Water Bill

Lord Moynihan Excerpts

Monday 27th January 2014 Lords Chamber

[Lord Moynihan (Con)]

My Lords, 25 years ago I had the privilege of being one of the Ministers taking the original water privatisation Bill through the Commons. I spent over 100 hours in Committee defending a measure widely reported at the time as being the most unpopular privatisation to be undertaken by the late Lady Thatcher’s Government. As soon as the 10 existing water authorities were replaced with 10 public limited companies and the National Rivers Authority, the debate about abstraction licensing began in earnest. Like my noble friend Lord Crickhowell, I note that it shows little sign of abating 25 years on.

I make no apology for having spent many hours during 1988 and 1989 seeking to persuade colleagues in another place of the merits of a new economic theory—the much debated mechanism of comparative competition—which, once on the statute book, Ofwat successfully brought to life by measuring and comparing the efficiency of each integrated water company, incentivising the least efficient companies to narrow the gap. The Bill before the House today builds on the discipline of the marketplace by providing a positive incentive to the industry to continue to be efficient and competitive. It provides a constant pressure to innovate. Market reform is welcome and timely, and I congratulate officials and the ministerial team on making significant progress in that direction.

However, as my noble friend Lord Selborne and the noble Lord, Lord Whitty, have mentioned, one market inefficiency is the current proposal to prevent retail market participants from exiting the market. Successful markets require the right of both entry and exit. The argument that incumbent companies will focus less on their household customers if the non-household customers are separated out is just not borne out by the experience in Scotland, where Scottish Water has markedly improved its services to households and reduced its wholesale costs since non-household customers were separated into a retail subsidiary.

The Water Industry Commission for Scotland, which is the economic regulator in Scotland, has demonstrated that there has been a net benefit to Scotland from that worth over £140 million. Adding estimates for dynamic efficiency savings, WICS estimated that legal separation of Scottish Water’s retail business and non-household competition has a positive net present value of around £330 million. Business Stream has improved both the quality and the price of retail services: one-third of customers have tendered their water contracts and almost 60% of customers have secured price discounts. Many more customers receive new and enhanced services, in particular, helping them to save water.

If you extrapolate that across England, the indicative net benefits could be well over £1 billion. JP Morgan has gone further, estimating that Severn Trent Water’s non-household retail business alone could be worth around £116 million. Scaling that figure up across both household and non-household retail businesses across England and Wales would imply that separated retail businesses could be worth over £4 billion.

What are the benefits? They are clear: for example, increased productivity efficiency through renegotiating contracts and streamlining processes; and increased dynamic efficiency, with the development of new and better ways of working—for example, through developing new billing systems and introducing smarter meters and through the growth of more efficient companies and the replacement of the less efficient ones. The ability of multi-site customers to contract with one or two national retail service suppliers could lead to a reduced number of bills and administration costs and improved comparability of consumption information. For example, reducing one customer’s 4,000 paper bills each year to a national electronic bill could save in the region of £80,000 to £200,000 for that customer alone.

There are environmental benefits through competing water retail service companies having new incentives to give customers what they want, including helping customers to make savings by using less water, identifying leaks rapidly and, above all, reducing water consumption. By reducing water demand and providing the knock-on benefit to the country for water conservation, this therefore delays the need for new water supply infrastructure. Similar benefits are possible on the wastewater side by encouraging customers to make use of water harvesting and sustainable drainage solutions, which would free up capacity in our sewers and makes them more able to cope in extreme weather conditions.

However, for all this to succeed, there must be market provision for the failing expensive retailers to exit the market. What other private sector industry restricts exit, as proposed in the Bill? I hope that at an early point in Committee the Minister will respond to the rare alliance of the water companies, academics and commentators, the regulators and the Defra Select Committee, to allow for exit in the retail services market.

Given that the noble Lords, Lord Selborne and Lord Cameron, have both raised a number of points I wanted to cover, including the importance of de-averaging, I would be interested to know of the Minister’s views on two further issues. First, I am concerned by the desire of both the Government and the Opposition to add additional duties to Ofwat’s remit. The sectoral regulators exist to perform specific functions that are generally economically focused. Ofwat was first established to protect customers, because of the natural monopoly nature of the water and sewerage sectors after privatisation, and to ensure the continued delivery of the essential services those companies provide. In contrast, organisations like the Environment Agency exist specifically to protect the environment. Ofwat’s primary statutory duties therefore require it to balance keeping customers’ bills down with service quality at an acceptable standard while still securing that companies have enough money to continue to operate and deliver those essential services.

Economic regulation works best when the focus of the regulator is narrow and targeted: to protect consumers and to ensure that investors can earn a fair return from an efficient company. To introduce a new primary duty around resilience, or, as we have heard proposed, to elevate the sustainable duty to a primary duty, could suggest that the Government wish to water down those core functions. That was precisely why a similar change to Ofgem’s duties was resisted during the passage of the Utilities Act 2000. My concern is that the new duties and greater role for the Secretary of State will inevitably increase the level of political involvement in the activities of the regulator and will water down Ofwat’s focus on protecting customers.

To be effective, a retail market needs all participants to have access to clear and accessible prices, clearly defined and common levels of service and standard terms and conditions. We must ensure that incumbent water companies are obliged to deliver a genuinely level playing field and that the market codes are common for all participants in any particular appointed area and do not have to be negotiated separately. Some licence changes will inevitably be required to promote a level playing field in the market between exiting companies and new entrants.

My second concern is that existing legislation does not provide Ofwat with the ability to modify water company licences on the basis of majority agreement, as occurs in other regulated utilities. Instead, there is a requirement for the individual agreement from all monopoly companies—an approach which allows monopolies in the sector to block sensible changes that would deliver a more effective market and benefit customers.

The impact of this absence is perhaps best illustrated by my example about retail exit. The OFT recently described “exit” as a vital part of an effective market. This perhaps explains why 76% of water companies support voluntary retail exit. However, this statistic is important, because it also reveals that 24% of companies are indifferent or opposed to something that will support the effectiveness of the market. The point I want to make is that, under the current arrangements, 24% of companies could stop progressive changes. This is because each individual company would have a substantial influence over the provisions that Ofwat needs to put in place to establish a level playing field for all market participants. This change was a specific recommendation made by David Gray to the Government when he reviewed Ofwat in 2011. It is disappointing to see that the recommendations of a regulatory expert have not been taken forward in this Bill.

I agree with the view of the noble Lord, Lord Whitty, that the proposals for Flood Re are a much needed and important step forward. I hope that, when we look at the detail, my noble friend the Minister will be able to reflect on some of the key issues surrounding the recommendations being made to the House. Initially promoted as all embracing, the Flood Re scheme was expected to exclude only a few households, but the latest estimate is that some 9,000 households in England and Wales will not be covered by the Government’s flood insurance scheme because their properties are either too expensive or were built after 2009.

The exemption for council tax band H opens the scheme to the same criticism levelled by many in your Lordships’ House against the putative wealth tax, whereby an increasingly elderly population, including many living in large houses on modest incomes, are excluded not on their income but on the size of their properties. That “mansion tax” was covered by Anna Walker’s review in 2009—which, by the way, I recommend to your Lordships as essential reading in this context—which recognised that the rateable value of a property bears little relation to a customer’s ability to pay. For this reason I hope we will be able to explore the band H exemption in Committee.

All of us are interested in parliamentary accountability. For example, the decision to require the setting of the primary levy at £10.50 to be subject to affirmative resolution, but the setting of the potentially far higher top-up levy for the one in 200 year flood—costed at £2.4 billion—to happen without parliamentary scrutiny is surprising. Surely a flood of such magnitude would warrant full parliamentary scrutiny? For that reason amongst others, I believe we should seek a requirement on the face of the Bill that an affirmative resolution should be required in both cases.

Then there is the apparent lack of a well considered water abstraction framework. In this context, further debate is needed both on the Environment Agency’s powers to review applications for such licences and on the conundrum—highlighted by the noble Lord, Lord Whitty—of the impact of introducing competition before abstraction reform.

Turning to small businesses, I note that none is to be protected, on the grounds that they face a more sophisticated market in which to buy insurance cover than households face. Yet many insurance businesses, serving communities in flood-prone areas of the country, can equally ill-afford exorbitantly high premiums, if indeed any insurance cover is available to them at all. As John Allan, national chairman of the Federation of Small Businesses, recently warned, one in five small companies were hit by the flooding in 2012, and many more have been battered by nature into financial submission over recent weeks. The British Insurance Brokers’ Association has understandably called for newly built and expensive properties to be covered rather than face the 2009 cut-off.

Also, who is to define which domestic properties will fall into the category of those “at the very highest risk”. From the introduction of the new scheme, how regularly do they need to be flooded over time to be excluded from Flood Re?

Whilst the issues raised are relevant to our consideration of the Bill, it is nevertheless welcome legislation capable of delivering substantial benefits to customers. However, buried in the 230 pages of this Bill are many areas which I believe require close scrutiny in your Lordships’ House. I look forward to hearing my noble friend the Minister’s reflections.