should consist of; it is up to the Minister and his department to come up with the appropriate forms in discussion with the DWP and other government departments and agencies that work in this field with vulnerable and low-income households. I am not attempting to lay that down. Therefore, this is not a top-down approach. It allows for some diversity of delivery.
The Minister’s objections to this proposition really do not stand up on either count. I hear what he says. I suspect that the department is pretty immovable on this but it is certainly an issue to which I intend to return. For the moment, I withdraw my amendment.
Lord Whitty
“Provision of information to water companies
(1) The Water Industry Act 1991 is amended as follows.
(2) After section 207 (provision of false information) there is inserted—
“207A Provision of information to water companies: landlords
Where a water company does not have information about a resident in a property that is using water, if the occupants of that property are tenants, the landlord must, on request, provide to the water company contact details for the tenants.”.”
Lord Whitty
My Lords, Amendment 120 relates to a different issue, that of debt—I think I am on the right one. I am on the right one but I do not have the right notes. However, I know what I am talking about.
Uncollected debt is a serious problem in the water industry. Every water company has a problem with uncollected debt. This arises from two groups: families such as those we were just talking about, who really cannot afford to pay their bills; and individuals and families—and sometimes businesses—who, frankly, will not pay their bills, or cannot be found and made to pay their bills. Both these issues need to be tackled. My previous amendment relates to the former; Amendments 120 and 122 relate to the latter, and the lack of activity on the part of some companies to rectify this position.
There is a disproportionate number of unpaid bills in the private rented sector. Even so, it is noticeable that there is a differential performance by water companies in collecting that debt which is not directly correlated to the level of private rented accommodation in their areas of operation; in other words, some are much better at it than others.
Lord Spicer (Con)
My Lords, I ask the noble Lord whether his amendment covers the reverse—a situation where a customer is owed money through, for example, a standing order. If at the end of the year a customer has not accumulated the same amount of expenses as the standing order, is that covered by the amendment?
Lord Whitty
My Lords, this is an issue, particularly for metered customers who have an estimated bill, for both companies and the residential sector. However, my amendment does not cover that. If the noble Lord wishes to bring forward an amendment, I am sure that the Government would look on it with favour.
Lord Spicer
The noble Lord’s amendment covers the question of debt being carried through the regulatory system of prices. Therefore, does it not affect the reverse: namely, credit?
Baroness Parminter
I rise to support the intention of Amendment 120, if not the intention of Amendment 122, which is grouped with it. The issue of bad debt and the implications of what that means for the affordability of all our bills is an important one.
At Second Reading I asked the Minister why the Government, unlike the Welsh Government, are not implementing the bad debt provisions in the Flood and Water Management Act 2010, alluded to by the noble Lord, Lord Whitty. If they were to do so, it would help company debt recovery and bring down household bills. The response I received was that the Government were wedded to the idea of a voluntary scheme, with a database that the water companies were helping to fund, which would be brought in, probably via regulations, in the next month or so. I may be wrong, but I suspect that, with only an intervening 10 days between Second Reading and now, that is the answer that we will get again and that the Government will not wish to support these amendments.
Therefore I ask the Government, if they are determined to stick with the voluntary approach, whether they will set a reasonable review period to evaluate whether or not the voluntary scheme for landlords is effective. All the evidence to date, from the voluntary schemes of companies such as Northumbrian Water and others, shows that they do not work. It seems to be a reasonable request, if the Government are not prepared to move ahead with a mandatory scheme, for them to give an indication to the House of a reasonable review period, so that if the scheme is found to be ineffective—as most of your Lordships believe it will be—the regulations can be changed to make it compulsory.
Lord Whitty
My Lords, in relation to Amendment 122, the information the Minister has given us and his response to the question from the noble Baroness, Lady Byford, indicate that Ofwat thinks it has the powers already. The power was given to the Secretary of State to stipulate that Ofwat can do that; it was always going to be the regulator who did it, under my amendments. If the regulator thinks that, because of the flexibility provided by the move to totex control—rather than everything being bound up in capital propositions—it can effectively both incentivise and penalise companies with poor debt collection records, then clearly Amendment 122 would not be needed. I think we need to return to this a couple of years down the line. Therefore, I will certainly not press Amendment 122.
On Amendment 120, however, it seems to me that the Government cannot have it both ways. Either there is a problem or there is not. They say that the evidence was weak and they hope that a voluntary approach will work. Certainly informally the companies say that this is a serious problem in the private rented sector. Most literature on the subject says there is a particular problem in the private rented sector and—if memory serves me right—the evidence to the committee chaired by the noble Earl, Lord Selborne, said it was a real problem in the private rented sector. That was seven years ago, so we are not getting very far along the line.
I hope that the Government will at some point revisit the triggering of the powers that they already have to introduce secondary legislation. If they do that, then there is clearly no need for Amendment 120, but I hope they will check fairly quickly whether the voluntary registration in which they are engaged is yielding results, because they have the powers to act and I am still pretty bemused as to why they have not done so. In the mean time, I beg leave to withdraw the amendment.
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.
Lord De Mauley
My Lords, I thank my noble friend for her Amendment 122A, which would introduce a new statutory duty on the Secretary of State to ensure that the bodies involved in regulation of the water industry work to minimise bureaucracy. It would also require a definition of all the statutory bodies concerned with water to be published on a single website. I strongly support her in her desire to minimise bureaucracy, duplication of effort and waste. I am quite sure that I railed against it and for the consolidation of legislation when I was in opposition, as the noble Lord, Lord Whitty, is enjoying doing today. These issues are not exclusive to this sector. Indeed, this Government have an energetic and far-reaching programme of reform designed to slash red tape wherever possible. I would argue that we have made some considerable progress with that.
My department has been one of the trailblazers in Whitehall in transforming our approach to regulation. For example, through our Smarter Environmental Regulation Review, in which I have been closely involved, we are attacking unnecessary complexity, inconsistency and duplication of environmental regulation. We are also rationalising environmental guidance and data reporting to make it easier to comply with legal obligations. My department has also carried out a comprehensive assessment of the costs and benefits of all the regulations for which we are responsible. Through the Red Tape Challenge initiative, we have reviewed more than 1,200 regulations and by the end of this Parliament we expect to be delivering savings to business of more than £250 million each year. I hope that this provides my noble friend with some assurance that the Secretary of State already has bureaucracy squarely within his sights.
On the specific changes being made by the Bill, first and foremost I should emphasise that it does not create any new public bodies. The existing regulatory landscape remains unchanged in that regard. I am grateful for this opportunity to clarify the current framework for regulation in the water sector. In England, the water industry is regulated by three separate, independent bodies: Ofwat, the Drinking Water Inspectorate and the Environment Agency. Ofwat is the economic regulator responsible for ensuring that water and sewerage companies provide consumers with a good quality service and value for money. This includes setting price limits to ensure that customers receive a fair deal, while ensuring that the companies are able to attract low-cost investment in our essential services.
The Government commissioned an independent review of Ofwat and consumer representation in the water sector in 2011. Undertaken by experienced regulator David Gray, the review concluded that regulation in the water sector has worked well since privatisation and that major changes to the statutory and institutional framework were not required. The Ofwat review made a range of recommendations about the ways in which the regulator could reduce the regulatory burden it places on the industry. In response, Ofwat put in place a programme of internal reform and substantially reduced reporting and other burdens. It has since revised its approach to the price review—something we talked about earlier today—in order to ensure that companies focus on their customers’ priorities rather than looking to the regulator for guidance.
The Environment Agency regulates the impact of the water industry on our environment and promotes sustainable development. It regulates water abstraction as well as the treatment and discharge of wastewater back into the environment. It also helps water companies with their long-term water resource management and drought-planning functions. The Government have introduced a process whereby all public bodies are subject to triennial review to scrutinise how the Government deliver their objectives as effectively and efficiently as possible, achieving the best possible value for taxpayers and the public. The Environment Agency was reviewed under this process in 2013. The review looked at how it could work in leaner, smarter ways to enable and drive sustainable growth, making best use of the resources available to it.
The Drinking Water Inspectorate is responsible for ensuring that companies provide safe, wholesome drinking water that meets standards set down in law. Although not a regulatory body, the Consumer Council for Water also plays an important role by representing water and sewerage customers.
My noble friend referred to the market operator. In our debates on Tuesday, we clarified that this is neither a public body nor a regulator but a straightforward administrative entity that will be run by the industry for the industry, within the context of the regulations laid down by Ofwat. In fact, the market operator will serve to minimise bureaucracy by providing a single set of administrative systems for switching customers, which would otherwise need to be duplicated by every company operating in the market. In our debates on this matter on Tuesday my noble friend Lord Selborne noted that such bodies are a common feature of regulated utility industries.
I hope that I have gone some way to clarify the roles and responsibilities within the water sector. As with any sector, we are always looking for ways we can do things better and more efficiently. As I have said, we are active in challenging red tape and bureaucracy. We have the Red Tape Challenge process, which has already scrutinised all the regulations affecting the water industry. We have established the principles for economic regulation to guide the high-level institutional design of the regulatory frameworks by the Government. These reinforce the Government’s role in establishing the policy direction and appropriate guidance, leaving regulators to regulate independently. A new regulators’ code also takes effect in April that will apply to non-economic regulators such as the Environment Agency and the Drinking Water Inspectorate. It is the latest step in the Government’s drive to put businesses’ need for clarity, transparency and minimum bureaucracy at the heart of the regulatory system.
There are more examples of the provisions already in place to ensure the roles and responsibilities of regulators and other public bodies are clear, and that unnecessary bureaucratic burdens are identified and removed. One of the more relevant of these is the shared duty of the Secretary of State and Ofwat under Section 2 of the Water Industry Act 1991 to have regard to the principles of best regulatory practice. The Act already specifies that their respective regulatory activities should be undertaken in a way that is transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed.
Lastly, I know that my noble friend is keen to see information about the various bodies concerned with water on a single website. I am therefore pleased to be able to confirm to her that all of Defra’s agencies will move across to the gov.uk website by the end of March this year. I also thank my noble friend Lord Moynihan for his welcome for the notes and the road map, which is indeed on the website. Although I fully concur with the spirit in which my noble friend’s amendment has been tabled, I ask her to withdraw it as it would effectively duplicate existing provisions.
Lord Whitty
Lord Whitty
My Lords, I will speak also to Amendment 124. These amendments deal with the water resource management plans. Water resource management plans, to colleagues who are not familiar with them, are the 25-year plans which each water company is required to produce, which then have to be approved by the Environment Agency. Those plans are fairly strategic. A lot of thought and work goes into them and there is a lot of consultation on them—but it is not always clear what they are used for thereafter. One presumes that the companies follow them for their own strategic decisions. To a limited extent Ofwat follows them in terms of the allowance for capital expenditure that is required in the price review. However, that covers only five years, and Ofwat, try as it might, cannot always see 25 years ahead as regards the changing capital and management requirements that will be needed.
The legislation on this, which is marginally changed by Clause 27, refers only to those plans being authorised,
“for the supply of water to consumers”,
which is of course the key issue. However, it is also important that the plans allow various regulatory, environmental, water quality and resilience requirements to be met. For example, water framework directive timetables and objectives and various ecological requirements have to be met. Following the Government’s inclusion of resilience as a primary duty of Ofwat, companies will undoubtedly have to meet requirements under the resilience criteria by a certain date. The amendment seeks to broaden what the plans deliver in public policy terms and therefore includes a requirement to meet environmental, quality and resilience standards.
Amendment 124 deals with an issue at which I hinted earlier—namely, that once the relevant plans are in place, the environmental regulator and the economic regulator need to pay attention to them. At the moment, following a change of direction or policy on the part of either Ofwat or the Environment Agency, decisions can be taken which do not accord with the plans. Theoretically, the relevant company then has to change the plans but probably does not do so until it has to revise them in five or six years’ time. Amendment 124 suggests that the Bill requires the relevant regulator to have regard to those plans when conducting price reviews, and that the Environment Agency must do so when conducting its regulatory and enforcement activity. If that is not done, the plans will gather dust on the shelf, will be referred to occasionally by the companies themselves but will be used rarely by those who are supposed to be in charge of regulating the sector.
I may exaggerate the position slightly, in that these are important documents and are regarded as such, but they are not quite given the importance that they deserve at either the company or the regulator end. These amendments seek to change that position. I beg to move.
Baroness Northover
My Lords, I thank the noble Lord, Lord Whitty, for tabling these amendments. As noble Lords know, the noble Lord introduced the Water Act 2003 to Parliament, which made the planning processes a statutory requirement. We recognise that he seeks to ensure that the water resources management framework has greater bite and that the relevant plans will have the desired effect. I hope to show him that these plans are supported by other policy measures.
Water resources management plans must show how incumbent water companies intend to maintain a sustainable water supply demand balance over a period of at least 25 years, as the noble Lord, Lord Whitty, said. They must do this within the framework of environmental protection that is set out in legislation. The noble Lord seems to be concerned that they may not have that necessary effect.
Within this context, new Section 37A allows the Secretary of State to issue directions to the incumbent water companies on any relevant matter for which they must plan. In addition to this, water resources management planning guidance sets out the expectations of government and the regulators in relation to the water environment—for example, that the options chosen must not lead to any deterioration in the status of the water environment.
The companies have their own statutory environmental duties. For example, when exercising their functions, companies must have regard to the environmental sites protected by the habitats regulations. They must also have regard to the Environment Agency’s relevant river basin management plans. In addition, both the Environment Agency and Natural England are statutory consultees on the draft plans, and the Environment Agency provides the Secretary of State with technical advice on the plans. Following consultation on the plans, the Secretary of State has power to direct an incumbent water company to change its plan if he is not satisfied—
Baroness Northover
I am sure that my noble friend shares everyone’s concern that the Government should take responsibility for ensuring that we do our very best to protect the environment. We need only to look at the challenges that we are facing at the moment to realise the importance of that, and it is in our common interest to do so. Here we have a semi-monopoly in an area that is vital to everyone. It is extremely important, therefore, that we balance all the necessary pressures. However, I am sure that my noble friend Lord De Mauley will be happy to talk further with my noble friend to explain the philosophy behind the Bill.
Coming back to my comments on the amendment of the noble Lord, Lord Whitty, I was setting out the other areas that help support his ultimate aims, which were, as I understood them, that these 25-year plans should have positive environmental effects. I was showing how other measures, too, help underpin and strengthen those plans.
As regards Amendment 124, both Ofwat and the Environment Agency already have general duties regarding incumbent water companies’ maintenance of their water supply systems. Ofwat and the Environment Agency consult extensively with incumbent water companies through the water resources management planning processes. For the current water resources management planning round, joint government, Ofwat and Environment Agency guidance was issued to companies to help them prepare their plans. This guidance also set out the role of each regulator in the process.
The Environment Agency, as well as having responsibilities to protect and improve the environment, and promote sustainable development, also has duties such as those set out in Section 15 of the Water Resources Act 1991 to have particular regard to incumbent water companies’ duties. Ofwat has primary duties to ensure that the companies can both finance and properly carry out their functions. The current round of water resources planning and business planning processes have seen much closer joint working between Ofwat and the Environment Agency than may have occurred in the past. I hope that that point is helpful to the noble Lord. To ensure that the outcomes of the water resources management planning process are reflected through the price review process, the Government have made it clear that they expect Ofwat to use its role as a statutory consultee to identify at an early stage any proposals within a water resource management plan that would be inconsistent with its approach to the price determination process.
I have set out a number of these other areas in order to reassure the noble Lord about how the 25-year plan fits into this issue. I heard his concern about whether these provisions had any effect, but all are consistent with what he has been saying about trying to ensure that the water companies operate within a sustainable framework. I hope that my exposition has reassured him and that he will be happy to withdraw his amendment.
Lord Whitty
My Lords, I am happy with those reassurances, in particular on underlining the need for the regulators to work more closely together and on the plans themselves. I think I am probably the only person alive—I am certainly the only person in this House—who has served on the boards of both Ofwat and the Environment Agency, albeit for only a very short time on the board of Ofwat. Although relations had thawed somewhat by that time, they are actually more constructive today, which is very important when looking at these long-term plans. I thank the noble Baroness for her reassurances.
In a sense, my amendments were provoked by new Section 37AA(2) which states that a direction about adjusting the plans or addressing them can be given,
“only where the Secretary of State considers it appropriate”,
in relation to the supply of water. However, there are other outcomes, and the noble Baroness has given me a reassurance that they will be dealt with elsewhere. I beg leave to withdraw the amendment.
Lord Whitty
Lord Whitty
My Lords, Amendment 134 and the other two amendments in this group deal with the issue of collective consumer rights. We are now into the consumer field. The water industry or service has pretty standard terms. Tariffs, whether by volume in the metered sector, or by rateable value in the non-metered sector, are pretty standard. Charging schemes and means of payment are also usually pretty standard. The nature of the service—the supply of water—is fairly straightforward. However, there are wider services in terms of advice, and emergency services when a customer is cut off or there are leakages. If something goes wrong on all these fronts, more than one consumer is likely to be affected.
The Bill introduces a degree of choice, but only in a relatively limited field. It leads to the possibility of switching, but in general people will be faced with standard terms and a standard service. Failure to provide the service or the misallocation of costs or mis-selling of prices is likely to affect a significant number of people. However, the consumer rights in this field and the procedures which are written into this and more general legislation are almost entirely written in terms of individuals.
Amendment 134 allows group complaints. If a whole village complains about the way its water has been cut off, the complaint would not need to be dealt with property by property. If a whole tranche of customers feels aggrieved by the prices they are being charged or the overcharging of prices, the amendment allows them all, either on an opt-in or opt-out basis, to bring complaints. The noble Lord, Lord Spicer, raised an example a few minutes ago in relation to the overcharging of people who have agreed to pay by direct debit in advance on a metered tariff.
The Government have recently introduced the Consumer Rights Bill in the other place. That legislation does something that I have been advocating for a considerable time—it introduces a degree of collective rights and collective redress generally across the consumer field. However, it only relates to abuse of competition law; it does not relate to mis-selling or unfair contract terms. But it is at least a start. I have argued on most Bills, whether on banking services, the energy industry or more generally, that we should have more collective provision in terms of enforcement rights. That should also be recognised in this legislation as regards water.
Amendments 134 and 135 provide the basis for dealing with such a complaint in the first instance and for redress to be granted on a collective basis. In other words, everybody who suffers from unfair treatment should be allowed to have equivalent redress, however many pounds that would be in compensation. Noble Lords will be aware of how this has got out of hand in another sector, where every PPI claim has had to be pursued by individuals or claims companies. We know the effects of that. Had the complainants woken up to this a lot earlier, they could have proposed a collective redress system. This is less likely to arise in water because it is a less complex industry, but, by definition, that means that where it does go wrong more people are likely to be involved. It is therefore important that this is written into the Bill.
My third amendment in this group deals with the Consumer Council for Water, whose role is written into various parts of the Bill and preceding legislation, but not in the context of being consulted on water charging systems. The 1991 Act preceded the creation of CCWater—which was created by the 2003 Act—and provided a number of consumer rights or protections. Most subsequent legislation has adjusted to the fact that CCWater now exists, but not in relation to the provisions on charging schemes. I am therefore suggesting, in Amendment 136, that CCW should be specifically consulted on charging schemes. The amendment would correct the omission.
It is important that we upgrade the ability of consumers in this field, which is still a regionally monopolistic one. Where there is monopoly, there is often abuse of consumers; the possibilities are there in this field, and sometimes they are a reality. I therefore think we should provide both for a role for CCWater and for consumers in general to be able to act on a collective basis. I beg to move.
Lord Spicer
My Lords, this is pretty standard stuff: first you legislate to weaken competition, which is the true protector of the consumer; then you legislate for consumer rights. That way lies socialism.
Lord Whitty
My Lords, I am grateful to the noble Baroness for spelling that out. I should explain to the noble Lord, Lord Spicer, that we are discussing a consumer redress scheme that is being proposed for the first time by this Government. I suspect that they did not have in mind that they were setting off down the road to socialism, but there we are.
I was suggesting that we need to make it explicit that there is collective ability here, because there are a lot of these schemes where there is no such collective ability. Certainly, the complaint goes first to the company. If there is a failure to resolve that at company level, there are systems involving CCWater for taking it further. Ultimately it could appear either through the new ADR system that the Government intend to develop, which is not yet a full ombudsman, or it could still end up in the courts. In the courts, it would still have to be an individual system.
I may not need to specify it in relation to the redress system, but there remains an issue in relation to potential collective claims. However, it was very helpful that the noble Baroness put on the record that under the scheme that is envisaged and being consulted on now, collective claims, collective complaints and collective redress could all apply; I am very grateful for that.
My second amendment concerns the role of CCWater. I should point out that we are not actually asking CCWater to be an adjudicator. The amendment is supported by CCWater, as I understand it. It is just that in this particular area of charging schemes, it is not written in as a consultee, whereas in other areas it is. It is true that in practice most companies—the noble Baroness says all; I will take her word for it—consult CCWater. It would have been quite useful for that to have been in the Bill. However, for the moment, I will withdraw the amendment.
Lord Whitty
“General duties with respect to water industry
In pursuit of its duty under section 2 of the Water Industry Act 1991 (general duties with respect to water industry) the Authority must take into account all information provided by section (Duties of undertakers to furnish the Secretary of State with information: annual review); and may consider such information when determining whether reopening a review of prices would further the consumer objective, set out in section 2(2A)(a) of the 1991 Act.”
Lord Whitty
My Lords, rather late in the day we are approaching a rather important issue, which concerns the powers of Ofwat to reopen a price review within five years if circumstances change or if information received from companies on their performance raises serious issues. Considering Ofwat’s role in a more dynamic market, this seems very important.
At present, we set the price maxima for five years. Companies can reopen the five-year settlement if circumstances change; for example, if they need to expend more capital than was allowed for in the price review, they can go back in. Thames Water went back in to see Ofwat about additional money for the super-sewer. It was knocked back by Ofwat but it had the right to ask. I imagine that companies do not do it more often because if the company reopens the price settlement, Ofwat has the right to reopen it as well. It is not a big feature but I am arguing that there should be an equivalence.
Ofwat does not have the power to initiate a reopening. It uses informal powers, and has been quite successful in negotiating with some companies over the current five-year period for reductions in prices because of changed circumstances—mainly reflecting the fact that the cost of capital was significantly less in practice than had been allowed for when the price review was concluded. In reality, as my noble friend Lord Hanworth has pointed out more than once, that allowance for capital has permitted a significant degree of profit enhancement and dividend enhancement by companies, and it is important that Ofwat keeps an eye on this.
Amendment 137 would allow Ofwat to reopen the settlement if it thought that the way in which it was operating was no long appropriate to the economic circumstances, or that the company’s own behaviour gave it cause to reopen it because the terms of the settlement were no longer appropriate. Amendment 146 would provide some background for this. It would require water undertakers to provide information to Ofwat on a regular, annual basis on their financial affairs. This could be dealt with separately from the other amendment, but we have grouped them together for these purposes and there is an interrelationship. If this is a different provision from the very detailed cost breakdown that Ofwat now requires from companies in advance of the price review every five years, and if we move to a more competitive market, the details of that form of regulation may not have to be so onerous over time.
This amendment looks at how companies perform during the price period. It will provide a big picture of how the financial operation as a whole is working out. As we have constantly reiterated, there is a problem in this industry of a vertically integrated regional monopoly, with higher levels of gearing, dividends—they have been at over 90% of income over the past few years—and rates of return on assets, in a relatively low-risk industry, paying relatively low levels of taxation. There are issues about the totality of the finances of the sector that a regulator ought to be free to query. It certainly should have information on it. Your Lordships may have heard a recent programme about this on the BBC’s “File on 4”. I did not agree with all of it, but it pointed out, for example, that some of these companies have at least seven levels of executive decisions before reaching the real decision-makers at ownership level. That applied to Thames Water in particular.
It is important that Ofwat can challenge the way in which these companies conduct their financial affairs. Amendment 146 would provide it with the information for doing so and Amendment 137 would allow it to reopen the price settlement if it saw that there were serious and endemic concerns about the way in which a company was operating, or about changes in the cost of capital or the level of corporate internal transfer pricing and so forth. It is important that Ofwat understands the total system and it is important that it has the ability to reopen the settlement. Of late, water companies have received fairly bad publicity because of their overall financial structure. At the moment, the regulatory system cannot really address that and does not have the information needed in order to address it. This is a gap in Ofwat’s powers that needs to be filled. I beg to move.
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 De Mauley
I thank the noble Lord, Lord Whitty, for his amendments. I shall deal with the amendments in reverse order, Amendment 146 followed by Amendment 137, as to some extent the latter builds on the former.
The new clause introduced by Amendment 146 would give water companies a duty to report every year to Ofwat and the Secretary of State about their performance, investment, tax, corporate structure and dividends. If obtaining these data is the noble Lord’s concern, I can confirm that all this information is already freely available in the public domain. The effect of the amendment would be simply to duplicate existing reporting requirements. The cost of the additional administrative burden on water companies would ultimately be met by customers. All companies—not just water companies—are already required to report on many of these matters in their annual reports and accounts. Any additional water sector-specific reporting requirements are a matter for the regulator, which is ardent in pursuing them.
The noble Lord raises some important issues about the way in which the sector is run, regulated and structured. I believe that the regulator is already taking action to address these issues. Let us be clear about the direction of regulation in the water sector. Ofwat is already taking vigorous action to improve standards of corporate governance across the sector. It is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance generally. Ofwat recently published the outcome of a consultation on principles relating to board leadership, transparency and corporate governance. The principles set out clear standards for what the sector must do and set a clear timetable for their introduction across the sector. The response from water companies has been positive and I welcome that.
Ofwat has also launched a similar consultation relating to holding companies, seeking to apply basic principles to holding company boards across the sector on issues such as risk, transparency and long-term planning. I believe that the proposed annual review would place an additional burden on companies for very little gain, so I share the concerns about it expressed by my noble friends Lady Neville-Rolfe and Lord Moynihan.
Amendment 137 builds on the clause which would be inserted by Amendment 146. It would place a new duty on Ofwat to take into account the proposed annual report by water companies to the Secretary of State. It would then give Ofwat a further power to consider this information when determining whether to reopen a price review. Ofwat already has the power to reopen a price review under the substantial beneficial effects clause of the water company’s licence or by making an interim determination. If a water company is profiting from factors outside its immediate management control that were not anticipated at the time of the price determination, Ofwat can reopen its five-year price settlement. So Ofwat has the powers necessary to revisit price determinations. However, given the importance of regulatory stability in keeping prices down for customers, it rightly utilises these with caution and considers carefully whether there would be benefit to customers.
We are at risk of talking about things as they were, not things as they are or will be. Ofwat is changing the way in which it regulates. It is seeking to change the culture of the water sector and to facilitate companies taking greater ownership of and accountability for delivery to customers, now and in the long term. Therefore, I am not persuaded that these further powers and duties are necessary and I hope that I can persuade the noble Lord to withdraw his amendment.
Lord Whitty
My Lords, I would not disagree with the Minister and the noble Baroness that Ofwat is toughening up its stance, including on issues of governance within the sector. I think that I am at one with the Government in hoping that we move away from the detailed, costs-checking form of regulation of the industry towards a more broad-based one which will be helped by a degree of competition within the industry.
The Minister is right that Ofwat has emergency or overriding powers. The fact of the matter is that it has not used them and would have to meet some fairly stringent criteria so to do.
The Minister rightly admonishes me for looking backwards rather than forwards, but we have to look backwards to the immediate past. We have had two five-year price reviews. At the beginning of those reviews, the cost of capital, which is a huge part of the actual expenditure of the industry, was seriously overestimated over a period of 10 years, and prices set accordingly. During that period, the capital value of water companies went up substantially; the dividend payments went up substantially and a number of them were taken over, sometimes two or three times. Somebody made a significant amount of money out of that; it was not because of the increased efficiency of the industry, although the industry did make some efficiencies. It was a fortuitousness similar to when Ofwat, with what it thought was the best information at the time, set the allowance for capital; that allowed a much bigger profit than one had assumed at that time.
Under its existing powers, Ofwat did not judge, nor did successive Secretaries of State seek to nudge them to intervene. If the public knew that the system of regulation did not allow them to do so, they would be pretty appalled. I therefore think we need to do something. The Minister might not like my particular proposals—and they certainly are not perfect—but Ofwat needs to know what the unforeseen financial consequences are of the companies’ operations. It needs to have some ability to intervene on behalf of consumers—business as well as individual consumers—if it thinks that something has gone seriously wrong. At the moment, those powers are not sufficient.
I would like to see a measure like this on the statute book; I would not envisage that Ofwat would very often use it, but the experience of the past 10 years—it may well be exactly the opposite experience in the next 10 years as far as the cost of capital is concerned—leads me to think that there is a gap somewhere in Ofwat’s powers. We need to address that somewhere in this Bill and I am sorry that the Minister is not prepared to take it away and look at it in this context. I will withdraw the amendment, but this is something to which we might need to return in a slightly different form. I beg leave to withdraw the amendment.
Lord Whitty
Lord Whitty
My Lords, I will not detain the Committee too long on this one. When I saw this provision, it jumped out of the page at me because the Bill seems to delete the requirement to provide mapping of flood vulnerability. Having now checked the impact assessment and checked with the Environment Agency, I see that it is clear that the particular clause is not inappropriate in the circumstances, but I thought I would use this opportunity to ask the Minister to tell us, perhaps in writing, what maps are now statutorily required for flood risks.
This issue will arise significantly when we come to discuss, as we will do in the next day of Committee, Flood Re and the properties that are to be covered by that system. The issue also arises in terms of resilience and, for other bodies, in terms of planning decisions, as well as in issues for the insurance industry that go wider than the Flood Re system. While the section that is to be deleted may be redundant, it is important that we ensure that the resources that the Government give the Environment Agency and other bodies are sufficient to provide detailed, robust and accessible maps defining the flood risk around the country.
There is some urgency to the issue because I know that there are, to put it neutrally, constraints on the Environment Agency’s resources in this area. The agency is, probably rightly, trying to focus what resources it has on front-line services. However, if you focus on front-line services in a diminishing budget, you inevitably cut backroom services, some of which are in this area of mapping and prediction—which is done by the Environment Agency but often in conjunction with the Met Office—of where flood risk is likely to arise in future. As I said, I do not expect a detailed argument from tonight’s discussion, but I would like, before we proceed further with the Bill, an indication of what mapping is required and what resources are there to carry it out. I beg to move.
Lord Knight of Weymouth (Lab)
My Lords, briefly, I support my noble friend Lord Whitty in his challenge to the Government and, to some extent, the Environment Agency. At the moment, my home down in Dorset is technically under a flood alert. I can look at maps on the Environment Agency’s website and the detailed data on river levels at the station near to my home which, during this sort of scenario, are updated every few hours. In conjunction with looking at the Met Office website—because I am an experienced watcher of these things—I can predict pretty accurately whether we will flood. I am willing to put on record that I do not think we will flood over the next 24 hours. We put our floodgates up—some of them, but not all of them—but that is mostly because we could not be bothered to take them down from the last time.
This whole business is obviously very worrying for householders. I pay tribute to the Environment Agency for making all the data available so that people like me can, assuming we are online and confident enough to use those tools, make that judgment. However, it is really important that those resources are sustained and, as technology and resource allows, are improved as more and more householders, given climate change, worry more and more about their resilience for flooding.
Baroness Northover
My Lords, when I heard the earlier debate about consolidation and clarifying legislation, I thought that this was a case in point. The noble Lord, Lord Whitty, rightly spotted that, too. This amendment allows me to put something on record. The issue is about duplicate records. Our plan is to repeal Section 195 on the basis that a single record is all that is required. The Environment Agency is not aware of any request having been made for the inspection of the duplicate record required by Section 195. Of course, it will continue to maintain its primary and comprehensive sets of data, including maps. I can assure the noble Lord, Lord Knight, that public access to this information can be obtained under the Environmental Information Regulations 2004, or for that matter under the Freedom of Information Act 2000. This is a small efficiency and cost saving to the Environment Agency, without detriment to necessary data collection, maintenance or public access. I will write to the noble Lord, Lord Whitty, with details of the data held by the Environment Agency. On that basis, I hope he will be happy to withdraw his amendment.
Lord Whitty
I thank the noble Baroness for that and her determination to write to me setting it out. The importance of this is that these maps are there but will change. They will change as a result of development activities, because of climate change and our experience of floods that are supposed to happen once in every 200 years in the Somerset Levels—to return to that topic—but have happened in two years. It is vital that mapping resources are there and accessible to everybody, as they clearly already are to my noble friend Lord Knight. Not everybody has that level of accessibility. We need it, and we need to be assured that the resources can be updated and improved as information changes.
I thank the noble Baroness and the Minister for their patience this afternoon. We will meet again shortly, dealing with floods, in particular. I beg leave to withdraw the amendment.
Winter Floods
Lord Whitty Excerpts(10 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty (Lab)
My Lords, I thank the Minister for repeating the Statement, particularly the announcement on Bellwin, which will be a great relief to the authorities and communities affected. I also thank him for his support for the people who are struggling to cope, in Somerset in particular, with the extraordinary and devastating events in that part of our country.
As noble Lords know, until two years ago I was a member of the board of the Environment Agency. I know the area; I live about 20 miles away. It is an extraordinarily complex system to manage. When an emergency occurs, it is the Environment Agency, the emergency services and local people who act together to try to minimise the effect, but it is a colossal effect and all our support should go out to the farms, families and villages that are in such serious difficulty.
Of course, as the noble Lord said, the problems are not just in Somerset. As it happens, while your Lordships were amusing yourselves with the European Union (Referendum) Bill last Friday, I was on the train to Plymouth, and a beautiful railway line it is—or was. It had been known that the line was vulnerable. There is now a serious problem as to how we restore communications with the far south-west of our country.
While it is important to recognise the efforts of the emergency services, it is also important to learn lessons. It appears that central government were taken a little by surprise on this occasion. It is an unusual event and therefore may not be in the normal contingency plans of central government. Nevertheless, the expectation of the population—certainly the expectation of the people of Somerset and other affected areas—was that the response would have been quicker than it was. In Questions, the noble Lord, Lord King, said that the level of pumping is the highest ever. It undoubtedly is. However, getting the pumps in was quite difficult, as the standing pumps were overwhelmed by the event. Whoever does it, the response must start a lot earlier than it did on this occasion.
Obviously there are issues behind this. The noble Lord has quoted some figures for expenditure on flood defences. The fact is that when the Government came in, for the first year they cut expenditure on flood defences—via the Environment Agency and in total—by £100 million. They have now restored some of that cut, but it has led to a hiatus. I would like the Minister to explain whether concentrating the resources of the Environment Agency on front-line activity at the moment—rightly so—has hit its ability to prioritise and to put in place a strategy for flood defences in the medium term. I think that there are serious concerns in that respect. Despite the Government’s claims, the resources available to the Environment Agency have not been made up by the funding from elsewhere—the £148 million to which the Government referred—as not all of it has been delivered, some of it is double-counted, and it is mainly from other public authorities. Therefore, there is an issue of public expenditure as well.
We need more priority given to flood defences of all sorts. By that I do not mean just pouring concrete, but catchment management. If anything, the Somerset Levels show very clearly how important catchment management is. It is not only a question of dredging; in my view, dredging will make relatively little impact, as the water must go somewhere. Dredging may be part of a solution, but it transfers the water somewhere else that may be more vulnerable, with more businesses and people involved. The catchment as a whole needs looking at, from the top of the hills, where there has been deforestation and inappropriate land use, right down through the streams into the sea. In an area that is below sea water, with a tidal river, these problems are particularly difficult. It requires a long-term plan and it is not yet entirely clear that we have a long-term plan.
I welcome the Bellwin scheme and the efforts that are now being made to deal with the immediate situation. However, the immediate situation includes a lot of people who are in ancillary distress. It would be helpful if the Minister could indicate, for example, when he expects the electricity supply to be restored to all of those who have been hit. When does he expect the restoration of the rail services west of Exeter beyond Dawlish? Six weeks sounds a bit optimistic, I must say. We must recognise that while we are rightly worried about the hundreds of people affected in the Somerset Levels, some 1.3 million people are cut off from their main means of communication to Plymouth and Cornwall—an area that is greatly lacking in communications in the first place. I hope that we can have some urgency on that. It may require more drastic changes to the railways in that area. There is serious damage in Dawlish itself, which is an emergency equal to that in Somerset.
This has happened before. After the 2007 floods, the previous Government commissioned a report from Sir Michael Pitt. He made a lot of recommendations, some of which have been implemented. However, the Government have stopped producing progress reports on half of them. I would like the Minister to indicate when we will go back to those recommendations or any modification of them. In particular, could he refer to the recommendations relating to reducing the risk of flooding and the 10 recommendations, not yet acted on, concerning being rescued and cared for during an emergency?
There is also a superstructure issue. We have had 20-odd meetings of COBRA. However, Sir Michael Pitt proposed a national resilience forum. Although it is not necessary to have a Cabinet committee telling the Prime Minister how to run the Government, a national resilience forum is a good idea. It was being discussed towards the end of the previous Government. We would like to see progress in relation to that.
In immediate terms, I return to the issue of the long-term plan for the Somerset Levels. A number of assertions have been made, or have reportedly been made. However, the area needs to know what its future is. This emergency has hit a relatively poor part of the country pretty hard. Changes may be needed. The area is also one of great beauty and of significant economic importance to the agricultural and tourist sectors in that area. We must know how quickly a clear, long-term plan can be put in place.
I thank the Minister for the Statement. As the Prime Minister is now in charge of these issues, I suspect that he could do without the interruption to the Water Bill. I was to some extent expecting the Leader of the House to take this Statement. Nevertheless I welcome the contribution of the Minister and would like to hear his answers.
Water Bill
Lord Whitty Excerpts(10 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“Retail exit
(1) The Secretary of State may by regulations make provision about the transfer of an undertaker’s assets and liabilities associated with its non-household retail business into a separate company.
(2) Regulations under this section are to be made by statutory instrument.
(3) Regulations under subsection (1) may, in particular, make provision for any such transfer to be subject to—
(a) approval by the Secretary of State; (b) any such safeguards as may be specified in the regulations;(c) the transferee company holding a licence containing a retail authorisation pursuant to section 17A of the Water Industry Act 1991;(d) the provision of any information or other such assistance from the relevant undertaker as may be required by the Secretary of State for the purposes of approving the transfer.”
Lord Whitty (Lab)
My Lords, at Second Reading there was bemusement on all sides of the House as to why the Government were being resistant to the concept of exit in the new retail market. I am not sure that the Minister’s words, either on that occasion or in any briefing since, have convinced me as to why, uniquely in this market—or almost uniquely—we should not allow exit.
It is a funny market in which we are trying to encourage new entrants by designating the area in which they should operate, and designating the terms and regulations under which they should operate. We envisage benefits to business and other non-domestic consumers within that market as a result of that competition, and we are assuming that it will bring benefits to a wider part of the whole water structure and water consumers. However, to maximise the effect of a market, there have to be winners and losers; and we are talking about competition and different companies with different forms of experience.
There is not only bemusement around the House about why the Government were resistant to the concept of exit. Out there, many bodies—including Ofwat itself, which I would have thought is fairly significant—are saying that we should allow exit. Although some of the incumbent companies are opposed to it—Water UK has said that, on balance, it is not really convinced by it—some of the major companies are in favour. I have not declared many interests so far, but my current interests are that I am a consumer of two water companies, Thames and Wessex, both of which have written to me and said that they are in favour of providing an exit clause.
Why would you allow a situation to continue in which somebody is supplying part of the non-household retail market but not doing well at it? Remember that there is an obligation on the regulator to ensure that everybody who wishes to be connected to the water supply will be connected to the water supply, so nobody is going to be stranded despite some of the things that have been said. Why should a supplier who is losing customers and presumably losing money, or certainly not making as much money as they had hoped, be prevented from leaving when Ofwat can arrange for somebody else to take over those assets and that market? I do not know of a serious precedent in any other field. We are trying to encourage a degree of churn, with new entrants, new competition and new drive for reducing costs, yet failing companies, or relatively failing companies, are not allowed to pull out.
This is odd, but even odder is what seems to be the Government’s main objection. The Government were kind enough to send us a further explanation, and although there are some other points in it that we do need to take seriously, the main point was that providing for exit would create uncertainty and put off investors. I tried to downplay investor panic when speaking to the last but one amendment, but there are arguments about that. Investors are getting a good return, but why would they want to persevere in an area in which they were not getting a good return, where they were failing, and where on their own internal economic analysis they were being advised to get out? Investors see the UK water market as a pretty good return, a steady return and one that will last a long time. However, there may be a part of that market they are supplying and where they are failing. Customers may be pulling away from them and going to rivals or they may be getting a high level of complaints—one way or another they are failing, and that will show up in their balance sheet eventually. Why would international investors say we absolutely will not invest in England unless we are forced to remain in an unprofitable market?
There seems a fair degree of absurdity in the explanation. That argument for the Government falls. Maybe some strange investor has told somebody in the department or a government adviser that that is the case, but logically, that cannot possibly be the reason. The problem is that the department has got stuck on this. The reality is that it was a bit untidy to allow for exit. New rules and procedures would have to be invented and safeguards built in, and that was not the priority. The priority was to get new people in, not to get people out.
Fair enough, but we have moved on, because a range of people have, as I have said, raised this issue. The Government now have to think again. There are some objections to providing for exit and some concerns about it, but those concerns are covered by the safeguards that are built into the amendment. The Government may want to elaborate on it, but it provides that for exit, Ofwat has to approve it, ensure that there is a substitute supply and make sure that there is no disruption as far the business consumer is concerned, and Secretary of State approval is also needed. That might appear a bit draconian to some investor who desperately wanted to get out. However, it provides a safeguard to counter for example the objection that comes—rather quietly, but nevertheless it does come—from the Consumer Council for Water, which is a bit worried that they would have people left literally high and dry. That could not happen under this system: Ofwat must supply. In a strange situation, the Secretary of State could block it if there was a real reason for thinking consumers might be in danger, whether they are consumers in a competitive market or other consumers affected by the knock-on effect.
Lord Whitty
My Lords, I am slightly baffled by the Minister’s reply, which seemed to repeat the main arguments that noble Lords all around the Committee have knocked down. I am very grateful for their interventions, particularly the forensic analysis by the noble Lord, Lord Moynihan, of why this is a misunderstanding of markets.
I tried to do a relatively simple thing. We are creating a market in the non-household retail sector and my amendment addresses only that. We are encouraging entry and improvements, and we surely have to recognise that that will drive some people out in normal circumstances. I cannot see what the creation of a market means if you cannot have that churn. The Government seem fairly stuck on this. Some of the things the Minister said really relate to wider considerations and there is nothing in these amendments—certainly not in my amendment—that means forced separation. This is voluntary withdrawal by incumbents from a relatively small part of the market. Their new rivals coming in already have that right so it is not a level playing field. Really, what does this market mean? I know it is small and that we are making changes that are quite new within the water sector, but surely we ought just to be bold enough to allow this. I hope the Minister will recognise that there is a lot of experience in this Committee and in the industry with a consensus for allowing this, subject to the kind of safeguards written into my amendment, which give Ofwat and the Secretary of State huge powers to prevent any catastrophic effect on consumers of any sort.
Just before I stood up, I tried to find the quote from Cathryn Ross of Ofwat that the noble Lord, Lord Moynihan, used. I will just end on that point. If we took the Government’s line—I have lost the quote again now—we would effectively provide for failing companies and bake in cost. The Government do not really want to do that, do they? I hope they will think again. Meanwhile, I will withdraw the amendment.
Water Bill
Lord Whitty Excerpts(10 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“( ) Granting of an authorisation of a retail or restricted retail authorisation for supply to non domestic sector customers must be done in such a way and on such terms that it does not disadvantage domestic customers.”
Lord Whitty (Lab)
My Lords, compared with some of the amendments before us this afternoon, this one is pretty straightforward and also pretty fundamental. We on this side of the House support the principle of extending competition in the non-residential retail sector of water, partly because we have been impressed by the progress made and experience in Scotland. There, not only have businesses and public bodies benefited from competition within the sector but also there appears to be benefit for the household sector from improved efficiency driven by that competition. That is a good model but of course history does not always repeat itself. We have a very different structure here in England and Wales, and markets are funny things. You cannot predict how the knock-on effects of introducing competition will work out in either the short or medium term.
The Government have made it clear that they do not at this juncture wish to give powers to extend competition into the household sector directly. The logic of competition in the non-domestic sector may well lead to improved efficiency but could equally lead to much tighter margins in the incumbent companies. Ideally, there would be other ways of compensating for those tighter margins but there would be a temptation for companies to restore their margins effectively through higher costs or less good customer service to the household sector. We know that that is not the intention of the Government, nor of the Opposition in supporting the Government in the principle of the move in this respect. We also know that Ofwat will use codes and charging regimes to try to prevent such a thing happening to the disadvantage of the household sector. However, would it not be sensible for this essential principle to be embedded right up front in the Bill?
I am sure that the Government will argue that this is probably not the right place for it but, because of the way the Bill is constructed and the slightly obscure way that retail competition comes in the redraft of 20 year-old legislation, the introduction of retail competition does not exactly leap off the pages of the Bill. Therefore, it would be sensible to put the qualification in early.
Accepting Amendment 1 would ensure that there is no ambiguity and that the intention of the Bill is to introduce retail competition in the non-domestic sector, but with no disadvantage in either price or in kind to the domestic sector. In addition to Amendment 1, Amendment 121 in this group would require Ofwat to keep an eye on the relativity between non-household and household charges. Amendment 45 reflects the need not to disadvantage the household sector by either price or lower service in relation to setting charges and establishing codes, which Ofwat is required to do under the Bill.
Amendment 1 is the principal amendment and would amend Clause 1 so that there would be no ambiguity. I very much hope that the Government can accept such an amendment, or something very like it. I beg to move.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)
My Lords, I thank the noble Lord, Lord Whitty, for his Amendments 1, 45 and 121 on the important issue of protecting householders. It is a crucial issue and one that the Government take very seriously.
Before I go further, I ought to take the opportunity to reiterate disclosure of my interests. I have a tributary of the River Thames running through my farm; I have an abstraction licence and a borehole. I own a house that was flooded in 2007 and I own one-third of a commercially operated lake.
The noble Lord, Lord Whitty, introduced the Water Act 2003 to Parliament, which was intended to put the customer at the heart of the water sector. This Government have continued that work through the water White Paper. We have been very keen, throughout the reforms that the Bill makes to the non-household market, that the household customer remains fully protected, and I think that we have achieved that. Indeed, the Bill introduces reforms designed to help us manage future pressures as efficiently as possible, ensuring that customer bills are kept fair for the long term.
The Secretary of State, Ofwat and the Consumer Council for Water all have a shared duty to protect customers. They must have special regard to, among other people, rural customers and people who are unable to switch their suppliers when carrying out their statutory functions.
There are already mechanisms in place to prevent business customers’ bills being subsidised by household bills. Ofwat’s policy of setting different retail price caps for household and non-household in the current price review will ensure that households do not subsidise the competitive market. Let us be clear about what that means. We can be certain that household customers will not cross-subsidise retail competition because there are separate wholesale and retail price limits. The costs of implementation for upstream reforms will be shared, as will the benefits. It is not desirable to prevent that, as this would also isolate household customers from the benefits of this reform.
We expect that household customers will benefit from the improvements and innovations that competition will foster. Water companies will be incentivised to introduce efficiencies and invest in improved customer services in order to retain and attract non-household customers. There will be positive knock-on effects. Household customers are also likely to benefit from these improvements, as our impact assessment shows.
We will come to the issue of de-averaging in later debates, so I will not detain your Lordships by talking about it now.
I stress that the Bill puts in place a framework that enables household customers to be protected against any changes to their bills resulting from the expansion of the competitive market. To be explicit, our charging guidance will say that de-averaging must occur only where it is in the best interests of customers.
I started by saying that we take the protection of customers of customers seriously. I hope that I have been able to reassure the noble Lord that we have thought about these issues very carefully indeed, and I hope that he will agree to withdraw his amendment.
Lord De Mauley
Perhaps I might quickly respond to that. First, what I should have done when I spoke first was to thank those noble Lords who have come to discuss their concerns with the Bill with me. That has been an extremely informative and helpful process. I am grateful to my noble friend for his point; he is not the first to say it. As he kindly says, we have been doing our best to help noble Lords with the Bill and I will continue to do that. I also take his point about informing the wider public. If I may, I will take that point away and see what we can do.
Lord Whitty
My Lords, I thank the Minister and the noble Lord, Lord Crickhowell. I have to say that if the noble Lord, Lord Crickhowell, cannot understand this Bill, with not only his experience of the whole legislative programme and procedures in both Houses but his intimate knowledge of the water sector, there is precious little hope for the rest of us. As for the general public or even those people who are to operate it within the industry and its regulation, there are some serious difficulties.
The noble Lord, Lord Crickhowell, was absolutely right to say, as I mentioned at Second Reading, that the Minister and his officials have been extremely generous with their time and effort. A lot of those documents are extremely comprehensible. It is a pity that that is not reflected in the Bill but it is a huge improvement on some departments that we have at times known, under all Governments. So I congratulate Defra and the Minister on the information given to us.
However, given the Bill’s complexity and the difficulty of reflecting it in simple terms for those who are operating it, let alone the average consumer or small business at the far end of the water chain, would it not be simpler to put something quite straightforward, like my amendment, right at the beginning of the Bill, so that everybody could understand it? The Minister has not taken this point fully.
I can understand the Bill sufficiently to see that there are checks and balances in relation to the charging system. It is difficult to see how the domestic sector would, literally, come to subsidise the non-domestic sector as a result of competition being introduced in the latter. However, it is not just about pricing. If the incumbent is faced with squeezed margins it is not just a question of banging the price up a bit because that is, by and large, set for five years and Ofwat would be pretty stringent in ensuring that it stays. However, you can save money by diminution of service and this is why I use the word “disadvantage” rather than referring to cross-subsidy. The sector could suffer from non-price effects of this if it went wrong and competition, instead of driving efficiency across the board, as we are told it has done in Scotland, did not have that effect on the supply to the domestic sector.
I would like to see this at the front of the Bill but I am clearly not going to get that from the Minister today. However, I suspect that, as we go on, there will be other points where greater clarity and part of the Bill being written in large letters would help people to understand. I beg leave to withdraw the amendment.
Lord Whitty
My Lords, I thank my noble friend Lord Hanworth and the noble Baroness, Lady Parminter, for drawing our attention to this aspect of the reform. It is passing strange that, in one of the very nice charts that the department produced and on which we have been congratulating it, it is clear that this market operator is the key to how the situation will play out in practice. We are setting up a market that does not exist, and we are trying to create and sustain it in a way that on the one hand gives the Secretary of State certain powers and on the other Ofwat certain powers, building on its existing ones.
Nowhere in this legislation are there any specifics about this market operator. As my noble friend has found out—I did not know this and I am not sure if any other noble Lord knew—there is a 61-page document on Open Water’s website telling us what it is doing. Having tried to fight my way through that document I am not sure that I am any better informed. Nevertheless, it is clearly an important body. The noble Earl, Lord Selborne, may be right that the Secretary of State should not be laying down precisely how it operates.
The Minister owes it to the House at least to put on the record what the Government expect of this organisation. It has very wide functions. It is crucial to how the market is going to operate, and has fairly substantial powers in terms of dealing with relations between existing companies and with the regulator. This is absent from the legislation, in even the mildest form. That is a bit bizarre. Its objectives include registration and switching; financial settlements; market governance; slightly ambiguously, the enforcement of codes—certainly their operation and administration—and the operation of the industry database. It is owned not as a separate, independent stand-alone company, but by the operators in the industry, which are nine regional monopolies, or eight if Wales is not involved; I am not entirely sure about that. It will allow new entrants to come in, which is jolly good of it. It is not entirely sure whether potential new entrants also have a role in this in relation to the market operating well.
The organisation’s relationship with Ofwat is not clear. It is not owned by Ofwat, which it says explicitly. It is not a subdivision of Ofwat, but is it a contract from Ofwat? Is Ofwat giving these responsibilities to that organisation that is then run by the industry, in the way that the noble Earl, Lord Selborne, describes? If so, are that responsibility and contract ever contestable? There are a lot of questions here. In some ways, the powers and responsibilities that it has, and the governance that it appears to have, would have been familiar to 18th-century economists. They would probably have called it an institutionalised cartel. I am sure that is not what the Government intend, but the way it is described in these documents tends to suggest that it is a fixed market and not as open as the Government like to claim.
Leaving aside one’s anxiety about this issue not having even the slightest mention in the legislation, before we finish our consideration of the Bill the department and the Minister need to lay out a little more precisely how this body will be set up, how it will operate, to whom it is responsible and how its performance is to be judged. Therefore, although these are basically probing amendments, I support the intention behind them.
Lord Whitty
“(e) the Consumer Council for Water or other appropriate statutory consumer body”
Lord Whitty
Amendment 3 is the first of a number of amendments that we will propose from the Opposition Front Bench on engagement with the Consumer Council for Water. It is important to recognise that one of the main players in the water sector has been the Consumer Council for Water. The Minister referred to me bringing in the 2003 Bill, which was when we took the Consumer Council for Water out of Ofwat and made it an independent, self-standing, statutory consumer body. While there has been a lot of change in statutory consumer bodies over the years, the consumer council has played an important role. While it has supported the regulator’s focus on the consumer, it has also challenged it. There has been a reasonable relationship between Ofwat and the consumer council. In recent years, Ofwat has encouraged some greater sense of responsibility on the part of the water companies and set up consumer challenge groups, which have fed into the boards of those companies. The Consumer Council for Water has helped to facilitate that. It is therefore important that that relationship is fully institutionalised.
Baroness Northover
My Lords, I thank the noble Lord, Lord Whitty, for tabling these amendments. The Government recognise the significant role that CCWater plays in the industry by representing water and sewerage customers in England and Wales. The noble Lord made that case cogently.
However, these amendments concern the licence authorisations that relate to inputting water to the network, and the noble Lord is clearly well aware of that point. This means that they relate solely to the relationship between water supply licensees and the incumbent water companies, rather than that between licensees and customers. Before issuing a wholesale or supplementary authorisation, Ofwat must consult the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate. This is not least because they can provide intelligence on any prospective licensees that are trying to operate in this area. The purpose of this is to ensure that these parties are fit and proper persons for the purpose of operating in the new markets.
We would like CCWater to continue carrying out its valuable work of protecting customers and handling customer complaints. It is worth noting that Ofwat already publishes a notice on its website asking for comments from interested parties before it issues a licence with either a retail or restricted retail authorisation. CCWater therefore has the opportunity to respond on any issues that might affect customers at this point. I hope that any concerns, as identified by the noble Lord, Lord Whitty, can be addressed in that way. I hope that he is reassured by this and is willing to withdraw the amendment.
Lord Whitty
I thank the noble Baroness for those comments. She is right that these clauses deal with the relationship between new bulk suppliers and the incumbents, but that has a significant effect on the nature of the market beyond that. If the purpose of this consultation is to establish whether the newcomers negotiating a relationship with the incumbent are fit and proper persons, one issue is the effect on consumers down the line. I accept that Ofwat is open to people writing in, but why is the statutory consumer organisation not one of those listed to give a view in the first place? We are changing the market, and there should be a consumer view on how that market is changing and who is entering that market. I am looking not for a veto, but for an input. I hope that the Government will think slightly more. It would not cost them that much to add a new paragraph (e) to this subsection, and it would be consistent with what is done later in the Bill—admittedly on parts closer to the consumer—and with the established legislation and regulations. I withdraw the amendment for now, but I would hope that the Government could consider this further.
Lord Crickhowell
My Lords, there is something to be said for learning from experience. The fact is, we have the experience of the Water Industry Commission for Scotland, which introduced highly successful arrangements from 2008. It is very clear in its recommendations on this particular point, and in the paper sent to some of us it has taken note of the debate that took place in the other place. It says specifically:
“In our view the prudent course of action would be to remove the direct link between the provider of resource services and the retailer/customer. This would remove any ambiguity that could be exploited by a large corporation to the detriment of all other customers. It would also allow a market to develop that could help in building resilience and improving our environment”.
On the front of the paper, it simply says:
“Some of these issues were raised and debated during the Committee stage in the House of Commons but as yet the Government has not been persuaded to accept amendments on the topics of substance we discuss in this note”.
Clearly, in the light of the good experience in Scotland and the very firm advice given to us, we need to know why the Government are not accepting the advice. I shall be very interested to hear what my noble friend has to say.
Lord Whitty
My Lords, I speak only because the noble Earl, Lord Selborne, and to some extent the noble Lord, Lord Moynihan, have rather pre-empted my speeches on the next group. Clearly we are on the same page. The reason I did not put my name to these amendments was that I was not entirely clear what they would do. I thought it would be better to establish a principle position on de-averaging and see what the Government thought. Clearly the Scottish experience is important. Given that experience, it is incumbent on the Government to tell us why they are not legislating in that way for England and Wales, and whether the precise amendments suggested by our Scottish colleagues would work under the Ofwat regime. Clearly the principle is an important one and it is one I will come back to on the next group.
Lord De Mauley
My Lords, these amendments, tabled by my noble friends Lord Selborne and Lord Moynihan, seek to introduce a fundamental change which would narrow the approach to upstream competition in this Bill by removing the link between upstream arrangements and retail arrangements with customers. They would mean that licensees would be able to make arrangements with incumbent water companies to provide water and sewerage services without needing to have a specific customer to consume the water or use the sewerage services through the retail market. The implication is therefore that the market might be established through incumbents tendering for new resources under a so-called single buyer model. This would be a significant change from the regime that has been in place since the Water Act 2003 and which we propose to extend through this Bill.
The current approach provides common carriage rights to licensees who want to provide their customers with water resources or sewerage treatment services using incumbents’ networks. Common carriage is the term used when new entrants are given rights to use incumbents’ networks to provide services to their customers. A single buyer approach is a very different model with decisions on tendering for water supplies or sewerage services resting with the incumbent. It provides fewer rights and less flexibility for new entrants.
The Water Act 2003 brought in a specific common carriage regime for new entrants to access the public supply system by making water supply a licensable activity. Under this regime, the same licensee that puts the water into the system must supply the retail services to the customer. The Bill reforms the existing regime by allowing different licensees to input water and provide retail services to eligible customers, but still requires there to be a specific customer. There is nothing in existing legislation that prevents incumbent water companies from making arrangements with third-party water suppliers or sewerage service providers to input water into the system or deal with sewerage disposal. Indeed, we are pleased to see that Thames Water has gone to the market to see which third parties could provide it with water in order for it to meet future water resource needs. Potential suppliers to Thames Water do not need a water supply licence to be able to make an input under this tendering process. There is no need to amend the Bill to make it possible for third-party suppliers to sell water to incumbents, should we feel this is the right way to go in the future. Clause 12 is designed to enable this. The Bill also provides for licensees to withdraw waste water and sludge from the sewerage system through the disposal authorisation in the sewerage licence. This could be used by Ofwat to introduce a similar model to a single buyer arrangement in the sewerage market if it feels that this would be appropriate.
Through the Bill, we are seeking to bring in new resources and introduce more innovation into the sector. My noble friends’ amendments would allow incumbents to dictate the future direction of upstream markets. This would reduce pressure on those incumbents to introduce efficiencies that will benefit customers and the environment because only those licensees that are able to bid for and win contracts would be able to enter the market. Incumbents rather than customers would therefore determine future upstream markets.
My noble friends have indicated that the main objective of the amendments is to remove risks connected with the de-averaging of water charges. As the noble Lord, Lord Whitty, said, that is something which we will come to in a little more detail in the next group of amendments, but I hope that your Lordships will allow me to say a few words on it now in response to the contributions that have been made. There is a crystal clear steer from the Government in our charging principles that Ofwat must not allow de-averaging that is harmful to customers. Ofwat has all the necessary regulatory tools to enable it to limit the effect of de-averaging on customer charges. Ofwat has clearly stated that it believes that these tools are sufficient. The Government’s charging principles make it plain that Ofwat must use these tools to ensure that any de-averaging or cost reflectivity is in the overall interests of customers. Two independent experts have reviewed the issue of de-averaging: Professor George Yarrow for Ofwat and Professor Martin Cave for the Consumer Council for Water. Both experts confirmed that Ofwat can facilitate upstream competition without any de-averaging. De-averaging has not happened in other regulated utility sectors, even though greater proportions of those markets are open to competition, and it is no more likely to happen in the water sector.
I stress again that the Bill puts in place a framework that enables household customers to be protected against any changes to their bills resulting from the expansion of the competitive market. Our charging guidance will explicitly say that de-averaging must occur only where it is in the best interests of customers.
My noble friend Lord Selborne raised the case of Shotton as a legal precedent to support the case that de-averaging is a real risk. It is a complex and long-running case, but I hope I can persuade him that it is a misunderstanding to describe it as a case of de-averaging. Shotton was a very unusual case and it is not appropriate to extrapolate from it more widely. For example, it concerned a discrete system that served only two customers, one of which was served by Albion Water. This is very rare. To give some context, the case only represented 0.01% of Welsh Water’s turnover. At the time of the dispute, this agreement was not subject to regulation by Ofwat. The Bill includes measures that will bring all such transfers within the scope of the regulatory regime. Ministerial guidance and Ofwat’s charging rules will therefore set out how charges between water companies and inset appointees such as Albion Water should be determined in future.
My noble friend raised the concern that EU competition law might require that indiscriminate de-averaging takes place, affecting both business and household customers. First and foremost, there is no general prohibition under competition law against the use of average pricing. In fact, it is common practice in both regulated and unregulated sectors. The obvious examples are the gas, electricity and telecoms sectors. In each of these regulated, networked sectors, regionally averaged prices have remained the norm. There is no suggestion that this approach is inconsistent with competition law.
My noble friends Lord Moynihan and Lord Crickhowell referred to parallels with the Scottish system where there is no upstream competition. In England, we have a very different market structure and a different set of resource challenges. We are learning from the example of Scotland where it is appropriate to do so but they are different systems and their regulation will accordingly be different. Perhaps we might discuss the Scottish situation in more detail in subsequent groups of amendments.
My noble friends’ amendments remove the direct risk of de-averaging but may not lead to a better outcome for customers. They could still see an increase in charges if incumbents introduced overly burdensome standards in tendering contracts or made poor decisions over which bids to accept. Ultimately, incumbents would not be incentivised to make their upstream services more efficient and would continue to be incentivised to make decisions that benefit themselves rather than customers.
Given that these amendments considerably narrow the scope of competition in the sector, I ask my noble friend to withdraw his amendment.
Lord Whitty
“( ) The rules must include provision for and in connection with ensuring that there are no variations between charges, or the amount of charges, imposed by a water undertaker under different section 66D agreements in consequence of the location at which the duty or duties to be performed by that undertaker under such agreements fall to be performed.”
Lord Whitty
My Lords, some of the issues covered by Amendment 9 have been discussed in the previous group. I do not entirely disagree with the Minister’s response on common carriage, in terms of how water gets delivered and having as broad a range of potential new retailers as possible. However, the outcome seems to be that if you have de-averaged prices, you have discrimination between users. Whether all the structural amendments—some in this group and some in the previous group with the amendment of the noble Earl, Lord Selborne—would be necessary to prevent that, the Bill ought to enunciate that principle. At the end of the day, we do not want a market where the easiest route leads to suppliers cherry picking and to a two- or three-tier market for the final delivery of water to businesses, public authorities and so forth—the non-domestic retail market.
In one sense, Scotland shows us what the benefit to business, and the knock-on effect to the domestic side, has been. It has been not in differentiated prices but in better service, in driving water efficiency both in the delivery and use of water, in better means of dealing with waste water, in better water treatment in specialist cases and in disposal of water and waste. If you put competition wholly on the price side, you will not get those advantages. It will be easy for a supplier, on the supply side, to have a more accessible or more cheaply accessible source of water at the upstream level to bring to its business consumers or, on the demand side, to have a group of businesses and other institutions taking advantage of its terms because they are all fairly close together and all have similar requirements, and therefore there are economies of scale in actually supplying that institution.
I do not think that the Government envisaged—and nor did we on this side—the increasing competition in the retail sector as being primarily about wholesale price. Reassuring noises have been made about Ofwat having the ability to ensure that de-averaging does not take place. The natural drive of the market, however, is likely to make it quite attractive. Unless Ofwat has a clear line, which this amendment would give them, that the wholesale price and therefore the retail price of wholesale water would not be differentiated by location, we will get some differentiation of outcome. We will get cherry picking and we will get distortion. It will hit particularly the more remote rural areas and rural businesses in those areas; it will hit particularly businesses in rundown parts of the inner city, where not many of them are inclined to negotiate deals with the company; and it will hit businesses where it is difficult to see how a new arrangement would work.
Unless there is an overall presumption that there should be no de-averaging then it is quite easy to see how the market would end up with that. It may be that Ofwat’s powers would be exerted to prevent that, but this Bill does not require Ofwat to do so. The terminology that de-averaging would exist only if there was an “overall benefit” to consumers makes it quite difficult to assess. You have an example of de-averaging which clearly might benefit the immediate consumers who are benefiting from that de-averaged price, but how do you then assess its effect in the short and medium term on consumers as a whole? It is quite a difficult judgment for Ofwat. If the outcome the Government want is that which has been delivered in other quasi-utility markets—largely it has been—why not actually tell Ofwat to deliver that? Surely it would be easier.
I hope that the Government take this slightly more seriously. It will not necessarily unravel their whole approach to competition in this Bill. It is simply giving Ofwat an explicit duty that will deliver an outcome the Government say they want. The Government should not fundamentally object to this amendment. It may require a bit of back-up along the lines the noble Earl, Lord Selborne, has suggested already, but it requires at least the principle to be reflected in the Bill. Otherwise, we will get cherry picking and we will get discrimination, which is unlikely to drive the kind of efficiencies that we have been praising the Scottish system for delivering. I beg to move.
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 De Mauley
My Lords, before I address this group of amendments, perhaps I may answer the noble Lord, Lord Cameron, and my noble friend Lady Parminter, who asked about the truncated period between Committee and Report. I fear that these things are way above my pay grade and are decided through the usual channels. All I can do is apologise to noble Lords for any inconvenience that that may have caused and assure noble Lords that my door remains open. I will be there to answer questions between days in Committee and between Committee and Report; I hope that I can be helpful.
Turning to this group of amendments, I thank noble Lords for some articulate speeches about a complicated issue. It is one that we take very seriously. As noble Lords said in earlier debates, this is not an easy area to get one’s head around. Specifically on de-averaging, when we talk about averaging or de-averaging of costs, we are discussing how best to share the costs of sourcing and disposing of water between customers. Most providers of goods and services average their costs to some extent.
In my view, it makes sense to share the costs of maintaining the network on which all customers rely across all customers, regardless of their location. The network makes up about 90% of a water company’s assets, so when we discuss de-averaging in the context of the Bill, we are talking only about charges in the competitive part of the market, which accounts for about 10% of the companies’ activity. I think that many noble Lords agree that there could be real benefits from increasing the cost-reflectivity of charges for different sources of water to reflect the environmental costs of supply. That is especially important in water-stressed areas or for business users that use large volumes of water.
Strange as it may seem, at present, there are almost no economic incentives for businesses that use large volumes of water to seek out the least environmentally damaging source of water. Nor are there any economic incentives to encourage incumbent water companies or new entrants to the market to help businesses to identify the most environmentally efficient sources of water. The Bill is intended to change that. Our upstream reforms will encourage competition for business customers and incentivise more efficient use of resources. More efficient use of water resources must be good for customers and good for the environment.
I discussed earlier the measures in place to ensure that householders are protected. In regard to de-averaging, as I said in the debate on the previous group, we are clear in our charging principles that de-averaging must occur only where it is in the best interests of customers. In answer to my noble friend Lord Moynihan, when we issue the charging guidance we will make it clear that there must be robust boundaries on the scope of any de-averaging. In particular, Ofwat will be expected to exert control to prevent the de-averaging of network costs and any negative bill impacts that could arise from this. Any moves to enable greater cost reflectivity will be targeted squarely on water resource costs in the competitive parts of the market. This is where there may be social and environmental benefits from encouraging sharper price signals. The Government are completely committed to maintaining bill stability. Customers have made it clear repeatedly that stability is important to them. We will not permit anything that undermines that stability.
The charging rules that Ofwat makes, within the framework set by the Government’s charging guidance, will be flexible. As the situation changes over time, our guidance and the rules that Ofwat sets about charges will be able to respond to the way in which the market evolves. I mentioned earlier that it makes sense to provide a price signal that reflects important decisions about our precious water resources. Using the Bill to ban any kind of price signal would, I suggest, be disproportionate. At the same time, we want to ensure that customer bills remain stable and reasonable. The flexible framework of charging guidance and charging rules will achieve this.
The suggestion was made in the debate that customers could end up paying for stranded assets. This is a regulated sector and the important question of what costs should be borne by customers is one for the regulator. In fact, this point is less about de-averaging than about whether the investment made by incumbent water and sewerage companies is made efficiently and in the interests of customers. No one here, I suggest, would think it right that customers should have to foot the bill for inefficient investment. It must therefore be right that the regulator has the powers to protect customers from paying for inefficient investment.
My noble friend Lord Selborne asked how Ofwat can enforce rules on de-averaging. The charging rules produced by Ofwat will regulate the price relationship between the incumbent and the licensee. It will be able to set out how incumbents apportion the costs of the network and distribution. In making these decisions, it will need to take account of its duties, which include having regard to rural customers. It will also have to reflect the Government’s charging guidance. The Secretary of State can veto Ofwat’s charging rules if they do not reflect the guidance.
Noble Lords asked whether rural customers might lose out. Ofwat will continue to have a statutory duty to have particular regard to rural customers and the charging principles that the Government published recently reinforce the protections that will remain for rural customers. They require Ofwat to ensure that any greater cost reflectivity must provide benefits to customers. No customers should be unfairly disadvantaged by the way that reform impacts on water charges. The noble Lord, Lord Cameron, referred to water being a universal right and I strongly agree. Water companies are under a statutory duty to supply and the Bill will not change that fundamental requirement.
I mentioned earlier that both Professor George Yarrow and Professor Martin Cave confirmed that Ofwat has the tools to regulate the upstream market without any de-averaging. The Bill will impose a legally binding framework for the industry and the regulator regarding their approach to the averaging of prices. This view is supported by competition experts. For these reasons, I hope that the noble Lord will be reassured and be able to withdraw his amendment.
Lord Whitty
My Lords, I thank noble Lords who have spoken in support of this principle. On this occasion, I found the Minister’s reply slightly confusing. I thought that there were some novel parts and a few red herrings in there. He says he is in favour of robust boundaries to de-averaging then claims in aid Professor Cave and Professor Yarrow who say Ofwat have the powers. However, all the amendment asks is that we make those powers explicit and that we require Ofwat not to discriminate on the basis of location. There might be certain areas where they could discriminate but not in relation to location of either source or customer.
If the Minister is saying that that will happen because Ofwat already has all these duties to ensure everybody is treated fairly, including rural and remote consumers and so forth, why not stipulate what they are trying to do in the Bill, rather than through the interaction of several parts of different codes? The noble Lord’s argument about discouraging the use of the least environmentally efficient sources of water was a little unclear. Any individual source of water from a new provider is a very small part of the totality of the incumbent company’s activities. Discouraging environmentally inefficient or damaging sources of water will, and should, be tackled through the abstraction regime well before the Minister introduces upstream competition. The noble Baroness, Lady Parminter, and I have amendments to that effect later on. That is, surely, the direct way to discourage environmentally damaging and inefficient sourcing of water at the top end.
At the other end, the requirement of the noble Lord, Lord Cameron, that water should be universally delivered is not only a matter of delivering it but doing so at approximately the same cost wherever you live. That has happened, under various Acts of Parliament, with water regimes going way back to private and municipal companies, through nationalisation and every stage of privatisation. It would be a pity if this legislation, with all its benefits in improving efficiency at the far end of the water chain, were to move away from that basic principle. The Minister has not yet established that there is a good reason for moving away from that, nor that Ofwat’s existing powers, important though they are, would necessarily deliver that outcome. We shall probably return to this subject at a later point. For the moment, I withdraw the amendment.
Lord Whitty
My Lords, to be honest I do not intend to challenge any of the Government’s amendments, even those that I understand. However, I would ask one question of the Minister. I had expected to see in this group of amendments, although maybe it will come later on Report, a response one way or the other to paragraph 12 of the report of the Delegated Powers and Regulatory Reform Committee, where the dehybridisation procedure—or the procedure to remove the hybridisation procedure—is adopted. It drew the House’s attention to that and to how it is being dealt with by the Government. If the Minister is saying that it may come up in a general reply to the committee, I am quite satisfied with that, but I thought that I would raise the matter here as it is in this part of the Bill.
Lord De Mauley
I assure noble Lords that we will deal with all the issues raised by the Delegated Powers and Regulatory Reform Committee, and I am sure that we will accept the vast majority. There are some quite complicated issues in there, which we are working through at the moment.
Lord Whitty
My Lords, my name is also on the amendment to which the noble Earl, Lord Selborne, has just referred. My reason for putting my name to it was very much the point he was underlining. Only by some form of no-detriment clause—some of the amendments go slightly wider—can we protect what is intended to be an outcome of retail competition, which is more focus on energy and environmental improvements at the retail-user end and final delivery. Historically, Ofwat has not been particularly good at being prepared to finance—if that is the word—through the price review, or to give priority in the price review to water efficiency schemes. I think that Ofwat improved a little in the previous price review and it shows intention to do so again in the next one, but the reality is that we have not done very well on that front. The introduction of upstream and, to some extent, retail competition could, if it is not contained, have an effect on improvements in water efficiency at the retail end, and the positive move by Ofwat in recent years to focus on water efficiency could be reversed. I strongly support what the noble Earl, Lord Selborne, has said on the amendment.
Lord De Mauley
My Lords, perhaps I may start by saying that our approach to retail competition is being developed jointly with the industry, along with the England and Scottish regulators, and others. This group is well placed to identify the conditions that will work best in England, capturing any lessons learnt and building on the Scottish experience.
I am not sure how a no-detriment duty would sit alongside the general duty for the Secretary of State and Ofwat to secure that licensees meet their statutory obligations and the conditions of their licences, given that these are set by the existing duties on Ofwat and Ministers. Ofwat is under a general duty to ensure that incumbents are able to finance their statutory functions. This duty enables Ofwat to create the right incentives to ensure that incumbents can benefit from investments that deliver improved water efficiency in their respective areas. It is suggested that incumbents may show preference to licensees that do not concentrate on water efficiency activities. This is addressed through Clause 23, which requires Ofwat to ensure that incumbent water companies do not discriminate in the provision of services. Ofwat is also able to address such issues through its Competition Act power, which incidentally is a power that WICS does not have in Scotland. In England and Wales, both incumbents and licensees are subject to a duty under the Water Industry Act 1991 to help their respective customers conserve water. I would not want to undermine the market for water efficiency services. I am sure that that was not an intended impact of the amendment.
Curbing the licensees’ water efficiency activities could also put them at a competitive disadvantage if a similar duty was not placed on the retail side of the incumbent’s business. Why should licensees be kept under a duty which potentially curbs their water efficiency activities, while an incumbent’s retail business is allowed to operate without this barrier? Amendments 46 and 53, in particular, may be a barrier to licensees working with customers to become more water-efficient because they impose a condition that any new arrangements designed to reduce pressure on networks must not impose any more costs on incumbent water companies. This same requirement is not being placed on the incumbents’ retail businesses through these amendments. A no-detriment clause works in Scotland due to its circumstances, having just one incumbent retailer and wholesaler. It simply will not work in the same way in England and Wales. For that reason, I ask my noble friend to withdraw his amendment.
Lord Whitty
“Separation of retail and wholesale activities
Any company granted a water supply licence under section 17A of the Water Industry Act 1991, prior to the passing of this Act, must establish separate legal identities for its—(a) retail activities, and(b) wholesale activities,within one year of the passing of this Act.”
Lord Whitty
My Lords, I shall speak also to Amendment 97. I am asking the Committee to consider a rather more radical approach to the structure of this industry. In earlier debates today, there was reference to unravelling some of the accounting structures of companies. Indeed, the Minister referred to the requirement on separate indication of charging by the retail and wholesale ends. We have to remember what was said by several of us at Second Reading. This is a very odd industry. In England, it consists, effectively, of eight regional monopolies, all of which are totally vertically integrated, with high profitability over the years since privatisation. There has also been high investment but there has nevertheless been high profitability for their owners and high dividends have been paid out. There has also been a high level of gearing in order to meet those investments by going to the money markets. Most of them are now owned by international investment funds although in many cases they have had a sequence of owners. However, they retain a close resemblance to the pre-privatisation water authorities.
Over the years, there has been some degree of breaking up of monopolies in other industries, including vertical splits, to encourage a more effective form of competition. The recent report by Martin Cave and Ofwat’s own assessment of the situation give rise to suggestions that Ofwat, too, ought to be able to require separation of the wholesale and retail ends of the currently vertically integrated water companies. When we move to retail competition, its major feature is likely to be that the retail arms of other incumbent companies will begin to compete in the areas that are dominated by the historic incumbent companies. To some extent, that has happened in Scotland, where English-based companies provide some of the competition in the non-domestic retail sector.
We would expect those companies to continue, one way or another, to dominate the scene, even if they are in more direct competition with each other. As other noble Lords have said, that means that we have to separate out how those companies operate on the retail side and consider what the relationship between the wholesale water undertaker operation and the retail operation will be. One can do some of that by ring-fencing, separate accounting, Chinese walling or whatever, but we need to consider separation as legal entities or even disinvestment from one company to another. That option is not available to Ofwat or, indeed, the CMA, whatever the performance of companies, the competitive flaws of the market or the outcome for consumers may be. This argument about where to separate quasi-monopolies has applied. We have had many debates over recent years about banking, we have had the situation of the railways and the issue arose at some length during the debates on the Energy Bill. It is horses for courses, but the fact that there is no power to require this, even in a situation which is still pretty well dominated by regional monopolies, seems to be an omission.
There are reasons why Ofwat and successive Governments have not gone down this road, one of the main ones being that it might well frighten off investment. This is a pretty good investment. It has provided a very substantial return to those people who have invested in the English water industry over the past 20 or so years. They have had a pretty good and reliable return. Over the past two price review periods some would say that, particularly because of the over-allowance by Ofwat for the costs of capital, they have had an exceptionally good return on prices which have been designated by the regulator. That is not to say that a change in the circumstances would not cause some hesitation on the part of investors, but the reality is that on whatever basis we operate it will continue to provide a good, safe, consistent return to international investors. For that reason we should discount some of the scare stories that surround the issue of enforced separation.
These two proposals give the Government an option. Amendment 49 would give Ofwat, and by extension the CMA in certain circumstances, the power to mandate separation either for one company, or, following a market review, for all companies operating in that sector. That is a pretty substantial increase in their powers, although it is not very different from what the CMA can do in most markets if it finds that there is a breach of general competition law. The rather softer alternative which I think the Government might well consider more is Amendment 97. That would allow for voluntary separation in certain circumstances or negotiated separation if Ofwat were to intervene in order to enforce better competition and better performance.
Amendment 97 therefore is a minimalist form of separation. Amendment 49 is more draconian. The Minister can probably guess which I should prefer, but in this context I would be happy to see the Government take up either. At some point down the line, the current structure of the water sector is going to have to be challenged more fundamentally than is done by the Bill. If we were to give the contingency power to Ofwat now, or make it easier for the companies themselves or for Ofwat to negotiate and suggest to companies that they should split, that would give us the ability to reshape the industry following the introduction of retail competition even to the degree provided for in the Bill.
I suspect that the Government are going to be deeply resistant to either option, but they are wrong. The structure of the industry is not one which can be sustained for very much longer. It is one that requires significant investment and we do not want to frighten the investors. On the other hand, we have to face up to the reality that proper competition, meeting both business and household consumer needs plus the very substantial environmental demands on the industry, may well require a more radical solution to the structure of the industry than is envisaged in this reform.
I hope that the Government will at least take this matter seriously. Giving Ofwat some powers in this area would be a significant move forward. I beg to move.
Lord De Mauley
My Lords, I am grateful to the noble Lord, Lord Whitty, for tabling Amendments 49 and 97, which are about an important subject, that of separation, whether legal or functional. Legal separation is what Amendment 49 deals with. The amendment would require the eight licensed water suppliers currently operating under the existing water supply licensing regime—so not the incumbent water companies—to set up legally separated entities for the retail and wholesale parts of their business. It is unnecessary to require these licensees to undergo legal separation. In the current market, such licensees can already choose to offer retail services only. In fact all of them do. In the new market, licensees will be able to offer both retail and upstream services separately.
As drafted, this amendment would not require the legal separation of incumbent water companies, but I understand that that is the intention behind it. Legal separation of the incumbent water companies is usually perceived as a way of preventing them from discriminating against new licensees entering the market in favour of their own retail businesses. This discrimination could be either through the prices they charge or by other non-price forms of anti-competitive behaviour. However, legal separation would not eliminate the risk of discrimination in competitive markets, nor is it the only way to deal with discrimination. Ofwat has a range of tools it could use, for example by making licence changes to govern the relationship between the retail and wholesale parts of the companies. These could go as far as requiring effective functional separation. The Bill also gives Ofwat stronger powers to ensure that it can take action to tackle discrimination and ensure a level playing field for all market participants.
The water White Paper made it clear that we would not drive fundamental structural change to the industry, such as forcing the legal separation of incumbent water companies. We were persuaded by the arguments of water companies and investors in the sector that doing so would reduce the regulatory stability of the sector and put future investment at risk, something to which the noble Lord, Lord Whitty, referred. We must not take risks with a successful model given the challenges we face in building the resilience of the sector and the importance of keeping customer bills affordable.
The Government expect Ofwat and other competition authorities to take firm action to prevent discriminatory pricing or behaviour. This could include requiring undertakings from market participants to address anti-competitive behaviour, for example by introducing functional separation. Furthermore, under Clause 23, the Government have also introduced a duty on the Secretary of State, Welsh Ministers and Ofwat to ensure that incumbent water companies do not exercise undue preference to their own retail businesses, associated licensees or other incumbent water companies on non-price matters. Ofwat therefore has sufficient powers to reduce discriminatory behaviour without there being legal separation of incumbent water companies.
As the noble Lord, Lord Whitty, explained, Amendment 97 would enable licensed water suppliers to choose to specialise in either retail or wholesale services. Clause 1 and Schedule 1 to the Bill already enable this by removing the requirements in existing legislation for suppliers of upstream services also to provide retail services. This amendment is therefore unnecessary to achieve the objective the noble Lord seeks.
Forcing separation would not simply be about costs to investors, it would impact on costs to customers. If the sector becomes less attractive, the cost of capital increases, and increases of as little as 1% can lead to £20 on a bill. We must remember the need to ensure that bills remain affordable. I therefore ask the noble Lord to withdraw his amendment.
Lord Whitty
My Lords, clearly I am going to withdraw my amendment because the noble Lord indicated in his opening paragraphs that it is in the wrong place to achieve what I thought it might achieve. However, the subject is worthy of further consideration. It is true that Ofwat has a power of functional separation in Schedule 1 but it is only one way round. The amendment would provide for it to be both ways round. It would give some flexibility to Ofwat, but only on functional separation.
On ownership separation, this is such an odd market that at some point some Government will have to consider this. The proposed clause, as drafted and as intended, did not say that we would do it, but it would give Ofwat reserve powers to do it in relation to either one company which was engaged in anti-competitive behaviour—which is wider than simply the relationship between its own wholesale and retail internal pricing system—or across the board.
The power exists and is used by both the European and British competition authorities in almost every other sector—we have required breweries to give up their pubs and banks to give up their retail branches—but water is more protected because it has a sector-specific structure of regulation which has built up, for understandable reasons, from the old nationalised structure into a regionally based oligopoly. It has attracted a serious amount of investment, but at a cost. Part of the cost is inflexible and the Bill seeks to introduce a greater degree of flexibility. I accept that, but, ultimately, you would not necessarily want the structure for all time.
Therefore, although I do not advocate wholesale intervention at this point, Ofwat, as the sector-specific competition authority, needs stronger powers than it currently has. My proposed new clause clearly would not give it those powers, and even if it did the Minister would not accept it. We have a problem with the nature of the industry. It has had some fairly bad publicity recently in terms of its levels of profitability, its method of gearing and the way that it treats its customers. There is considerable room for improvement. One potential stick for that would be to give Ofwat wider powers. Indeed, a future White Paper may well address this issue more radically than we are doing today. In the mean time, I shall withdraw my amendment.
Lord Whitty
My Lords, I can accept quite a bit of what the noble Lord, Lord Crickhowell, has just said, but it does not deal with the totality of the noble Baroness’s amendment, which I broadly support. Amendment 74 deals with bulk transfers which may well be within the context of an existing abstraction licence—it is only change of use if it is used for some other purpose. The Environment Agency does not have a licence control except in terms of change of use. It is an Ofwat responsibility, in increasing upstream competition, to arrange for these bulk transfers. It is complicated but it seems to me that if there is a serious environmental problem, the Environment Agency and its Welsh counterpart need some powers over and above consultation—which already exists—to stop those transfers taking place. I think that is really where the noble Baroness’s amendment is aimed.
The consultation rights already exist and the noble Lord, Lord Crickhowell, has spelt this out. In most cases, under the previous regime, Ofwat and the Environment Agency have certainly in recent years reached an amicable agreement. However, there is the possibility of a clash under the new regime, and in those circumstances the noble Baroness’s Amendment 74 would be appropriate.
Lord Crickhowell
I am grateful to the noble Lord. I do not have the papers immediately to hand but I have it in mind that if there is a change of use, that prompts Ofwat to have to consult the Environment Agency. I may be wrong on that and no doubt my noble friend will be able to deal with it.
Lord Whitty
If there is a change of use—for example, if you are a landowner with an extraction licence who now, under the new regime, wants to put it into the water system—then the Environment Agency has to give a change of use certificate, and will judge that in the same way as if it was a new extraction licence. So that control is there. However, if it is simply a bulk transfer within existing use and with existing abstractors, then that break is not there. I think I am right in saying that.
Lord Whitty
My Lords, I have Amendment 104 in this group, which touches on exactly the issue that the noble Earl referred to right at the beginning of his remarks. The essential problem here is that we have two issues: the introduction of upstream competition and the deficiencies in the present abstraction regime. Logically, it would be sensible to have accomplished, or at least set in train, the abstraction reform before we introduce upstream competition. In fact, the Bill gets it entirely the other way round.
The inadequacy of the abstraction regime has been fairly long-standing. I can remember having arguments within Defra when we brought in the 2003 Bill that we ought to have been more radical at that point. Indeed, ever since, the situation in several catchment areas has seriously deteriorated. Although the noble Lord, Lord Cameron, is right that it sounds odd for us to be talking about it in light of the recent inclement weather in most of the country, the reality in the long term is that a lot of our catchments are not in very good condition, either in terms of water resources or of their environmental flow. Abstraction levels and potential abstraction levels have had a serious effect on that.
The Government know this and have undertaken a review of the abstraction regime. It has been rather a long time coming, but they have nevertheless got to the point where they issued a very good consultation paper only last month, which gives two options as to how we could conduct the framework of reform. They could have gone a little further—issues such as charging, which the noble Earl also referred to, ought to be part of this. However, if we are unable to introduce that reform until into the 2020s, and meanwhile we have triggered upstream competition, we are aggravating the position. Once there are new suppliers, they will be looking at new sources. They will be looking at trading licences. In reality, it is not only the abstraction that is taking place that is damaging to a lot of our catchments, but the potential abstraction under existing licences. Many of these existing licences, which we talk about being introduced in the 1960s, are grandfathered rights, which probably existed centuries previously when the demand for water was less and the precipitation was probably even more than we recently experienced.
We have catchment areas that are subject to increased demand at the far end, to increased environmental deterioration and to climate change, and present potential problems for water quality as well as water supply. That problem needs addressing. If existing licences provide for twice the level that is actually abstracted—in other words, less than 50% of the potential abstraction actually occurs—and more people are trying to get their hands, figuratively speaking, on the water to put it back into the system and to enhance competition, then we have got a perfect storm. What, however, if we do it the other way around—if we speed up the introduction of abstraction reform and get the legislation we need? Some of it can be done without legislation, but probably not all of it. For example, the issue of compensation was a major inhibitor on the Environment Agency, as it comes out of the Environment Agency’s budget and the Treasury makes absolutely certain that it comes out of your budget. This inhibits the degree to which you can introduce modifications of termination of abstraction agreements. Probably, because it is a property right, that needs primary legislation. We need to move to primary legislation fast. We need to introduce it and you cannot introduce it all at once. It will take a bit of time to introduce it, but we need to start as rapidly as possible.
Once we have an abstraction regime that puts a cap, catchment by catchment, on the amount of water in aggregate that people can extract, and defines that in terms of the flow of the river, the demand on that river, and the potential environmental damage or benefit to which that river contributes, then we can relatively easily within that framework introduce competition, trading, sophisticated agreements of swapping water between one entrepreneur and another and indeed across boundaries of the water company areas. If you do it the other way around, however, you will affect the environment and the supply of water. You will make it much more difficult later to introduce rules in relation to the competition which affect the abstraction licences which exist, let alone new ones.
The Environment Agency is not without some powers in this respect. As we said in relation to the previous group of amendments, at the point of change of use, the Environment Agency can effectively introduce new provisions. However, not all of these will be change of use and if you have an abstraction licence currently, which would allow you to take out twice as much water as you actually need, then only part of that licence would be used for the public water supply system and the rest would remain. In effect, instead of taking 40% of the abstraction you would be taking 100% and only half of that would go into the public supply to provide for additional competition.
Although there are powers for the Environment Agency, they need to be strengthened. The sequence of events needs to be a rapid conclusion of the current consultation on abstraction, and introduction of the primary legislation and other regulations that we need as rapidly as possible over the next few years If we sped it up we could probably do that by 2020, which the department says is probably the earliest date that we could introduce upstream reform in any case. If we do not have that legislative sequence, we will get to 2020 without abstraction reform being properly implemented, and have all the problems of suddenly introducing upstream competition.
All we are asking in these amendments is to put the order right, put both elements in the Bill, and recognise that we will still need another Bill to do the abstraction reform in detail. I am suggesting that the division between the primary legislation for abstraction reform and the introduction triggering the provisions on upstream competition should be five years. The noble Lord, Lord Cameron, queries whether that actually made matters worse, but that is more or less the timescale the Government are working on for upstream competition in any case, so it does fit. If necessary we can alter that five years, but we need some clear sequence. At the moment the Government are dealing with only half of it in this Bill. The department have started the other half but we need to do them the other way around. I hope that the Government at least accept that principle, even if they are not prepared to accept the noble Baroness’s or my amendment tonight.
Lord De Mauley
My Lords, I thank my noble friend Lady Parminter for moving her amendment and other noble Lords for their contributions to this debate. This is, we all agree, a vital area. Amendment 96 would delay regulations under Clause 12 and the market for private water sales to water companies from coming into force until draft legislation is presented to Parliament on abstraction reform. Amendment 104 would introduce a new clause to prevent Clause 1 from coming into force until five years after the Royal Assent of future primary legislation on abstraction reform.
These amendments would delay both the upstream reforms and the retail market reforms in the Bill. We do not think they are necessary. I will explain why. We are fully committed to delivering abstraction reform and we share the views of noble Lords that just because we have had the wettest January on record does not mean that we will not imminently go into drought. We have seen that in recent years. We do not share the view, however, that there are risks in introducing upstream reform ahead of abstraction reform.
The Government and the Open Water programme—a partnership between the industry and regulators—are working towards retail market opening in 2017. Our retail reforms are widely supported by customers, who will benefit from improved customer service as a result of these changes. Non-household customers will be free to negotiate the best package to suit their needs. Customers with multiple sites will benefit hugely from being able to negotiate for a single bill from a single supplier. Improved customer services will have knock-on effects for household customers too.
Upstream reform will be introduced at a slower pace, as the noble Lord, Lord Whitty, acknowledged beyond the 2019 price review. This is because we recognise— and I thank my noble friend Lord Crickhowell, for his expert views which supported this—that upstream reforms will require careful planning and close working between the water industry, regulators and customer representatives. However, it is important to progress upstream reform because the current regulatory model is not delivering the kind of efficient resource use and innovation that we need. This reform will help to keep bills affordable and, vitally, to benefit the environment.
I assure noble Lords that there are sufficient safeguards in the existing regimes to prevent an unsustainable increase in abstraction being caused by the Bill. In order to sell water into public supply, abstractors will need to apply to the Environment Agency or Natural Resources Wales for a “change of use” for their abstraction licence. The Environment Agency can refuse such a request if it will lead to unsustainable abstraction. It can also refuse if it would cause deterioration in the catchment, or apply conditions to ensure that this does not happen.
In addition, Ofwat must ensure that anyone wishing to input to the public water supply system holds the appropriate abstraction licence, and informs the Environment Agency about any trades with other abstractors.
Through this Bill, in Clause 1, the Government will also require Ofwat to consult the Environment Agency or Natural Resources Wales before issuing a water supply licence. As my noble friend Lady Northover explained in the context of an earlier group of amendments, there are also safeguards in the existing regimes to prevent an unsustainable increase in abstraction by water companies for the purposes of water trading or “bulk supply” agreements. I also assure noble Lords that we are completely committed to abstraction reform and the introduction of a new system fit to face future challenges including changing climate and population growth.