Water Bill

Lord Whitty Excerpts

Monday 27th January 2014 Lords Chamber

[Lord Whitty (Lab)]

My Lords, I thank the Minister for a very clear, not to say dry, exposition of the terms of the Bill. I particularly thank him and his officials from Defra and Ofwat for making themselves available to so many of us in the run-up to the Bill and trying to explain some of its more obscure aspects.

I do not have the same interests as the Minister, in that I have taken the precaution of living on top of a hill. However, I have form. One or two noble Lords were around when I took the Bill that became the Water Act 2003 through this House. Since then, I am probably the only Member of your Lordships’ House who has served on the boards of both Ofwat and the Environment Agency, albeit rather briefly in the case of Ofwat, so I have some experience of this interesting industry. I am afraid that that experience leads me to conclude that the Bill is not really up to the job of sorting out a strategic future for the sector. However, I can tell the Minister that the Opposition will not fundamentally oppose the main elements of the Bill. We will be vigorously querying them, and will make some propositions, but the real problem I have with the Bill is what it omits.

In one sense, that is slightly surprising. As the Minister said, two years ago, admittedly under a different Secretary of State—one who actually believed that climate change was occurring—the Government produced a very good White Paper, Water for Life. That White Paper dealt holistically with water as a resource, as an environmental force—for good or evil—as an amenity and as an economic and infrastructure system. The White Paper was positively received by the industry, environmental groups, consumer groups, the regulator and politicians of all parties. It was therefore assumed that the Government would produce a Bill which implemented all elements of that strategy. Instead, the Government produced a much thinner Bill—thin in content rather than in volume, I have to say to the noble Lord, Lord Crickhowell. The initial Bill was even thinner and was roundly criticised by the Select Committee in another place under the leadership of the redoubtable Anne McIntosh MP. The Government then produced a slightly better Bill, which is what we now have. It went through the House of Commons fairly quickly and, just before Report, the Government introduced the key element, to which the Minister has referred, on flood insurance. We will be taking quite a rushed job on the Bill, but a number of issues need some pretty thorough examination.

The water system is one massive system, natural and engineered; the water industry is one massive industry, dominated by very large companies. The system has to be managed and regulated in a holistic way, but I am afraid the Bill only tinkers at the edges, important though some of those interventions are. So there are huge gaps in this Bill.

In terms of what is in the Bill, there are three main objectives. First, on flood insurance, as the Minister said, foremost in our mind must be the distress and suffering caused by the recent floods, and their impact on families, farms and businesses. Part 4 of the Bill sets up the Flood Re system, which the Minister described. I congratulate the Government, particularly the Minister’s former colleague, Richard Benyon, on reaching a conclusion with the insurance industry, which I know is not the easiest of negotiators. We will support the overall concept of Flood Re and the contingency provisions under the flood insurance scheme—my noble friend Lord Grantchester will expand on our position on that later on. Noble Lords will be aware that a number of representations are being made by groups that feel excluded from the scheme, and no doubt we will have an interesting time in Committee, but I strongly support the concept.

The second main element of the Bill is retail competition for non-domestic consumers, which is the flagship policy here. We support that objective—indeed, attempts were made to introduce competition in the 2003 Act and in the 2010 Act, but they never really materialised under that regime and only four instances ever occurred. However, in Scotland, where there is a different structure and a state-owned wholesale company, we have seen rapid development of a retail non-domestic market, which is working for the public sector, for businesses and for charities, particularly those which operate on multiple sites. They have seen benefits in terms of bills, water efficiency and customer service. Although only about 5% of non-domestic consumers have switched in Scotland, the very fact of competition has had a beneficial effect on the rest of the market.

However, we must also recognise the limitations involved. Theoretically, 1.2 million customers will now be able to choose alternative retailers, but, in practice, the option is likely to be most attractive to entities such as supermarkets which operate on multiple sites or to public sector bodies such as local authorities and universities which have a lot of bills that they would wish to consolidate. It is unlikely that there will be anything like 1.2 million people taking advantage of the market; the majority of small businesses, for example, are even less likely to switch—as we have seen from the energy market—than are domestic consumers. Although competition is important and puts an edge into the industry, we should not exaggerate the degree to which it is transformational.

Moreover, we have to consider carefully the effect on household consumers. Twenty million household consumers will continue to rely on regulation rather than competition to get them a better deal. We will have to strengthen protections in the Bill to ensure that domestic consumers are not disadvantaged by the fact that part of the non-domestic market is getting a better deal. The Minister gave an assurance to that effect in that Ofwat has the tools, which I think is how he put it, but those need to be strengthened and made clearer in the Bill.

Even where there is effective competition and some choice, the provisions do not fully deliver an effective, functioning market. I shall take just two or three issues. Entry into the market appears to be largely by negotiation with the incumbent company rather than by open and transparent price competition, as would be the case in most markets. Even more surprisingly, there is no provision for exit from the market. Surely provision for exit from the retail market by poorly performing competitors or incumbents is essential for a properly functioning market. Most stakeholders seem to favour providing for it, with safeguards to protect the consumer, so we will be looking at whether we should provide in the Bill for exit from the market. We also need tighter provisions on non-discrimination by incumbent companies to make this work at all. Therefore, we support the direction of travel, but there are a lot of details that we will wish to go into.

Thirdly, there is a resilience duty in the Bill. This caused a little bit of manoeuvring in the Commons and I am not entirely clear that the resilience duty that the Government have come up with goes as far as we would wish. Historically, there has been a dual system of regulation in water, with Ofwat being the economic regulator—sometimes very narrowly defining what that meant—and the Environment Agency being the environment regulator.

Synergy and cohesion have got better in recent years. Since 2003, Ofwat has had a secondary sustainability duty. Nevertheless, the record shows that Ofwat has in its price review tended to give greater priority to things that related solely to the economic side and less to what was needed for the environmental or resource-conservation side. We need to look again at that. That is why I think that green NGOs and many of our colleagues in the Commons were pressing for sustainable development, which is currently a secondary duty, to be elevated to a primary duty.

The resilience duty is, in a sense, the Government’s response to that. Resilience is undoubtedly important, and the Minister said that it will be interpreted in a broad sense, but it is a bit vague. Resilience certainly does not cover the range of subjects that sustainable development does, and it is still criticised by some NGOs. The Government have strengthened the position since they first introduced it into the Bill, and we need to take account of that, but we will still want to probe whether resilience is really the better expression or whether, as I suspect, it could exclude key aspects that are covered by sustainable development—especially, to take an obvious example, social sustainability, which is an important aspect of how the water market works. We intend to probe those issues in Committee.

That covers what is in the Bill, but there are some massive things which are not—two very large elephants in the room. First, there is the bizarre financial structure of the industry, which has been commented on in the press in a timely way in the past few days. Secondly, there is the management and regulation of the physical water system, the movement of water from precipitation right the way through our streams, rivers, culverts and pipes to our taps or to the ocean. We know that it is a huge and risky system—the past few weeks have told us that, and only a few months earlier we were talking about the scarcity of water in certain parts of the country. The existence of scarcity or excess crucially affects our ecology, our agriculture, our way of life and our communities. Those are huge issues; they were addressed in the White Paper, but not really reflected in the Bill.

I shall take the economic structure of the industry first. The Minister says that privatisation has been a success and, in the limited sense that we have had substantial investment, it has—and we do not want to jeopardise that—but this is an odd industry. It is dominated by regional monopolies which are themselves vertically integrated. Some of them have been subject to takeover and they are now mostly owned by overseas-based investment funds. I do not decry that, but it means that their structure for raising finance is odd for a public utility. They are also highly profitable. On some calculations, there has been a return of 17.5% on asset value since privatisation. They are, as the newspapers have pointed out in the past couple of days, very high payers of dividends, with nearly 90% of profits returned as dividends last year.

The sector is very highly geared, for the most part. On average, well over 70% of capital comes from the markets, not from equity sources, as was assumed when we first privatised the industry. The industry also has a fairly poor record on innovation, as some of your Lordships’ Select Committees have pointed out over the past few years. At the far end, over the past 10 years there has been a 55% increase in prices to the consumer. The industry has also been relatively poor, although improving, on customer service. That does not describe either a modern, dynamic, innovative market or an effective delivery mechanism for a general social good. Although delivery of investment has been important, those other aspects need addressing.

The system of regulation needs a pretty fundamental rethink. In the past few months, Ofwat itself has recognised the need to change. The regulator is proposing significant changes in the coming price review and has already implemented a significant improvement in consumer engagement. I welcome that, and the role of the Consumer Council for Water in that. In the price review, however, Ofwat is going to put less emphasis on capital expenditure and have more flexibility between different forms of expenditure, which I welcome. It is taking a longer-term view on investment and more emphasis is likely on interconnection, water efficiency and demand management and on environmental measures. I welcome pretty much all those Ofwat initiatives, but they are within a framework which does not necessarily push them in that way. The initiatives need to be embedded because they will be seriously challenged by some of the operators and undertakers within this industry. The system of regulation needs review and the Government need to be a bit more radical. They need to look at whether there are stronger measures which can ensure that the companies actually deliver, including perhaps addressing fundamental issues such as the proper and full separation of the wholesale from the retail market.

We also have a pretty odd way in which we pay for water, with most domestic consumers still operating on a rateable value which is several years or decades old. The result is that its affordability to our citizens and businesses is very much in question. In the household sector, more than 12% have very serious problems with affordability. The previous Government’s 2010 Act provided for social tariffs to make water more affordable to vulnerable families, but I am afraid that first the regulator and then the industry have been slow in taking them up. The Minister said that they will have them the next year or the year after, but the fact of the matter is that the record at the moment is not very good. If we add all the schemes together, including the WaterSure scheme which the Government promoted for large families or those with serious medical conditions, there are only 70,000 or 80,000 people covered in total. Yet from the figures which I just quoted, we know that there are about 2 million having problems with affordability. Since the companies appear to be so recalcitrant in coming forward, we will be pressing for a stronger move towards social tariffs and for some form of national affordability scheme to be introduced, to set targets for minimum standards and for the way in which companies treat their less well-off consumers.

There are also big problems with the water system itself. There is a huge loss and misdirection of water both in its supposedly natural movement, which is often in practice the result of human land management, and in the engineered part of the system. Inappropriate land management, deforestation at the top of water courses, the changing and dredging of natural watercourses and the loss of natural water meadows and flood soaks all have the effect of pushing more water downstream, just at the time when it should not be. Excessive man-made abstractions of water, currently and historically, threaten the system itself and some of our key geological features. For example, we are destroying our chalk streams from Yorkshire down to Dorset—a landscape and geological feature which is almost unique to England. In economic terms, excessive abstraction means not only not enough storage in the winter to provide for the needs of agriculture and society in the hotter months but that the whole management of the system becomes difficult. Meanwhile in the engineered part of the system, increased floodwater leads to sewage leaks, with their attendant risks, and increased leakage from the clean water system.

All those issues were covered in the White Paper, but they are not in the Bill. However, there is one thing in the Bill which threatens effective achievement of a better system of water management as a whole. That concerns upstream competition being provided for in the Bill before we have properly regulated and introduced a new system of abstraction reform. The present system of abstraction licensing is 50 years old and even then has grandfathered ancient rights. I have been arguing for radical abstraction reform for well over a decade. The Bill rightly ends compensation to water companies for the modification of abstraction licences, which is an issue that the Environment Agency has been trying to modify within the current structure over recent years.

The Bill provides for upstream competition to be introduced. The Government have said that this will not happen before 2020, but nevertheless to introduce upstream competition before we have actually reformed the extraction system is highly dangerous. Abstraction licences are not used to their full; only about 42% of water allowable under such licences is actually abstracted. That means that there is a lot of potential water to be abstracted under the present system. If we introduce competition and the ability to source that water differently, the effect may well be that we create scarcity in those areas where there is not already scarcity. It is already a problem that a majority of our water catchment areas are overextracted. Upstream competition and trading could work if there were a limit on abstractions, but until we get to a proper system I think that the Government are wrong to provide for upstream competition even in the way that it is provided for on a contingency basis in the Bill. It must be clear by the time the Bill leaves this House and goes on to the statute book that upstream competition is dependent on there first being a proper regime for abstraction; otherwise, we will have the worst of both worlds.

I hope that we return to many of these features in Committee and at subsequent stages, and I hope that the Government take note particularly of our concerns over abstraction reform at the top end of the system and affordability at the point where it reaches our homes.