Public Bodies (Water Supply and Water Quality Fees) Order 2012

Lord De Mauley Excerpts

Thursday 13th December 2012 Grand Committee

Moved by

[Lord De Mauley]

That the Grand Committee do report to the House that it has considered the Public Bodies (Water Supply and Water Quality Fees) Order 2012.

Relevant documents: 9th Report from the Joint Committee on Statutory Instruments, 13th Report from the Secondary Legislation Scrutiny Committee

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

My Lords, the order is made under the Public Bodies Act 2011 to modify the funding arrangements for the Drinking Water Inspectorate. The order will enable the inspectorate to charge water companies for the regulatory activity from which these companies benefit.

The Drinking Water Inspectorate is the drinking water quality regulator for the water industry, providing independent assurance that water supplies in England and Wales are safe and that drinking water quality is acceptable to consumers.

The inspectorate is currently funded entirely by Defra, with the costs of its operation falling to the taxpayer. However, a significant proportion of the inspectorate’s activity relates to scrutinising the way in which water companies meet their regulatory requirements through technical audits and inspections.

The proposal to introduce a charging scheme was first raised in the consultation on the Flood and Water Management Bill in 2009. The proposals were not included in the Act. The charging scheme will enable the inspectorate to recover the cost of its regulatory activities from water companies. This is considered to be a much fairer way of recovering costs. It will make the inspectorate consistent with other related water regulators such as Ofwat, the Environment Agency and the Consumer Council for Water, all of which charge for their regulatory activities.

The scheme will not enable the inspectorate to recover all its costs from industry: it will not cover the costs of prosecutions and court-related activity associated with enforcement orders and other sanctions.

Defra will continue to fund the inspectorate for this work and the inspectorate will seek to recover these costs through the court system. Defra will also continue to fund the activity to support drinking water policy such as the advice the inspectorate provides to Defra on scientific and technical matters.

The water industry in England and Wales values the activities of the Drinking Water Inspectorate very highly and companies are supportive of this proposal. The inspectorate has consulted with water companies to seek their views on how a charging scheme could identify the cost of regulatory activities. The outcome is a charging scheme that will be based on two elements: part of the fee will be based on the number of sample results checked and the other part based on the time taken in auditing water supply arrangements, investigating incidents and investigating consumer complaints.

I consider this approach to provide a fair means to allocate the costs while keeping the charging scheme reasonably simple to administer. The rates to be applied to determine the annual fee for water companies will be fixed by the chief inspector and subject to approval by Ministers.

The order will introduce charges for water companies which supply wholly or mainly in England. A similar order has been approved under the Public Bodies Act 2011 by the Welsh Government, which will apply to water companies that supply wholly or mainly in Wales.

The benefits of this scheme are twofold. Allowing the inspectorate to charge the water industry for its regulatory work will save the public purse around £2 million per annum. The introduction of a charging scheme will also provide an incentive for water companies to review their procedures for water safety management.

In its consideration of the order, the Secondary Legislation Scrutiny Committee cleared the draft order but requested clarification of the way the order promoted effectiveness and economy in the delivery of the inspectorate’s regulatory functions. I am happy to provide that clarification now.

The order will enable the inspectorate to assess and improve its effectiveness by providing transparency in the cost of the regulatory functions it delivers. This will enable direct comparison of the effectiveness of the inspectorate compared with other water regulators.

The order will also assist the promotion of economy by providing an incentive for water companies to consider the value of the regulatory activity provided by the inspectorate against other options for the management of quality assurance. An example of this is where water companies now attain accreditation from UKAS which undertakes technical audits of laboratories. The inspectorate has an agreement with UKAS which means that it does not routinely inspect laboratories which have UKAS accreditation. Transparency of costs will allow water companies to compare the services provided by the inspectorate with other accreditation bodies which offer audit and quality assurance services.

I hope that the Committee will agree that the introduction of a charging scheme will provide transparency of the cost of regulatory activities and will assist in the long-term effectiveness and economy of activity to safeguard drinking water. I beg to move.

[Lord Grantchester]

I thank the Minister for his introduction and explanation of the order. I will not detain the Committee for long, as it seems largely straightforward.

The issue is the switch of payments for the regulatory function of the Drinking Water Inspectorate, which will be made in future by customers rather than by the taxpayer, and how this will work. The Minister has explained that the Public Bodies Act 2011 enables him to change the funding arrangements to reflect the fact that if an industry needs regulation in undertaking an activity that could cause adverse effects in others, then the industry should face the regulatory cost. There is no more important product than safe, clean, hygienic drinking water. The change will comply with the Hampton review recommendations for better regulation and with the Defra charging handbook strategy aims. It will bring funding into line with that for other water regulators, such as Ofwat and the Environment Agency.

The new system will ensure that regulatory costs are recovered in proportion to the individual relative regulatory burden, serving as an indicator of the relative efficiency and effectiveness of each water company or supplier. Furthermore, only one of the 21 responses from the 33 key stakeholders consulted did not support this policy change. I note the proposed charging system will apply to all water companies and that none is classified as a micro-business, with the result that there are no discriminatory burdens that will weigh disproportionately.

The cost of the regulatory function of the inspectorate is in the round rather small, and the Minister may well say this is a tidy-up exercise, with the modest cost to consumers judged to be more than outweighed by the non-monetarised benefits already highlighted. Nevertheless, I would like the Minister to expand where he can on some of the potential implications and the public information for customers.

The Explanatory Memorandum explains that the total charge being transferred from taxpayers to customers amounts to £1.9 million, less than a 0.1% increase to most individual bills, or around 15p per annum. The 13th report from the Secondary Legislation Scrutiny Committee updates this figure to include unmetered and metered households to produce an estimate of 9p or 10p per annum. While noble Lords will not be expecting front page exposure in the Daily Mail of “the thin end of the wedge” even if charges were to increase, can the Minister say what would trigger concern and action on any report to Ofwat? Will Ofwat’s approval be required for all and any increases? Will it be looking at cost control and cost-cutting measures if it is to address the Secondary Legislation Scrutiny Committee’s concern that the change in the charging system does not appear to promote economy in the inspectorate’s delivery. The scrutiny committee had asked for more clarity on how the charging structure will promote this effectiveness and economy, and I thank the Minister for his further explanation in his introduction of the order.

In the Minister’s officials’ meeting with the industry has any discussion taken place on how water companies will spread the charge across their customer base? Will the charge be made per customer bill, or will it be volume related, a question especially pertinent to metered supplies and high-volume commercial operations? Will there be consistency across the regions, will intercompany performances be monitored and published, and will this include Wales?

Will the Minister indicate whether the water companies will be highlighting the admittedly small charge with a separate line on the face of customers’ bills, even if only annually, and therefore fulfilling the very reason to make the charging change? No doubt this will require public information arrangements to be made for customers.

Finally, water affordability is becoming an ever increasing concern to more and more households. While the Minister may be reluctant to go into detail today on the proposed social tariff scheme, will he at least confirm by stating the commitment that this fee will qualify to be included under the social tariff umbrella?

I have no intention not to agree with this order. But if the Minister could indicate any understanding on how this change will be implemented, it will be of great interest to consumers.

[Lord De Mauley]

My Lords, the Government are committed to everyone in England and Wales having access to clean, wholesome drinking water and keeping water bills at an affordable level. Approval of this order will enable the Drinking Water Inspectorate to recover the cost of regulatory activities from the water companies which benefit from them. This change in funding will result in a saving, as I said earlier, of about £2 million to the taxpayer each year and may increase the average annual customer bill by about 10p, as the noble Lord, Lord Grantchester, mentioned. He asked about the way in which the charge will be passed on. Explicitly in answer to his question, Ofwat must approve any passing on of charges. Therefore, if water companies propose an inappropriate means of passing on charges, it would have the chance to object.

The noble Lord, Lord Grantchester, asked about the consistency of how charges will be passed on. For instance, will it be a separate line on the bill? On the one hand, that is up to the companies to put forward a proposal but, on the other hand, how it is dealt with is subject to Ofwat approval. It will be included in the social tariff scheme.

To the extent that I have not answered the noble Lord’s questions, perhaps I may write to him.

[Lord Grantchester]

My Lords, the Minister has done very well in answering all the questions but one, which was regarding Ofwat having to agree to any changes and increases in the charges from year to year.

[Lord De Mauley]

My Lords, the cost will not be subject to Ofwat control but will require approval by Ministers. I hope that that satisfies the noble Lord. On the basis of that, I thank the noble Lord for his questions and I ask the Committee to agree the order.

Motion agreed.