My Lords, the Government have prioritised growing the economy and improving the environment. This Water Bill contributes to both of these priorities. There are two important parts to the Bill; first, to reform the water industry to ensure it is fit for the long term, and, secondly, to provide a solution to deal with the availability and affordability of flood insurance for households at high risk of flooding.
Recent events have reminded us all just how devastating flooding is for those affected. They also remind us how important it is to help manage the financial impacts of flooding. Perhaps at this point I should declare some interests. A tributary of the River Thames runs through my farm. I have an abstraction licence, a bore hole and a recently flooded house, as well as a share in a lake. These are clearly issues close to my heart.
The Water Bill has three aims: to build the resilience of our water supplies without damaging the environment; to encourage and contribute to economic growth; and to give customers greater choice. These are important issues for noble Lords across the House and I look forward to discussing them in the coming weeks. I am very grateful to noble Lords who have already taken the time to talk to me about these aims. Their views have given me real food for thought and I will continue to work with them to try to address their concerns and answer their questions. I look forward to a similar, strong level of engagement during the Bill’s passage through your Lordships’ House. I value enormously the debate and scrutiny that this Bill will receive in this House.
First, I shall set out why this Bill is before us today, the issues we are addressing and why it is important. Water is essential to life. We need clean and plentiful water resources to supply our homes and to support a growing population and economy. Water is also critical for a healthy and flourishing natural environment. That natural environment is the essential foundation for sustaining our economy, for prospering communities and for our individual well-being.
The 2011 water White Paper, Water for Life, set out the Government’s ambitions for a sustainable, resilient and customer-focused water sector. It outlined the plans for delivering substantial improvements in the health of our rivers through improving water quality and tackling unsustainable abstraction. Let us be frank: we must acknowledge that a growing population and the impacts of climate change pose risks to our water resources and the ecosystems they support. We need to take these challenges seriously to avoid causing irreparable damage to our environment.
The White Paper set out the challenges for the water sector through to 2050. This Bill is one part of our policy response, which is designed to drive long-term changes to ensure a secure and sustainable water system. Delivering this long-term change requires action by government, Ofwat and the Environment Agency, the water sector and users of water across the economy. We have put this challenge at the centre of the policy framework we have set for Ofwat through the strategic policy statement. We are reinforcing that through the new resilience duty in this Bill.
We are driving change in water companies through our guidance on water resource management planning. This Bill includes a new power for the Secretary of State to direct in advance the level of resilience a water company must plan for. We are using the Bill to extend competition to drive innovation, bringing new players with new ideas into the sector. Competition will keep a downward pressure on the costs customers pay. This is about safeguarding our water supplies for the long-term future. Ensuring a resilient supply system will require action to develop new water resources and use them in a different way, and to manage demand.
The Bill will change behaviour and change the focus of the water sector. It will hardwire future resilience into its regulatory framework. This is resilience in a broad sense. It encompasses water networks and water resources. It includes the environment from which companies draw their supplies. Resilience was a central theme of our White Paper and is a key theme of the Water Bill. We will return to it time and again in our consideration of the Bill.
We must ensure that our infrastructure can deal with more extreme weather. The floods and indeed droughts we have experienced in recent years illustrate the risks we face. In 2012, one in every five days saw flooding but on one in every four days we were in drought, putting our water supplies under great pressure. The water White Paper recognised these challenges and set out the Government’s strategy for a sustainable and resilient water sector. This Bill is part of our plan.
Let me give your Lordships an example of action we are taking outside the Bill. Resolving the issue of unsustainable abstraction from our water resources is a priority. That is why we are taking action now, including in this Bill, and developing detailed plans for reform. We have intensified our work to tackle the overabstraction currently damaging our rivers by varying and removing licences. We will be bringing previously exempt groups into the system in the near future.
The Environment Agency has reviewed thousands of abstraction licences and has changed about 80 of them, returning 75 billion litres of water per year to the environment in England. That is equivalent to the annual average water use of a city larger than Birmingham. Over the longer term, we are reforming the abstraction regime to make it more flexible and resilient to future challenges. We published our consultation on future options in December.
The Government are absolutely committed to early legislation to deliver abstraction reform, but we have to get it right. The Government are acting in a wide range of ways as part of a strategy to secure the future of our water sector. With this wider context in mind, I should like to talk about the things that the Bill before us seeks to achieve. It will make a vital contribution to addressing the challenges that I have highlighted.
I turn, first, to reform of the water industry. The Bill will remove the regulatory barriers that discourage or prevent new firms competing in the water industry. This is not competition for competition’s sake. It will provide real choice for non-household customers and bring new entrants into the market. Competition between companies will drive improved customer service as companies will need to work harder to attract and maintain customers. As we go forward, this competition will exert a downward pressure on bills for all customers.
In the two decades since privatisation, the sector has attracted more than £116 billion in low cost investment. Privatisation of the water industry has been successful in attracting investment that has improved infrastructure and produced cleaner water supplies. The importance of the stability of this investment—the stability of the market—cannot be overstated. We must maintain the attractiveness of the water sector. We are talking about evolutionary change. We have been careful not to risk stability by forcing through sudden and dramatic changes.
The Bill seeks to build on the strengths of the current regime, using enhanced competition to drive improvements for the benefit of all customers. For example, the Bill will make it easier for water companies to trade water with each other, offering alternative sources of water to companies, which could be crucial, for example, in the case of drought.
We are making it easier for new businesses to enter the water market to provide new sources of water or sewage treatment services. We are making developing new sources of water, and selling it to water companies, easier and more attractive for landowners by creating a regulated market. We are also making it easier for innovative businesses to find different ways to treat and dispose of wastewater and sewage. This could include recycling and reusing wastewater as a new water resource, or using sewage sludge for anaerobic digestion rather than landfill.
There are some exciting and innovative things happening in our water sector. We are already seeing the first signs of a competitive market. In September last year, First Milk became the first multisite customer to switch to Severn Trent Costain. The two companies are working together to improve First Milk’s water efficiency and lower its environmental impact. These opportunities are limited at the moment because they are open only to the largest water users. The Bill is designed to encourage precisely such innovation by developing the market further.
The Bill will allow all businesses, charities and public sector customers to switch their water and sewerage supplier. This is a significant reform that will bring significant gains for multisite customers—such as hospitals and supermarkets—which could save thousands of pounds in administration costs by dealing with only one water company across their estate.
Competition in Scotland is delivering real benefits to customers and to the environment. The public sector in Scotland is forecast to save £36 million over four years, thanks to better water efficiency and discounts.
Competition will benefit the environment more widely. Water companies will offer better water efficiency advice and other services to attract customers, such as smart metering and improved customer service. This is where we expect to see knock-on benefits for householders. Water companies offering improved customer service and better awareness of water efficiency measures will also be serving household customers. All customers will benefit as the sector becomes more innovative and efficient at what it does. Householders will not subsidise the costs of increased competition. Ofwat has confirmed it has the tools it needs to ensure this. The Government’s charging principles also make it clear that the protection of householders is fundamental.
I should like to talk about affordability for households. We are all conscious of the impact of water bills across the country. It is not possible for us to discuss a Water Bill without mentioning water bills. Let us be clear. Water is a price-controlled sector. Ofwat sets an overall cap on the total amount that each water company can recover from their customers. It is Ofwat’s responsibility to ensure both that charges are fair and that the companies are able to finance their operations.
Ofwat estimates that the current price review could reduce pressure on bills by between £120 million and £750 million a year from 2015. Water companies themselves are taking action. A number of companies have already committed to keeping bills below the price cap for 2014-15. Water companies already help households struggling to pay their bills and most are planning social tariffs for 2015 that are designed to reflect local circumstances. It is important to recognise that the independent regulator is doing its job.
Water companies have reacted well, and that is the way the sector should work. Too much interference from Government would undermine the principle and advantages of independent regulation. The Government’s approach on this issue is a responsible one. A stable, independent regulatory system is critical to keeping bills affordable. Small changes to the industry’s financing costs can have a significant impact. A 1% increase in the cost of capital can add £20 to customer bills.
The Government are tackling affordability over the longer term. Our market reforms will exert a sustained downward pressure on water bills. Through this Bill, we are also taking important steps to address the affordability of flood insurance for households in areas at high risk of flooding. I know that future arrangements for flood insurance are of great interest to noble Lords. The recent extreme weather has served to highlight the important role that the insurance industry plays in helping people to get back on their feet after flooding. The measures in this Bill bring forward powers to provide affordable insurance for those at high risk of flooding. Both Government and the insurance industry recognised that there was a need to bring forward new measures following the expiry of the statement of principles agreement between Government and the insurance industry, which came to an end in June 2013.
Our preferred approach, a reinsurance scheme which is known as Flood Re, will limit the amount that high-risk households have to pay on the flood insurance element of their premiums and excesses. The effective limit on the premium would vary according to council tax band, rising for more expensive properties, which means that benefits will be targeted towards lower-income households, providing more support for those who need it the most. To fund this, an industry-backed levy would be introduced. It is initially expected to be £10.50 per policy. The Association of British Insurers has assured us that this will be achieved without increasing bills for those people at low or no risk of flooding.
The Flood Re scheme is designed to be industry run and led. Our ambition is that it will be up and running in 2015 and the insurance industry together with Government is working hard to achieve this. Insurers have agreed to continue to meet their commitments under the 2008 statement of principles until the Bill has passed through Parliament and Flood Re has been set up.
Although Flood Re is our preferred approach, we are seeking reserve powers to provide affordable cover if Flood Re should prove unworkable or prices in an open market prove unacceptable. Having a fallback means that customers can have confidence that the issue is being addressed. I also take this opportunity to draw noble Lords’ attention to the fact that arrangements for flood insurance are designed to be transitional measures. Over time, there should be a gradual transition towards more risk-reflective prices, based on robust evidence of local risk, to increase the incentives for flood risk to be managed over the longer term.
The Water Bill will prepare our water sector to face the challenges of the future. There will be greater choice for customers, leading to improved efficiency, more innovation and better levels of service. The Water Bill will put in place measures to ensure a future with resilient water resources and an improved environment, as well as ensuring that householders at high risk of flooding can access affordable flood insurance into the future. With these principles in mind, I beg to move.
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.
My Lords, I have neither the interests that the Minister had to declare nor the form of the Opposition Front Bench. Indeed, this is the first Bill that I will be taking through this House on behalf of the Liberal Democrat group. I may not have the interests or the form but I certainly have the passion to ensure that the Bill delivers to meet the challenges that our water resources currently face.
Only one in four of our rivers and lakes is a fully functioning ecosystem. Equally troubling, many of our water supplies are under pressure from unsustainable levels of abstraction and the combined effect of climate change and a growing population. Liberal Democrats accept that each generation is responsible for the fate of our planet so it is no surprise that we want to protect natural resources, on which future generations and economic prosperity depend. We therefore support the Bill, which sets the framework to improve the health of our precious lakes and rivers while keeping water available and affordable.
We are members of a coalition Government so of course there are areas where we would like to see the Bill go further. Opening up the upstream water market should go hand in hand with the reform of the abstraction licensing regime, rising demand for water should be tackled by greater metering and affordable flood insurance should equally help to build up our resilience to future flooding. These are areas that I will be seeking to strengthen in the Bill through clarification and amendment.
I credit Ministers who have gone a long way to meet the widely held aspirations for a stronger commitment to sustainable resource management in the remit of the water regulator, Ofwat. The introduction of a primary duty to secure the long-term resilience of water supply and sewerage systems is significant, and made all the stronger by the new Minister, Dan Rogerson, during the Bill’s passage in the Commons. To make crystal clear the Government’s intention to protect our natural resources, I would hope that Clause 24 could be amended to oblige rather than invite future Governments to take into account social and environmental matters when drawing up future strategic priorities and objectives for Ofwat. I invite Ministers to reflect further on that.
It is a disappointment that the Government are not legislating now to reform the water abstraction regime. The current system, in place for more than 40 years, has left ecosystems damaged. As the House of Lords EU Sub-Committee D’s 2012 report into EU freshwater policy said, and I must declare an interest as a member of that committee,
“delaying this reform for at least 15 years fails to respond to the urgency of the situation”.
Like the Opposition, we on these Benches think that without the proposals for abstraction reform running in parallel with those that create a market for trading water, there is significant risk to our scarce water resources. The Government’s consultation document on abstraction reform confirms as much, saying:
“Significant volumes of water are licensed but unused. If this water is used, for example, as a result of increased trading in a reformed system, this could cause environmental deterioration”.
Equally, the Environment Agency has identified a large number of catchments where increased trading could leave less water in river or groundwater than is needed to maintain required environmental standards.
The Government so far have committed that the timetables for both reforms are “likely to be broadly similar”. We need assurances that proposals for upstream reform, which are in the Bill and which could come into force by 2019, will be fully aligned with reform of the abstraction regime, which is not legislated for. In the absence of the Minister being able to give such assurances, there must be further environmental safeguards put in place prior to the introduction of upstream competition.
Liberal Democrats support the proposals to open up retail competition in the business market which has worked so well in Scotland, saving money for businesses, charities and public authorities with multiple sites and enhancing water resource management. However, in Committee we will seek clarification over the proposals to open up the upstream wholesale market to competition. While this may make trading between water companies easier, this theoretical market model seems to include the potential for the de-averaging of prices and currently lacks parliamentary scrutiny of central elements, such as the setting up of the market operator.
Managing water resources for the long term has to take account of affordability for consumers now, with more than 2 million households currently spending more than 4% of their income on water bills. This coalition Government are to be applauded in getting more families on low incomes out of paying tax to boost the money they have to meet household expenses. The water companies could do far more to bring those household expenses down by more firmly tackling bad debt which adds £14 to all our water bills. Recognising that finding non-payees is critical and that 80% of them are in rented households, a voluntary database for landlords to register tenant details will soon be introduced. In Committee in the other place, Water UK expressed the view that a voluntary approach simply does not work, a view echoed by the EFRA Select Committee. The evidence of Northumbrian Water which has had such a website for two and half years shows that only 7% of landlords have registered, and they were the landlords who were already committed to tackling the issue.
Why are the Government, unlike the Welsh Government, not implementing the bad debt provisions in the Flood and Water Management Act 2010 which would make compliance with the database mandatory when such a move could help company debt recovery and bring household bills down? Do the Government support the fixing of the date for implementation of those proposals, should the voluntary database fail to work?
The Bill rightly seeks to build up our national water resources, but unlike the water White Paper, there is insufficient focus on the equally important issue of demand management. The Government argue that this can be pursued outside legislation, and of course it can. Indeed, it is good to see the recent changes Ofwat has made to its calculation of a total expenditure approach which should incentivise water companies to use demand management and green solutions such as water catchment management as opposed to capital investment, but we need leadership on metering to help tackle the demand for water, and such leadership should be reflected in this Bill.
In the UK, every person uses about 150 litres of water a day, which is one of the highest levels in Europe. Anglian Water confirms that households which are metered use 10% to 15% less water, yet less than half of the country is presently on a water meter, and current water company plans aim to reduce water usage by just 5 litres a day per person by 2020. Metering gives consumers greater control over their water consumption and the chance of improved affordability. It also helps water companies target households using large amounts of water, provide water efficiency support and tackle leaks. The case for smart water metering, combined with advice on how to reduce water usage and social tariffs which minimise affordability issues for disadvantaged heavy-use households, is strong. The independent Walker review in 2009 recommended a widespread switchover to metered charging. This conclusion was supported by the EFRA committee and more recently, at Second Reading in the other place by the former Defra Minister, the honourable Member for Newbury, who called for a possible legislative stimulus for metering, adding,
“knowledge is power for households”.—[Official Report, Commons, 23/11/13; col. 79.]
The Government’s response in the other place was that companies might invest a lot of money in meters that,
“could be spent on other infrastructure”.—[Official Report, Commons, Water Bill Committee 10/12/13; col. 164.]
Surely this Government believe it is for companies to decide their own business priorities within the framework set by government and the regulator. At present, if a company wants to consult its customers about introducing compulsory meters, it cannot unless the Secretary of State determines that either the whole or part of the area of that company is one of serious water stress. Location should not be a bar to action, and so I will table an amendment to the Bill to remove this restriction on business and send a strong signal to water companies about moving towards universal metering.
Like many in the House, I feel deep sympathy for those who, as a result of recent flooding, face the worry, upheaval and stress of rebuilding their lives. I am sure that we will hear more about the impact of flooding in Somerset from my noble friend Lady Bakewell of Hardington Mandeville later. The fact that the Bill guarantees affordable flood risk insurance to all householders is therefore extremely welcome and Ministers are to be congratulated on negotiations with the insurance industry which could deliver this.
Flood Re will be a private sector body handling public money and, as such, its aims should clearly reflect the need to act in the public interest and to incentivise householders to reduce their flood risk over time. By amending Clause 51 in this way, we can transition to a stronger place at the end of the scheme’s 25 years. By doing so, it will reflect the Liberal Democrat view that to successfully manage flood risk we need a greater people and community focus, not just a focus on institutional responses, with their infrastructure plans for flood defences and installing huge pipes. Moreover, given that a number of new clauses were added in Committee in the Commons and therefore lacked pre-legislative scrutiny, I and my noble friend Lord Shipley, who sadly cannot be here today, look forward in Committee to teasing out a number of questions about Flood Re’s operation and the ability of key agencies and local communities to respond to the flooding challenges which the adaptation sub-committee of the Committee on Climate Change recently set out so clearly.
In conclusion, Liberal Democrats strongly welcome the Bill. It will help to meet the Government’s stated goal of securing the most efficient use of scarce water resources. I have, however, highlighted a number of areas which I hope will be addressed in Committee, and look forward to participating enthusiastically as the Bill passes through this House.
My Lords, I rise with some trepidation because, although I can bring something to the discussion here on matters to do with the broad spectrum of water, I feel that I am a minnow in the presence of giants. I first thank the Minister for agreeing to meet me at very short notice today; I appreciate that very much.
I remind noble Lords of my interests as a landowner and member of the Country Land and Business Association, and president of the National Association of Local Councils and of one of its county associations. I am also a vice-president of the Local Government Association. More specifically, however, I am a practising chartered surveyor and a valuer, with a professional involvement in and some experience of risk and the effects of flooding; although in this particular instance I certainly defer to the noble Baroness, Lady Bakewell of Hartington Mandeville, and my noble friend Lord Cameron—who I see is not in his place—when it comes to matters to do with the appalling flooding we have seen on our television screens, particularly in association with the Somerset Levels. I add my sympathy to them, and to all others who have been appallingly affected by the flooding.
My first observation is that much of the Bill is left to regulation. So much, in fact, that the shape and dynamic of what we might ultimately be facilitating seems unclear. I can understand the desire to get paving legislation in place and discuss the detail later, but I am bound to say that it leaves me uncomfortable, particularly on matters to do with the flood reinsurance scheme. I would like to see some of those regulations brought forward.
My particular interest is of course in Parts 3 and 4 of the Bill. There are of course good and less good portions. Certainly, the possibility that through the Bill communities and property owners might increasingly work together to provide local flooding solutions is welcome. They need to be re-enfranchised. However, communities will need guidance, some powers and, above all, resources. Their efforts will need durability and continuity if they are to have any effect on perceived insurance risk, because diffuse and often voluntary activity is inevitably on the back foot in this respect.
Redefining the scope of the roles of the Environment Agency and Defra on flood defence is commendable and, in so far as there is to be any future investment, will be enormously welcome. However, a policy preference for conservation at the expense of basic flood protection must be revisited. When it comes to that, what about the legacy of flood defence infrastructure and responsibility for its future management? I refer, of course, to the system of levees, dykes, channels and so on, some of which have been in place for hundreds of years, which serve to protect land, homes, communication and service installations and, near my home in Sussex, a major international airport.
Understandably, people have put their trust in public stewardship, but in recent times watercourse management has been compromised by environmental objectives with failure to dredge, objections to spreading mud and silt on adjacent land, or cutting back vegetation. This needs to be rebalanced. Of course, environmental considerations are important, but so is the risk of flooding and the competence of these installations. Outside internal drainage board areas there is ignorance of the rural drainage network, its layout and capacity. There is a lack of any obvious responsibility for things such as roadside ditches or for preventing watercourses being compromised or destroyed.
The CLA expressed concerns to me that in many instances liability for flood defence infrastructure works may increasingly fall to the landowner by default. There are fears that this could arise simply by failure to maintain. The genesis of many of these works goes back to the fact that no private individual or group could effectively undertake to construct and maintain something on that scale. Of course landowners have responsibilities, but they cannot be open-ended. I shall press the Government to reflect on that in the Bill.
I also welcome the proposals for sustainable drainage systems. I regret that in many areas affected by overwhelming of sewers, no general requirement has been made to procure retroactive attenuation of runoff from pre-existing as well as new development. I look forward to seeing this addressed. I also welcome any moves to develop means of mitigating damage and reducing the vulnerability of existing at-risk property.
However, Part 4 probably concerns me the most. We have been living in a dream world in which reality has dawned as technology has closely identified areas of significant flood risk. I entirely understand the background and the need to move to move to the real market and actual risks, which is implicit in the Flood Re proposal. Remarkable though it is that it has taken so long to get to this point, the fact remains that universal cover for flood risk by an informal process of mutualisation is being broken up. Based on this we are told that the genie cannot go back into the bottle, and I agree with that. However, it is not known what other risks may be singled out in future. What about windy locations, or areas subject to possible landslips because they are on steep sites?
The issue is well illustrated on the Association of British Insurers’s own website. Like it, mortgage lenders are risk averse and expect borrowers to insure against all the “standard perils”, not least flooding in all its forms, including surface runoff. To the extent that properties are at any material flood risk but cannot insure, it is universally accepted that the lender’s requirement cannot be met and that this has consequences in terms of loan suitability.
The Government, to give them their due, have made a brave fist of quantifying the outcomes in their impact assessment, but the reality is that all such calculations are replete with highly sensitive variables which cannot be accurately quantified. Indeed, the impact assessment baseline assumptions are themselves questionable, let alone the “what-ifs” that arise under the various options. Precise numbers of properties at significant flood risk or actually affected by exclusion from Flood Re are a matter of speculation. I did not see much property valuer input to all this—I declare an interest again—and some of the justifications, such as that of insurance’s industry need to use automation, do not entirely convince me.
I worry that setting a limited range of property to be covered by Flood Re embeds in statute a form of market segregation of its own; the assumed continuation of risk bundling with other factors remaining constant cannot be guaranteed. My own belief is that we are in this situation precisely because trends in risk top-slicing, better knowledge and changing responses to risk are taking place.
The British Property Federation and the Council of Mortgage Lenders, with others, approached me with their concerns. They, too, operate on the basis that risks are bundled. They suggested that the limited coverage of Flood Re will by default take us into uncharted territory in terms of valuation impacts. This is complex and I am far from convinced that the market consequences have been fully explored by the Government.
Furthermore, despite the fallback provisions, I wonder about the Government’s agency cost recovery implications on the Flood Re fund. The list of exclusions is significant: much long leasehold and buy-to-let property, band H houses, all small businesses, homes built after 2009 and more will not come within Flood Re. It does not mean that they cannot get insurance of some sort. But all sorts of numbers of properties that would be most severely affected have been suggested. Whether or not they are excluded from Flood Re, the numbers that will thereby lose access to conventional loan finance—with or without an actual flood risk—is entirely unclear. We need to get to the bottom of that. It is the fact of exclusion that will start people worrying about their properties, especially when the statement of principles referred to maintaining,
“cover for domestic property and small business customers”.
We appear to have a form of partial retreat from that position. I regard that as unfortunate. Furthermore, I am not clear why second homes should be within the Flood Re scheme but band H properties are outside it. That seems wholly anomalous.
Evidence of value write-downs, though scant, I believe is none the less real. I recommend that the Government urgently look into this in more detail, together with lenders and property professionals, so that Flood Re does not result in adverse consequences on the rebound of what we may put in place under this Bill. That said, and in the absence of any better ideas, I am bound to admit that for all its imperfections and limitations Flood Re as a concept is the only solution currently on offer, and I support it on that basis. I wish there was something that would deal with the bits that it does not include. On that basis I can assure the Minister that he has my general support at this juncture, and I will do my best to work with him and his department to find ways through this complex issue, and to provide relief to those whom the scheme currently excludes.
My Lords, I have not followed developments in the water industry closely since handing over my responsibility for the National Rivers Authority in 1996. As a consequence it came as a shock to read several sections of the White Paper, Water for Life. Paragraph 17 states,
“we need a new approach that mobilises local groups and draws on new sources of funding. Therefore this White Paper takes forward the new ‘catchment-based approach’ to water quality and diffuse pollution launched earlier this year”.
In paragraph 21 we read:
“The White Paper explains how we will learn lessons from around 70 catchment scale pilot projects, and provide intensive support to 25 of them, as a precursor to rolling out this approach across the country”.
In my last chairman's report for the NRA in 1996 I commented about the role of our regional advisory boards, and said that,
“equally important has been the system of catchment management planning and consultation that we established. I cannot emphasise too strongly our belief that these two features must remain as cornerstones of the new agency arrangements”.
I went on to say that,
“it was a great relief that in the last month of our existence we finally received approval to proceed with a trial of statutory water quality objectives in eight catchments. I very much hope that it will be possible to proceed rapidly with the introduction of SWQOs on a wide scale … it has taken too long to get this far”.
In genuine bewilderment, I ask: what on earth has been happening over the interval of more than 17 years? How is it that what was absolutely central to the work—and, I would add, success—of the NRA is now presented as the new catchment-based approach? How is it that after we had finally attained the approval of statutory water quality objectives in eight catchments, after delays that I attributed to,
“the lengthy timescale of government consideration”,
lessons are now to be learned on pilot projects? Do the 10 pilot catchments that we are told the Environment Agency is hosting embrace the eight we had approved all those years ago? I suppose I must at least welcome the fact that our cornerstone is again to be placed back in position.
I intend to comment on only three aspects of this very thick and complex Bill. The first is the duty to secure resilience. Ofwat is required to balance all its duties. They include the existing sustainable development duty, to which is to be added a new resilience duty, making sustainable development as central to the work of the economic regulator as it is to the work of the environmental and quality regulators. If I have understood this correctly, this is a very welcome step forward, at least from the situation with which I had to deal. I described that situation on 22 November 1994 in a speech to the parliamentary environment group, when I said:
“It now seems clear that when the Water Act was passed insufficient thought was given to the relationship between the regulators, of which the NRA is one, and Ofwat. It was not widely foreseen that the Director-General would see it as his duty to stand between customers, by which he meant those who paid water bills, and the environmental regulators, and to argue strongly that the pace of regulation was too hot. Still less was it foreseen that the Director-General would strongly press the case that so substantial were the demands of the European Union that no other additional regulatory requirements should be permitted”.
The vigorous, though always courteous, arguments that I had with Mr Byatt, the director-general, were made worse by the fact that initially the estimates of costs that he obtained were flawed and exaggerated. Wisely, Ministers accepted our arguments and approved expenditure that allowed for a large number of the most urgent cases. In my speech, I said that,
“before the next review there is an urgent need to find a better way to conduct this debate”.
Things then did move on and, since 2005, Ofwat has had a statutory duty to contribute to the achievement of sustainable development.
The debate continued and, after the 2011 review by David Gray, the Government issued statutory guidance to Ofwat in a strategic policy statement. This provided a strong steer to the regulator on its interpretation of the sustainable development requirement. Clause 24 of the Bill requires Ofwat to act in accordance with any such statement issued by the Secretary of State. The position is also to be strengthened by the new resilience duty designed to deal with long-term pressures.
The water industry has welcomed the new requirement as it enables it to plan and manage its finances taking account of long-term needs, with the knowledge that these are now much more likely to be approved by Ofwat. Clearly, these changes and their practical consequences need to be examined very closely in Committee; but I am green with envy that the regulators in future are unlikely to face the difficulties that confronted Ian Byatt and myself.
Another subject will need even more thorough examination and has been referred to by a number of noble Lords: water abstraction. In the NRA, we were confronted with huge difficulties as we tried to deal with historic abstractions, often providing essential supplies while doing devastating damage to rivers and the fisheries and wildlife they sustained. The Government say they are,
“reforming the abstraction management system to make it more flexible and resilient to climate change and population growth”,
and have sought to refute the suggestion that,
“the requirement in the resilience duty to respond to environmental pressure could lead to over-abstraction to meet demand … where water resources are under pressure”.
The water companies’ statutory right to compensation for losses resulting from modifications and revocations of their abstraction licences is to be removed, with companies apparently compensated through the Ofwat review process. Similar changes are being made by the Welsh Government. The Environment Agency regulates abstractions, and Ofwat is required to consult the agency before issuing a water supply licence. So far, so good. But—and it is a big but—very good though all this sounds, there are a number of complications, some of which have been referred to by the noble Lord, Lord Whitty, on the opposition Front Bench. The upstream reforms set out in the Bill will make it easier for new players to enter the water sector, possibly using new water sources. What impact will that have on abstractions? The Government are considering how to bring exempt abstractors into the licensing regime. Furthermore, over a longer period the Government intend to reform the abstraction regime to make it more flexible and resilient to the challenges of climate change and population growth. Those reforms are not part of the Bill and consultation is taking place. Information about the amount of groundwater available for abstraction is not reliable, and fresh research is being undertaken.
The Government say we should not rush these reforms and they are right, but it is going to make examination of this part of the Bill in Committee difficult—with the cake half cooked, so to speak. I raised some of these issues at one of my noble friend Lord De Mauley’s briefing meetings, and he has taken the trouble of sending me what he describes as a comprehensive response. It is comprehensive and, as I suspect we will hear most of it in Committee when he deals with any amendments to this part of the Bill, I will say at this stage only that phrases such as,
“confident that the regulatory framework, correctly applied, is fully capable of managing these risks”,
“confident that there is no practical risk of an unsustainable increase in abstraction”,
coupled with the information that:
“The Welsh Government has taken the decision not to implement all of the upstream reforms at this time”,
suggest to me that these are matters that need to be probed thoroughly. That view is reinforced by the admission that:
“Abstraction reform is complex both in economic and environmental terms”.
We are also told that:
“The upstream reforms will require careful planning and close working between the water industry, regulators and customer representatives. To allow sufficient time for this, the main upstream reforms will not be implemented in advance of the next Price Review which will set charges for 2020-2025”.
I can imagine what Lady Thatcher would have snapped at me if had proposed a policy with that timescale. “That is longer than the duration of either world war”, she would have said. It will be a long time before any of us who are still alive will know whether we have got it right or wrong.
Perhaps it is because many years ago I was an insurance broker and Lloyd’s underwriter that I feel uncomfortable about the flood insurance clauses and the idea of a levy-funded pool for high-risk households, worthy though the aims may be, and of course I share the sympathy that others have expressed for all those who suffered the horrible fate of being flooded. There is the objection first raised by Lloyd’s that it was not aware of any UK precedent for this proposal to require UK businesses to enter into particular contracts, very likely to be loss-making.
To my mind, it is one thing for insurers and policyholders in general to contribute to the costs arising from properties that are only very rarely likely to be flooded, or to provide against exceptionally severe events, but quite another to provide for those who live in properties on flood plains where building should never have taken place. Time and again I have observed developers, with the consent of reckless planning authorities, ignoring advice about the probability of flooding, going ahead with large projects in places where they should never have taken place and then complaining that flood defence precautions were inadequate. Definitions of “high flood risk” and “very high flood risk” and a huge amount more are to be covered by regulations. The Government may be laying a minefield for themselves, and I worry that the scheme may be overtaken by events.
Against that background, I have been astonished to read about possible plans for two new towns in the south-east—one at Yalding, a village through which I drive every time I visit my older daughter and her family in Kent. My astonishment arises not from the fact that Yalding has just been flooded but because it has quite frequently been flooded in the past. It does not take much observation to form the view that it will be very hard to prevent it being flooded again in the future. Can anyone seriously be planning to put a new town on that flood plain? If they are, is it going to be equipped with canals and boats and named New Venice?
Finally, I wonder whether it is wise to pass legislation that is as dependent as is this Bill on future consultation and future unknown regulations.
My Lords, I am new to thinking about the issues surrounding the water industry. Therefore, like my noble friend Lord Whitty, I thank the noble Lord, Lord De Mauley, and his officials for all the briefings and materials they have provided to increase our understanding of this Bill.
I have learnt a lot but I am not completely reassured by that or by what I see before me in the Bill. The water industry is huge and complex, with impervious structures. It is made up of regional monopolies, which pay little or no corporation tax and whose focus is turned towards their shareholders rather than their customers. This all leads to the water industry having a negative public image. Therefore, I believe that we need a water industry that is better managed and better regulated.
We need to do more to modernise the industry, encourage innovation and change the culture. We need to develop a water industry that looks outwards towards the needs of its customers and deals adequately with water affordability. That is what I expected to see in a Water Bill put forward by the Government. After all, as has been mentioned, in the Government’s own White Paper, Water for Life, there was a whole chapter on developing a customer-focused water industry. Therefore, while there are measures to be welcomed in the Bill, it is disappointing that a focus on the customer is missing, especially as water bills have increased by almost 50% in real terms since privatisation. According to industry figures, 23% of households in England and Wales spend more than 3% of their income on water and sewerage bills, with 11% spending more than 5% of their income. To me, that illustrates that the current approach to keeping water affordable for all is failing.
First, there is a low take-up of the WaterSure scheme, which was introduced by Labour to help households that have a high level of water use due to an illness or because they have three or more children. According to the Consumer Council for Water, only a fraction of families that are eligible for help actually receive it. Why is that? It is because customers do not know that help is available to them. Although there has been an increase in take-up over the past six years, as Dame Yve Buckland from the Consumer Council for Water said, it is merely a “drop in the ocean”. Take-up has happened, and been shown to increase, only when water companies are proactive. Whether they are is, however, a matter for that company because it is voluntary. Therefore, the Bill should include measures that require water companies to promote the WaterSure scheme. Should we not have arrangements with the DWP so that people who are entitled, and consent, get the help they need?
Secondly, the voluntary nature of the establishment of social tariffs by water companies is inept. Water companies are able to design social tariffs to help customers most in need of support but only three have such schemes, helping just 25,000 households. As it is voluntary to have a social tariff scheme, many water companies have not bothered to set one up and some have no intention of doing so. Whether or not you get help with your bill therefore depends on where you live. That cannot be right or fair.
I repeat that the current approach to keeping water affordable for all is failing. As water is fundamental to life and public health, many families make sacrifices to pay their water bill. The Consumer Council for Water states:
“One in eight customers says they cannot afford their bill”.
It notes that customers,
“continue to pay their water bill even when it is unaffordable to do so”.
I was reading a discussion thread on Netmums about the impact of rising bills on families. I want to read a short extract from a Yorkshire Water customer. The subject line read:
“My water bill has quadrupled; I think I am going to have to stop eating to pay”.
The customer then wrote:
“I am literally shaking and in tears over this bill. There is no way I can cut costs any more. I work two jobs. I literally can’t work any more than I already do, but it still isn’t enough”.
There are many stories of struggle and hardship being faced by families in this country. Are we really saying that there are no more ways that legislation can help to ease their burden? Today and over the weekend, the media have reported that Ofwat plans to curb rising bills between 2015 and 2020. That is to be welcomed. But this Bill should strengthen Ofwat’s powers to deal with the impact and the problem of water affordability.
I agree with the noble Baroness, Lady Parminter, that the Bill should also seek to deal with bad debt, which adds an average of £15 to everyone’s water bill. It is not right for those who do pay to subsidise those who do not. As we have heard, the Flood and Water Management Act 2010 made provision for the Government to require landlords to give tenants’ details, but this has not been enforced. Why did the Government choose to take a voluntary approach? I understand that the new database for collecting tenants’ details will be ready next year. The Bill should require landlords to use it or be held liable for that debt. We also need to give Ofwat powers to act against water companies that fail to act on bad debt.
The Prime Minister stated that there would be action on rising water bills, but a two-page letter from the Secretary of State to chief executives of the water companies asking them to be “fully alive to concerns” is not action. As we have seen with social tariff schemes and the promotion of WaterSure, voluntary requests for action do not work. As we will see, the voluntary approach to collecting tenants’ details from landlords will not work. It is surely time for this Bill to make someone do something. It is time for real action. It is time to require the water companies to act on water affordability and bad debt.
I turn briefly to the issues of metering and new infrastructure projects. Voluntary switching to water meters is on the increase. Around one-third of properties have meters and this is set to rise to a half by 2015. The Bill therefore needs to make sure that we protect unmetered, low-income households from unaffordable bills that may arise in areas with high levels of metering. Billions of pounds-worth of infrastructure projects are already planned and the costs of these are expected to be passed on to customers. Do the Government know the overall impact that this planned infrastructure will have on customers’ bills? This Bill is a chance to ensure that we get to know the impact on future bills, that everyone is getting value for money, and that there is greater transparency in the process.
In addition to water affordability I want to raise one other issue of concern, which is borne out of my personal and local experience. As set out by the noble Lord, Lord De Mauley, one of the Bill’s main aims is to make it easier for new businesses and landowners to ensure that the water market is providing new upstream services. Inevitably, that will lead to new infrastructure, which is where my personal experience leads me to suggest that more provision for public consultation and public involvement is needed around any such future infrastructure.
Where I live in Deptford, significant controversy surrounds Thames Water’s proposed placement of the 46-meter shaft needed for the Thames tideway tunnel. The proposed site is vehemently opposed by local residents, and consultation on the site and where it is placed has been inadequate. Thames Water’s promotional material illustrates how the construction of the tunnel will be by the riverside, which it largely is until we get to Deptford. Initially, the preferred site promoted by Thames Water was by the river but, curiously, it changed its mind and the site was moved inland to Deptford Church Street and Crossfields Green. That is despite this being one of the only green spaces in that area, being next to a listed church and a residential estate, and being right next to a primary school. This has led to nearly 1,000 local residents signing a petition against the proposed site and some being involved in the campaign group, Don’t Dump on Deptford’s Heart. It is estimated that up to 32 heavy goods vehicles a day will be needed to service this site, causing road closures, traffic mayhem and road safety fears. Obviously, there will be an increase in the level of noise and air pollution.
What is most disappointing is that Thames Water has confirmed that it is perfectly possible not to use this site. Even more disappointing is that one of its justifications for choosing this site is that the local people already suffer from noise and pollution, so they will not be troubled by more. That is totally unacceptable, particularly when a perfectly viable alternative exists. I hope that the flaws in Thames Water’s plans will be recognised by the Planning Inspectorate. If not, I hope that the Government will review them.
As I look towards this Bill, my local experience leads me to ask whether we are encouraging the development of infrastructure through this Bill and, if so, how we can better hear the views of the public. In the Government’s desire to open up competition and to encourage new providers to the market, how can we ensure that proper consultation is not overlooked or cut short? Would a provision in the Bill in this area not help to reassure the public that any new construction projects will consider the views of the public and the environmental impact?
Finally, I want to reiterate my central point regarding water affordability. When dealing with rising energy bills, we may be able to heed the advice of other Ministers to wear more jumpers but for water we cannot take our buckets to the Thames. We all need water to live. We therefore need the charging system to be urgently brought up to date. We need a system that is affordable, fair and sustainable. I agree with my noble friend Lord Whitty that we need a review of how we all pay for water and how we use it. We need less voluntary measures and more requirements for action. We need to deal with bad debt, to increase the take-up of WaterSure, to insist on social tariffs and to develop a national affordability scheme. The chance to tackle the impact that rising water bills are having on family budgets has been overlooked by this Bill. That is a wasted opportunity. I look forward to discussing these issues further in Committee.
My Lords, I congratulate the Government on bringing forward this Bill. We all take water for granted but we should not because it is our most precious resource. Until now, 95% of the water we get goes straight into the sea. I think that everyone welcomes making it a primary duty of Ofwat to secure the long-term resilience of water supply and sewerage systems. But should there not be a national policy statement for water? We already have one for waste water, so why not one for water supply—our most precious resource?
I will talk mainly on the Flood Re scheme, but before I do, I would like to make two points. First, the Government are trying to encourage landowners, such as farmers—I farm in Norfolk—to build reservoirs and then sell excess water to the water companies. At first, that seems a great idea, but I am sceptical about whether it will work as on-farm reservoirs will probably be too small to make any meaningful contribution. Even if they did, the quality of the water from the on-farm reservoirs may not be very good, as it may have high levels of nutrients, pesticides and metaldehyde. There may also be problems for farmers piping excess water from their reservoirs across other people's land to a treatment plant.
We need the water companies to build more large reservoirs themselves to store the necessary water. In the south-east of England, the last time a reservoir of any size was built was probably the Bewl Water reservoir, which holds 7 trillion gallons of water over a site of 1,200 acres. It was built in the early 1970s; 40 years ago. Since then, the population and number of houses in the south-east have risen dramatically and will no doubt continue to rise dramatically. It is alarming that the Office for National Statistics estimates that if the current trend persists, the population of this country could double over the next hundred years—a frightening thought. If we do not build more reservoirs to capture water in times of plenty, all that will happen in times of drought is that the water companies will continue to extract water from the rivers, which by then will themselves be gasping for water.
Secondly, I share the concerns of those who say that it is cackhanded to be bringing in upstream competition in water trading before the existing water abstraction system has been reformed, given that the Environment Agency says that many rivers are already overabstracted and overlicensed.
Moving on to Flood Re, I have been an insurance underwriter, including home owners’ business, and I have worked in the London insurance market for about 30 years. Hundreds of underwriting businesses make up the London insurance market and getting all those underwriters who write home owners’ business to make considerable compromises and agree willingly to this deal has no doubt been no mean feat. I have no doubt that negotiations have been very fragile and it has taken three years to get this far. The not-for-profit Flood Re mutual, which will be owned and managed by the industry, will offer flood insurance to the 500,000 home owners most at risk, with an excess of £250 and a premium of between £210 and £540, depending on council tax band.
The scheme helps to solve many of the current affordability problems, but there are a few exceptions. The first is that homes built after 2009 will not be covered. That is not a new exclusion. Every developer has known that under PPS25 homes should not be built in flood risk areas from that date. Underwriters were insistent that they did not want anything in the scheme that would encourage unwise or irresponsible development. Also, the Government emphasise that where the Environment Agency objects to a development on the grounds of flood risk, 97% of those risks are refused by planners, so that is good news. Or is it? Of the 455,000 planning applications, the Environment Agency looks at only 6.6%. Obviously, it cannot look at all of them, but 6.6% does seem worryingly low.
The second exclusion is small businesses, which buy commercial insurance that has a range of cover different from that of home owners: business interruption, loss of profits, different levels of stock cover and employer’s liability insurance, to name a few. The third exclusion is band H and I properties, on the basis that their owners should be able to afford the higher risk-reflective premiums, and be able to take the necessary actions to reduce their flood risk. Happily, my band H home is not in a flood risk area. Also, there is an understanding that genuinely uninsurable properties—properties that are continually flooding—should not be covered by Flood Re. However, it has not been possible to agree a definition, and I believe that negotiations are continuing.
Flood Re is a good scheme. It might not be perfect, and we could probably all pick holes in it, but it will offer flood insurance to the vast majority of home owners seeking it, at a relatively cheap premium and a low excess. However, I do have three concerns.
My first concern is our being tempted to pass amendments to this scheme with the best intentions that might render it unworkable. For instance, we might want to include small businesses in the scheme, because, after all, the Federation of Small Businesses reported that 20% of small businesses were affected by flooding in 2012. The Association of British Insurers and the Government looked at this and concluded that it threw up more problems than it solved, hence the agreed exclusion.
My second concern is that there is significant scope in this Bill for the Government to make secondary legislation. I do hope that this Government, or indeed, a subsequent Government, are not tempted to bring in any secondary legislation without first having consulted and agreed with the Association of British Insurers, so that any rules or refinements needed use Flood Re’s own procedures. We might then get the intended answer.
My third concern is the clauses relating to the flood insurance obligation. I understand that the Government feel that these are necessary in case Flood Re proves unworkable, but the obligation would be a very unusual measure that would effectively force a private insurance company to sell a product whether or not it wanted to do so. I hope the Minister can reassure the House that every effort will be made to get Flood Re up and running, so that the obligation will never be needed. I look forward to debating these and other matters in Committee.
My Lords, I declare an interest as a farmer in possession of two abstraction licences. Also, not to be totally outdone by the Minister, I must own to having several fields that frequently lie under water, particularly this month.
On the whole, I think that this is a good Bill which is much needed to ensure that our watercourses, our water supplies, our water environment and our water management safeguards are all in good condition to face the future. Water, although not very highly valued by most people in this country—particularly in one of the wettest Januarys for years—is in fact the most valuable commodity on the planet. Ask any scientist looking for signs of life in the universe or any African farmer struggling with climate change, and you will find that water is indeed the key to life.
There is much good in the Bill, but to my mind it is lacking in ambition—a point on which I shall expand. My main point is that, even if the Government are right to proceed on a softly-softly basis, I for one should like to see more enabling clauses that permit the water industry to make more competitive and environmental progress without having to wait for another water Bill, which, after all, is unlikely to come along for a decade or so.
Let me run through various aspects of the Bill to show what I mean. First, retail competition for commercial customers is a good idea. As many noble Lords have said, it has been beneficial to more than half the businesses in Scotland, even if most of them ended up staying with their existing supplier. The reforms in Scotland have also resulted in household customers benefiting from the thought processes that such non-domestic retail competition has provoked in the water companies, but surely the end game must be to have retail competition across all water customers, commercial and domestic. I am therefore surprised that it appears we have to wait for another water Bill before such household competition can be introduced. There ought to be some enabling clause in this Bill to allow progress on this front, as and when it becomes appropriate.
Having said that, I for one would want to ensure that any future competitive structure was to the benefit of all customers and did not lead to de-averaging, and thus the unfair exploitation of rural and remote rural customers. I am told that competition can happen without de-averaging. Equally, it is important that water-saving activities by retailers do not result in anti-competitive activities by wholesalers. In other words, the Bill before us lacks the “no detriment” provisions of the Scottish legislation which protect both customers and the environment.
Moving on to the next lack of ambition, I think that there is a total absence of foresight over the question of metering. Southern Water, which covers the most metered area in England, believes that 100% metering would result in a 12% saving in water. That is a gigantic amount of water to remove from the system day in, day out. This could be the most environmental part of the Bill—if only it were there. Furthermore, the current voluntary-only metering actually puts the price up for those not metered and thus has proven negative social implications. I realise that if there was a universal tariff for every litre of water used, some poor households with large families, and others, would find themselves worse off under 100% metering. However, with transitional tariffs, social tariffs and even block tariffs and the like, and with the meter in the house and not at the end of the garden, it is perfectly possible for everyone to benefit from 100% metering. There is absolutely no doubt that the environment would win hands down—I repeat that there would be a 12% saving.
Furthermore, 100% metering results in retail water companies having a better and more direct relationship with individual customers. So metering is good for the environment and should also be good for customers. However, there appears to be nothing about metering in the Bill. At the very least, as I have said, there should be an enabling clause for greater incentives for water suppliers to work towards 100% metering—if that makes sense for their customers. The Government need to show some leadership in this field. For instance, the current barrier of having to prove the existence of a water-stressed area before promoting metering is totally unnecessary.
Moving on, I will touch on abstraction. Again, so far so good: upstream transfers—good, in my book; the flexibility of buying water from farmers’ winter storage reservoirs—good; and the free surrender of unused water company abstraction licences—very good. The latter unused licences have been hanging over the proper economic and environmental management of our river basins for far too long, and I am glad we are finally gripping that particular problem.
However, looking deeper at future plans for abstraction, I read the Defra consultation document Making the Most of Every Drop with interest. It is rightly ambitious in its proposals and I would go with either of the two main proposals that are in it. This is an important subject as water becomes more and more valuable to a growing British population, who are subject to ever more extreme climate events and yet possesses an admirable desire to protect their environment. However, I worry about the timetable. Why, as the consultation suggests, do we have to wait until the 2020s before implementing any changes? This would seem to be unnecessarily cautious. What guarantees do we have now that anything is going to happen at all? Again, why can we not have an enabling clause in the Bill or, at the very least, a time limit by which any new scheme has to be introduced? I urge the Government to be brave and to grip this issue firmly to bring about reforms as soon as they can.
So far, my comments have been largely about saving water and benefiting the environment, but I want to cover two other areas. The first is Flood Re, which I think is a good scheme and will work well. While I suspect that many of us would prefer it to cover band H properties and even SMEs, I recognise that the more it covers the greater will be the cost to ordinary householders, so I support the boundaries as currently proposed.
However, I am not sure that the cut-off date of 2009 can be quite so easily defended. We have to bear in mind that a large number of people outside the Westminster bubble, who bought houses in good faith which were built after 2009, would have been unaware that an Act would be introduced in 2014 which would make it impossible for them to benefit from a government flood insurance scheme. After all, those houses were built with the approval of local government through its planning system, and it is quite possible that central government even encouraged those people to buy them through its Help to Buy scheme. It therefore seems grossly unfair to impose on largely unknowing householders a retrospective date of 2009 for a scheme introduced in 2014. I think that people will be amazed to find that they are ineligible, so it would be better to set a date in the future, or at the passing of the Act, rather than holding the line on 2009.
My last point has not been mentioned so far in the debate but it came up in Committee and on Report in the Commons. It is to do with the protection of water supplies and the environment from fracking. I am very much in favour of fracking. I wish to see the multitude of boreholes necessary for a successful industry to be able to come into being in this country with the minimum of fuss from the public. One of the great concerns of the public is that their water supplies will be contaminated by stray gas concentrations from the fracking process. The industry assures us, and I believe it, that this is virtually impossible. All I can say is that, in that case, the public liability insurance bond will not cost them very much.
Meanwhile, the Minister in the other place assured us that such a compulsory insurance bond was unnecessary because the Environment Agency already has powers to make the polluter pay in the case of any required pollution clean-up and that, anyway, rigorous financial tests would be carried out on the fracking companies which would ensure they were as safe as the Bank of Scotland, so no government bailouts would ever be necessary. Quite apart from the fact that not all the companies currently involved in fracking exploration have totally pristine balance sheets—in fact, in some instances, it is very much the opposite—I do not believe that the public have confidence that the Government will not have to step in to protect water supplies and the environment. So why not insert a clause into this Bill which reassures the public that the companies will take on their own liabilities through an insurance bond—as they say, it should not cost them very much? I believe that that would go a long way to reassuring some potential objectors and thus help get the fracking industry off the ground, which I am keen to see.
Finally, by way of summary, I believe that this is a good Bill, but it is slightly lacking in ambition to really to get to grips now with all the problems that the water industry will have to face in the future.
My Lords, I should start by declaring that I am another farmer with an abstraction licence, although I am delighted to report that, unlike the Minister, I have not been flooded.
A number of speakers have already referred to the Water for Life White Paper of December 2011. I remind your Lordships of the earlier White Paper of the same year, the natural environment White Paper. I shall restrict my remarks to broad issues identified in those two White Papers and consider to what extent this Bill meets the agendas set out in them: first, the need to innovate and develop expertise in the management of our water and sewerage resources to deliver the required contribution to our green economy; secondly, the need to halt and reverse the damage that we have done to water ecosystems which provide essential services such as flood abatement, pure water, carbon storage and much else; and, thirdly, the need to increase competition for the ultimate benefit of all water users.
As we have heard, this last objective is to be promoted in the Bill by increasing choice in the retail market for non-household customers, by making it easier for new entrants to contribute new sources of water or new approaches to treating water and sewage, by measures which would allow water companies to buy and sell water from each other, and by measures which would clarify the right of developers to connect new developments to the water supply and sewerage system.
As the Minister reminded us, the Bill is only one part of a much wider water-related agenda. The issues which still need to be addressed, which many have touched on, before we have a coherent, long-term, sustainable national water management policy, include the following. There is the reform of the abstraction system—much referred to by the noble Lord, Lord Whitty, my noble friend Lord Crickhowell and others. There is the delivery of basin management plans with suitable mechanisms for community participation. I recognise that since 1996, we have made very little progress from the start made by my noble friend Lord Crickhowell. There is the resolution of long-standing management issues concerning sustainable drainage systems and investment in catchment-sensitive farming schemes. All those are outside the Bill but essential components if we are to put our water management at a national level on to a coherent basis.
Increased choice in the retail sector and a more joined-up approach to regulation are certainly valuable contributions which the Bill makes. The new duty of resilience imposed on Ofwat is a crucial contribution to address long-term pressures on the water sector and the environment. Frankly, in previous years, after the time of the NRA but during the time of the Environment Agency, far too often there was an unhelpful struggle between Ofwat and the Environment Agency. I did not think that I would ever feel sorry for the water companies, but I did when I understood to what extent they were being regulated in contrary directions by those two regulators. We now have the opportunity for the fault line between the two regulatory authorities to be finally eliminated.
England and Wales must, in all humility, recognise that Scotland has been ahead of us—and indeed of most of the rest of the world—in promoting competition at the retail level, having introduced a retail market for the supply of water and sewerage systems to non-household customers in 2008. I was interested to hear from the Water Industry Commission for Scotland of the significant benefits. We have heard some figures cited. Those benefits have permeated not just to commercial customers but down to household customers indirectly in terms of better services, innovation, reduced environmental impacts and lower bills. Indeed, one could say that the water companies in England have benefited, because they have been able to compete as new entrants in the Scottish retail market, and a number of them have done so. The lessons learnt will no doubt prove invaluable once competition is opened up in the English and Welsh retail markets.
It is important that we now at last achieve consistency between the Scottish and English markets so that there can be a fair cross-border retail water market. We must take note of the lessons learnt in Scotland in the past five years in operating a competitive retail market. The Water Industry Commission for Scotland and, indeed, Scottish water companies, have drawn attention to four issues which need to be addressed in the Bill adequately to reflect the lessons learnt in Scotland.
The first and foremost is an issue referred to by the noble Lord, Lord Whitty, which is the failure to have an exit provision for retail companies which have, frankly, either lost interest, are losing money or have failed adequately to provide a service that customers want. The Government for some mysterious reason simply bottled out of the inevitable conclusion of what happens when you introduce competition and encourage innovation: some companies just have to drop out. The EFRA committee, in its pre-legislative scrutiny, strongly recommended that those companies should be allowed to exit the market, but the Government—I simply do not follow this—have said that they cannot accept that that is the sensible thing to do, but they should contract out their retail services. Having read carefully the Government’s response to the pre-legislative scrutiny, I remain to be convinced and I am sure that we will have to look at that carefully.
The other three issues raised by the Water Industry Commission for Scotland are matters of more detail, concerning what is implied by a level playing field between incumbent companies and new participants, and the need to protect customers in remote areas from being discriminated against by a two-tier pricing system. I recognise that the Government have it much in mind to prevent just these things happening but there are some detailed recommendations, which are perhaps best left for Committee. I simply note that these concerns come from a background of the successful delivery in Scotland of precisely what the Bill seeks to deliver in England and Wales on retail competition. Any improvement to the Bill suggested as a result of this experience should be helpful.
The White Paper, Water for Life, promoted the need to manage water catchment areas in a way which embraces partnerships with a range of interests: the water companies themselves; local authorities; regulators; landowners and farmers; conservation organisations; internal drainage boards, where they exist; and local resilience forums and the like. Each has a role to play if new ways are to be developed for achieving effective water management and mitigating the risk of surface water flooding. Increased water storage, water trading and abstraction reform will all help but unless local communities can be made part of the process in developing these catchment plans and the water companies’ water management plans, there is a real danger that we will not have policies which ultimately carry the confidence of all parts of the community. They will therefore inevitably fail in the end.
One of the great distractions in the past has come from inappropriate measures that have turned off all co-operation from householders. The hosepipe ban is usually imposed with good intentions, yet the amount that this restriction does to reduce demand is not as much as one would imagine. However, it does an awful lot to dissipate good will—and without the good will of all people to try to ensure that the catchment is adequately managed, we will run into trouble. I am sure that innovative and sensible alternative proposals, not least those coming through advertising and other public relations measures, could be much more effective than the dreaded hosepipe ban.
The provisions in the Bill which enable licensing to become more flexible and demand management to be more appropriately handled are to be greatly welcomed. I was privileged to play a small role in a project led by the University of Cambridge Programme for Sustainability Leadership on sustainable water stewardship, which was sponsored by Anglian Water. This looked at innovative ways of involving all the local community in making a contribution in specific water catchments. We have a lot still to learn and the social sciences have a great contribution to make in involving the wider community.
The Cave review of April 2009 identified problems with the way that developers are charged for connecting to water and sewerage services. The water companies themselves say that they can deliver SUDS—sustainable urban drainage systems—only if that is accompanied by the right to discharge surface water. Clause 21 clarifies the functions of a sewerage undertaker to include the building and maintenance of SUDS features, which is welcome, but there remains the issue that the undertaker has to negotiate the right to discharge or else compulsorily acquire the rights to discharge. Before 1989 sewerage undertakers had a statutory right to discharge, as still exists for highway authorities. If the Bill could extend that right again to sewerage undertakers, it would encourage them to build and adopt SUDS rather than surface-water sewers, and explore hybrid designs that combine more traditional methods with SUDS. It would also resolve the current legal uncertainties that have arisen since 1989 with regard to discharges.
I return to the thrust of the Bill, which declares that it is there to promote innovation. Innovation ultimately relies on research and development. The UK water industry has its own research capacity in UK Water Industry Research, but it is true to say that it is very much reduced from its capacity of some 20 years ago. Some of the water and sewerage operators conduct in-house research but in the public sector, important scientific underpinning, including vital long-term data sets, is provided by the research councils and Defra. I declare an interest as chair of the advisory board of the Centre for Ecology and Hydrology, a Natural Environment Research Council research centre. If we are to deliver this resilient, sustainable and competitive water management, we must retain a national capacity in our relevant research base. The Government must recognise that the public sector plays a key role and that this publicly funded research is a key component for the long-term delivery of this water agenda.
My Lords, along with the Minister, I have to declare an interest in that I own one bank of a river: the River Rede in Northumberland. The river, which runs through Redesdale, has a name that deals with some of the pollution problems there: in Northumbrian it means “red river”. That is probably from the iron oxide that has leached into it, but I prefer the definition given in a local history guide which says that it ran red with the blood of Scotsmen after the Redeswire massacre in the 1560s. However, that strays into another Bill that we will come on to in the not too distant future.
As a Back-Bencher I enjoy the fact that you can focus on one issue alone. This Bill is quite light on issues. I will not be focusing on many other parts of the Bill, but I would raise the issue of competition. Many noble Lords have talked about the value of competition in driving down prices and, as the Scottish example has shown, there could be short-term gains through competition. However, we should take on the lessons learnt from the energy sector that the short-term gains might turn into very long-term problems, especially with the issues of extraction.
An area that I particularly welcome in the Bill, though, is the Government pushing forward issues around the capex and opex problem and introducing the new word “totex”, which is quite an ugly expression but certainly may well help to deal with some of the fluctuations brought about by the five-year AMP cycle.
The issue that I want to focus on particularly was flagged up in the White Paper as one that the Government were going to look at under concern, but that dropped out of the draft Bill: the question of whether there should be a duty on Ofwat in sustainability. Having watched the pictures of flooding on the television this morning, and I think that everyone who has ever dealt with a flood knows just how horrendous that situation can be, I cannot believe that we do not face an issue with climate change. We were facing a drought last summer. They said, “If we don’t get a 200% normal rainfall pattern, we will have to have hosepipe bans through the whole of 2013 and 2014”. Luckily enough, we had over 200% of normal rainfall. Perhaps it is only me who thought, “Over 200% of normal rainfall is not a normal situation”. Now, of course, we have gone from drought to a flood. With climate change, drought and flood are two sides of the same coin, and we are going to face that in future.
The Minister and the Government have come forward and said, “We don’t need the word ‘sustainability’ as a duty because we’re looking at resilience”. I believe that there is a massive difference in how people view the terminology between “resilience” and “sustainability”. Sustainability is already written into the Bill—there is a clause on sustainable drainage—but not as a duty for Ofwat. Why do I believe that that is important? Because the regulator sets the terms of the tariff that we pay and therefore what the water companies can use that money for.
Unless the regulator takes looking at sustainability in the long term really seriously, we tend to end up with a much shorter-term decision-making processes. Of course, when we are talking about the long term, we are talking about only 20 years, or perhaps even less in some of the assessments. I plan to be a water customer in 20 years’ time—with my family history, I probably will not be—and it is quite possible that as a customer in 20 years’ time, I will be paying a much higher bill because of the decisions we are making now about the cost of living. When we talk about the squeezed middle classes, I understand that water bills are going to be higher. However, if we do not take those measures, the cost of water in a few years’ time will be a great deal higher.
The one issue I have is that much of what has gone in the White Paper is business as usual: “We have always had a lot of water. Water is fine. We can deal with it, and there will not be a problem”. That is not really the case. I manage a private water supply—I have a borehole—and it focuses your mind on some of the problems with water. One of the major problems with water is the cost of extraction. The cost of extracting water through a borehole is very high in energy. Of course, water companies are some of the highest users of energy in the country, so when we are talking about price sustainability, we also have to think about how much it will cost us in energy terms, and energy prices are going up quite dramatically.
We also have to think about the fact that we tend to forget that the price covers not just the extraction of water but the treatment of sewage. Dealing with a blocked septic tank on a freezing cold Sunday morning in December focused my mind on the problems of sewage on a personal level. We should realise that as much energy is used in getting clean water to us as is used in dealing with sewage and reprocessing the water.
We have to make sure that the water companies understand that sustainability is an issue. That is where I have a slight disagreement with Ofwat. Ofwat has a secondary duty of sustainability, not a primary duty. Many noble Lords have talked about the regulator’s sustainability duty, but it is secondary to economic regulation and means that sustainability has not been as important. The issue is slightly more important now because there is a real problem with which duties are undertaken by which regulatory authority. In Committee in another place, the constructive tension between the environmental regulator and the economic regulator was referred to as leading to an optimal outcome in the periodic review process. The noble Lord, Lord Whitty, indicated that that might have been the case in the past; however, the Environment Agency no longer has a policy role and, while it gives guidance, it relates to statutory duties and it no longer actively promotes an environmental agenda with water companies. At the same time, the Environment Agency has been given a duty to promote economic growth. No commensurate duties or functions have been placed on Ofwat. This means that the creative tension really no longer exists.
A resilience duty is good for resilience—and I stress that I do not underestimate the importance of a resilience duty—but it does not by default mean that it is an environmental duty. Waterwise and other green NGOs feel that there needs to be something stronger, such as a primary sustainability duty on Ofwat to ensure that issues such as water efficiency and catchment base solutions, which have been mentioned by many noble Lords, and energy management come to the fore.
An issue that often gets overlooked and was always overlooked in the energy debate is that it is no longer business as usual. We are going to have to change our habits in relation to water. We will have to start thinking about water efficiency. We are one of the highest users of water in Europe. We waste potable water—drinking water—by washing our cars with it. That water has an energy cost that has been processed and an environmental cost. We are going to have to start changing fundamentally how we look at water efficiency. A water efficiency duty placed on Ofwat would be a start to meeting that sustainability agenda. The water companies already have a water efficiency duty placed on them, but the water regulator tells them how they can spend their money. If they are to change their attitude, then we have to change the attitude of the regulator. There would be a question as to whether that should be through a primary duty on sustainability, or a primary duty of water efficiency and energy use. That argument is yet to happen, and I would very much hope that the Minister will look at it.
This issue really has to be taken seriously. We could be facing a hosepipe ban now due to the drought of 2012. We are going to see a great deal more of this flip-flop between flooding on the one hand and drought on the other. I do not think that hosepipe bans are going to be the worst of our problems. When we go back to standpipes we will have a real issue. I hope that this could be looked at. I first started having this argument with Ofwat a number of years ago. One of the problems is that nothing moves quickly in the water sector. The decisions we make now will have fundamental implications for the future of the water industry. I very much hope that the Government can look favourably upon a sustainability amendment and, if not that, upon a water efficiency duty—I understand the reliance duty incorporates issues of climate change—and an energy duty. If not, I would feel that that had to be imposed upon the Bill.
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.
My Lords, I should like to talk about the financial circumstances of our water companies, but first I must describe some of their recent history and its relevance to their prospects.
From the middle of the 19th century for a period of 100 years, the water utilities in the UK and elsewhere became progressively concentrated under public and municipal ownership. Then, in the UK in 1989, the process was reversed through privatisation. Now the UK water utilities are owned almost entirely by private profit-seeking firms, of which the majority are in foreign ownership. The motives for privatisation in the UK and elsewhere were both ideological and fiscal. By the late 1980s, the water utilities were in a parlous state. Successive Governments, who had been intent on limiting public expenditure, had been unwilling to afford the necessary capital expenditure that was required for maintaining the water network. The water mains were corroded and the sewerage system was in a state of collapse.
The effect of privatisation was to release the water industry from this burden of financial stringency and to allow it to fund its investment by borrowing from the financial markets. Soon, the beneficial effects of the increased capital funding became evident. There were significant improvements in the state of repair of the water network, and the cleanliness of our rivers and beaches began to approach the standards that had been mandated by European legislation. In the six years after privatisation, the companies invested £17 billion, compared with the £9.3 billion that had been invested in the six years before privatisation.
The proponents of privatisation regarded the improvements as a validation of their philosophy. However, the improvements were at a cost to the consumers. Tariffs increased by 46% in real terms during the first nine years after privatisation. Operating profits increased by 142% in the first eight years, which is to say that they more than doubled. The private profitability of the water industry has increased in the ensuing years and has reached astonishing levels, but now there is an impending crisis in the provision of the services. Our water supplies are coming under increasing pressure as a result of a growing population and a changing climate. The summer droughts and the winter inundations that have been experienced in recent years are set to become increasingly severe.
The necessary investments to meet this crisis have not been forthcoming and the Government no longer have the power to compel the private companies to meet the needs. It is only by dint of increasing investment in the water infrastructure that the resulting problems can be alleviated. The requirement is for a nationwide strategic initiative aimed at upgrading the infrastructure, and this is what we should expect from a water Bill. The current Bill falls far short of what is required. It seems to embody the delusions of the protagonists of privatisation.
The intention of the Bill is to address the emerging problems by creating a competitive environment in which the water companies can operate. Thus it has been asserted in a document of the Department for Environment, Food and Rural Affairs that:
“Allowing more competition in the sector will drive forward both innovation and efficiency, by bringing in new players and new ways of thinking, and by using market forces to keep down customer costs”.
The hope is that:
“This will benefit not only customers and stimulate growth, but will also contribute to our future resilience and the environment”.
This prescription must be utterly bemusing to anyone who is mindful of the circumstances of a natural monopoly. It is as if by tinkering at the edges of the industry, the major demographic and climatic problems that we face can be addressed.
It is appropriate, at this point, to examine what has happened to the ownership of the industry since it was privatised, and to explain why the Government can have little influence over its investment decisions. The firms of the water industry have become vehicles for financial profit-seeking by owners who have used their guaranteed profitability to pay exorbitant dividends to themselves. In fact, the ultimate ownership of the firms is often obscure and has to be traced through hierarchies of holding companies back to private equity companies, which often reside in offshore tax havens, or to sovereign wealth funds. The tenure of ownership is often fleeting—five years being a typical duration.
The owners have used the equity of the water companies as a means towards some highly leveraged borrowing of funds that can be used for purposes that have nothing whatever to do with the financing of investment in the infrastructure of the water industry. The attraction of the water companies to the financiers has been on account of the highly assured income streams that they generate. There is no likelihood of a reduction in the demand for water, and some generously remunerative water tariffs are fixed for five-year periods by the regulator Ofwat. Such circumstances are liable to lead to favourable appraisals by the credit rating agencies, which enable the borrowing of funds at low rates of interest.
As a result of their borrowings, the leverage ratios of the water companies, which are the ratios of their total borrowings to the enterprise value—which is the sum of the borrowings and the equity capital—have reached astronomical levels. It is reported, for example, that the leverage ratio of Thames Water reached 80% in 2013; and figures as high as 95% have been reported for other companies. On the eve of privatisation, virtually all the enterprise value of the water companies was in equity capital, which is to say that their leverage ratios were close to zero. A high leverage ratio constitutes a significant tax advantage. It implies that the debt servicing of the company is predominantly via interest payments as opposed to dividend payments. Interest payments are regarded as part of the operating costs of the company and are deducted from the income before the residue is taxed. By contrast, dividend payments enter into the calculation of the tax liabilities.
A disadvantage of a heightened leverage ratio is that it is liable to prejudice the credit rating of the company. Given that variations in the size of the dividend payments can provide a significant buffer in the event of a loss of profitability, the financial vulnerability of a highly leveraged company is increased and, therefore, its ability to borrow is decreased. In consequence of its heightened leverage ratio, Thames Water is facing financial difficulties and cannot borrow the money it needs to finance the Thames Tunnel project. As a private equity company it is unwilling to raise more equity, since this would entail a loss of control in favour of the shareholders. Instead, it is asking for help from the Government.
This may be the first of a series of similar circumstances affecting our water companies. Companies will have difficulty in financing other similar investment projects that will be vital to our future environmental security or resilience, as the Government’s documents term it. Therefore, it is probably inevitable that the Government will have to provide the necessary funds. This should also provide the Government with an opportunity to restore the water utilities to some degree of public or municipal ownership and control.
There is one outstanding example of what can be achieved by the appropriate governance of a water company: Welsh Water, which is run as a not-for-profit company. It was bought from its owners in 2000 at a cut price when it got into financial difficulties through an ill advised programme of diverse acquisitions. The buyers were a group of former industry executives and public servants, and their leveraged buyout was financed entirely by debt. Since this acquisition, the performance of the company has been outstanding. Its surpluses have been invested in the network and have been used to augment the company’s financial reserves. Shares have not been issued but the ratio of the company’s debts to its total asset value has fallen from 93% to 65%, thereby giving it the best credit rating in the entire UK utilities sector. This is a model of responsible ownership and governance that could be replicated throughout the water industry.
My Lords, I declare an interest as a trustee of the Crafnant Trust, which has responsibility for Lake Crafnant—a small reservoir above the Conwy valley in north Wales which I do not own.
I welcome the opportunity to contribute to this debate and to note that, although the Bill applies to both England and Wales, it gives Welsh Ministers powers in relation to the whole area served by water and sewerage undertakers,
“wholly or mainly in Wales”.
I would not presume or dare to speak on behalf of the Welsh Government, but I believe that they would not wish to follow the direction outlined by the Westminster Government, whom they consider to be,
“overly dependent on competition within the water supply system”.
That is their right under powers devolved to them, but I also welcome the fact that, if enacted as currently drafted, the Bill will enable Ministers in future Welsh Governments to introduce competition if they so wish.
I was pleased to hear the noble Lord speak about the work of Dwr Cymru, and perhaps here I should also declare an interest as a customer. There is a belief that in Glas Cymru we have a framework and a supply system that work for the people of Wales. Glas Cymru is a not-for-profit organisation with no shareholders. It has brought investment into the system and reduced bills, and it is perhaps a model that should be emulated.
I welcome the attempts in the Bill to help those in areas at high risk of flooding to secure affordable insurance. However, as I understand it and as other noble Lords have highlighted, there are some concerns about the provisions that apply only to those in domestic properties. I am sure we can all think of examples of flooding in our areas where homes may have been affected but so, too, have the business premises next door. Perhaps my noble friend could place on the record, for interested parties, the reasons why small businesses will not be treated in the same way. As I said, I welcome these changes as far as they go, but changing the insurance regime in isolation is surely dealing with only one side of the coin. I hope that your Lordships will allow me to deal with the other side of the coin as I seek to bring the debate back to the matter of insurance.
As we begin to realise the enormity of the task that we have to deal with in order to combat the effects of climate change, many of us believe that there has to be a commitment to further flood defence work to prevent a repetition of the misery that we have seen in recent weeks. The Conwy valley, where I live, is certainly no stranger to the misery caused by flooding. I respectfully suggest that the magnitude of the flooding that we experience would certainly not be solved by community or group activity. One characteristic of the Conwy river is that it rises very quickly and can subside equally quickly, particularly after a high tide, but the flood waters have in the past left up to 100 flooded homes in their wake.
Many Members have spoken about sustainability, and they may be interested to hear of some work that has been carried out in the area of the source of the river Conwy. Some £300,000 has been allocated to restoration work on the threatened Migneint upland peatbog on the Conwy-Gwynedd border. The scheme has been funded by the National Trust and Natural Resources Wales and supported by many volunteers. This project, which is aimed primarily at saving a threatened Welsh ecosystem which can store more greenhouse gases than the Amazon rainforest, is recording impressive results according to scientists. Miles of ditches dug on a large area of peatland over the past two centuries have been filled with the aim of storing carbon and, at the same time, reducing flooding in the valley below. Already, some evidence is pointing to a slowing down of the rate at which the river rises, as the run-off from the slopes of the Migneint and Berwyn mountains is retained for longer in the peatlands.
Because of the severity of the floods that we suffered in the Conwy valley in 2004 and 2005, we saw massive schemes put in place by the Welsh Government, Environment Agency Wales and Conwy County Borough Council. Here, I pay tribute to the effective partnership working that we have seen between these organisations, and I add my recognition of the contribution made by European rural development funding to the schemes.
In an effort to protect our homes and businesses, a massive culvert was constructed under the streets of our town. As they rise, flood waters are now diverted into the culvert, stored there and gradually released as the waters subside. Demountable barriers, purchased from Holland—where the people know something about controlling water—are now available and can be installed to block off streets if flood waters threaten properties. Thankfully, these have not been required so far.
Embankments, or levees, which had been constructed along the river bank over the years to claim the fertile flood plain soil for agriculture, have been levelled and the flood plains are once again allowed to do the job nature intended. Farmers have been consulted and compensated and their co-operation in moving livestock at times of high risk has been achieved. New bunds, or small embankments, have been built and artificial lakes created to store flood water in order to protect the next village.
Those of us who live in close proximity to water have a healthy regard for its power, force and unpredictability and would never be foolish enough to say that such schemes are guaranteed to make flooding a thing of the past. However, the Environment Agency's data show that the volume of water which would have caused flooding to properties in the past did not do so in our last flood event. An unseen and unheralded saving to householders and insurance companies has therefore emanated from the flood alleviation scheme.
We all understand that each river and each incidence of flooding has its own characteristic and a solution achieved in one location will not necessarily apply to another. However, our experience in the Conwy valley shows that innovative thinking and creative engineering can make a difference.
This is neither the time nor the place to make a plea for the encouragement of more schemes to restore peatlands or of more engineering projects to protect vulnerable areas, but I hope that my noble friend can confirm that these matters are at least under discussion, that consideration is and will be given to methods of their funding and that the potential consequential savings to householders, local authorities and insurance companies will also be taken into account.
My Lords, my noble friend the Minister has persuasively outlined the case for this Bill and has been very helpful in providing advance information to all sides of the House, for which I thank him. I was especially struck today by the list of innovations that he and my noble friend Lord Moynihan outlined. These are just the sort of things that improve life for business and consumers in a quiet way.
This is a highly technical subject. We have a 230-page Bill to scrutinise and I know that many noble Lords are better versed in the intricacies than I am. However, I want to make three general points. I come to the subject as a businesswoman, including a directorship in a UK company, 2 Sisters Food Group, that uses water in its production, and as a farmer’s daughter. We had two large lakes on the farm where I was brought up, a constant menace to generations of adventurous children like ourselves. The Bill offers the prospect of making such lakes valuable assets in which to invest rather than simply a dangerous liability.
One of my main interests is improving UK competitiveness, so that we are not left behind in the global race. One key to competitiveness is good infrastructure and investment in things like water. Water is, of course, a central part of industrial production in a range of sectors, from beverages, such as whisky, to car manufacturing. I have chosen these examples because they are both important export industries too. Water is important in many businesses and, as others have said, is essential to life and to civilisation.
With our population expected to rise to 70 million by 2027, our water infrastructure will come under huge pressure, especially in the south and east. That brings me to my first point. Are we doing enough? Does the Minister think that this Bill will encourage the large-scale investment that we need? Many believe that in decades to come we will need major strategic and co-ordinated investments in the water sector; for example, by providing for large-scale movements from surplus to deficit areas. Are we doing enough in this Bill or, crucially, somewhere else to provide for this possibility?
If you have visited the Pont du Gard, Rome or Bath, you will know that the Romans had the right approach to the subject. Can we learn from experience overseas? I have talked to the Californians about the problems of raising revenue for water schemes for both consumers and agriculture in the Napa Valley. I have talked to the Spanish about the more successful catchment investments that they have made to support salad and other crops in southern Spain, which serve the UK market in winter. I recognise that the Bill is not seeking to do everything but it is important for your Lordships’ House to understand the wider strategic context.
Secondly, I am concerned about the quality of our regulatory regimes. Water is an important example and, as it is a natural monopoly without substitutes of the kind you find in energy or telecoms, the regulatory regime is even more important. I am very glad to see the increase in competition that will be encouraged and to hear today of the positive experience in Scotland. However, I have a concern that the new regime for competition with its new market operator, appeals to the Competition and Markets Authority, charging guidance and charging codes, and any new regulations made under the new powers, when fitted together with the existing Ofwat regime and the work done by the Environment Agency could be bureaucratic and therefore prone to error.
Having too many layers and agencies can risk regulatory arbitrage, confusion and excess bureaucracy. More expensive people will be hired and they may waste resources chasing each other and having endless meetings. Consumers, business, the water industry and Parliament will not be quite sure who to hold to account on what. Will the Minister let us know what steps are being taken to prevent overlap and confusion in this vital utility and perhaps comment on the scale of new staff and administrative costs that he expects to be incurred?
My third and final point relates to how we ensure the right balance between the all-important current consumer and investment for the long-term resilience of the system. Ofwat is to be given a new overarching duty, on which many speakers have touched today. Under this resilience objective, Ofwat will have to secure the long-term resilience of water supply and sewerage systems,
“as regards environmental pressures, population growth and changes in consumer behaviour”.
Following discussion in the other place Ofwat has also been asked to ensure that water and sewerage undertakers,
“manage water resources ‘in sustainable ways’ and reduce demand ‘for water so as to reduce pressure on water resources’”.
That all comes at a cost. No doubt the regulatory formula for the water companies, many of which are now unfortunately owned abroad, will be adjusted to take these duties into account. Let me share my concern. I am not sure whether to worry more that the incentives will be too low for proper investment in our water infrastructure or the opposite—that too much investment will go into resilience and sustainability at a guaranteed high rate of return. Certainly, as my noble friend Lord Crickhowell suggested, it will take time to see how the system pans out.
Major infrastructure always raises such intergenerational issues, as my noble friend Lady Parminter suggested, because the necessary investments are so long term. It is a real dilemma suitable for the forthcoming debate in your Lordships’ House. I support the Bill because it is taking this sector in the right direction. I look forward to my noble friend the Minister’s reply on the three points that I have raised and to participating in Committee.
My Lords, I have various interests to declare, which I shall do during the course of my remarks, but in so far as water metering has been mentioned, and we have to be very careful about these things these days, I should declare an interest as a director of the company that designs, builds and supplies water meters that telemeter their output to wherever it is needed.
At this stage in the debate, many of the more attractive foxes have been shot, and there is not much point in revisiting the corpses, which have been well worked over. It is clear that we are in a changed situation. Climate change will bring us less predictable and probably more intense weather episodes and we have the problem of growing urbanisation.
I, too, welcomed and applauded the White Paper and I am a little disappointed, for reasons that have been rehearsed, over the content of the Bill that we have today. Indeed, many of the points raised in the White Paper were foreseen in the report of the Science and Technology Committee some years earlier in its investigation most ably chaired by the noble Earl, Lord Selborne.
Today, I will restrict my remarks to three fairly high-level points. First, a number of noble Lords have referred to the question of the interface between the range of regulatory bodies involved in the areas of water provision, water discharge and flood containment. It would be of use to the whole House during further consideration of the Bill if the Minister were to agree to concisely put down, perhaps in a note in the Library, the present view of the responsibilities of the agencies involved and the accountability between them. One thinks immediately of Ofwat, the Environment Agency, the Drinking Water Inspectorate, Defra itself and, certainly in the discharge of water, the whole range of organisations involved in sustainable urban drainage systems—SUDS, as referred to by the noble Earl, Lord Selborne—and other related matters. It is hard to find this in a coherent and consistent manner at the moment.
I turn now to the question of a high-level, long-term national water strategy. I am not clear where the responsibility for that lies. I have searched the websites of the various regulatory bodies and Defra in vain to find an answer. I may have simply looked in the wrong places and not found it, but it is clear, to me at any rate, that we need a long-term strategy to deal with the challenges of climate change and increasing urbanisation. We need to be looking at a range of possible future scenarios for 25 or more years ahead. We may indeed find that the resilience criteria need to be changed and that more major infrastructural developments are needed as we understand climate change better. The reason for doing this now is that infrastructure developments are extremely slow to build. It is a long, slow business.
It is also worth pointing out that because moving water is expensive, the first solution to water problems should be sought within each catchment area. This does not mean that there ought not to be water transfer around the country. However, it is likely to be an expensive solution if done on any large scale. It does mean that we have to look hard at local solutions, and these have to start, as many have said, with reducing waste and leaks, or other deficiencies.
Beyond that, desalination has to be considered. The plant built by Thames Water in the Thames estuary is an example. To declare an interest, a company of which I am a director is providing the desalination plant with renewable energy. In many urban situations, however, as the Minister pointed out, particularly those located away from the sea, the solution may well lie in regenerating and purifying sewer water to potable standards. In this way a city could make an approach to being water self-sufficient. There is of course, as the noble Lord, Lord Redesdale, has pointed out, a serious energy penalty. Enhanced storage of water will also have a role to play.
A good example of both long-term strategic thinking and a resilient system is Singapore. Again I have to declare an interest, having for some time co-chaired the Public Utilities Board’s advisory committee on water and environment. Singapore now has what are described as four taps: water imported from Malaysia by pipeline, rainfall water from its own catchments, water from desalination, and so-called new water produced by the reprocessing and purification of waste water. The outcome of this long-term strategic programme is a resilient system implemented by private companies.
Finally, I shall say a few words on R&D. The UK water industry has had a poor record in recent years. Investment in water R&D has given a number of countries, some of them small, major positions in the international water industry—an industry that will necessarily grow with the world population and with the increased expectations of that population for higher living standards. Two examples of small countries that have built international reputations in water science and technology are the Netherlands and Singapore. For our part, we have had a regulatory regime imposed by Ofwat that made significant investment in long-term fundamental research virtually pointless, and indeed impossible. I understand that Ofwat has now changed its policy, but there is a lot of ground to make up. A second problem is that, with the investor profile described partly by the noble Lord, Lord Whitty, but also in the recent document by the New Policy Institute, the UK water companies tend to be seen simply as reliable and steady sources of income rather than as companies that should explore new technology that might lower costs, let alone earn from their R&D.
It is sufficient to say that at the most recent major international water meeting that I attended there were nearly 1,000 companies exhibiting their products. Among them I found only three from the UK, all concerned with pipelines. I have already drawn attention to the energy cost of purifying water to potable standards. This is now largely done with reverse osmosis membrane technology. The challenge is to devise membranes that will have lower energy demands. Singapore is one of the global leaders in this field. This is one example but there are a host of other examples of useful and applied research where this country has little or no presence, meaning that we are simply going to be followers.
The relatively small R&D capacity of UK water companies means that many do not have the competence in-house to be an intelligent customer for new technology and, as a consequence, tend not to use or exploit new technologies. That means that they will not be able to achieve the efficiencies and consumer price reductions that are urgently needed.
Water is set to become a major issue in this country. Although we have some companies that are forward-looking, many are not. To cope with the challenges of climate change and population, we need a well regulated and well run industry that is technologically sophisticated and aware. It is not clear that we have it today. This Bill is good as far as it goes but we shall need another.
My Lords, I commend the Government on this most important piece of legislation. Through the Bill, we are able to address a number of issues, and I believe it will improve the health of both our economy and our environment. It should also reduce water bills for consumers in the long term. It is clear that our water industry is in severe need of reform. Greater investment in our water and sewerage systems is long overdue, and greater levels of competition, efficiency and innovation are needed.
I will focus on Part 4 of the Bill, which relates to flood insurance. At this juncture, I declare an interest as chairman of an insurance broking and financial services organisation. I have been a director and the regional chairman of the British Insurance Brokers’ Association. I support the policy objectives of the Government on this issue and broadly support the measures contained in the Bill, for reasons I will go into in due course. I am particularly pleased that the insurance industry and the Government have been working closely together on this. Indeed, we must all work together to try to help facilitate a solution that will make affordable flood insurance available to UK property owners, including small businesses, in the long term.
Flooding is the greatest national threat that the UK faces, and the risk is rising. In recent years, this increased risk has been reflected in the number and cost of major flood events that property insurers cover. In the 1990s, there were two flood events with a claim cost of more than £150 million for insurers. In the first decade of this century, there were five such events, including the 2007 floods, which cost insurers £3 billion. The 2012 floods saw insurers paying out approximately £600 million.
A significant number of government amendments were made to the Bill in the other place, particularly on flood insurance. That was to be expected, given that in the first printing of the Bill the flood insurance provisions were set out in the broadest possible way. These new amendments set out the Government’s proposed legislative approach and are included in Clauses 51 to 71 of the Bill in its current form.
I welcome the fact that Flood Re will effectively limit what most high-risk households should have to pay for the flood component of their home insurance. Although the current statement of principles agreement ensured that viable flood insurance was available, it by no means guaranteed affordable prices for consumers and has long distorted the insurance market. However, the statement of principles ensured that the Government continued to spend on flood defences, where for every £1 spent, £8 is saved in claims.
I am sure that the clarity for those customers whom Flood Re will cover will be most welcome. Prices will be set according to council tax bands so people will know the maximum that they could be asked to pay. Moreover, it seems perfectly fair that those who are in smaller properties should not have to pay as much for flood insurance as some of those in larger houses. Support would be targeted at those who need it most, and the level of excesses charged by insurers controlled. The fact that the levy on all home insurers that will be used to fund the scheme in addition to insurance premiums comes within the pricing structure of the market means that most ordinary home owners will not face any rise in bills. Spreading risk across policyholders is a widely used model for insurance. Even with the possibility of a top-up levy being required in the early years of the scheme, it is envisaged that the overall effect will be neutral over time.
However, for those excluded from Flood Re, there continues to be genuine concern about both the availability and affordability of flood insurance. Some criticism has been levelled at the Government for these proposals based on the fact that Flood Re will not cover houses built after 2009. A cut-off date is needed to maintain a signal to planning authorities that all developments must be appropriate and resilient to flooding. However, a 2009 cut-off is unnecessary, as policy planning statement 25 has been in force since then. There is not a significant number of properties that have been built in flood-risk areas since 2009. These have been subject to planning policy statement 25. An alternative cut-off date of 2014 would mean that home owners in flood-risk areas would get the protection they need without materially affecting the ability of the scheme to deliver its objectives.
The importance of resilience when it comes to flooding must not be understated, for in some areas it is virtually impossible not to build on flood-prone land. With this in mind, I believe that more thought should be given to “uninsurable” properties in this scheme. It is inevitable that the risk that some properties would carry would make them unsuitable for Flood Re, but we must do all that we can to ensure that “uninsurable” properties are not left behind.
The Flood Re proposals have been broadly welcomed by all parties, although inevitably there are some concerns. One such concern has been that small businesses will be ineligible for Flood Re and therefore be afforded less protection than in the statement of principles by which they are covered. It is clear that the risks for businesses are different and that financial risk is often much greater.
The fact that small businesses could be in a worse position than before is a cause for concern to the Federation of Small Businesses, the British Property Federation, the National Flood Forum and the British Insurance Brokers’ Association. I am pleased that in Committee in the other place the Minister there clarified that small businesses were covered if they were based in council tax-paying residential properties. However, this will be for only a tiny minority, as most businesses will be registered in a company name and Flood Re excludes businesses if the insurance is taken out in the name of the business.
Figures from the Federation of Small Businesses show that, in 2012 alone, one in five small businesses was affected by flooding, highlighting just how important for such companies the availability of affordable protection is. I ask my noble friend to comment on whether he believes that small businesses will be suitably protected by Flood Re and, if not, what provisions have been made to ensure that they can continue to access affordable flood cover.
Judging premium costs based on council tax boundaries is a reasonable approach. There has been mixed reaction to the exclusion of band H properties, with some claiming that their inclusion would have little impact and others claiming that the effect will be greater. However, I ask my noble friend how the differential pricing in the system was designed and, more importantly, do the Government believe that the current proposals are robust enough to help those on lower incomes, particularly those who may live in band H homes who are asset-rich and cash-poor?
The ultimate goal of Flood Re is to pave the way for a smooth transition to the free market. If that were successful, it would be most welcome, but, of course, that is not an easy feat. No country in the world has a free market for flood insurance which successfully preserves widely available and affordable flood insurance for those at high flood risk without some form of government involvement. With that in mind, I seek further explanation from my noble friend on how the transition in the insurance sector from the cross-subsidy being formalised in Flood Re to an eventual free market will be managed.
Moreover, what, if any, safeguards will be in place to ensure that premiums do not rise considerably once a free market is established? I look forward to my noble friend’s answer on that issue. Although a contingency plan in the form of the flood insurance obligation is being legislated through the Bill, I know that from the industry perspective there is strong feeling that that must be avoided. Perhaps that is not a bad thing, because it makes the incentive for Flood Re to work even greater. However, there are real concerns about placing an obligation on each insurer to take a proportionate share of high flood-risk households. The obligation would be the first time that insurers were forced to provide a type of cover to a high-risk home owner-occupier who they otherwise might have chosen not to cover.
Although the obligation would force insurers to compete with each other for the business of high-risk households in order to meet their targets, there is a danger that that could make some insurers withdraw from the market, reducing capacity, competition and choice, and resulting in increased prices. I believe that there is a risk that this measure, intended to help customers to shop around, would in fact limit their ability to do that very thing. It could also negatively affect those at low flood risk, as insurers seek instead to compete for high-risk properties in order to fulfil their quota.
Having said that, I welcome the measures in the Bill, but I believe that more needs to be done for those currently excluded from the scheme: in particular, small businesses such as those we have seen mopping up their small shops and offices around the UK in recent months.
Throughout the process of taking forward the Bill, it has been recognised that in some ways we have made good progress. We have been able to develop proposals as far as we have only through a partnership approach. This has seen a considerable compromise by the insurance industry and a significant future commitment from the Government. I am sure that for as long as that continues, we will be able to secure a system that is fit for purpose.
My Lords, I am pleased to support the Bill because of the increased competition it will bring to the water sector generally. I am glad that Her Majesty’s Opposition in another place welcomed this aspect of the Bill. In talking about competition, I will concentrate on Part 4 of the Bill concerning flood insurance. Here, I must declare an interest, or a residual interest, because I was, until June, the chief executive of a Lloyd’s insurance company and a London market reinsurance company, which was a member of the ABI. Although I am not now an employee, I am still the subject of various restrictive covenants. I am also, like my noble friend the Minister, the owner of a flooded house, but, fortunately for me, it was occupied by my father-in-law.
Making flood insurance available and affordable to all, as is the intention of the Bill, is a common problem in many countries and the temptation to interfere in the open market is fraught with difficulties. In the United States, for example, the National Flood Insurance Program was created in 1968 and allows property owners in participating communities to buy protection from the Government. The problem with government schemes is that the correct risk-adjusted rate is not charged, so the program is now about $30 billion in deficit. When you try to correct it, as the Biggert-Waters Act of 2012 was seeking to do, you get huge rate increases. In this case, there were increases of up to 400% for some home owners.
Having said that, there are huge problems for those households which, through no fault of their own, live in areas that are susceptible to flooding and for which this is a deeply worrying matter. It is surely right that there should be temporary help for those households while, at the same time, acknowledging on the face of the Bill the intention to,
“transition to risk-reflective pricing of flood insurance for household premises”.
The Bill stipulates a 25-year transitional period. Flood Re is a unique solution and, after many months of negotiation, it has the advantage of being supported by the insurance industry, as represented by the Association of British Insurers. It will be an industry-owned mutual classified as a public body. In agreeing to this, recognition should be paid to the insurance industry for agreeing to maintain the statement of principles until Flood Re is up and running. The industry has an incentive to make the new company work and avoid the flood insurance obligation, which is also in the Bill.
Flood Re will be an improvement because it makes affordable insurance available where it is not today. All insurers, new and old, are on a level playing field. Of course, there is nothing to stop an insurer keeping high-risk flood properties and not ceding them to Flood Re if it can get what it judges to be the correct risk-adjusted rate. That happens in many countries. There are, however, a number of potential problems, which will no doubt be addressed in Committee.
The first is the danger that, in the early years, a large-scale flood or series of floods over several months could exhaust Flood Re’s resources. That is a possibility although an extremely remote one. Like all insurance companies in the Solvency II world, Flood Re will be capitalised to a one in 200 level. In other words, it will have enough resources with an appropriate level of reinsurance—and assuming that the internal model is correct—to cover 99.5% of the losses that it could ever expect to face. This takes into account possible model errors and a host of other variables, which have to be documented and validated before the internal model is approved by the PRA. One in 200 is far more remote than any recent losses. Even the floods of 2007, which would have had an estimated £400 million cost to Flood Re, would have had to be six times worse—to be accurate, the reinsured loss amount would have to be about six times higher—to exhaust the likely level of the reinsurance programme.
In the event of a shortfall, the member insurance companies could be asked for a top-up levy to enable Flood Re to pay out its contractual aggregate limit after which, like any reinsurance arrangement, the liability falls back on the insurance companies that wrote the original business. The insurance industry has accepted this risk. While not incurring any contractual liability, the Government have affirmed in the memorandum of understanding with the industry that they bear primary responsibility for dealing with a flooding event with a greater than one in 200 return period.
Secondly, there are exceptions that Flood Re will not cover. These are mainly areas that are not covered anyway today by the statement of principles, such as houses built after 2009, to which the noble Lord, Lord Cameron of Dillington, referred, commercial properties and SMEs, and potentially genuinely uninsurable properties, although this will not happen at the outset of the scheme. If the intention is to move to free-market pricing, albeit over 25 years, it would surely be odd to increase the scope of the market intervention at the outset.
Thirdly, there are many details to be addressed before Flood Re can begin operations, which makes mid-2015 an ambitious target. The reinsurance protections will have to be bought in the open market. Flood Re will have only a finite amount of ceded premium and levy available to pay for that reinsurance, and whether or not the market will provide the required aggregate limit at an acceptable price remains to be seen. The fact, too, that it has to be bought under public procurement rules makes the exercise more time consuming. June 2015 is an ambitious timetable, with more than 170 open work packages to complete. Anyone who has been involved with Solvency II preparation, the validation of an internal model and the approval of the very onerous documentation requirements will know that is not trivial and that timely authorisation from the PRA should not be taken for granted. Nor, by the way, should EU authorisation for state aid, and I would be interested to hear from my noble friend the Minister when he anticipates that this will be forthcoming.
Finally and, to me, worryingly, it seems that Flood Re is going to be the most regulated company in the insurance market. It has been set up deliberately as a private regulated insurance company, but there will also be public arrangements for oversight due to the levy that will raise an estimated £180 million. Because of that, all the panoply of public supervision will be imposed in addition to the normal regulation that Parliament and the European Union have seen fit to impose. Actually, £180 million is really not a great deal of money—to put it in context, insurance premium tax alone raises more than 16 times as much. Nevertheless, as a result, Flood Re will be regulated by the PRA and the FCA. The National Audit Office will assess the economy, efficiency and effectiveness of its operation. There will have to be a responsible officer directly accountable to Parliament. There may well be scrutiny by the Public Accounts Committee. Defra will be held accountable to Parliament because Flood Re will be part of its accounts, with obvious implications for Flood Re’s compliance and governance costs. Commenting on this, Defra’s briefing note states:
“This proposed approach aims to strike a balance between the requirements of accountability to Parliament, and the need for Flood Re to be able to operate as an integral part of the insurance market”.
I hope that the future CEO of Flood Re, who is yet to be appointed, agrees.
Nevertheless, these concerns, which can be met, should not detract from an innovative solution to a genuine social need: to achieve affordable insurance for some 500,000 homes in the country while at the same time preparing the way for genuinely risk-reflective rates.
My Lords, we have had a wide-ranging debate today covering the many aspects of this important Bill. I will try to be brief and my comments are concentrated on three areas. While the majority of the Bill is concerned with the supply of water and ensuring that all households throughout England have a steady supply of fresh water—and this is vital—today I am addressing the issue of the surplus of water: that is, flooding.
As has been said already, the Bill makes provision by Flood Re for those properties at risk of severe flooding to get affordable insurance following the end of the statement of principles with the insurance industry that has been in place since 2000. As others have commented in the past, my accent betrays my heritage. In Somerset, as all can see from television and newspaper coverage, especially today, the landscape changes dramatically in winter, sometimes for short periods but currently for much longer ones. This has always been a problem for the levels, but it is definitely getting worse. In the winter of 2012-13, the village of Muchelney was cut off for weeks, and it is now cut off again. The fire brigade has done a brilliant job ferrying people to and fro, and the county council has assisted in building a pontoon for villagers to access boats so that they can do their shopping and get to work. The great British community spirit has risen above all the difficulties. Nevertheless, residents in long-term flooded areas are suffering stress and the beginnings of mental health problems.
While welcoming the proposals for Flood Re, like others, I am concerned about some of the exclusions. Many small businesses that operate on the Somerset Levels will find it impossible to get insurance if they are not included in Flood Re. At a time when the economy needs every job it can get, it seems short-sighted in the extreme to be putting the viability of those businesses at risk. As I understand the Bill, some mixed hereditaments are included in Flood Re, but this seems to be dependent on whether they are assessed for business rates. Similarly, private rented and leasehold households are excluded. When everything we know about housing is that it is in short supply, to again jeopardise that supply by pushing private landlords out of the market could be discriminatory. It is generally a requirement of mortgage lenders that insurance is in place. To have insurance that excludes flooding is not wise. Are the flood-prone areas therefore to become devoid of population as people are forced to move to higher ground in order to be able to get the insurance cover needed to have access to a mortgage?
Internal drainage boards comprise local people who know their area and its problems. They can often see what solutions might be needed and could implement fairly low-cost works to alleviate some of the flooding. Disaggregating the drainage board levy from local authority council tax is vital to enable the boards to operate effectively and efficiently. Enabling them to assess what is required and then raise the necessary levy in order to carry out remedial works is key in helping to restore public confidence that the issue is being taken seriously.
Lastly, I wish to raise the issue of the value placed on agricultural land. As can be seen on our television screens, acres of agricultural land are underwater for large portions of the year. This is affecting farmers’ ability to earn a proper living and placing their families at risk. Again, there is a risk to mental health as well as to health and well-being. When it comes to flood defence works, to what extent do the loss of earnings and devaluation of the land figure in the calculations about which areas qualify for flood alleviation works and which do not? How does adequate funding for repairs get taken into consideration? Some form of financially sustainable system needs to be in place in order for the land to be farmed effectively. Land cannot just be left fallow year after year. Land does not look after itself, as I am sure all the farmers here know. It needs constant managing in order to get the best out of it. Farmers need encouragement, not obstacles and difficulties. This is a very real issue and one that I hope we can address during the passage of this Bill.
I am encouraged by much of what is included in the Water Bill, and I hope that we may be able to address many of the points made by others, with which I agree, over the coming weeks.
My Lords, first, I welcome this Bill as a much needed change to the legislation. I thank South West Water, which invited me to a water works and sewage works in Exeter to brief me on the industry and show me how it works in practice. I little thought that on entering your Lordships’ House my first visit to a company would be to a sewage works.
There are several challenges facing the supply and regulation of water in the UK, and the Bill sets out eminently reasonable reforms to ensure a long-term plan for improving our infrastructure and for providing better value for customers. The best way to improve the efficiency of suppliers and to drive down costs for customers is of course to allow more competition. Of course, the real task for any new competitor is to understand the legislation, the rules and regulations. The length of the Bill hinders that somewhat. Perhaps we are, oddly, overregulating to allow more competition.
It is good that the Bill seeks to allow new entrants into the market with more upstream competition and more competition for business customers. However, I wonder if this extension of upstream competition is slightly out of sync with reform for abstraction licences. The Government are concerned that the water supply is limited and are rightly looking at reforming these licences, the system for which was set up in the 1960s. Reforms will make abstraction more sustainable, but this probably is not happening for another two years or so; indeed, a consultation was launched only last month. Even with a more competitive market and more upstream competition, we may not have the surge in new entrants that we want until they have more certainty on the future of abstraction licences. It would be disappointing if good reforms were hindered in the short term because they are not aligned with other important steps being taken. However, I am sure that hindered reforms are better than no reforms.
Although it is not specifically covered in the Bill, I will talk briefly about the issue of identifying tenants, which surely must be an area of future consideration. At present, there is a premium of around £11 per household on all water bills because of bad debts. Water companies do not know who the occupiers are, as they are often short-term renters. Sometimes a property will have a high turnover of tenants, too, making the problem worse. Enabling legislation to make landlords identify the tenants who are liable for unpaid bills does exist but has not been implemented. This may seem like more bureaucracy for landlords, but it would arguably add no more burden than the checks they already have to make to make certain that they get paid the rent, and information they already give—for instance, to the immigration authorities. Ultimately, everybody pays for the failure to successfully recover unpaid debts.
There are two causes of bad debt for water companies: those who cannot pay and those who will not pay. For those who cannot pay, we already have mechanisms in place. The social tariff exists, in most water companies, for customers on an income below £15,800. That tariff is usually applied to those in arrears, if they can demonstrate that they cannot pay. For those who will not pay, marking their credit rating will at least reduce their ability to take credit in the future, to the benefit of future lenders.
Perhaps we also ought to look at reduced flow measures. Essentially, those who will not pay their water debts would receive a water supply only sufficient to enable them to drink. However, the reduced flow would make it inconvenient to use the supply in other ways, such as for baths. Such measures were made illegal in the Water Industry Act 1999. However, they are applied in certain Australian states, so measures like this ought to be considered. After all, I am sure that we would like to see a reduction in the bills of ordinary and honest families. This could be a way to achieve that.
It is good to see the Government addressing the affordability of flood insurance for those in high-risk areas. However, I have one small point of concern with the flood reinsurance scheme. While flood reinsurance seems to be backed by industry, perhaps we need to think more fundamentally about where many areas of housing are located. We would all argue that it is simply not a good idea to have lots of housing in an area of high risk and frequent flooding.
As the noble Lord, Lord Oxburgh, referred to shot foxes: the Bill has simple aims, and indeed, it was summarised in only four pages. However, it is 230 pages of dense text, including 81 clauses in four parts, and has no fewer than 12 schedules. Is it possible that the drafting team for the roughly 700-page Finance Bill, having taken a rest after passing their Bill through the other place, leapt to what passes for immediate action to draft this particular legislation? Battalions of people have been interpreting the Finance Bill for a living, but they are threatened by the welcome creation of the Office of Tax Simplification. I hope that they do not believe that this is an employment scheme to ensure that they will be able to find their metier in the world of sewage. My only plea is that readability should be higher up the list of priorities.
However, I must say that it is a rare thing indeed for a Bill to have so much support from the industry concerned. That is not to say this Bill is a gift to the industry, to the customer’s detriment. It rather suggests that quite sensible and thorough reforms are contained in the Bill. Credit must go to the Government—and to the Minister—for ensuring that customers will be offered more choice and that the long-term resilience of water and sewage supplies will be more secure.
My Lords, the Water Bill has very much to commend it, and has been commended around the House. I will start by declaring my interest, albeit a very minor one, as a dairy farmer. I am very aware of the price rises that have come through in recent years, and due to my experience in the dairy industry I am not at all surprised that a milk co-operative of farmers is leading the way in some of the advantages in Scotland. I thank all Members today for their contributions, the Minister for his introduction, and thank him and his officials for the helpful discussions he has conducted with all sides of the House. We have also received many briefings, which have been very helpful, especially the information from and discussions with the Water Industry Commission for Scotland. The noble Earl, Lord Selborne, underlined the importance of understanding the benefits achieved and the lessons learnt.
All sides of the House have come forward with a general welcome, but I am sure that the Minister is in for a very heavy and intense Committee stage, as all noble Lords expressed concerns when they got into the detail of what is involved in the Bill. My noble friend Lord Whitty outlined our approach, and his description of the industry shows that reform is required. The need for reform of the industry was echoed throughout the Chamber. There is a welcome choice for businesses and non-household customers by allowing them to switch suppliers. The noble Lord, Lord Cameron, called for more ambition, and competition without de-averaging was brought up around the House, especially by the noble Lord, Lord Moynihan, and other noble Lords.
Improved services and innovation were a key focus of many comments, and there was also a keen focus on customers, which my noble friend Lady Kennedy deemed to be missing. She mentioned the WaterSure scheme and the necessity of a change of culture. The ensuing downward pressure on prices was also welcomed around the House, especially by the noble Lord, Lord Sheikh, and the noble Baroness, Lady Parminter. That leads to improved infrastructure, which was a keen focus of the noble Baroness, Lady Neville-Rolfe, whose speech I would sum up as a cry of, “We can do better”. I look forward to many of the Minister’s replies on the infrastructure and resilience of the water provision. That was an important part of the speeches by the noble Baroness, Lady Parminter, the noble Lord, Lord Crickhowell, and the noble Earl, Lord Cathcart. Indeed, there was a general call—in particular from the noble Baroness, Lady Parminter, my noble friend Lady Kennedy, and the noble Lord, Lord Borwick—for a sharpening up of real action to be applied through the use of databases, metering, and the achieving of a more ambitious leadership, which the noble Lord, Lord Cameron, also mentioned.
The Minister will need to explain to the noble Lord, Lord Oxburgh, how the various regulatory authorities will complement each other. This landscape will be welcomed by all before Committee. It will be easier to trade water. The noble Earl, Lord Selborne, among others, showed his concern for innovation and management plans. That was also welcomed by others.
The Bill will make it easier for new entrants in a more open marketplace, by removing some of the existing regulatory barriers. This was welcomed by the noble Lord, Lord Borwick; but many who spoke were concerned by the lack of an exit ability in this Bill. Charities, hospitals, and multisite companies, will also benefit from dealing with one supplier, and from an invoice rationalisation. Extending the scope for an environmental permitting regime to include water abstraction and fish passage approvals was also a key emphasis for many noble Lords.
An important reason for this Bill is the introduction of the Flood Re scheme. One half of the question to the issue concerns flood defences, a matter addressed by the noble Baroness, Lady Humphreys. We support the Flood Re scheme and encourage measures to make insurance affordable, just as we hope the Government will ensure that water bills are affordable for all. Households in areas of risk from flooding can find it difficult to obtain affordable insurance. Various aspects of this were of keen interest to the noble Earl, Lord Lytton. That is why the previous Government began negotiations with the insurance industry to establish a levy-funded insurance pool for households at high risk of flooding, aimed at keeping premiums affordable.
The Government have failed to prioritise the issue, and the new scheme will not be introduced until 2015 at the earliest, with some reports suggesting that it may slip by another year. The Government’s flood reinsurance scheme does not appear to account for a change in a number of properties at high risk of flooding. The main risk is not static, with the Government’s own figures showing over the next 15 years alone, 1 million more people could be put at significant risk of floods because of climate change. The Government have rejected clear advice from the Committee on Climate Change that the flood reinsurance scheme fails to take into account the likely increase in numbers of at-risk properties as a consequence of climate change, and fails to incentivise flood resilient repairs to at-risk properties.
The setting of a target number of registered premises by the Secretary of State should be informed by the best available independent evidence, including taking into consideration these impacts on climate change, and the Government should be required to consider the advice of the Committee on Climate Change. Given that the Secretary of State in the other place does not believe in climate change, can the Minister guarantee that this will not affect the longevity and effectiveness of the Flood Re scheme?
The long-term aspects of the success of the scheme were a matter of great concern to the noble Lord, Lord Crickhowell, the noble Earl, Lord Cathcart, and others. It also does not seem as though the flood reinsurance policy includes any provisions to reduce flood risk, or to encourage the transition to risk-reflective pricing. Can the Minister tell the House what steps will be taken in this direction?
We would also encourage the Government to publish regular reports on the number of properties eligible for inclusion in the scheme, and the cost of including those properties. Can the Minister please provide the House with a full breakdown of the number of properties that the Government propose to exclude, including band H properties and those built after 1 January 2009? A large number of properties have been excluded from the scheme, no right of appeal has been established for households that are not included in it and there is currently no means of checking whether a property is included in it—for example, prior to purchase. This often hinges on whether the property was built before 2009. Furthermore, will he please tell the House whether households will have a right of appeal to be removed from the scheme? Many speakers today asked questions around exclusions from the scheme, and I am sure this issue will be well tested in Committee.
Purchasers should be able to check whether or not a property is covered by the Flood Re scheme prior to purchase. Surely the Government cannot intend families to be unaware of whether or not a property is covered by the scheme when they are putting in an offer for it. Noble Lords would appreciate reassurance on this front. It should not be sufficient to rely on proper and effective searches to unearth these details. The noble Lord, Lord Cameron, also voiced his concerns about that. Therefore, while I congratulate the Minister on making some progress on this matter, the condensed timetable in which it has been put before Parliament means it is especially important that he responds to these concerns, and others from around the House. Do the Government recognise the concern at the reduction in flood defence resources that they have imposed on the Environment Agency, and the greatly reduced funding by the Minister’s department following downgrading of this element from that department’s list of priorities?
It is deeply concerning that the Secretary of State for the Environment gives every impression of being highly sceptical of the scientific evidence of climate change, and so unwilling to take this seriously that he has apparently failed even to request a briefing on this issue from his own Chief Scientific Adviser. In fact, the Secretary of State has said that, if climate change is a reality, which he has not accepted, there could even be benefits for the UK.
The realities of flooding in Somerset, and its effects, were spoken about by the noble Baroness, Lady Bakewell. These are all very serious issues and we all share a deep concern for those affected. The costs of flooding to the UK’s economy are already considerable. The economic losses from the July 2007 floods were estimated to be £3.2 billion. Flooding on 20 July 2007 in Gloucestershire alone is estimated to have cost the country £50 million. Figures published by the Association of British Insurers show that the cost of flood damage since 2000 has increased 200% on the previous decade. At a time when severe flooding is becoming more frequent, thanks to climate change, the Government are cutting spending on flood defences, in spite of the evidence showing that for every £1 invested in flood defence schemes £8 is saved further down the line, as was clearly stated by the noble Lord, Lord Sheikh.
The Government have reduced investment in flood defences in real terms from £646 million in 2010 to £527 million this year. By 2015, the figure will be £546 million—still £100 million lower than the level they inherited. Furthermore, the Government have also admitted that the £148 million they propose to raise from external contributions has not been secured. The previous Labour Government prioritised flood defences and increased funding each year after the 2007 floods from £264 million in 2007-08 to £354 million in 2010-11 to protect homes and businesses.
The noble Lord, Lord Crickhowell, expressed concerns about flood plains. Will the Government make water undertakers statutory consultees on planning proposals for building on flood plains? On social tariffs, will the Minister please tell the House whether he will be backing Labour’s plan for a national affordability scheme? Does he agree that having only 25,000 homes on a social tariff is vastly insufficient? Labour would like to see the introduction of a national affordability scheme with a single eligibility criterion for assistance with bills, and which requires all companies to participate in and fund the scheme. Regulation of the existing regulatory price control regime by a tougher Ofwat would ensure that this did not lead to higher bills for other customers.
In Committee, we would like to examine Ofwat’s powers with a view to providing it with a greater range of criteria to trigger a reopening of the current five-year price reviews, thereby enabling Ofwat to require water companies to reduce prices for customers. Ofwat needs to become more of a powerful consumer champion that stands up to the water industry, rather than being just a regulatory body. It is important that there should be movement both ways. If a company is allowed to reopen due to changes, it must also be the case that, if a change is to that company’s advantage, consumers should be able to examine those changes through Ofwat. All water companies should be required to provide detailed information on their performance, ownership and financial tax structures—an issue raised by my noble friend Lord Hanworth.
I am sure that much on the future infrastructure and structure of the industry will be of great concern to the Competition and Markets Authority. We recognise the improvements that should come from changing the frequency of drought planning to a five-year cycle to coincide with other water planning cycles. Given the usual ability to improve Bills as they flow through their stages in your Lordships’ House, I am sure that all participants will ensure that this Bill will be much improved when it leaves.
My Lords, I thank all noble Lords for their contributions to this debate. A large number of questions and points have been raised, and I had better get cracking if I am to respond adequately to as many as I can. All the points raised will be taken away and considered carefully. I know that during the remaining stages of the Bill I will have plenty of opportunities to answer any points that I do not address today.
Several noble Lords raised concerns about introducing upstream reform ahead of abstraction reform. We will not take action that would increase unsustainable abstraction. We have looked carefully at how the regulatory regime will operate to reduce this. There are strong safeguards in the existing regime to ensure that the Environment Agency and Ofwat work together to prevent unsustainable abstraction in the short term.
Noble Lords asked what environmental safeguards will be in place regarding upstream reform. In order to sell water into the public supply, all non-water company abstractors will need to apply to the Environment Agency for a change of use in their abstraction licence. They will be required to go through the same process as if applying for a totally new licence. The Environment Agency can therefore refuse a change of use request if it would lead to unsustainable abstraction or deterioration in the catchment, or it could apply conditions to ensure that this did not happen. In addition to the existing process for issuing abstraction licences and regulating change of use, there are separate licensing requirements for new entrants to the water sector. The Bill was also amended in the other place to require Ofwat to consult the Environment Agency before issuing a water supply licence entitling the holder to input water into the public supply system.
A number of noble Lords raised the issue of the resilience duty and compared it against a potential sustainable development duty. Having listened carefully to points raised in the other place, we have made amendments to the new duty of resilience. I am pleased that we have been able to respond on these important points and that some noble Lords who have spoken and stakeholders such as Blueprint for Water have welcomed the changes. This new duty is an important contribution to the regulatory framework. It will ensure that regulation of this sector takes appropriate account of the impacts of environmental pressures, population growth and patterns of demand on our essential services. Supporting reform of the aspects of the current system that institutionalise short-term thinking will help to reduce pressures on the water environment, on which we all rely.
The noble Lord, Lord Oxburgh, referred to Singapore’s experience. I lived there for five years. He is right about the growing population and demand, and a long reliance on neighbouring Malaysia. I can remember the pipes that ran the length of the country squirting water tens of metres high. That has forced Singapore to be hugely innovative, and it is quite a lesson to us.
The noble Lord, Lord Redesdale, asked: why the resilience duty; why not sustainable development? Ofwat has had a statutory duty to contribute to the achievement of sustainable development since 2005. We have also issued statutory guidance, which states clearly that sustainable development is central to everything that Ofwat does and must be fully embedded throughout its regulatory decision-making. We have thought carefully about how to change Ofwat’s duties to support action to address the long-term challenges facing the sector and encourage better outcomes for customers and the environment. The best means of doing this is to create a new overarching duty specifically designed to prioritise an enhanced focus on long-term resilience.
The noble Lord, Lord Whitty, asked whether the resilience duty included social resilience. Ofwat already has a primary duty to protect consumers, and this includes particular responsibilities to vulnerable groups. By requiring Ofwat to secure the long-term resilience of water supplies and services and the sustainable management of water resources, the resilience duty protects both current and future consumers and will help to keep bills fair for the long term.
Several noble Lords asked about metering. The Government agree that metering provides a fair way to pay. We want companies to do more to promote metering to those who would benefit, although it is important to remember that some struggling customers would see their bills rise. Therefore, water companies are best placed to find the most appropriate local solution in discussion with their customers. The costs and benefits of metering vary from region to region, depending on the level of water stress. As the noble Lord, Lord Cameron, said, and to answer the noble Baroness, Lady Kennedy, metering has winners and losers. Some bills go up and some go down. The evidence suggests that there is not a very good cost-benefit case for universal metering outside areas of serious water stress—areas where, indeed, universal metering is already possible.
My noble friend Lord Cathcart asked about a national policy statement for water, and we are continuing to keep the need for that under review. Water companies have recently consulted on new water resources management plans covering the period 2015 to 2040.
A number of noble Lords asked about retail exits. We have considered this issue very carefully, and I need to be absolutely clear about this. It is not something that we have completely ruled out for the future, but at present the risks of retail exit outweigh the potential benefits. First, we feel strongly that water companies must continue to be responsible for all parts of the supply chain. They must have a connection with their customers. Secondly, there is a risk that retail exit would be forced on the sector. That is not a risk we are prepared to take: it should be for Ministers and Parliament to decide whether or when separation should take place. Thirdly, we must not forget household customers, who will not be able to switch. If we allowed retail exit, householders could be left stranded with a water company with little incentive in investing in customer service once it had washed its hands of its business customers. This would effectively create a two-tier water market, with household customers losing out.
My noble friend Lord Moynihan said that 76% of companies support retail exits. However, there is in fact a real mix of views in the sector on this issue. The 76% figure comes from an article in the publication Utility Week. It is based on telephone conversations with 36 individuals and reflects the personal views of those interviewed.
The noble Lord, Lord Cameron, and my noble friend Lady Parminter spoke about de-averaging. This is the question of whether customers’ charges could directly reflect the specific costs associated with supplying their premises. This is instead of what we have now, where customers simply pay a share of the total costs of running the network.
We should be careful to distinguish between the different kinds of costs that are reflected in water bills. It makes sense to share the costs of maintaining the network on which all customers rely—more than 90% of water charges—across all customers, regardless of their location. The use of average pricing for such charges is common practice in comparable sectors such as gas, electricity and telecoms where regionally averaged network prices have remained the norm following liberalisation of those industries. However, I think that many noble Lords would agree that there could be real benefits from increasing the cost reflectivity of charges for different sources of water. It would reflect the environmental costs of supply, which is especially important in water-stressed areas or for business users that use large volumes of water. Our charging principles make it clear that the Government’s detailed charging guidance to Ofwat will place limits on the scope of any de-averaging of prices.
The noble Lord, Lord Cameron, and my noble friends Lord Selborne and Lord Moynihan referred to the Scottish model. The vast majority of our approach to retail competition is very similar to Scotland, but water is a devolved matter and the systems are different. Scotland has no upstream competition; the Scottish market is much smaller than the potential retail market for England; Scotland has only one incumbent retailer and one wholesaler. There are 19 integrated incumbent water companies in England and Wales. Our approach to retail competition is being developed jointly with the industry, along with the Scottish and English regulators and others. This group is well placed to identify the conditions that will work best in England, building on the Scottish experience.
On the specific issue of a no-detriment clause, the Bill already provides a general duty, in Clause 23, to ensure that water companies do not exercise undue preference to themselves or their own retail businesses. It is essential that all those who enter the markets have confidence that incumbent companies act appropriately. They must not be able to abuse their dominant positions. We have carefully considered the issues relating to discrimination in relation to the market reforms in the Bill. My noble friend Lord Moynihan raised the procedure for changes to water company licences. The issue is complex and sensitive and I am happy to discuss it further with him if he would like.
The noble Lord, Lord Whitty, asked about environmental protections for upstream. New entrants will be subject to the same environmental controls as other abstracters and those that discharge water back into the environment. The environmental regulators will be involved in the licensing and appointment of new entrants that offer upstream services to assess their suitability to operate in the water supply and waste water markets. They will also be a statutory consultee in the preparation of market codes. In the context of market reform, the noble Lord, Lord Whitty, suggested that the Bill only provides for negotiated access to the market. We are satisfied that the Bill will allow regulated access to the retail market through market codes and rules. There is flexibility to enable negotiation to allow, for example, local issues to be addressed in the upstream market.
My noble friend Lady Neville-Rolfe asked a number of questions, the first of which was to do with large-scale investment. We aim to increase resilience, included in which is planning our strategic infrastructure for years to come. Our work on water resource management plans, looking at water resources out to 2040, is part of this long-term planning. The framework we are setting for Ofwat will ensure that economic regulation of the sector supports these objectives. I am happy to commit to placing a note in the Library on responsibilities and accountabilities in the area requested by the noble Lord, Lord Oxburgh.
My noble friends Lady Parminter and Lady Neville-Rolfe asked about how we prevent the interplay of the various agencies and players now involved becoming bureaucratic and wasteful. The market operator is a company that will be set up to facilitate switching and financial settlement between market participants. It is common for such bodies to be established to simplify switching processes. The equivalent in Scotland is the Central Market Agency. Such bodies are not set up by legislation, as a general rule: they do not have any statutory powers, duties or roles.
My noble friend Lady Neville-Rolfe also asked about duties combined with the regulatory formula for water companies and whether that encouraged too much or too little capital investment in the longer term. It is the role of the regulatory system to ensure that there is sufficient investment in our essential water and sewerage services which are undertaken as efficiently as possible. Ofwat undertakes a comprehensive efficiency challenge every five years through the price review process. The Government are responsible for setting the policy and legislative framework. They also issue guidance to Ofwat to help it balance all its duties.
We have discussed the new duty of resilience in the Bill to address the specific uses relating to the long-term pressures facing the water industry. The duty makes it clear that this is not only about capital solutions; it could also be delivered through more innovative approaches, such as demand management and catchment management. It is widely recognised that such solutions have the capacity to improve long-term resilience.
There was discussion, particularly from the opposition Benches, about affordability and social tariffs. The Government take seriously the real cost-of-living pressures on households and the need to keep bills as low as possible. The average household combined water and sewerage bill in 2013-14 in England and Wales is £388 a year or just over £1 a day. The average increase in bills has been in line with inflation since 2009. That is because the price review process keeps bills affordable.
Looking forward, we support Ofwat in its efforts to ensure that consumers get a fair deal. Ofwat has estimated that the current price review could reduce pressure on bills from 2015 by between £120 million and £750 million a year. All the water and sewerage companies have developed packages to help customers with affordability issues. These include customer assistance funds, support tariffs, debt advice and water efficiency measures. Social tariffs give an extra tool.
We published social tariff guidance in April 2013. By April 2015, the vast majority of companies expect to have a new social tariff in place. The idea of legislating for a national social tariff overlooks the regional nature of the water industry. Costs are different in different regions, as are the nature of the affordability problems faced by customers. A national scheme would be a very blunt instrument. Company social tariffs allow for flexible schemes responding to local issues and are developed in consultation with customers.
My noble friends Lady Parminter and Lord Borwick, as well as the noble Baroness, Lady Kennedy, asked about the bad debt situation. We are firmly of the view that regulation should not always be the first resort of government. The effectiveness of measures to manage debt differs significantly between water companies. We want to see this change. At present, customers in some regions are paying much more than others to cover the cost of unpaid bills. We are making sure that the industry’s worst performers are challenged to match the performance of the best. The industry is already taking more responsibility in this area. It is working on a voluntary approach to sharing data and information on customers in rented accommodation through the landlord database which will be launched in March this year.
Several noble Lords, particularly on the opposition Benches, raised corporate governance and water company structures. Customers rightly expect governance standards in a regulated industry to be high. Questions about these standards go to the heart of the sector’s public legitimacy, which is why Ofwat is taking action to ensure improved standards of governance across the sector, ensuring that it leads the way in corporate governance. It is right that the independent regulator tackles these issues. The water companies’ licence makes clear that they are expected to be transparent about their board leadership, financial structures and governance arrangements.
Recently, Ofwat has consulted on new voluntary principles relating to board leadership, transparency and governance. We particularly support the drive for increased independent and customer representation on boards. For the record, I probably should say that I do not agree with the characterisation of the noble Viscount, Lord Hanworth, on the position regarding Thames Water and the Thames tunnel but he would not necessarily expect me to. My noble friend Lady Humphreys raised the Welsh water model and I welcome her comments. I note that different water companies excel at different things but no one model has been shown to have been better than any other. That model is popular with customers but I venture to suggest that the not-for-profit structure has not resulted in particularly outstanding performance on some key issues—for example, customer service or management of customer debt.
Turning to the insurance part of the Bill, I fully appreciate concerns raised in relation to those properties which are at the very highest risk of flooding or which some people have termed as genuinely uninsurable. I should like to make clear that all those properties will be included in Flood Re at the start of the scheme. However, over time, Flood Re may develop an approach for properties that flood very frequently that will help to reduce the impact of their claims on the scheme's affordability. For example, Flood Re could suggest resilient repairs and, if these were not taken up, could set higher premiums or excesses. Only in the most extreme cases would exclusion from Flood Re be considered.
My noble friends Lady Parminter and Lord Sheikh, the noble Earl, Lord Lytton, and the noble Lords, Lord Grantchester and Lord Whitty, all raised the issue of climate change and resilience and information to households. I recognise the strength of opinion on this important issue and share many of the views expressed. We welcome the constructive contribution of the adaptation sub-committee and recognise the need for Flood Re to publish a plan for transition to the free market. The Bill provides for that. The ABI has just come forward with some thoughts on providing information to householders in Flood Re about their flood risk. Discussions on the details of this and on incentives to drive the uptake of household-level resilient measures are continuing and I will provide a further update on this issue to your Lordships in Committee.
I am running short of time. Noble Lords have raised important issues about the various categories of exclusion. I hope that noble Lords will forgive me if I confine my remarks to saying that Flood Re is designed to help those who are struggling most to afford rising insurance premiums. Flood Re targets financial support to those at the lower end of the income spectrum by providing proportionately more support to those in council tax bands A to C. In designing Flood Re, a balance has had to be struck between supporting those at the highest risk and managing the impact on those at low risk. Including additional policies within Flood Re could not be achieved without decreasing the level of support going to those most in need or increasing the levy paid by all households. Perhaps we can talk further either before or during Committee about the specific issues of 2009 properties, business properties and council tax band H, which noble Lords raised.
The noble Lord, Lord Cameron, and my noble friend Lady Bakewell of Hardington Mandeville raised the issue of what has been going on over the past few weeks on the Somerset Levels. Flooding has had a devastating effect there and in other parts of the country. The Somerset Levels are among the most seriously affected and people have had to endure flood water and disruption for several weeks. It is incredibly hard for them and I know that all noble Lords share my sympathy for them. Local authorities, residents and the emergency services have been working around the clock to make sure that people are safe and to help with the clean-up.
We have been talking with local agencies about what more can be done and we have asked the Environment Agency for a detailed analysis on the proposed major dredging and any other action that can be taken to manage flood risk on the levels. A local task force has been set up comprising local partners and communities to develop a clear, long-term vision for the future of the Somerset Levels and moors. My right honourable friend the Secretary of State has been in Somerset today talking to local people, and the noble Lord, Lord Grantchester, should not necessarily believe what he reads in the red tops.
We talked about the need to keep water available and affordable and to continue to improve the environment. We also mentioned the importance of the provisions on flood insurance for the future availability and affordability of cover. This underlines the importance of the issues that we have been discussing today and will discuss over the coming weeks. For this reason, I am grateful for the many contributions today and I look forward to the debates that will follow.
I hope that in my few closing remarks I have been able to deal with some of the issues raised by noble Lords during the debate and I apologise that I just do not have time to come to them all, but I know that one way or another over the next few weeks we will do so. Once again, I commit to having further discussions inside and outside this Chamber with noble Lords on their concerns. If any noble Lord wishes to raise a concern, my door is always open. In the mean time, I commend this Bill to the House.
Bill read a second time.