Water Bill

Lord Crickhowell Excerpts

Tuesday 25th March 2014 Lords Chamber

[Lord Moynihan (Con)]

My Lords, I seek to assist the House, first by defining the concept of exit that my amendment aims to address, and then by responding to the concerns raised by the Minister in Committee about this important issue.

My interest in this matter began when I was one of the Ministers in another place who was responsible for the privatisation of the water industry, working at that time with my noble friend Lord Howard and the late and much missed Nick Ridley. Our aim was to introduce competition into the industry, to improve services and water quality, and to ensure that, through access to the capital markets, the industry could undertake significant, long-term investment into much needed new infrastructure. The fact that in the six years after privatisation the companies invested £17 billion, compared to £9.3 billion in the six years before privatisation, with higher-quality water, demonstrates the benefits of that measure.

My amendment seeks to take competition further by recognising the distinction between the wholesale process of delivering key water and sewerage on the one hand, and, on the other, encouraging the 18 incumbent water companies to separate off their retail services. These retail services are customer-facing. They are likely to include water efficiency advice and implementation—including benefit sharing—water harvesting and sustainable drainage, and more efficient and effective billing and payment options.

In Scotland since April 2008, non-household customers have been able to choose their supplier and/or renegotiate the terms of their supply. During that time, levels of service have improved considerably and there has been a much clearer focus on environmental services. Some two-thirds of customers have actively opted for a better deal, and the safeguards that have been put in place ensure that no customer, household or non-household, is worse off as a result of the introduction of competition. Indeed, in Scotland, Scottish Water opted legally to separate its non-household activities from the rest of its business by creating a new subsidiary company called Business Stream.

My amendment echoes government policy to allow the most efficient companies to merge or new companies to enter the market to provide customers with better service. The amendment goes further and allows those companies that are inefficient or in favour of exiting the market to apply to the Secretary of State to leave. This proposed move away from vertically integrated, private sector monopolies is to be welcomed. It allows companies that want to specialise in major long-term infrastructure to do so. However, it also allows others—such as the Singapore company Sembcorp, which owns Bournemouth Water, one of the world-leading facility managers for large industrial companies with process management skills—the opportunity, if they so choose, to offer retail services to a far wider base of customers than they do now. For today, they can compete only under current legislation by buying every customer, one by one.

The Bill takes a leap forward from 25 years of supply-driven legislation to a focus on much needed, demand-led service. In Scotland, such legislation has worked well since its introduction in 2008. However, it is deeply concerning that, unless we amend the Bill, we will create a competitive market but we will also create a market that prevents those participants that wish to exit the market doing so. For example, if, hypothetically, the board of Thames Water and its investors wanted to exit the retail business and specialise in the very different skill sets required for its core business—major infrastructure projects, which cover more than 90% of its current business—the company would not be allowed to do so. All the incumbent companies today would have to keep offices, keep the staff, keep the IT systems, pay rates and rent, and build up a cost base to be passed on to their customers, even if the board and shareholders wanted to exit the market and, in extremis, even if the company had only a handful of customers.

Only last week, Oxera published a study on the potential cost of passing the Bill without a provision for exit, and came to the view that this measure could amount to around £190 million in NPV terms over a 10-year period. Of course, this is not surprising. If we continue to insist in this legislation that the non-household, retail divisions of the incumbents have to maintain the capability of running the infrastructure systems needed and lose market share, they will end up with rising costs relative to their revenues, they could see losses increase and continue, and no cost synergies would be possible.

Exit is based on straightforward market efficiencies. The Defra Select Committee supported exit. An increasing number of water companies advocate exit. The Scottish experience is a case study for the benefit of exit. The Water Industry Commission for Scotland has come out in support. Macquarie has published a research note and it supports exit. I quote some investors with whom I have been in touch. One says, “Companies should be allowed to exit”. A second says, “If loss-making, it will be detrimental to regulated business to be forced in keeping them”, whereas a third says that it is eminently sensible to be allowed to do so. A final one states, “Anything that promotes competitive tension to improve the customer experience is positive”.

The chief executive of Ofwat, Cathryn Ross, on 3 December last year gave the following evidence to the Water Bill Public Bill Committee:

“Our view is that retail exit for incumbents is a critically important element of a functioning, effective retail market. Particularly important is the fact that if we do not allow incumbents to exit, essentially we are mandating inefficient retailers’ remaining in the market. That will basically be baking in cost that customers will have to pay for, which we can easily avoid”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 7.]

Even in your Lordships’ House in Committee there was harmony, agreement and support between, on the one hand, my noble friend Lord Crickhowell— the first, and indeed outstanding, chairman of the National Rivers Authority, appointed during privatisation —the noble Lord, Lord Whitty, and the Labour Benches behind him, and the noble Lord, Lord Cameron, from the Cross Benches, who would in fact go one step further in enabling exit and competition between householders as well as non-householders.

[Lord Crickhowell (Con)]

I am grateful to my noble friend for giving way and for the kind things that he has just said about me. I strongly supported him when he made an immensely powerful speech in Committee. The case he has made this afternoon is equally powerful and, in my view, unanswerable. I hope that the Government, even at this late stage, will listen to that argument. I assure him and them that, if they do not, I will support him in any further action that he deems necessary to get this matter through.

[Lord Moynihan]

I am very grateful to my noble friend for those comments. Indeed, I hope that through his intervention and through the remarks that I made, and indeed through the remarks that the noble Lord, Lord Whitty, made in Committee, my noble friend will determine to join these eminent ranks in support of creating an effective, competitive market for retail services with the intent of providing low-cost improved services to non-householders, because today we are focusing on businesses.

My amendment does not seek to persuade the Minister to introduce competition at this stage to householders, although there are those in your Lordships’ House who hope that, once successfully tested in the business sector, such a transition to competition in the householder market will be fully reviewed. I am proposing that the Secretary of State begins work on preparing regulations not in haste but ready for market opening in 2017. I hope that in so doing—this emphasis is really important—the Minister will provide customer protection and take into account the need for further work to ensure that the Consumer Council for Water is able to maintain its position whereby customer confidence in the water industry is significantly higher than in any other utility sector.

I met the council’s chair, Dame Yve Buckland, and its CEO, Tony Smith, yesterday and I listened carefully to their request to work with customers directly on retail exit—an area which, they freely recognise, requires far more work to be undertaken by them. They wish to review the experience in Scotland. They want to make sure that their customers—particularly the small businesses —are consulted and protected. They are right to do so. In accepting either of our amendments, the Secretary of State will have the time and opportunity to listen to their concerns, for he will need to ensure that all consumers are protected from unnecessary increases in price and from service reduction.

Perhaps I may help my noble friend with examples of the measures available to him to protect the business customers under consideration. He can insist on the full army of tools which already exist. Default tariffs can be set through price controls, ensuring price and service protection. New codes can be drafted to contain all necessary customer protections and to keep the system as simple as possible. Powers of the Enterprise Act can be used for consumer protection should issues go awry—for example, through a failed merger.

--- Later in debate ---

[Baroness Parminter]

My Lords, along with a number of colleagues around the House, I raised serious concerns in Committee about the potential for environmental damage resulting from the upstream competition proposals being agreed in advance of reforming the water abstraction regime. I will not repeat those this afternoon. However, I am very pleased to say that the Government have clearly listened to our concerns and are proposing a number of significant amendments to address them.

First, the Government propose to report in 2019 on progress in reforming the water abstraction regime. The Government’s stated aim, following the publication of their consultation on abstraction reform last December —which the noble Lord, Lord Whitty, welcomed—is to legislate early in the next Parliament and implement abstraction reform in the early 2020s. The report will therefore give Parliament an opportunity to scrutinise the management of the interface between what should be by then the two pieces of legislation and their implementation. We can then seek to ensure that their implementation delivers the desired outcomes for both customers and the environment.

I am also grateful that specific concerns that I raised about sleeper licences and bulk trading were heard. The Government have introduced amendments to require Ofwat to consult the Environment Agency or Natural Resources Wales before they issue the codes on bulk supply agreements and before allowing a water supply agreement between relevant parties and incumbent water companies. Equally, relevant parties will be required to consult before entering into bulk supply agreements, and Ofwat will have to take into account any response from the Environment Agency or Natural Resources Wales. In that regard, I do not agree with the noble Lord on the Front Bench opposite that these government amendments are weak. I know from my conversations with Ofwat, which did not want the amendments to be tabled, that it most assuredly does not see them as weak.

In advance of the abstraction regime being reformed, the Environment Agency is already seeking to vary and remove unsustainable existing licences. It will be helped in that by the Government’s removal in this Bill of a statutory right to compensation for a water company resulting from such modifications or the revoking of a licence. The Government have therefore gone a long way towards addressing concerns that noble friends and colleagues expressed in Committee. These proposals satisfy my concern that legislating now for upstream reform in advance of reform of the water abstraction regime could lead to an unsustainable increase in abstraction. Therefore, I would not support any further amendments being tabled by the Opposition Front Bench.

[Lord Crickhowell]

My Lords, I want to probe a little on the timing. I agree with everything that the noble Baroness has just said. For eight years, as chairman of the National Rivers Authority, I had to try to deal with this problem with rather less adequate weapons than the Environment Agency now has, so I welcome the steps that the Government are taking and have taken. I also want to see rapid progress made on the competitive regime, but there seems to be a very difficult timetable. We will have a report five years out on how abstraction is going, yet there will be legislation in the next Parliament which takes us a year further forward. I do not quite see exactly how the Government envisage progress being made on these two important priorities. I confess that I have been away abroad since Committee—I have been enjoying myself in the Galapagos—so my mind has not been on this matter, but I would be grateful if my noble friend could give us a little greater clarity on the timing of these two interlocking steps, on the way in which they are likely to relate and on how the legislative timetable is likely to fit in.

[Lord De Mauley]

My Lords, this has been another important debate on abstraction reform. It gives me an opportunity to declare another interest: that of a holder of an abstraction licence. Noble Lords have once again emphasised the importance of rapid progress in reforming the abstraction regime and expressed concern about the linkage to implementation of the upstream reforms in the Bill. I thank noble Lords for the knowledge, experience and constructive challenge that they have brought to the debate on this important matter. I have listened carefully to what they have said and I am left in no doubt as to the strength of feeling.

First, I assure noble Lords that the Government are fully committed to abstraction reform. The proposals in our consultation document on abstraction reform demonstrate just how seriously we are taking this, as well as the complexity of reforming such a long-established regime. Our proposals reflect the importance of abstraction reform for people and the environment and the fact that organisations and individuals across the country are dependent on access to water to live their lives and run their businesses.

I want to see a real improvement in the quality of water bodies in all parts of the country. That means we must take action to reduce overabstraction that damages the environment now and ensure we can continue to protect the environment and ensure access to water in the more challenging conditions we will face in the future. Abstraction reform and upstream reform are both designed to help to achieve that goal. While some fear that these could be conflicting mechanisms, I can assure noble Lords that the intention is for them to be entirely complementary in both design and implementation. I hope I can provide further reassurance on this, not least through the further amendments that we have tabled to Clauses 8 and 12 and a new clause before Clause 45.