Environmental Targets (Fine Particulate Matter) (England) Regulations 2022

Debate between Lord Whitty and Lord De Mauley

Monday 30th January 2023 Lords Chamber

[Lord Whitty (Lab)]

My Lords, I have long taken an interest in this subject. When I came into this Chamber I did not intend to speak, but I was utterly shocked by the way the Minister—who in many respects I have some respect for—dismissed the case for a much more ambitious target. My noble friend has set out in great detail how that could be achieved, and why it should be achieved.

I was, until recently, the president of Environmental Protection UK, whose origins were in the National Society for Clean Air, which proposed the Clean Air Act in the 1950s. It was the Minister’s predecessors, in the Conservative Government of Anthony Eden—which does not have a high historic record—who adopted the Clean Air Act when they were told by people, like those who have got at the Minister, “You’re going to try and change people’s habits and they’re not going to stop burning coal”—but they did. I speak as a child bought up in London with asthma in the 1950s. Those five years, in which they cleaned up London, probably mean I am still alive and here in your Lordships’ House today.

It was incredibly dismissive of the Government to condemn those who were advocating tighter regulations. They are based on strong medical evidence; the campaigns that the evidence here dismisses are mainly informed by strong medical evidence that this kills, it deforms and it limits life in all its respects. The Minister needs to take a grip, think again and come back and respond to my noble friend with something better. Otherwise, this Government have something to be seriously ashamed of.

[Lord De Mauley (Con)]

My Lords, we all have a growing understanding of the devastating effects of PM2.5 and particulate matter in general on human health, and we welcome efforts to bear down on them. I think I heard the noble Baroness sidestep the question of what an appropriate target was, preferring simply to demand more ambition. Although other noble Lords have made some suggestions, she did not answer my noble friend the Minister’s question of what actions she specifically proposes should be banned or seriously cut back. It is important that the public know what they are.

Public Bodies (Abolition of the Advisory Committees on Pesticides) Order 2015

Debate between Lord Whitty and Lord De Mauley

Wednesday 4th March 2015 Grand Committee

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

My Lords, this is an order to be made under the Public Bodies Act 2011. As detailed in the explanatory document accompanying it, it delivers one of the outcomes of the Government’s programme of reform for public bodies. The order will abolish the Advisory Committee on Pesticides and the equivalent body for Northern Ireland as statutory non-departmental public bodies. The Government will then establish a new expert scientific committee.

I wish to make it absolutely clear that this is not an attempt on the Government’s part to stem the flow of impartial and independent scientific advice on pesticides—in fact, quite the reverse. We are very clear that the Advisory Committee on Pesticides has several strong features that must continue. These include: expertise, independence, impartiality, transparency, a direct line to Ministers, and the ability to initiate its own lines of inquiry. We will retain these qualities, but we see an opportunity to make improvements. I firmly believe that there will be benefits from the successor committee operating in a different and more flexible way, while of course retaining its independence.

We need new arrangements to reflect wider changes in the regulatory landscape for pesticides since the Advisory Committee on Pesticides was set up nearly 30 years ago. We need to establish a broader, more strategic and proactive role for the successor committee while meeting the continuing need for independent expert scientific advice in this area.

Over recent years, Defra has taken steps to improve its management of the wide range of scientific advice and evidence that underpins its work. As an expert scientific committee, the successor body to the Advisory Committee on Pesticides will work in a more co-ordinated and peer-reviewed environment. This is overseen by our chief scientific adviser and science advisory council. They do not interfere in the work of experts but provide valuable co-ordination, challenge and support.

We have consulted widely, as required by the Public Bodies Act, on the future of the Advisory Committee on Pesticides. As we have reported, there was clear support for our proposals. We also have the full support of other UK departments and the devolved Administrations. We have secured the required clearance from the devolved legislatures for the order. I believe we have gained this support because we acknowledge that these other parties have a strong interest in the future arrangements. We have worked closely with them and with the committee itself to draft the terms of reference for the new expert scientific committee. The input of the committee members is particularly important because they will transfer to the successor body.

The draft terms of reference have been discussed at two meetings of the committee and small but important adjustments have been made. These changes have satisfied members that the draft clearly sets out a shared vision of the independence of the committee, its right to initiate work and its right to communicate directly with Ministers. This text has now been put to departments for final agreement.

The Secondary Legislation Scrutiny Committee report on the order highlighted several issues to be captured in the terms of reference. These included addressing the comments by the Advisory Committee on Pesticides in the earlier consultation about independence and proactivity. It also mentioned the importance of the Principles of Scientific Advice to Government and the Code of Practice for Scientific Advisory Committees. The report also called for the establishment of escalation routes to ensure that advice from expert scientific committees can be submitted directly to Ministers, as appropriate.

In flagging those points, the Secondary Legislation Scrutiny Committee nevertheless concluded that the Government have demonstrated that the draft order serves the purpose of improving the exercise of public functions as set out in the 2011 Act, in line with the considerations contained in it. The committee was consequently content to clear the order within the 40-day affirmative procedure.

I am glad to be able to confirm that the issues raised by the scrutiny committee are all carefully and fully addressed in the draft terms of reference for the successor body. I can also confirm, as outlined earlier, that the members of the current Advisory Committee on Pesticides and all the relevant departments have been closely involved in this work. The existing Advisory Committee on Pesticides has provided real value over a number of years and the Government are determined to carry over its strengths to the new body. However, the new structure will be more flexible and efficient. I commend the draft order to the Committee.

[Lord Whitty (Lab)]

My Lords, I thank the Minister for spelling out the content of this order. Clearly, with the passage of the Public Bodies Bill—four years ago now—the authority to abolish this committee, provided the Government followed the appropriate procedure, has been there.

In Committee on the Public Bodies Bill, I queried the wisdom of abolishing this committee, and my noble friend Lady Quin queried it on Report. The significance of that for those who are not all that familiar with the history of Defra is that my noble friend Lady Quin was the last MAFF Minister to have responsibility for pesticides and I was the first Defra Minister to have responsibility for pesticides. We relied very heavily on the objectivity of the statutory committee, as well as the operations of the pesticides department—PSD—within Defra, because there are always some very difficult, if not controversial, issues arising about pesticides.

The difficulties and controversy have, if anything, increased in recent years. A number of bans at European level have been contested by the industry and some others in crop protection. There has recently been a serious disagreement between the Government and our European colleagues on neonicotinoids. There are always concerns for wildlife and, in particular, the bee population, the effects of various pesticides on them and therefore on their ability to fertilise a whole range of cultivated and wild plant life.

Within what is a no doubt objective and highly scientific area, there are quite often serious disagreements between experts. One of my main memories of my time as a Minister in this area was one huge row where—I will not go into the details—somebody was appointed to the committee whom the crop protection industry was not particularly keen on. It was always important to ensure a balance on the committee, with a range of people. Of course, that is quite difficult for government appointments. Almost everybody with a scientific background in this area, whether at university or in industry, has at some point in their career been employed or had their research sponsored by companies within the industry. It is therefore very important that transparency, accountability, independence—from industry as well as from government—and balance are clear in the advice that the Government receive.

Actually, the non-departmental public body requirements help to ensure that. My concern about the abolition of the committee was that we might lose that balance. The Government have gone through the correct procedures to ensure that there is understanding of the new way of carrying things out. I appreciate that and have every faith in the Government being very diligent in ensuring that that balance and independence are still there. They put it within a wider context where, effectively, this is an expert committee reporting to the science advisory council, which oversees the whole of Defra’s scientific work. That makes sense to a degree, provided that that is well resourced and that the expert committees covering specialist areas maintain the balance and independence I referred to.

I accept the Government’s good intentions within this area but they have to recognise that it is one where, publicly, media-wise and in the scientific community, controversy can jump out at Ministers who are without great expectation or, frankly, much knowledge of the balance of understanding on the scientific argument. That means the Government must be able to defend whatever future, more flexible arrangements are put in place. The Government refer to flexibility of advice. That should not be too ad hoc or Ministers would be open to the accusation that they have chosen the advice from those people most likely to favour their or the industry’s position. That would be unfortunate in an area where a degree of objectivity has generally been respected over the years.

Pesticides used in our agriculture and horticulture have an important effect on the countryside, wildlife, bystanders, rural communities and the productivity and economic structure of our agricultural sector, so this is an important issue. I hope that the new arrangements work as well as the old ones. I dug out the latest annual report. It is clear from even the summary of the activity—where there were 12 important authorisations of pesticides, some more authorisations of equipment and some serious discussions about the regulatory regime of pesticides in that very year—that that intensity is unlikely to diminish.

Single Use Carrier Bags Charges (England) Order 2015

Debate between Lord Whitty and Lord De Mauley

Wednesday 4th March 2015 Grand Committee

[Lord Whitty (Lab)]

My Lords, I suspect the Minister was hoping for full approval for this government initiative. I am gratified that the Government have finally got around to it. I have been campaigning on this front for at least 15 years, so I am glad that, 13 years after the Republic of Ireland, and then following the devolved Administrations within the UK, we have at last reached this position. To continue the scriptural allusions of my noble friend Lord Dubs, there is always much joy in heaven for a sinner who repenteth, and we should all appreciate that. Nevertheless, we could have had a much clearer policy announced today—one that would have been better understood by the public. I was struck by the point made by the noble Lord, Lord Holmes, that it is people who litter, not bags. That is absolutely true. However, as the noble Viscount, Lord Ridley, said, the whole point of this tax is effectively to change behaviour. It is not a tax; it is a levy.

My noble friend Lord Anderson referred to the experience in Wales. I happened to be in Tesco in Dundee on Sunday with a young lad. I would not say that he had great green credentials nor that he was always affected by prices, but he had already—this is relatively new in Scotland—changed his behaviour and brought a bag with him. That is the point. Yes, in the end, it is people who create litter and, by using these plastic bags, not only cause unnecessary carbon emissions but bring desecration to our countryside, wildlife, marine life, beaches and many of our city centres. I am glad that my noble friend Lady Golding found only one plastic bag in her car park, but I must say that that is not the general experience in either urban or rural car parks, or in other open spaces. It has been reported that some 2,000 of them can be found on every square kilometre of beach. That is atrocious from the aesthetic as well as the environmental and economic point of view.

I welcome the principle, but it has been unnecessarily curtailed, and in such a way that it does not do what it alleges it intends to do. The big exemption is for retailers with fewer than 250 employees, which exempts quite large retailers and represents around a third of all retail outlets. These exemptions do not exist in the devolved Administrations, but the exemption for very small retailers from completing the reporting mechanisms—the real red tape and administrative burden—is set at 10 employees. That seems to be a sensible approach. The exemption should be from the reporting and administrative burden, not from the requirement to impose the charge.

The exemption makes a big difference to the figures in the Government’s own impact assessment. The net present value of this over 10 years, according to the impact assessment set out on page 7 of the Government’s report and as indicated by the Minister, is £782 million. However, it would rise to more than £1 billion if all retailers were included. The Government’s position would be understandable if the retailers themselves were strongly pressing for this exemption, but I am sure that other noble Lords have seen the representations from a number of organisations that represent retail outlets, all of whom are saying, “This is daft and will actually impose a burden on retailers that will put them at a competitive disadvantage in certain respects”.

The British Retail Consortium has said that it is unfair to put smaller retailers in a position where they have to choose whether to charge. There are doubts about having an inconsistent position across the UK. The Association of Convenience Stores has said that some 60% of its members support a single-use carrier bag levy being applied, and in Wales, where it has actually happened, more than 80% of convenience stores support it. The association would strongly support its own membership being covered by this in England as well as in Wales, Scotland and Northern Ireland. The British Independent Retailers Association, which is the voice of the independent retailer and is often critical of the red tape of government regulations, has said that this should cover businesses of all sizes and that the only exemption should be on the administrative burden, to which I have referred. The Government do not have the support of those who would allegedly benefit from the substantial exemption this order provides for.

There are other exemptions or potential exemptions which can also be queried. The noble Earl, Lord Lindsay, has spelt out comprehensively why the issue of oxo-biodegradable bags is not worthy of being considered as an exemption because of their knock-on effect on waste management and the reusability of plastics in general. Others have queried whether other sorts of bags that are being exempted should have that exemption. The big issue I refer to in that respect is: why should non-reused paper bags be excluded when they themselves have a very high carbon content and are a significant part of the litter around our towns and countryside?

Given, therefore, that there is now a general acceptance of this approach, and that the alleged beneficiaries of the exemptions do not seem to be in favour of the Government’s position, why do the Government persist in doing this? Why, in particular, do they do so when the rest of the United Kingdom does not provide for those exemptions, or most of them, and when we may well be faced with a European directive at some point, which will probably not have those exemptions either?

As I say, we should give at least two cheers for the Government for coming forward with this at last. Nevertheless, it is a pity that they have botched it a bit, and I hope that maybe they will fairly rapidly rethink this, and that, even if we adopt this statutory instrument today or when it is considered in the Chamber, they will come back and say, “Actually, these exemptions are pretty much a nonsense. Let’s make it straightforward so that everybody can understand it, and it will have the effect on everybody, whether they are a customer of a small or large business, whether they have a plastic bag or a paper bag, and whether they are in the country or the centre of our towns”. I hope that the Minister will take that at least as partial support, but some rethinking would be appropriate in his department.

[Lord De Mauley]

My Lords, I thank all noble Lords for their comments, but in particular I thank those noble Lords who have given at least the partial support that the noble Lord, Lord Whitty, offered. I will see how many of noble Lords’ questions and comments I can address, bearing in mind that our process may shortly be interrupted. However, I will see how far I can get.

The noble Lord, Lord Anderson of Swansea, asked why there had been a delay in getting to where we have. I know that I will not satisfy him entirely, and I suspect that he may have heard me say this before. However, I will say again that we carefully considered the situation and looked at the effect of the scheme in Wales to enable us to design what we considered to be the most appropriate scheme in England. As he knows, we first used voluntary industry initiatives to reduce bags, which proved successful up to a point. The other point it is worth making is that we needed to work with retailers to give them time to prepare. I know that I am not satisfying him entirely, but he will allow me to make that point.

He also asked what the purpose of an end date to the legislation is. It is standard practice from the perspective of Better Regulation to include a sunset date. It gives the Government of the day the opportunity to review the legislation to decide whether it is fit for purpose, and indeed to amend it if they wish to do so. Seven years is standard practice in that regard.

The noble Lord raised the exclusion of SMEs, as did a number of noble Lords. I am aware that some SMEs wish to be included within the scheme, but we have chosen to exempt small and medium-sized businesses from the charge to reduce the administrative burden on start-up and growing businesses at a time when we are supporting new growth in our economy. It is important to remember that the large majority of single-use plastic bags are distributed by the large retailers, and the seven major supermarkets gave out more than 7 billion of those bags in 2013. Small and medium-sized businesses are able to charge on a voluntary basis if they wish, and we have been told about some that already charge voluntarily and are generating significant financial benefits from a reduction in the number of bags they supply. I thoroughly encourage that. There is a requirement in the order for the system to be reviewed within five years, and the scope of the review will be set by the Secretary of State at the time, but I am confident that the SME exemption will be one element of the policy that will be considered as part of that review.

The noble Lord, Lord Whitty, asked a related question. The impact assessment also states that there is an overall net benefit to society when SMEs are excluded from the scheme. The Government have therefore chosen to exempt them from the plastic bag charge to avoid placing an administrative burden on them at a time when, as I said, we are supporting growth in the economy.

Water Bill

Debate between Lord Whitty and Lord De Mauley

Tuesday 8th April 2014 Lords Chamber

[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.

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[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.

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[Lord De Mauley]

Yes, my Lords.

[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

Debate between Lord Whitty and Lord De Mauley

Monday 31st March 2014 Lords Chamber

[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.

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[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.

Water Bill

Debate between Lord Whitty and Lord De Mauley

Tuesday 25th March 2014 Lords Chamber

[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.

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[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.

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[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.

--- Later in debate ---

[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

Debate between Lord Whitty and Lord De Mauley

Tuesday 11th February 2014 Lords Chamber

[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.

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[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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

Debate between Lord Whitty and Lord De Mauley

Thursday 6th February 2014 Lords Chamber

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

My Lords, the purpose of Amendment 109 is to ensure that, in discharging its primary duty to protect consumers, Ofwat must take account of the needs of both current and future customers.

I agree that this is an essential objective. Water is an industry with unusually long planning and investment horizons. Our water resources management-planning processes require companies to plan, as a minimum, 25 years ahead and encourage them to plan over much longer timeframes. Although much of our current infrastructure will be expected to serve customers well for decades or even centuries to come, this is why we have introduced the new duty of resilience, which requires Ofwat to secure the long-term resilience of systems to the long-term pressures identified in the water White Paper, such as climate change, environmental pressures and population growth. It also requires Ofwat to ensure that the companies take action to meet the long-term needs of consumers by promoting appropriate long-term planning and investment; and by taking any and all relevant measures to manage water resources sustainably and reduce demand.

So let me assure the noble Lord, Lord Whitty, that I concur entirely with his aims. However, I consider his amendment to be unnecessary, because its effect would be to duplicate an identical existing provision in Section 2(5A) of the Water Industry Act 1991, which provides a definition of “consumers” for the purpose of the consumer duty. It clearly states that,

“‘consumers’ includes both existing and future consumers”.

I hope that this will satisfy the noble Lord and that he will feel able to withdraw his amendment.

[Lord Whitty]

My Lords, I thank the noble Lord, Lord Redesdale, for his support and agree with him that I was perhaps too dismissive in relation to the effect on Ofgem. Such a responsibility has had an effect on Ofgem and on the way in which its work, output and regulatory responsibilities are seen by the companies and consumers within the energy sector, so it has made a difference.

The arguments that the Minister has just put were very similar to those put initially by Energy Ministers in relation to the amendment to the 2008 Bill pursued by the noble Lords, Lord Oxburgh and Lord Redesdale. I cannot remember whether I openly supported them, but I certainly spoke to the then Minister—it was none other, I believe, than the noble Lord, Lord Hunt of Kings Heath—who agreed that the briefing that he had from his department was too negative and reflected the usual view of Whitehall that just because there were references to it in other documents you should not make it clear in the Bill. The Minister should perhaps go back to his own officials and say, “Well, yes, it may be that we can point to other documents, but people will look at the Bill”. They will look particularly at the front end of the Bill, if they get that far, which amends the 1991 Act—although that bit of it has not been amended yet by the Minister.

The role of future consumers is reflected very early on in the Bill in defining Ofwat’s responsibilities. The flexibility shown by Ministers in responding to the amendments to the 2008 Bill proposed by the noble Lords, Lord Oxburgh and Lord Redesdale, should be repeated here. Perhaps the Minister could agree to go back to his officials. I do not suppose that he will tell me that he is going to do that, so I will withdraw the amendment now and allow him time and grace to do that, because I would like to see this matter addressed on Report. I beg leave to withdraw the amendment.

Water Bill

Debate between Lord Whitty and Lord De Mauley

Thursday 6th February 2014 Lords Chamber

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

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[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.

Water Bill

Debate between Lord Whitty and Lord De Mauley

Tuesday 4th February 2014 Lords Chamber

[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.

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[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.

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[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.

--- Later in debate ---

[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.

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[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.

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[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.

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[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.

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[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.

Working Time (Amendment) Regulations 2013

Debate between Lord Whitty and Lord De Mauley

Monday 22nd July 2013 Grand Committee

[Lord De Mauley]

I thank the noble Lords, Lord Whitty and Lord Knight, for their contributions. As I said earlier, the amendments we are proposing to the Working Time Regulations are necessary technical amendments to the legislation as a result of the end of the agricultural minimum wage regulatory regime on 1 October, as the noble Lord, Lord Knight, was good enough to acknowledge. The amendments have no impact on levels of protection for agricultural workers and I believe that they are, in themselves, relatively uncontentious. However I recognise that, as the noble Lord, Lord Whitty, said, recent developments in Wales raise certain issues in regard to abolition of the agricultural wages board which noble Lords are rightly interested to hear about.

The Agricultural Sector (Wales) Bill, passed by the National Assembly for Wales on Wednesday last week, would restore a separate agricultural minimum wage regime in Wales. It might be helpful here if I gave noble Lords some explanation about relevant procedural matters.

Under the Government of Wales Act 2006 there is a recognised procedure for the consideration of whether Bills passed by the National Assembly for Wales are within its legislative competence. Essentially, this provides that the Attorney-General and the Counsel General for Wales—either or both—have four weeks after a Bill is passed by the National Assembly in which to decide whether to refer any question of competence to the Supreme Court. After this period, if no referral is made and the Secretary of State for Wales has indicated that he will not use his powers under the Government of Wales Act to intervene, the Bill is submitted for Royal Assent. This applies to all Bills passed by the National Assembly and this is the stage which we have now reached with the Agricultural Sector (Wales) Bill.

My right honourable friend the Attorney-General is currently assessing the legislation to determine whether its provisions are within the Assembly’s competence, as he does with all legislation passed by the Assembly. It would not be right for me to speculate here what conclusion either the Attorney-General, or indeed the Counsel General, might reach. I will say that, as noble Lords are aware from previous debates on this issue, the UK Government regard the agricultural wages regime as wage-setting and employment law, which are subjects that are not devolved to Wales. However, it is for my right honourable friend the Attorney-General and the Counsel General separately to consider whether or not a reference should be made to the Supreme Court on the question of the competence of the provisions of the Welsh Bill. This is a decision for them which it would not be appropriate for me to second-guess. Should either the Attorney-General or the Counsel General for Wales, or both, decide that such a reference should be made, it will be up to the Supreme Court to consider the Bill and make a judgment.

I hope, therefore, that that makes the position clear. There is a statutory procedure to be followed in the case of all Bills passed by the National Assembly and, quite properly, that procedure is now being followed in relation to the Agricultural Sector (Wales) Bill. The noble Lord, Lord Whitty—

[Lord Whitty]

My Lords—

[Lord De Mauley]

I am now coming on to some of the other points. Perhaps I may proceed, and if I do not cover them the noble Lord can intervene then. Would he like me to try?

[Lord Whitty]

Yes.

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[Lord De Mauley]

The words I used apply to both England and Wales. That is the point. It would leave those coming into agricultural employment in Wales in limbo as well. We do not want them to be left without certainty as to commencement of leave year and the other things we have been referring to here.

[Lord Whitty]

My point is on Wales. Although I recognise the delicacy of the position of the Attorney-General in looking at the question of competence of the Welsh Assembly, in advice going to the Attorney-General presumably the department has made clear the point that I made when the Government made a similar point during the passage of the Enterprise and Regulatory Reform Act: that although the Government have now invented the doctrine that this is employment legislation, since at least 1948, the wages board has been the responsibility of Defra or MAFF, not of whatever department was responsible for employment law. That may not be a clincher for the Attorney-General, but it is an important indication of the approach of previous Governments and in previous legislation—that is, as a matter of agricultural not general employment legislation.

[Lord De Mauley]

The noble Lord has been around for longer than I have in these affairs. I am absolutely certain that that has been done, but I will reiterate it. He makes a perfectly fair point and I will make sure that it is made again.

Perhaps I may continue with the next series of points. The Government’s position, as noble Lords know, is that abolishing the agricultural minimum wage will bring agriculture into line with other sectors in the economy. Allowing farmers to compete fairly in the labour market and for agricultural wages to follow market levels will enhance the competitiveness of the sector and may increase employment. This will in turn encourage long-term prosperity in rural areas.

Having said that, my experience is that workers, often on highly complex machinery and managing animals, which these days is also a pretty technical affair, are highly skilled and that the market for them is highly competitive. We have been quite clear that there is uncertainty about what the actual impact will be. The costs and benefits are made up of a number of elements, including the potential impact on wages for workers and other terms and conditions and the reduction in employment costs paid to government and others. The reality will, as I said, depend on demand, which evidence shows is increasing.

The real benefits will be from allowing farmers and workers the same flexibility to agree terms and conditions as employers and workers in other sectors of the economy, while ensuring the same levels of protection for workers. As I said in my opening remarks, workers with pre-existing contracts will retain those entitlements, and that is enshrined in legislation. I take the noble Lord’s point about that.

The noble Lord, Lord Knight, made a number of points. I acknowledge what he said about what is covered by the agricultural wages board. Of course he is right. Essentially, he asked why we had not done any back-assessment on the regulations. As we discussed, these are minor, technical amendments to the Working Time Regulations as a consequence of abolition of the agricultural wages board. They do not have an impact on the level of protection for workers, nor do we consider that they will have a significant impact on businesses, so an impact assessment has not been carried out.

The noble Lord asked whether we would be working with employers to remind them of their obligations. We have prepared guidance on the changes for agricultural workers and employers, which we have already shared with stakeholders. That guidance will be published on the Defra website shortly.

The Government firmly believe that the end of the separate agricultural minimum wage regime is in the best interests of the industry. The proposed amendments to the Working Time Regulations are a minor piece of the jigsaw to complete a simplified employment regime across all sectors of the economy. This will provide simplification, transparency and greater flexibility, thereby encouraging investment, growth and job opportunities in the sector, which will benefit both workers and employers. A successful agricultural industry will contribute to the growth of the wider rural economy, which is one of my department’s four key objectives. I beg to move.

Horsemeat

Debate between Lord Whitty and Lord De Mauley

Thursday 14th February 2013 Lords Chamber

[Lord De Mauley]

That is an interesting question. I am sure that countries in the rest of the world have their own problems. I am not aware of this specific problem arising elsewhere.

[Lord Whitty]

My Lords, will the Minister give a proper answer to my noble friend Lady Crawley, who after the previous Statement asked whether the cuts in resources for trading standards and the equivalent Meat Hygiene Service had had any effect on the effectiveness of enforcement? Secondly, in his assurances on health, will he assure me that the issue of people who are allergic to live horses has been covered in the possibilities of people being allergic to dead horsemeat? Thirdly, is his Secretary of State—a rabid anti-European—now convinced that European food chain issues can be resolved only by agreement at European level?

[Lord De Mauley]

That is quite a mouthful, my Lords. On the first point, the FSA oversees a rigorous, risk-based system of checking by local authorities. More than 92,000 tests were carried out in 2011-12. The FSA has assured Ministers that the recent machinery of government changes have not impacted on its surveillance and testing. On the health issue of people being allergic to live horses, I am not aware that this translates into the dead horsemeat arena. I am reliably informed that there are no risks to health unless the meat is contaminated with bute. We covered that issue in connection with the previous Statement. I am amazed at the noble Lord’s suggestion about my right honourable friend’s attitude to Europe. He is in Europe today, discussing the matter with his European colleagues in a very collegiate fashion. The noble Lord can rest assured.