Report (1st Day)
Clause 1: Types of water supply licence and arrangements with water undertakers
1: Clause 1, page 2, line 4, at end insert—
“( ) Granting a retail or restricted retail authorisation for supply to non-domestic sector customers must be done in such a way and on such terms that it does not disadvantage domestic customers.”
My Lords, I hope noble Lords are not leaving because Amendment 1 is such a complicated amendment. It is one of the most straightforward amendments on the Marshalled List today.
As the House will know, we on this side have supported the objective of introducing a degree of competition into the retail end of water supply for the non-domestic sector. However, our support for that—and I think a lot of people’s support for that—was on the clear understanding that there would be safeguards to ensure that there was no disadvantage or detriment to domestic consumers as a result of the competition operating within the business or non-domestic sector. That has of course proved to be the case in Scotland, but the Scottish structure is not exactly the same as the English structure, and we felt that it was necessary to make explicit that there should be no disadvantage. In principle, the Government appeared to agree. We therefore asked the Government to make that proviso clear in the Bill but the Minister said that that was not necessary.
Since Committee, we have pressed the department on how the existing safeguards would work and where those existing safeguards appear. According to replies from the department, the safeguards that it is relying on are twofold. First, they can be found in the Water Industry Act 1991. There is a similar reference there but that is in the context of a piece of legislation in which no competition was envisaged. It was in the context of monopoly regional supply and is therefore not completely effective in dealing with the entirely changed situation that the Bill would introduce.
The second place where the department says the safeguards are is in Ofwat’s regulatory methods on not allowing cross-costing with the domestic sector. That is true, but regulatory conventions and the way the regulator does its work are not as clear or as legally watertight as stipulations in statute. In any case, the Ofwat position appears to relate to cross-charging on pricing and not to other aspects, such as the level of service to the domestic consumer. The existing legislative and regulatory protection is not sufficient, so why not make it unequivocally clear in the Bill that the introduction of retail competition will bring no disadvantage to the millions of household consumers in England and Wales?
The Government sometimes say that the problem is not going to arise and point to the situation in Scotland, where there have clearly been benefits to business consumers, including those that did not actually switch from the incumbent provider, and domestic consumers. But the market is different in England and Wales. It is more complex and over time will become even more complicated. There are therefore unforeseeable consequences if no safeguards are built in. Consumers need to be reassured in this legislation that they have that protection. That is what my amendment is about.
I note that the Government have tabled two amendments in this group that give a clear role for the Consumer Council for Water in the charging regime. I welcome those government amendments, not least because they are very similar to the ones that I tabled in Committee. I therefore commend the Government on bringing them forward today.
The introduction of competition in the business market should not be detrimental to ordinary households in any way. The engagement of the Consumer Council for Water will help to ensure that is not the case but that is not as clear as the adoption of my amendment would be. The Government need to go a bit further and state that “no detriment to householders” will be clearly and unequivocally in the Bill and will apply to the new market situation that will arise as a result of the passage of the Bill, the relevant provisions of which, in general, we support. I beg to move.
My Lords, I start by reiterating the interests that I declared in Committee. I am the owner of a farm, through which a tributary of the River Thames runs; I have a bore-hole, which supplies farm and tenanted properties; and I have a property that flooded in 2007.
I thank the noble Lord, Lord Whitty, for moving his Amendment 1 on the important issue of protecting householders. The Government take this issue very seriously. We are very keen to ensure that household customers remain fully protected following our reforms to the non-household market. I am confident that we have achieved this. The Water Bill introduces reforms that will enable us to manage future pressures as efficiently as possible while ensuring that customer bills are kept fair for the long term.
Mechanisms are already in place to prevent business customers’ bills being subsidised by household bills. Ofwat’s policy of setting different retail price caps for household and non-household customers in the current price review means that households will not subsidise the competitive market. We also expect household customers to benefit from the efficiencies and innovations that competition will foster.
It is also important to remember that the Secretary of State, Ofwat and the Consumer Council for Water have a shared duty to protect customers. They must have special regard to people who are unable to switch suppliers—that is, household customers—when carrying out their statutory functions. I am therefore confident that household customers will be protected against any negative outcomes resulting from the expansion of the competitive market.
This brings me to government Amendments 57 and 58. I was grateful to the noble Lords, Lord Whitty and Lord Grantchester, for highlighting in Committee the important work that is done by the Consumer Council for Water. The noble Lords tabled an amendment to require incumbent water companies to consult the Consumer Council for Water on their draft charging schemes. In Committee, I explained that the Consumer Council for Water already does this, but I agree that it is a good idea to place into legislation the central role of the Consumer Council for Water, ensuring that the consumer voice is heard. That is why I am bringing forward Amendments 57 and 58 today. The Consumer Council for Water already plays a fundamental role in working with the companies to ensure that their charges schemes meet stringent, research-informed safeguards on behalf of customers. We want to see this continue.
I hope that our amendments illustrate that the Government are listening. I am grateful that we have continued to collaborate in a positive way throughout this process and am delighted to see real improvements coming forward. I ask the noble Lord, Lord Whitty, to withdraw his amendment.
My Lords, I think that the Government have gone slightly further than previously in referring to there being no disadvantage in relation to the cost of water. Indeed, we will return to the affordability issue later today. The Minister did not deal completely with the issue of non-price disadvantage. The servicing of consumers could suffer from the introduction of a degree of competition if too much of a company’s effort was focused on the business end and led to a diminution in service as well as a disadvantage in price. The Minister has probably said enough for me not to press this point today or in this Bill, but the department and Ofwat will need to be quite clear as to their intentions in that and in their beefing-up of existing mechanisms designed to protect household consumers. I therefore welcome the Government’s amendments and will support them when we reach that point. I shall withdraw this amendment with some slight regret, but the Minister has been relatively helpful. It has been a good start.
Amendment 1 withdrawn.
Schedule 1: Water supply licences: authorisations
2: Schedule 1, page 126, line 29, at end insert “for the purpose of, or in relation to, its participation in arrangements made by the undertaker for the introduction of water into its supply system”
My Lords, in moving the amendment, I shall speak also to 33 amendments grouped with it. We return to the potential risk of de-averaging of charges, on which I moved a plethora of amendments in Committee. I think that there was some mystification around the Chamber as to the purport of the amendments. I hope that the amendments this time round will not come as such a mystery, because we rehearsed in Committee the potential risk of de-averaging of charges. There was general agreement that de-averaging was to be avoided, but I think that we still need to test whether the Bill gives the sort of protection that my noble friend the Minister assured us it did in Committee.
The reason why I think that the Bill currently presents a real possibility of non-household customers paying different prices for the same services within the same appointed area is because of the nature of the link between upstream and downstream. The customers who would be most adversely affected by de-averaging of charges would most probably be smaller businesses and non-household customers in more remote rural areas—at this moment, I should declare my interest as a farmer and therefore, by definition, living in a rural area. As I said, the problem arises from the direct link in the Bill between the retailer and the provider of resources. Such a link was allowed in the Water Act 2003 for water in a different form and reappears, modified, in the Bill. The link is introduced for the first time for sewerage services.
The danger is that, if a new entrant retailer can access a new source of water more cheaply than the incumbent and offer it to selected customers with the focus on price, and price alone, there will be no incentive to improve on or even match the incumbent in providing, for example, water efficiency services that might be beneficial to the customer but which might involve an upfront cost for either the retailer or the customer. In other words, if you can offer a simple “buy it cheap” service for specific customers, you have immediately blown a hole in the averaging regime.
The Bill creates perverse incentives which direct the focus of retailers away from helping customers to play their part in reducing levels of water abstraction and, more generally, in building water industry resilience. The Minister told me in Committee, and I am sure that he will repeat, that the amendments would allow incumbents to dictate the future direction of upstream markets. I disagree. As noble Lords will see, the amendments mention participation and allow—indeed, encourage—incumbents to look for innovative solutions, but not at the price of cherry-picking or allowing people to purchase water or sewerage services on price alone.
The Government agree and say in their guidance on draft charging principles that de-averaging must be prevented. I cite their advice:
“No category of customer should be unfairly disadvantaged by the way reform impacts on water charges. A fair and non discriminatory approach to sharing network costs”—
I repeat, sharing network costs—
“will be critical. For example, rural customers must … be protected”.
That we can all agree on. De-averaging is not desirable and must be prevented. The issue is whether the Bill as drafted will lead inexorably to two-tier charging, whatever guidance the Government might be giving on charging at the moment. The guidance goes on to say:
“Averaging of charges is common practice in sectors that have much greater scope for contestability than the water sector does. Ofwat has a number of tools to limit the effect of de-averaging on customer charges. They will use these to ensure that any marginal changes are introduced in a measured fashion and, above all, that they are in the overall interests of consumers”.
My problem is that I am simply not persuaded that Ofwat will indeed have the tools to limit the effect of de-averaging on customer charges. Given the proposed link between retailers and potential upstream service providers, I cannot understand how Ofwat will be able to manage the impact of de-averaging to prevent any unfairness between customers, especially rural customers. The problem is, of course, that once you have allowed that direct link between upstream and the retailers, you have to justify in law any interpretation of the rules in court.
I mentioned in Committee what is perhaps an obscure case, but nevertheless a legal precedent, the Shotton case in Wales, where the precedent was set that local costs were required to be used in a ruling in setting prices under bilateral deals. My noble friend the Minister assured me that this precedent could be ignored, but I remain convinced as I have the feeling that legal precedents are legal precedents. An even more serious threat would be if this were determined under a European law and the United Kingdom Government might not be able to prevent the de-averaging of charges if a link is allowed, as the Bill allows, between the wholesale and retail markets. There is a threat and it is incumbent on us to be absolutely certain that we are not widening the scope for de-averaging by the way in which the Bill is drawn up.
The Bill has the laudable purpose, in part, of promoting the cause of reducing water consumption and reducing the harmfulness and quantity of wastewater returned to the sewage system. What is needed to achieve this is a focused retail market, which forces retailers to differentiate themselves principally by the quality of their service rather than by price. This would ensure that customers can make real contributions to reducing abstraction and discharges and would contribute to establishing a more resilient and environmentally secure water industry. All this is highly important but we are not going to get it by selling on price and price alone.
These amendments therefore seek to break the link between an upstream service provider and a retailer. Those with wholesale authorisations would be required to interact with incumbent water companies rather than retailers. This would then allow Ofwat to require incumbent water companies operating networks to procure water and sewerage treatment services in the most economic way possible. My amendments therefore amend Schedules 1, 2, 3 and 4 so that the holders of authorisations participate,
“in arrangements made by the undertaker for the introduction of water”,
“the removal of matter from the undertaker’s sewerage system”,
into the supply system, so that they cannot bypass the undertaker. I beg to move.
My Lords, I declare a past interest as a former chairman of a water company in this country and I sit on the board of one on the continent of Europe. I hope that my noble friend will take the remarks of the noble Earl, Lord Selborne, very carefully because there is a tendency to think of water as if it is like any other utility. Of course it is not because water is different, wherever you take it from, and it will be under bigger pressure than ever before because of the effects of climate change and of demand increases.
It is often possible in a small area to provide a small programme of water supply at a lower price because it is being tailored particularly and for very narrow demands. We are going to have to find better ways of sharing water supply in any case because of what is happening in this country, so the point that my noble friend Lord Selborne raises is very important. I have read carefully my noble friend’s comments about the Bill. None of us wants to reduce the amount of competition which the Bill provides, but I hope that the Minister will give some reassurance which goes beyond merely saying that Ofwat has the powers to deal with this. That is because I share my noble friend’s doubts that Ofwat has those and whether those powers would stand up in law—certainly, whether they would stand up were the law part of the very valuable European legal structure under which we operate. Thank God for the European Union, or we would never have the water supply which we have today. Our water would be much less clean and we would have much lower standards. We owe a great deal to our membership of the European Union on this, as on most other things.
However, on this particular issue we have to ensure that the Bill does not put us into a position in which de-averaging—one of the ugliest words in the English language—becomes a serious problem. I hope that the Minister will be able to reassure me that the legal situation is fully covered because I, too, think that there is sufficient precedent to make anybody reasonably concerned.
My Lords, I declare my interests as a farmer, thereby living in a rural area. Like the noble Earl, Lord Selborne, I am concerned with the effects generally on rural areas. While there are risks, I am not sure that this is the case here. We support the introduction of competition into the non-domestic market and take the issue of de-averaging very seriously. The noble Lord, Lord Deben, has spoken about how we must, indeed, be assiduous in making sure that price averaging is maintained as far as possible. However, we are satisfied that Ofwat has all the necessary regulatory tools to enable it to limit the effects of de-averaging.
Competition can also be about bringing innovation to the market in services and introducing efficiencies. However, we remain concerned that these amendments, which have been tabled by the noble Earl, Lord Selborne, might allow incumbent suppliers to constrain the development of future markets, thereby reducing the benefits that competition could bring.
My Lords, in welcoming the proposals to open up retail competition in the business sector, on Second Reading I, too, raised my concern, like other noble Lords, about the potential for the de-averaging of prices. Ensuring that rural or remote businesses do not pay more than their urban counterparts is vital. We need to share costs for water fairly, regardless of location.
In Committee, the Minister reassured the House that the regulator had the necessary tools to limit the effects of de-averaging on customer charges. Having talked to Ofwat myself, I know that it confirms that this is its belief. Equally, the Consumer Council for Water, which has the interests of water customers at its core, commissioned Martin Cave to review the issue, and he has confirmed that Ofwat can facilitate upstream competition without de-averaging.
The Government will be producing charging guidance to Ofwat, which the Minister confirmed will explicitly say that de-averaging can occur only where it is in the best interests of customers. This Bill provides Parliament with the opportunity to debate and vote on that charging guidance, following a consultation process, so that we have the necessary safeguards to ensure that it does. Not only will Ofwat have to act in accordance with such guidance, but the Consumer Council for Water will be a statutory consultee in the preparation of Ofwat’s charging rules. This seems to me to be a reasonable defence against the potential for de-averaging of water bills, particularly given that as a final resort the Government can veto Ofwat’s charging rules if they do not reflect the guidance given.
On that basis, I am satisfied with the assurances given by my noble friend the Minister, and I will not support the amendments tabled by my noble friend Lord Selborne.
My Lords, I thank my noble friend Lord Selborne for explaining once again his concerns to your Lordships. I laid out the government position on this matter clearly during Committee, and I confirm to my noble friend Lord Deben that I do indeed take this matter very seriously. I am happy to clarify the position for your Lordships again this afternoon.
My noble friend’s Amendments 2 to 29 and 31 to 36 would break the link between upstream and retail. While I know that this is not my noble friend’s intention, it would have the practical effect of derailing the reforms which this Bill seeks to introduce. The amendments would introduce a market where incumbents would tender for new water resources under the so-called single-buyer model. That is extremely incumbent-friendly, and would seriously undermine the competition that we are seeking to extend in the Bill.
The single-buyer approach, with decisions resting with the incumbent, will provide fewer rights and less flexibility for new entrants. These amendments would allow incumbents to dictate the future direction of upstream markets. This would, I suggest, present a considerable barrier to entry for new entrants. Only licensees who were able to bid for and win contracts under the terms set by the incumbent would be able to enter the market. Most importantly, it would not lead, I suggest, to a better outcome for customers. For example, there would be an increase in charges if incumbents introduced overly burdensome standards in tenders or made poor decisions over which bids to accept.
As I have said, I know that my noble friend’s intention was certainly not to undermine the market reform provisions of the Water Bill. I have heard his argument that this approach would mirror arrangements being introduced in Scotland, but this is not Scotland. The Scottish Government have taken a policy decision not to introduce upstream competition in Scotland, and that is their prerogative, but that does not mean that is the right approach for England. We face a more challenging water resource situation than our friends north of the border, and we are legislating here for a regime in England. Reducing the scope for innovation and entry into the market is not going to help deliver the change we need. I hope I have explained why I cannot accept the tabled amendments.
I know that my noble friend’s concern is about de-averaging in a more general sense, so perhaps I can take this opportunity to provide some comfort on that issue. The averaging or de-averaging of charges refers to the extent to which an individual customer’s bill reflects the direct costs associated with serving that customer. Some would suggest that a de-averaging of charges will somehow be a direct result of increasing levels of competition in this sector. However, there is no evidence to support this view. Averaged charges are a common feature across the networked utilities and, indeed, in all sorts of industries that are subject to market pressures. We think it is right that network charges should continue to be averaged, and the regulator has stated, repeatedly, that it has all the tools necessary to control the effect of de-averaging on customer charges.
The Government’s charging principles are unambiguous on this. Ofwat must not allow de-averaging that is harmful to customers, and that includes rural customers, to which my noble friend specifically referred. Our charging guidance will follow soon. I am happy to commit, as I have done before, to making it plain in that document that there must be strong, definitive boundaries on the scope of any de-averaging and that households, in particular, must be protected. There are powers in this Bill which the Government will not be afraid to use if Ofwat’s charging rules are not consistent with our charging guidance. I thank my noble friend Lady Parminter for her words.
However, we should not be simplistic. There is no doubt that there are areas where better cost-reflectivity could have substantial benefits for the environment and for the resilience of our water supplies. It must be right that the new upstream markets should reflect the environmental costs of supply. It must also be right that there are economic incentives for business users that use large volumes of water, and it must be right that water companies should seek to identify the most environmentally efficient sources of water. The Bill is all about opening the market, encouraging new entrants and increasing the resilience of our supplies. Better cost-reflectivity in the competitive part of the non-household market is a crucial part of this.
My noble friend suggested that new entrants will not focus on value-added services. He may not have put it like that, but that was the intent behind one of the points he made. New entrants already in the market, such as Business Stream, are very clear that they see value-added services as the best way to maximise profit, so I cannot accept that the way the Bill is designed makes that less likely.
My noble friend raised an important point about fears that the Government’s charging guidance and Ofwat’s charging rules might be overridden by competition law. I draw your Lordships’ attention to paragraph 5 of Schedule 3 to the Competition Act 1998. This provides for an exemption from competition law where an agreement is made in order to comply with a legal requirement imposed by or under any enactment in force in the United Kingdom. Ofwat’s statutory charging rules will take the form of a legal requirement imposed under such an enactment. The Bill provides the Secretary of State with the power of veto over the charging rules in order to ensure that regulatory practice remains well aligned with government policy. I can also confirm that there is no general prohibition in EU law against average pricing.
My noble friend raised the case of Shotton and Albion Water as a legal precedent to support the case that de-averaging is a real risk. This was a complex and long-running case. However, it is a misunderstanding to describe it as a case of de-averaging. Shotton was a very unusual case from which it is not useful to extrapolate more widely. For example, it concerned a discrete system that serves only two customers, one of which was served by Albion Water. This is very rare. To give some context, the case represented 0.01% of Welsh Water’s turnover. At the time of the dispute, this agreement was not subject to regulation by Ofwat. The Bill includes measures that would bring all such transfers within the scope of the regulatory regime. Ministerial guidance and Ofwat’s charging rules will therefore set out how charges between water companies and inset appointees such as Albion Water should be determined in the future.
The necessary safeguards are already in place. The Bill will put in place a robust, binding framework for the regulator as to how charges will be set, and when they may or may not be averaged. We are confident that these tools are fit for purpose. Customers will be protected, and that includes rural customers; our charging principles are explicit on that. I have said before that this view is supported by competition experts, to which my noble friend Lady Parminter referred. For these reasons, I hope that my noble friend will be reassured and feel able to withdraw his amendment.
I am most grateful to my noble friend the Minister and, indeed, others who have participated in this short debate. I agree with my noble friend Lord Deben that “de-averaging” is about the ugliest word one could imagine. The fact that it was not in any of the amendments, of course, rather confused those who did not know what the thrust of the amendments might have been.
I hear what the Minister says about these amendments derailing the whole competitive base of the Bill. I do not agree with that. It is perfectly possible to keep the undertaker as part of the competitive agreement while introducing competition at both ends of the spectrum. The real issue is whether we are satisfied that Ofwat does indeed have the powers to prevent the insidious creep of the removal of the averaging of charges. Clearly, most of the advisers take the view that it does and Ofwat itself thinks it does. I only hope that they are right.
There will be an opportunity, on a later amendment, to look at some rather more specific proposals as to how averaging might be protected. For the moment, however, I beg leave to withdraw the amendment.
Amendment 2 withdrawn.
Amendments 3 to 5 not moved.
Schedule 2: Water undertakers’ duties as regards water supply licensees
Amendments 6 to 29 not moved.
30: Schedule 2, page 141, line 32, at end insert—
“(c) the costs which would be incurred by a water undertaker in performing any of the duties to which the section 66D agreement relates are also recorded”
My Lords, here we come to two much more specific and modest proposals to address the potential threat of de-averaging.
In Schedule 2 on page 141, in proposed new Section 66EA of the Water Industry Act 1991, there are rules set out which make provision about the reduction of charges. These provide for the circumstances in which discounts can be allowed. Amendment 30 would additionally allow a discount only where overall costs to the network are reduced. This should prevent a discount in price which discriminates against other participants on the network. Highly desirable discounts—for example, for direct debit, for advance payments or paperless billing—which are available to everyone would in no way be precluded. If, however, a discount is offered to a customer which effectively loads costs on to other users, then this must be unacceptable. The thrust of the amendment is an attempt to ensure that the charges are not slanted in favour of one customer at the expense of another. Likewise, Amendment 37 makes the same provision for discounts on sewerage services. The sewerage undertaker must be able to offer discounts to all on the network who are sharing the facility, or to none.
Amendments 59 and 60 propose a change to the proposed rules about charges schemes. As drafted at present, subsection (6) of proposed Section 143B of the 1991 Act says:
“The rules may make different provision for different cases, including different provision in relation to different, or different descriptions of, persons, circumstances or localities”.
I accept the case for different rules for persons and circumstances. However, I am very concerned that localities should also be a reason for different rules. That seems to be a hostage to fortune. It will hamper the ability of Ofwat to prevent geographic difference in charges, which could lead once more to charges for rural customers being higher than for urban ones. Amendments 59 and 60 would therefore explicitly rule out different rules for different localities. I beg to move.
My Lords, I declare an interest for the purposes of Report, in that I am a farmer with abstraction licences on my farm. I support Amendments 59 and 60, which ensure that de-averaging on the basis of geographic location is outlawed in the Bill.
The delivery of water in a civilised, developed country should be a universal right. That is not to say that it comes free for anyone, but that all the costs of the necessary infrastructure, such as large pipes running across farms and small pipes running to farms, should be shared between all the parties. In the same way as Royal Mail has a universal service obligation, so should water.
The Minister said in Committee that Ofwat has the powers to prevent this sort of de-averaging, and he repeated that in response to the previous group of amendments. However, he also said that the Government’s charging guidance will say that any de-averaging must occur only where it is in the best interests of customers; but which customers—urban or rural? It is important to set out firm rules here against de-averaging on the grounds of location in the Bill. That is because there is no doubt in my mind that the Bill is merely the first step in a more comprehensive reform of the water industry, which will happen in due course. Like John the Baptist, the Bill is not the light but the precursor of the light to come.
The next Bill will undoubtedly bring in a comprehensive and sustainable abstraction reform—we know that that has been virtually admitted by Defra—while at the same time it will herald a sustainable consumption reform in the form of introduction of universal metering. I know we are coming to that; everybody knows that that is essential and only political games seem to be preventing it happening this time around. Moreover, as a result of these reforms at either end of the supply chain, I envisage a gradual move to the introduction of competition in the water industry in both the commercial and domestic water supply marketplace. At this stage the important principle of preventing de-averaging for different locations, which these amendments achieve, is absolutely paramount.
I am slightly suspicious of the Government’s reluctance to endorse these amendments in Committee, but I get a hint that they might move a bit further at this stage. If they do not, frankly, the writing will be on the wall for remote rural customers. To use the Minister’s words, it will undoubtedly be in the interests of customers —that is, urban customers, who are in the majority—if the minority of remote customers can be charged more. If that were to happen, it would be a major betrayal of the rural consumer. I say that as the person who has been asked by Defra itself to rural-proof government policies.
My Lords, my noble friend Lord Selborne has tabled Amendments 30 and 37, which would amend provisions in Schedules 2 and 4 allowing Ofwat to produce the charging rules that enable licensees to apply for discounts, where the licensee, its customer or anyone else, takes action to reduce pressure on water or sewerage networks. These amendments would restrict such discounts to situations where the incumbent water company’s costs are also reduced.
I agree with the sentiment behind the two amendments, but let me explain why they are not necessary. Ofwat’s powers to make rules on discounts are wide-ranging and can take into account impacts on an incumbent’s costs. They must also be consistent with ministerial guidance. It goes without saying that a discount should not result in an increase in costs for the incumbent or its customers. The sorts of things that we are looking for are agreements where customers commit to take positive actions, such as investing in water recycling facilities or agreeing not to take water during peak periods or during a drought. It might also involve a discount in wholesale charges, where a customer or licensee agrees to invest in an upgrade of a network where the incumbent is also making an investment. But my strong concern is that making a reduction in an incumbent’s costs a condition of such discounts protects the competitive position of the incumbent and risks stifling innovation in the sector if a proposal results in a one-off increase in an incumbent’s costs or if a small investment is needed by the incumbent to help the licensee.
I note that the amendment is similar to a provision in Scottish legislation, which also allows licensees to apply for discounts against charges made by Scottish Water. As far as I can determine, no details have been published of any discounts being applied in Scotland, and I do not wish to place such constraints on the system in England. I am confident that ministerial charging guidance and Ofwat’s charging rules can address issues relating to an increase in incumbent’s costs and what may or may not be passed on to other customers not benefiting from a discount.
Amendments 59 and 60 would prevent an incumbent making any charges within its area based on a location of premises. I know that my noble friend seeks to address issues relating to de-averaging, which we have just debated, but these two amendments could result in a significant impact on charges for all customers across England and Wales. It is sometimes necessary for an incumbent to set different charges within its area of appointment, particularly when it is merged with another incumbent. It may be necessary to maintain separate charges for different parts of a merged incumbent’s areas, even after the merger is complete. For example, Affinity Water provides services in three different parts of the country. The charges are different in each of those three areas to reflect the local costs of supplying water.
We are hoping to stimulate more merger activity through Clause 14—for example, to take advantage of economies of scale for the benefit of customers, who could lose out if the merged incumbent had to average its charges across a merged area. There will be winners and losers, but it will mean that the true costs of providing water and sewerage services may no longer be reflected in customers’ charges. Ofwat and the Secretary of State share a statutory duty to protect the interests of customers. The Water Industry Act 1991 provides that this duty should be discharged when appropriate by promoting effective competition. The Government are clear that the purpose of introducing competition into this sector must be to benefit consumers.
I know that noble Lords will be concerned about the potential for impact on rural and vulnerable customers. The noble Lord, Lord Cameron, referred to that. I share those concerns, and I know that noble Lords will be concerned about household customers who cannot switch suppliers. The Secretary of State, Ofwat and the Consumer Council for Water all have specific duties to have regard to the interests of rural customers and those who are unable to switch their suppliers, such as household customers. These duties are already clearly reflected in the charging principles which we have produced to inform these debates and will flow through directly into our charging guidance and Ofwat’s charging rules.
My noble friend referred to discounts for direct debits. To be clear, the discounts covered by the Bill are not discounts offered by incumbents, such as direct debit discounts for charging payment methods, but discounts for novel or innovative proposals which help all customers.
My noble friend was also concerned that charging rules could be different for different localities. This will allow Ofwat to provide extra protection—for example, for rural customers—as supported by its duty to have particular regard to certain classes of customers, such as, indeed, rural customers. Given these comments, I hope that my noble friend will be prepared to withdraw the amendment.
I am grateful to my noble friend for those observations. I am pleased that he at least agrees with the sentiments behind my amendments. However, I remain worried that where discounts are allowed by Ofwat for a section of the customer network, this could in certain circumstances impact unfavourably on others. If that occurs to non-householders or house- holders in rural areas, as so often could be the case, I fear that that is a slippery slope.
My noble friend said that the proposal to limit the reasons for having different rules might stifle innovation. Again, I simply do not understand why that should be the case. It is simply a proposal to try to ensure that we do not use the remoteness of a locality as an excuse to charge people more than their urban counterparts where, of course, service costs are, indeed, cheaper.
However, I suspect that I will not persuade my noble friend to change his mind. Therefore, I beg leave to withdraw the amendment.
Amendment 30 withdrawn.
Schedule 3: Sewerage licences: authorisations
Amendments 31 and 32 not moved.
Schedule 4: Sewerage undertakers’ duties as regards sewerage licensees
Amendments 33 to 37 not moved.
Schedule 5: Extension of licensing provisions in relation to Wales
38: Schedule 5, page 171, line 42, at end insert—
“ In section 158 (powers to lay pipes in streets), in subsection (7)(a), the following words are repealed—
(a) “or (b)(i)”;(b) “or laid in pursuance of section 66B(4)(b)(ii)”.”
My Lords, I beg to move government Amendment 38 and will speak also to Amendments 39, 73, 75 to 77, 79 to 86, 88, 92, 94 and 95 to 97. This group of amendments consists of changes to Clauses 37 and 39, following the recommendations of the Delegated Powers and Regulatory Reform Committee, as well as various minor and technical amendments to correct drafting errors in Clauses 49 and 80 and Schedule 12, and consequential amendments to Schedules 5 and 7.
We welcome the scrutiny of the Bill by the Delegated Powers and Regulatory Reform Committee. Following its recommendations, the Government have decided to amend Clause 37 on appeals relating to revision of codes so that the power to make regulations under this clause will be subject to the affirmative resolution procedure. This will apply to the first exercise of these powers only. On reflection, we agree with the committee that it is important for Parliament to have a further opportunity to scrutinise these regulations, and we have therefore tabled Amendment 73.
We have also followed the recommendations of the committee for amending Clause 39 on the exercise of adjudication functions in routine cases. The Government have left the choice of adjudicator open as we have not yet decided whether the relevant functions should be taken on by an existing body. However, we are grateful for the committee’s suggestion that this relatively wide power should be subject to the affirmative resolution procedure, and we have tabled Amendments 75 to 77 accordingly.
I would be happy to explain any of the minor and technical amendments to the House if there is anything that needs clarification. I beg to move.
Amendment 38 agreed.
39: Schedule 5, page 172, line 11, at end insert—
“ In section 213 (powers to make regulations), subsection (1ZA) (inserted by Schedule 7) is repealed (if not previously repealed by an order under section 3).”
Amendment 39 agreed.
40: After Clause 7, insert the following new Clause—
“Facilitation of licensed functionsPower to make regulations
(1) The Secretary of State may, by regulation, make provision (including provision for the making of transfer schemes or similar arrangements) for the purpose specified in subsection (2).
(2) The power conferred by this section shall be used for the purpose of enabling any company holding an appointment immediately before the passing of this Act as the water or sewerage undertaker for any area of England and Wales to transfer such of its assets and undertaking to—
(a) an associate which holds a water supply licence with a retail authorisation; and/or(b) an associate (which may be the same company as that specified in paragraph (a)) which holds a sewerage licence with a retail authorisation;as may be necessary or desirable to facilitate the carrying on by relevant transferee(s) of the activities authorised by its (or their) licence(s).(3) For the purposes of this section, a company is an associate of the transferor if—
(a) the transferee is a wholly owned subsidiary of the transferor;(b) the transferor is a wholly owned subsidiary of the transferee; or(c) the transferor and the transferee are both wholly owned subsidiaries of another company.(4) The references in subsection (3) to a wholly owned subsidiary shall be construed in accordance with section 1159 of the Companies Act 2006.”
My Lords, I seek to assist the House, first by defining the concept of exit that my amendment aims to address, and then by responding to the concerns raised by the Minister in Committee about this important issue.
My interest in this matter began when I was one of the Ministers in another place who was responsible for the privatisation of the water industry, working at that time with my noble friend Lord Howard and the late and much missed Nick Ridley. Our aim was to introduce competition into the industry, to improve services and water quality, and to ensure that, through access to the capital markets, the industry could undertake significant, long-term investment into much needed new infrastructure. The fact that in the six years after privatisation the companies invested £17 billion, compared to £9.3 billion in the six years before privatisation, with higher-quality water, demonstrates the benefits of that measure.
My amendment seeks to take competition further by recognising the distinction between the wholesale process of delivering key water and sewerage on the one hand, and, on the other, encouraging the 18 incumbent water companies to separate off their retail services. These retail services are customer-facing. They are likely to include water efficiency advice and implementation—including benefit sharing—water harvesting and sustainable drainage, and more efficient and effective billing and payment options.
In Scotland since April 2008, non-household customers have been able to choose their supplier and/or renegotiate the terms of their supply. During that time, levels of service have improved considerably and there has been a much clearer focus on environmental services. Some two-thirds of customers have actively opted for a better deal, and the safeguards that have been put in place ensure that no customer, household or non-household, is worse off as a result of the introduction of competition. Indeed, in Scotland, Scottish Water opted legally to separate its non-household activities from the rest of its business by creating a new subsidiary company called Business Stream.
My amendment echoes government policy to allow the most efficient companies to merge or new companies to enter the market to provide customers with better service. The amendment goes further and allows those companies that are inefficient or in favour of exiting the market to apply to the Secretary of State to leave. This proposed move away from vertically integrated, private sector monopolies is to be welcomed. It allows companies that want to specialise in major long-term infrastructure to do so. However, it also allows others—such as the Singapore company Sembcorp, which owns Bournemouth Water, one of the world-leading facility managers for large industrial companies with process management skills—the opportunity, if they so choose, to offer retail services to a far wider base of customers than they do now. For today, they can compete only under current legislation by buying every customer, one by one.
The Bill takes a leap forward from 25 years of supply-driven legislation to a focus on much needed, demand-led service. In Scotland, such legislation has worked well since its introduction in 2008. However, it is deeply concerning that, unless we amend the Bill, we will create a competitive market but we will also create a market that prevents those participants that wish to exit the market doing so. For example, if, hypothetically, the board of Thames Water and its investors wanted to exit the retail business and specialise in the very different skill sets required for its core business—major infrastructure projects, which cover more than 90% of its current business—the company would not be allowed to do so. All the incumbent companies today would have to keep offices, keep the staff, keep the IT systems, pay rates and rent, and build up a cost base to be passed on to their customers, even if the board and shareholders wanted to exit the market and, in extremis, even if the company had only a handful of customers.
Only last week, Oxera published a study on the potential cost of passing the Bill without a provision for exit, and came to the view that this measure could amount to around £190 million in NPV terms over a 10-year period. Of course, this is not surprising. If we continue to insist in this legislation that the non-household, retail divisions of the incumbents have to maintain the capability of running the infrastructure systems needed and lose market share, they will end up with rising costs relative to their revenues, they could see losses increase and continue, and no cost synergies would be possible.
Exit is based on straightforward market efficiencies. The Defra Select Committee supported exit. An increasing number of water companies advocate exit. The Scottish experience is a case study for the benefit of exit. The Water Industry Commission for Scotland has come out in support. Macquarie has published a research note and it supports exit. I quote some investors with whom I have been in touch. One says, “Companies should be allowed to exit”. A second says, “If loss-making, it will be detrimental to regulated business to be forced in keeping them”, whereas a third says that it is eminently sensible to be allowed to do so. A final one states, “Anything that promotes competitive tension to improve the customer experience is positive”.
The chief executive of Ofwat, Cathryn Ross, on 3 December last year gave the following evidence to the Water Bill Public Bill Committee:
“Our view is that retail exit for incumbents is a critically important element of a functioning, effective retail market. Particularly important is the fact that if we do not allow incumbents to exit, essentially we are mandating inefficient retailers’ remaining in the market. That will basically be baking in cost that customers will have to pay for, which we can easily avoid”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 7.]
Even in your Lordships’ House in Committee there was harmony, agreement and support between, on the one hand, my noble friend Lord Crickhowell— the first, and indeed outstanding, chairman of the National Rivers Authority, appointed during privatisation —the noble Lord, Lord Whitty, and the Labour Benches behind him, and the noble Lord, Lord Cameron, from the Cross Benches, who would in fact go one step further in enabling exit and competition between householders as well as non-householders.
I am grateful to my noble friend for giving way and for the kind things that he has just said about me. I strongly supported him when he made an immensely powerful speech in Committee. The case he has made this afternoon is equally powerful and, in my view, unanswerable. I hope that the Government, even at this late stage, will listen to that argument. I assure him and them that, if they do not, I will support him in any further action that he deems necessary to get this matter through.
I am very grateful to my noble friend for those comments. Indeed, I hope that through his intervention and through the remarks that I made, and indeed through the remarks that the noble Lord, Lord Whitty, made in Committee, my noble friend will determine to join these eminent ranks in support of creating an effective, competitive market for retail services with the intent of providing low-cost improved services to non-householders, because today we are focusing on businesses.
My amendment does not seek to persuade the Minister to introduce competition at this stage to householders, although there are those in your Lordships’ House who hope that, once successfully tested in the business sector, such a transition to competition in the householder market will be fully reviewed. I am proposing that the Secretary of State begins work on preparing regulations not in haste but ready for market opening in 2017. I hope that in so doing—this emphasis is really important—the Minister will provide customer protection and take into account the need for further work to ensure that the Consumer Council for Water is able to maintain its position whereby customer confidence in the water industry is significantly higher than in any other utility sector.
I met the council’s chair, Dame Yve Buckland, and its CEO, Tony Smith, yesterday and I listened carefully to their request to work with customers directly on retail exit—an area which, they freely recognise, requires far more work to be undertaken by them. They wish to review the experience in Scotland. They want to make sure that their customers—particularly the small businesses —are consulted and protected. They are right to do so. In accepting either of our amendments, the Secretary of State will have the time and opportunity to listen to their concerns, for he will need to ensure that all consumers are protected from unnecessary increases in price and from service reduction.
Perhaps I may help my noble friend with examples of the measures available to him to protect the business customers under consideration. He can insist on the full army of tools which already exist. Default tariffs can be set through price controls, ensuring price and service protection. New codes can be drafted to contain all necessary customer protections and to keep the system as simple as possible. Powers of the Enterprise Act can be used for consumer protection should issues go awry—for example, through a failed merger.
Powers in extremis could be used through the licence process. The appointed licence of retail entities already has special merger provisions. It is both likely and, in my view, necessary that the Secretary of State would consult the economic regulator, the Consumer Council for Water and Citizens Advice. I know that my noble friend could sign off each and every request made by an incumbent water or sewerage company to transfer its retail business to a third party. It is really important to emphasise that this approach does not require or compel incumbents to transfer any or all of their non-household customers. The amendment to permit retail exit, which I am proposing, simply provides the incumbent companies with the opportunity to apply to the Secretary of State to request that they do. It is an option—nothing more.
Exit has become a much debated issue—the most important issue that remains to be debated, although the others that we will hear this afternoon may contest that thesis. Nevertheless, exit is absolutely critical. In that context I place on record my thanks to my noble friend the Minister and his officials for having held a series of meetings with me and colleagues to discuss the implications of what I believe is a much needed and important amendment to improve the Bill.
Finally, my noble friend has expressed a wholly understandable concern, as has the Consumer Council for Water, about the effect of a transfer of non-household customers to a third party to its remaining household customers. The empirical evidence is to be found in Scotland. To assist the Minister I will quote from the head of the Water Industry Commission for Scotland, who states:
“Ministers have expressed a concern that ‘exit’ could strand household customers with a company that would have less interest in its customers. This is contrary to experience in Scotland where Scottish Water’s focus on its household customers has sharpened markedly since the non-household customers were transferred into its Business Stream subsidiary. Operational performance has also improved at least in part due to the pressure being applied to the wholesale operation to ‘up its game’ by retailers. Such improvements in operational performance (whether in terms of costs or levels of service) benefit households as well as non-households”.
That is compelling evidence.
Business customers have been promised competition for 15 years. With appropriate customer protection they should wait no longer. I hope that the Minister will agree to provide for exit and thereby create an efficient market mechanism. In so doing I hope that my noble friend will commit to ensuring that all business customers receive improved services and that the country will be provided with an efficient, demand-led mechanism which will help reduce wastage, protect consumers, increase smart metering, save water through demand management measures and provide confidence to the market to continue to invest in this vital industry. I beg to move.
My Lords, I, too, have an amendment in this group which argues for retail exit, but adds a few provisos. The noble Lord, Lord Moynihan, has once again made a tremendous speech in favour of his amendment, which I would certainly support. I will not repeat the full range of his arguments. If he has not convinced all noble Lords, I am sure that I will not manage it, but it sounded pretty convincing to me. It boils down to the fact that if this Bill provides for orderly entrance to the market it needs to provide for orderly exit as well for a proper market to function.
In a sense it is pretty straightforward, and I find it difficult to understand why the Government have hitherto been resistant to this. In Committee the Minister’s objections were largely about investors’ uncertainty, which I never really bought. I felt that most investors in these fields would be more inclined to support a system of regulation which allowed them to exit from failing parts of the business rather than be put off by it. Indeed, that has been borne out by a number of potential investors writing to us since the Committee stage, including the one to which the noble Lord, Lord Moynihan, referred.
Since Committee, the Minister seems to have shifted to a concern for consumers, both business and domestic, who might be left stranded in certain circumstances. Indeed, as has been said, the Consumer Council for Water has expressed concern on that front. Amendment 54 attempts to meet those objections by making explicit some of the matters to which the noble Lord, Lord Moynihan, referred and puts a proviso and a brake on the implementation of those before they have been thoroughly examined. Of course, Ofwat already has the duty to ensure continuity of supply, so the likelihood of anyone being left stranded is remote. The requirement in my amendment is that the regulations should provide safeguards for all classes of consumers. It also provides a brake in the sense that the Secretary of State would have to approve any specific withdrawal. If the amendment of the noble Lord, Lord Moynihan, were to be accepted by the Government and the regulations drafted under it, we would certainly support that.
The Government have to think carefully now. In Committee there was a fair degree of support for the principles of these amendments. Given that widespread support, the support of the regulators, the support of many of the companies within the industry and the support of potential investors in the industry, the Government need to think where they are going to take it from here. Basically, they have three choices. They can accept the amendment of the noble Lord, Lord Moynihan, and promise to tidy it up a bit—and I hope incorporate parts of my amendment—for Third Reading; they can resist the amendment but promise to come back with something on Third Reading, which may be a more attractive proposition; or they can resist the amendment outright, in which case the noble Lord, Lord Moynihan, would have the support of these Benches if he decided to press it.
The ball is well and truly in the Minister’s court and I hope that he makes the right decision.
I think I might be able to help the House. When it is my turn to speak, I will explain that the Government have recognised the strength of feeling in the House and are carefully considering the difficult issue of retail exits. I plan, as the noble Lord, Lord Whitty, suggested, to return to this issue at Third Reading. I will expand on that in a moment.
I am grateful. I intervene as a domestic consumer of the services of Scottish Water in Scotland merely to confirm that the passage the noble Lord, Lord Moynihan, read out at the end of his speech—from, I think, Scottish Water—conforms entirely to my own experience. Scottish Water has become much more visible in the past two or three years and, in my experience, provides an interesting and active service, not only in supplying water but in considering ways in which householders might be benefited by the services it can offer in support of that supply. I merely wish to make it clear that it is not only Scottish Water which says these things. Some of its consumers are very satisfied with its performance as well.
My Lords, that is a helpful intervention.
I thank my noble friend Lord Moynihan and the noble Lord, Lord Whitty, for their amendments. We once again have two amendments seeking to allow retail exits but with slightly different approaches. Both amendments would allow the Secretary of State to make regulations that would allow an incumbent water company to transfer its customers to a person holding a licence. Amendment 40, tabled by my noble friend Lord Moynihan, would allow for transfers to a licensed associate of the incumbent, while Amendment 54, tabled by the noble Lord, Lord Whitty, would allow for transfers to any company that holds a water supply licence. Amendment 54 does not allow for the exit of the retail sewerage market but I assume that the intention is to allow incumbent companies that provide both water and sewerage retail services to exit those markets. As with other amendments we have seen, both these amendments allow for non-household customers to be transferred through powers laid out in regulations, but do not allow us to fill in any gaps relating to who will provide retail services to new customers following a transfer or how we would treat transferred customers, including those who wish to return to the incumbent.
Allowing customers to be transferred does not mean that the incumbent has completely exited the retail market. The incumbent will still have certain responsibilities to non-household customers in its area of appointment and will therefore remain very much within that market unless certain duties are removed from it or transferred to the licensee which takes over the customers. It is a halfway house that does not benefit anyone, least of all the incumbent which wants to avoid dealing with non-household customers completely. The value of exits to incumbents would be limited unless the ultimate duty of supply is also removed. Household customers who remain with the incumbent may even end up funding this residual capacity of the incumbent to serve the remaining non-household customers.
But, as I hinted earlier, I have listened carefully to the thoughtful and well informed contributions to the debate on retail exits both today and in Committee. It is clearly an issue on which many noble Lords hold strong views. There is widespread support for enabling voluntary exit from the non-household market, subject to the approval of the Secretary of State. We remain convinced that such approval would be critical to avoid any perception that this will permit forced separation, given the impact that that could have on investment in the sector. I therefore propose to take this issue away and consider it very carefully before Third Reading. I will aim to table an amendment that will build on the objectives of Amendments 40 and 54 in the names of my noble friend Lord Moynihan and the noble Lord, Lord Whitty, respectively, which seek to provide a means for voluntary non-household exit.
I should like to put on the record now that the only practical way of delivering what the noble Lords are seeking would be to take a very wide-ranging power. Extensive changes to the Water Industry Act 1991 would be needed, not least to address issues relating to the incumbent’s duties to supply and its other statutory obligations to customers. Given this commitment to respond to the mood of the House on this important matter, I ask my noble friend to withdraw his amendment.
My Lords, I thank the noble Lord, Lord Whitty, and his colleagues for their support for the series of amendments we have debated on this issue as the Bill has progressed through your Lordships’ House. I also thank very much indeed the officials at Defra who have worked on this Bill. It is highly complex and it has gained far more prominence than I believe they expected at the outset. Not the least of that is because of the appalling weather we have had over the past three months and the focus now on the Flood Re insurance proposals, which have understandably generated a huge amount of interest across the country and have resulted in a greatly increased workload for the officials. They have been responsive, helpful, polite and informative at all stages, and I am grateful for that.
I thank my noble friend the Minister for his comments. I am pleased and not a little surprised to hear that he intends to come back at Third Reading with a government amendment along lines that I would strongly support. I thank him for his consideration of the importance of exit. I hear the relevance of the consequential amendments that will be forthcoming if we do not give a fairly broad-based power to the Secretary of State, but it remains my view that in order to have a competitive and effective market, we need exit. In the circumstances, I believe that it is appropriate to grant that power through this Bill. Again, I express my thanks to the Minister and to all noble Lords who have supported me on this issue. I beg leave to withdraw the amendment.
Amendment 40 withdrawn.
41: After Clause 7, insert the following new Clause—
(1) The Secretary of State may by order appoint a day on which section 1 is to come into force.
(2) The Secretary of State may only make an order under subsection (1) if—
(a) new primary legislation on the licensing of abstraction has been passed; and(b) 5 years has expired since the passage of any legislation under paragraph (a).”
My Lords, in moving Amendment 41 I will also comment on the government amendments in this group. I am pleased to see that the Government have at last recognised the importance of this issue and brought forward some amendments of their own. I will listen carefully to what the Minister says, but my first take on them is that, although they are very welcome, they are unclear in certain respects and do not yet go far enough.
This issue is one where economic and environmental regulation overlap. One of the central provisions of the Bill will allow and indeed encourage the eventual development of competitive markets, including in upstream water bulk supplies. That will not happen instantaneously—the Government have indicated that it will probably not happen until after 2020—but the legislation which will govern it happening is already the legal basis for that extension of competition into upstream areas. I am not opposed in principle to that, but there is a very basic problem. All competition, at least in the early stages, requires a surfeit of supply. However, difficult though it has been to believe over the past few weeks, there is a serious shortage of upstream water, in particular at key points in the summer. The level of water abstractions in the majority of our rivers in England—it rains rather more in Wales so I will confine this to England—is such that they have been overabstracted and at times are running dangerously low. This is the result in large part of overabstraction in the upstream areas and a shortage of water in the summer months. The reform of the abstraction regime has been talked about for a long time. Some limitation of abstraction rights is an essential prerequisite to introducing multiple suppliers with competition upstream.
Past legislation has given some powers to the Environment Agency and to the Welsh authorities in this respect, but most of the abstraction rights were embedded in the 1960s—so they are already 50 years old—at a point when there was much less concern about there being a limited supply of water. When the EA is carrying out its functions and rationalising, restricting and, in some cases, possibly taking away abstraction rights, that legislation requires compensation to be paid. That is paid out of the Environment Agency’s grant in aid and, in effect, out of Defra’s budget, so it has been very careful in using its powers. This Bill, rightly, makes one major step forward in removing from the water companies—which are the biggest, although not the only, abstracters—the right to such compensation. Although we note that the companies can, subject to Ofwat approval, recoup any loss from attenuation of abstraction rights by charging the consumer, this is a very welcome change as it means that the Environment Agency can be more aggressive in pursuing the restriction of abstraction rights in general, including those of water companies.
A further distortion and danger is that in many of the catchment areas, current abstraction rights are at a much higher level than the actual level of abstraction. Indeed, on average, 40% of the theoretical abstraction levels are actually drawn in most years. However, even with people taking up under half of their abstraction rights, several of our catchment areas are under severe pressure. If we have new entrants into the upstream area, some of that unused abstraction will undoubtedly, one way or another, be transferred to those new entrants. The logic is that we need a reformed abstraction regime, putting a cap on abstractions and allowing the restriction of or attaching conditions of time or place to the abstractions that are relevant to individual catchment areas. We need to do that before we introduce upstream competition.
It is clear from the amendments the Government have tabled that they recognise that. Indeed, the earlier Defra White Paper recognised that. Yet the Bill does not provide for any future legislation on abstraction reform as it does for upstream competition. The consequence of that is that if the Bill stays as it stands, even if the government amendments are adopted, we will be able to move to competition upstream, which would almost certainly have the consequence of greater use of dormant and underused abstraction rights and therefore more pressure on our catchments. It is true that in the very long run effective competition will lead to greater efficiency upstream, but the immediate effect of introducing competition would be more drawing-down and more abstractions, and there is no adequate limit on the totality of those in the abstraction regime as it stands.
Of course, Defra is currently consulting on changes to the abstraction regime. It is quite a good consultative paper, I have to say, although it was issued well after the Bill entered the parliamentary process. What I am trying to guard against is the possibility that down the line abstraction reform has not happened and yet the number of people using water upstream for commercial purposes has increased. The government amendments give some greater powers to the Environment Agency and the NRBW to check on this, and they institute a five-year delay, but the provisions are fairly weak.
It is not enough to consult with the regulators without giving them effective legislative backing for intervening and for restricting or putting qualifications on abstraction rights. That is why we say that reform should be in place and enforced before we move to introduce upstream competition. The government amendments and the five-year gap do not mean that abstraction legislation will be in place. They call for a report to Parliament. I do not want to be too cynical in your Lordships’ House but we know that plenty of reports to Parliament never actually see their way through to explicit legislation or regulation.
The department clearly recognises the problem and has been prepared to move a bit with the amendments in this group, all of which I can support, but they are necessary but not sufficient. The Government could say to me today that they will strengthen their approach and include a requirement to have legislation in place before the upstream competition provisions are triggered. They could still bring that forward at Third Reading. Indeed, that is probably the best way of proceeding. I hope the Minister will say that but in the mean time this is such a serious issue that I have to ask your Lordships to seriously consider my amendment. I beg to move.
My Lords, along with a number of colleagues around the House, I raised serious concerns in Committee about the potential for environmental damage resulting from the upstream competition proposals being agreed in advance of reforming the water abstraction regime. I will not repeat those this afternoon. However, I am very pleased to say that the Government have clearly listened to our concerns and are proposing a number of significant amendments to address them.
First, the Government propose to report in 2019 on progress in reforming the water abstraction regime. The Government’s stated aim, following the publication of their consultation on abstraction reform last December —which the noble Lord, Lord Whitty, welcomed—is to legislate early in the next Parliament and implement abstraction reform in the early 2020s. The report will therefore give Parliament an opportunity to scrutinise the management of the interface between what should be by then the two pieces of legislation and their implementation. We can then seek to ensure that their implementation delivers the desired outcomes for both customers and the environment.
I am also grateful that specific concerns that I raised about sleeper licences and bulk trading were heard. The Government have introduced amendments to require Ofwat to consult the Environment Agency or Natural Resources Wales before they issue the codes on bulk supply agreements and before allowing a water supply agreement between relevant parties and incumbent water companies. Equally, relevant parties will be required to consult before entering into bulk supply agreements, and Ofwat will have to take into account any response from the Environment Agency or Natural Resources Wales. In that regard, I do not agree with the noble Lord on the Front Bench opposite that these government amendments are weak. I know from my conversations with Ofwat, which did not want the amendments to be tabled, that it most assuredly does not see them as weak.
In advance of the abstraction regime being reformed, the Environment Agency is already seeking to vary and remove unsustainable existing licences. It will be helped in that by the Government’s removal in this Bill of a statutory right to compensation for a water company resulting from such modifications or the revoking of a licence. The Government have therefore gone a long way towards addressing concerns that noble friends and colleagues expressed in Committee. These proposals satisfy my concern that legislating now for upstream reform in advance of reform of the water abstraction regime could lead to an unsustainable increase in abstraction. Therefore, I would not support any further amendments being tabled by the Opposition Front Bench.
My Lords, I want to probe a little on the timing. I agree with everything that the noble Baroness has just said. For eight years, as chairman of the National Rivers Authority, I had to try to deal with this problem with rather less adequate weapons than the Environment Agency now has, so I welcome the steps that the Government are taking and have taken. I also want to see rapid progress made on the competitive regime, but there seems to be a very difficult timetable. We will have a report five years out on how abstraction is going, yet there will be legislation in the next Parliament which takes us a year further forward. I do not quite see exactly how the Government envisage progress being made on these two important priorities. I confess that I have been away abroad since Committee—I have been enjoying myself in the Galapagos—so my mind has not been on this matter, but I would be grateful if my noble friend could give us a little greater clarity on the timing of these two interlocking steps, on the way in which they are likely to relate and on how the legislative timetable is likely to fit in.
My Lords, this has been another important debate on abstraction reform. It gives me an opportunity to declare another interest: that of a holder of an abstraction licence. Noble Lords have once again emphasised the importance of rapid progress in reforming the abstraction regime and expressed concern about the linkage to implementation of the upstream reforms in the Bill. I thank noble Lords for the knowledge, experience and constructive challenge that they have brought to the debate on this important matter. I have listened carefully to what they have said and I am left in no doubt as to the strength of feeling.
First, I assure noble Lords that the Government are fully committed to abstraction reform. The proposals in our consultation document on abstraction reform demonstrate just how seriously we are taking this, as well as the complexity of reforming such a long-established regime. Our proposals reflect the importance of abstraction reform for people and the environment and the fact that organisations and individuals across the country are dependent on access to water to live their lives and run their businesses.
I want to see a real improvement in the quality of water bodies in all parts of the country. That means we must take action to reduce overabstraction that damages the environment now and ensure we can continue to protect the environment and ensure access to water in the more challenging conditions we will face in the future. Abstraction reform and upstream reform are both designed to help to achieve that goal. While some fear that these could be conflicting mechanisms, I can assure noble Lords that the intention is for them to be entirely complementary in both design and implementation. I hope I can provide further reassurance on this, not least through the further amendments that we have tabled to Clauses 8 and 12 and a new clause before Clause 45.
I turn first to the amendment tabled and spoken to by the noble Lord, Lord Whitty. The effect of that amendment would be to introduce a new clause to prevent Clause 1 coming into force until five years after Royal Assent to future primary legislation on abstraction reform. The noble Lord seeks to address the concern about a possible increase in unsustainable abstraction as a result of upstream reform. As I sought to reassure noble Lords in Committee, I believe that such an amendment is unnecessary. It would delay both our upstream reforms and our retail market reforms. I am sure that that is not the noble Lord’s intention.
As I explained in Committee on 4 February, the Government and the Open Water programme are working towards retail market opening in 2017. I cannot, therefore, justify the delay that would be caused by the amendment. Our retail reforms are widely supported by customers, who will benefit from improved customer service as a result of these changes. Non-household customers will be free to negotiate the best package to suit their needs. Customers with multiple sites will benefit hugely from being able to negotiate for a single bill from a single supplier. Improved customer services will have knock-on effects for household customers too.
The upstream reforms in the Bill are important as well because they will build resilience in the sector, bring in new thinking and drive efficiency. Given the benefits they offer to customers and the environment and the powerful set of safeguards that will be in place, the case to delay implementation until abstraction reform has taken place is unconvincing. Upstream reform will help to keep bills affordable and benefit the environment. We estimate that the upstream reforms will bring benefits of up to £1.8 billion over 30 years. The current regulatory model is not delivering the kind of efficient resource use and innovation that we need.
I outlined in detail in Committee the environmental safeguards in place to guard against any risk of increased unsustainable abstraction as a result of upstream reform. Although I believe that the concerns about upstream reform and increased unsustainable abstraction have been substantially overstated, I have tabled a further set of amendments to Clauses 8 and 12 to address any residual risk. I turn to those amendments.
First, as the Bill is drafted, Ofwat must consult, as appropriate, either the Environment Agency or Natural Resources Wales before it orders, varies or terminates a bulk supply agreement under Clause 8. Government Amendments 46 and 47 require parties that freely enter into those agreements to consult the appropriate agency as well. That means that the Environment Agency and Natural Resources Wales will have the opportunity to feed into the process at the outset in respect of all bulk supply agreements.
Secondly, government Amendments 42 and 44 require that before ordering, varying or terminating a bulk supply agreement under Clause 8, Ofwat must consult the Environment Agency or Natural Resources Wales,
“in particular about whether the proposed supply … would secure an efficient use of water resources”,
in light of its effect on the environment. This clarifies that Ofwat is able to take environmental considerations into account before ordering, varying or terminating a bulk supply agreement.
Thirdly, government Amendments 48 to 50 strengthen the environmental protections in place by amending the Bill to add a requirement for Ofwat to consult the Environment Agency and Natural Resources Wales before it issues the codes on bulk supply agreements. Fourthly, government Amendments 43, 45, 51 and 52 add an enforceable duty on the supplying party to a bulk supply agreement to provide information about the water supplied at the request of the Environment Agency or Natural Resources Wales. This could include the source or timing of the water supplied under the agreement.
Finally, we are also strengthening the environmental protections under Clause 12. Government Amendment 53 enables regulations about water supply agreements between incumbent water companies and other relevant parties to require Ofwat to consult the Environment Agency or Natural Resources Wales before ordering, varying or terminating such an agreement. This will bring Clause 12 in line with the provisions on bulk supply agreements under Clause 8.
I move on to government Amendment 87, which is significant. It responds to the concerns expressed from across the House on the timetable for abstraction reform. It signals the Government’s determination to progress abstraction reform and provides Parliament with a route to hold government to account on delivery of this commitment. The amendment places a duty on the Secretary of State to report to Parliament on progress on abstraction reform in England within five years of Royal Assent of the Bill. In practice, this will mean a written progress report being laid before Parliament no later than early 2019. Although we cannot commit to a timetable for introducing legislation on abstraction reform, our aim is to bring forward the necessary legislation early in the next Parliament.
This report will also be an opportunity to report to Parliament on the preparations for implementing abstraction reform and upstream reform, and how the two are being closely aligned. The timing will be apt. We have made clear that the earliest date at which the bulk of the new upstream measures would be implemented is 2019, so Parliament will have the opportunity to consider the interrelationship between the two regimes in advance of the new upstream markets going live. In Committee on 4 February the noble Lord, Lord Whitty, said that,
“it would be sensible to have accomplished, or at least set in train, the abstraction reform before we introduce upstream competition”.—[Official Report, 4/2/14; col. 159.]
The report will advise Parliament on how we are doing just that and how we plan to manage the implementation of both regimes so that they work together. As I have said, I strongly believe these reforms to be complementary, not conflicting. They are part of the Government’s wider agenda for securing the long-term resilience of our water supplies and the water environment, which was set out in the water White Paper. The report will also be an opportunity to set out other progress on moving towards a more sustainable abstraction regime. I anticipate that it would, for example, report on the essential work in advance of reform to tackle existing unsustainable abstraction and address other risks, such as unused licence volumes, which could present a risk in a reformed abstraction regime.
I assure your Lordships that the progress we are making through our current consultation and further engagement with abstractors will intensify as we work to finalise the proposals in 2015, seek to legislate early in the next Parliament and move to early implementation of a new and improved abstraction regime. I cannot accept the amendment tabled by the noble Lord, Lord Whitty, for the reasons I have explained and I hope that he will agree to withdraw it. I will move the government amendments to strengthen environmental safeguards and make government accountable to Parliament for progress on abstraction reform.
My Lords, I have to confess that this is a part of the Bill that I have not followed particularly closely, but I have listened to the government and opposition arguments with great interest today and, indeed, have sympathy with both. I would just like to ask the Minister—
Thank you. The clarification that I seek is whether the Minister would be willing, when he brings back these amendments at Third Reading, to strengthen some of the words relating to consultation to something rather stronger and relating to an obligation.
My Lords, I thank the Minister for his very comprehensive description of the position and I reiterate that I support the government amendments as a significant move in the right direction. However, they are flawed in one serious respect which I will come on to.
The Minister referred to complementarity between the abstraction reform regime and the new competition regime. I am absolutely in favour of complementarity and I think that both are very important for environmental reasons and for reasons of preservation and effective delivery of our water resources. Therefore, in principle, we are not divided. However, the provisions in this Bill are asymmetrical. We have quite detailed provisions on upstream competition. Nothing I have said affects retail competition. Upstream competition is provided with all the legislative framework that you will need—there will need to be some more regulation, but in effect it is there. The abstraction reform has only just started on its consultative phase. Both the noble Baroness, Lady Parminter, and the Minister have said that they intend to legislate in the next Parliament, which is nice to hear but we do not quite know who will run the next Parliament and it is not normal to pre-empt the Queen’s Speeches of the next Government, even if they happen to be the same one. In any case, the timescale is out of kilter.
The essential flaw in the Minister’s position is that all he is referring to is a report in five years’ time after the passage of this Bill, whereas my amendment says that legislation should be introduced in roughly that time and before we trigger upstream competition. That means that they are complementary; that means that the timescales are in line. The danger is that if we miss that early in the next Parliament commitment, they will be seriously out of line; and if we wait for the parliamentary report before we legislate, they will also be seriously out of line. Therefore, that essential commitment to wait until legislation is there is missing from the otherwise admirable amendment that he is proposing today.
This is so important that all parties need to be reassured that we have complementarity as an objective but complementarity along both tracks in the way in which we proceed. It is therefore with some regret that I would like to test the opinion of the House on this matter.
Clause 8: Bulk supply of water by water undertakers
Amendments 42 to 52
42: Clause 8, page 9, line 25, at end insert “, in particular about whether the proposed supply of water would secure an efficient use of water resources, taking into account the effect on the environment of the proposed supply.”
43: Clause 8, page 10, line 33, leave out “40I” and insert “40J”
44: Clause 8, page 11, line 2, at end insert “, in particular about whether the proposed variation or termination of the bulk supply agreement would secure an efficient use of water resources, taking into account the effect on the environment of what is proposed.”
45: Clause 8, page 11, line 37, leave out “40I” and insert “40J”
46: Clause 8, page 12, line 10, at end insert—
“(2A) A code must include provision requiring persons proposing to make, vary or terminate a bulk supply agreement to consult the appropriate agency.”
47: Clause 8, page 12, line 25, at end insert—
“( ) In this section “the appropriate agency”, in relation to a bulk supply agreement or proposed bulk supply agreement, means the body that would be consulted by the Authority under section 40(4) or 40A(2) if an order under section 40(3) or 40A(1) were being considered in relation to the agreement or proposed agreement.”
48: Clause 8, page 12, line 28, at end insert—
“(aa) consult the appropriate agency;”
49: Clause 8, page 12, line 29, after “such” insert “other”
50: Clause 8, page 13, line 30, at end insert—
“( ) In this section “the appropriate agency” means—
(a) the Environment Agency, so far as a proposed code relates to bulk supply agreements to which all parties are persons mentioned in section 40(10)(a)(i) or (ii);(b) the NRBW, so far as a proposed code relates to bulk supply agreements to which all parties are persons mentioned in section 40(10)(b)(i) or (ii);(c) both the Environment Agency and the NRBW, in any other case.”
51: Clause 8, page 17, line 37, at end insert—
“40J Duty to provide information about bulk supplies
(1) A supplier under a bulk supply agreement must provide such information as the appropriate agency may request in relation to water supplied under the agreement.
(2) The requirement in subsection (1) is enforceable by the Authority under section 18.
(3) In subsection (1) “the appropriate agency” means the body that would be consulted by the Authority under section 40A(2) if the agreement were to be varied or terminated by an order under section 40A(1).”
52: Clause 8, page 17, line 38, leave out “40I” and insert “40J”
Amendments 42 to 52 agreed.
Clause 12: Arrangements for water undertakers to take water from other persons
53: Clause 12, page 46, line 9, at end insert—
“(aa) provision requiring the Authority to consult the Environment Agency, the NRBW or both of them before making an order;”
Amendment 53 agreed.
Amendment 54 not moved.
55: After Clause 15, insert the following new Clause—
“National affordability scheme
(1) The Secretary of State must, by order, introduce a National Affordability Scheme for water.
(2) The National Affordability Scheme must include an eligibility criteria, determined by the Secretary of State, in consultation with—
(a) the Water Services Regulation Authority; and(b) the Consumer Council for Water.(3) An order under this section—
(a) shall be made by statutory instrument, and(b) may not be made unless a draft of the order has been laid before and approved by a resolution of each House of Parliament.”
My Lords, in moving Amendment 55 I will also refer to Amendment 56 in this group.
The Bill covers a wide range of dimensions of our water supply industry and its economic and environmental effects. However, it completely fails to address the social problems of those who face growing water bills and difficulty in facing growing pressures on their low-income budgets or their family responsibilities. It is estimated that for 11% of our population water bills account for more than 5% of their income, and for 23% of the population they amount to 3% of their income. That is a pretty significant cost. We have to accept that how people pay for water in this country is singularly irrational but also singularly unprogressive.
The report by Anna Walker a couple of years ago into the non-metered area—although it covered all consumers—where you pay according to your council tax band, found that 40% of low-income families were accommodated in the top four council tax bands, which effectively led to a cross-subsidy that was itself severely regressive. She identified a £600 million cross-subsidy going to more well off families and households and £180 million cross-subsidy going to less well off. We therefore have a net £420 million of the bills of the water industry moving in a severely regressive direction. Nor is all perfect in the metered area, because frequently in those areas subject to voluntary metering it has been those least likely to be dependent on large suppliers of water who have chosen to go for meters.
The totality means that there is a severely regressive structure in how people have to pay their water bills. That is why it was recognised that we need, as we did in energy, some form of social tariff to be introduced in the water sector. Since the 2010 Act, companies have been able to offer social tariffs, and Ofwat has encouraged social tariffs but, as from the beginning of this year, only three companies have introduced them and they have had a relatively small take-up. Even if you add on the WaterSure scheme, which is supposed to be national, for families with disabilities or large numbers of children, fewer than 150,000 at best have taken up social tariffs to mitigate the cost, as against 2 million plus who are paying more than 5% of their income.
Admittedly, the ability to set a social tariff has been relatively recent, but it is still true that only three companies have introduced one. It is claimed that another eight companies are working on social tariffs. The Government want to encourage companies down that road, as does Ofwat—and the companies claim, when you talk to them, that they are working hard to develop those tariffs. But when the current coverage is so small and the likely coverage of any new social tariffs looks like being similar, while we hope to see progress, it appears to be very slow—and it is not likely to be sufficiently inclusive. Companies will develop according to their own demography tariffs that suit their purposes, but will not necessarily corral all vulnerable and low-income families into the ability to choose a social tariff. So we need to speed this up.
My first amendment would set up a national affordability scheme for water, to set minimum standards of social tariffs and coverage of social tariffs. Companies can then within that framework develop their own tariffs, as they are claiming to do at the moment, as long as they meet those minimum standards. It does not require a uniformity of approach but it requires an inclusivity of approach. The details of that scheme will be left with the Secretary of State and officials to devise for secondary legislation, but it would drive provision and take-up of social tariffs. If companies and Ofwat managed to achieve what they claim are their targets for bringing in social tariffs, it would mean no extra cost to anybody. So if the Government’s objective was achieved, the national affordability scheme would be there simply as a safety net but would not add anything to the cost of other consumers over and above what Ofwat and the Government are attempting to do anyway. However, we need to drive this faster and to see a faster timetable. If companies fall behind in introducing social tariffs, I am afraid that it sounds to me likely that we do need that safeguard—and that safeguard is a driver of an affordability scheme set by the Government.
I hope that the Government take this proposition seriously because it is odd that the Bill does not address the most important aspect of water supply after continuity and availability of supply—that is, cost. This is one way of doing that, the details of which can be left to secondary legislation. It would at least mean that the social dimension of the sustainability and resilience of the water industry is covered as well as the environmental and economic ones.
My second amendment requires companies to inform all consumers, both metered and unmetered, of the range of available tariffs and to advise them on the most appropriate tariff for their needs, as is now the situation with energy companies. That applies to all consumers, not simply the more vulnerable ones. As we develop new tariffs, clearly there will be more of a choice to be made by government, particularly as regards meters.
As I say, I hope that the Government take this proposition seriously because a growing number of people suffer from something close to water poverty in the same way as millions suffer from fuel poverty. Successive Governments have attempted to do something about fuel poverty in various ways but have never seriously pushed the water poverty dimension. However, a lot of people, particularly large families, those in water-stressed areas, people with disabilities, or elderly people in financial difficulties face very serious social problems.
A national affordability scheme is a limited measure which would, however, drive all companies to take up their responsibility to look after their more vulnerable consumers rather more than they have done hitherto. I beg to move.
My Lords, I am sure that we are all sympathetic to the proposal of the noble Lord, Lord Whitty, to protect vulnerable consumers from the escalating costs of water. Clearly, it is difficult for some people to budget for something that accounts for 5% of their income.
However, before we look at setting up another national scheme, we need to understand why water can account for such a large proportion of people’s budgets. The first thing we have to do is recognise that as well as the “can’t pays” there are the “won’t pays”. The “won’t pays” are those who recognise that it is impossible for them to be deprived of water. People have a right to water whether or not they pay their bill. The expense incurred by water companies chasing those who will not pay but are perfectly capable of doing so in the small claims courts often leads to a long, inefficient drag on resources. It would be interesting to know the national figure for those who fail to pay when their income level is deemed perfectly reasonable. Perhaps the Minister has that figure available.
When the Science and Technology Select Committee looked at this issue some six years ago, it was not unusual to find that 10% of consumers from high-income streams did not pay their bills, which shocked me. We came up with a proposal which was accepted by all the members of the committee but not by the Government of the day, or subsequent Governments—namely, that we should follow the Australian practice of reducing to a trickle the water supply of those who could perfectly well pay their bills but did not do so and therefore unloaded costs on to those who were less able to pay their bills. The technology exists to do this but I am afraid that this practice is not considered acceptable. Rather rude remarks were made about their Lordships contributing to the great unwashed. I thought that that was a rather unfair observation. Nevertheless, we need to give the water companies every encouragement to chase those who will not pay. That would help those who cannot pay, who this amendment seeks to help.
My Lords, my noble friend has beaten me to the point that I wish to raise. Over the years, during consideration of whichever water Bill, we have had this debate on how you cope with those who are well able to pay but who choose not to do so. My noble friend is quite right: for various reasons, water is never cut off while, unfortunately, electricity can be. It is an unusual situation in that the water industry is the only one in which that position still exists.
I have some questions for the noble Lord, Lord Whitty, on his amendments. First, how would he balance that situation with what he is proposing? Secondly, does he have his own definition of what minimum standards might be, because he has clearly said that it would be for the Government of the day or officials to come up with them? It would be a good idea if the Official Opposition had some direct input themselves into that. Thirdly, the noble Lord said, “We can refer the matter to secondary legislation”. I have sat here on many occasions when we have all said, “Secondary legislation is all right but we do not have any control of it”. We have control of the Bill at this stage and it is essential to deal with this matter in the Bill rather than leave it to secondary legislation, if that were possible.
This is an important issue. When we were considering the Water Bill many years ago, it was difficult to decide who would qualify for being a special case and the circumstances that would be taken into account. I hope that the noble Lord, Lord Whitty, will put a little more meat on the bone, other than what he has done so far in these two amendments.
My Lords, I fully support affordability schemes but regret that I do not believe that they should be a statutory requirement.
The new social tariff guidance from Defra is to be welcomed, as this means that from this year more companies can introduce social tariffs. It is, however, disappointing—as has been pointed out—that so few companies have so far introduced social tariffs or seem to be preparing to do so. It is right that water companies are best placed to come up with the most suitable scheme for their customers, given their own regional circumstances. Any government regulations could end up being overly prescriptive, instead of allowing sufficient flexibility.
I am lucky enough to come from the West Country where Wessex Water is a major supplier and a forward-thinking company. Over the past 10 years, it has developed its own affordability scheme called Tap. Wessex Water recognises that every household is unique and has adapted Tap to ensure that its services are right for each individual’s situation. Through Tap, Wessex Water offers customers an extensive range of schemes and low-rate tariffs to enable them to afford their ongoing water charges and repay any debts they have accumulated. This runs in conjunction with practical help to reduce water and energy use. Wessex Water delivers this help through successful partnerships with the debt advice sector and other organisations supporting vulnerable customers. Customers are signposted so that they can receive holistic debt advice and income maximisation, as well as make proposals for a sustainable offer of payment, however small.
Wessex Water currently has around 14,000 customers benefiting from one or more of its schemes, with around 8,000 on its very low-rate tariff, Assist. The company is doing a lot of work out in communities to raise awareness and promote Tap, particularly the Assist tariff. It is a scheme for those unable to afford ongoing water bills. Working with debt advice agencies, the customer’s personal finances are assessed and a lower bill than normal is agreed, based on their ability to pay. The range of services covered by Tap, as well as Assist, includes Water Direct, which is for people on benefits, who are able to have payments for water taken from their benefits before they receive them.
A second scheme is WaterSure Plus for those who are on one of the main social benefits and who have either a medical need for extra water or three or more children under the age of 19 living at home. In this case, the annual bill is limited to the average annual bill for metered customers in that region, so they pay less than the bill would have been for the amount of water used. Lastly, the scheme includes Restart and Restart Plus for those who are already in debt with their water bill payments. This allows a payment plan to be agreed and, if the plan is kept to for the first year, the debt is reduced by an equivalent amount in year two. If in year two the payment plan is adhered to, the remaining debt is cleared and the customer has a fresh start.
There will be similar schemes—but not many, I agree—run by other water companies in the country, each developed with knowledge of their customers and their customers’ needs. To ignore all this hard work and impose a statutory affordability scheme is to stifle innovation and enterprise.
Therefore, although I accept that affordability schemes are essential, I believe it is far better for each water company to develop its own scheme rather than have the possible straitjacket of a national scheme imposed on it. However, a government review of the situation in 2015 would identify just how many water companies had failed to implement a scheme. Government encouragement to water companies to enter discussions with the Consumer Council for Water to come up with affordability schemes is essential. They would not have to do the hard work; the evidence is out there for them to utilise and access. Just as essential is clear communication of just how much paying customers are subsidising those who refuse to pay. The subsidy for low-income families struggling and willing to pay is very small compared with that for wilful bad debt. Wessex Water is a shining example of best practice which others would do well to emulate. I regret that I will not be supporting Amendment 55.
My Lords, affordability is clearly a key issue and I thank the noble Lord, Lord Whitty, for raising it this afternoon, although I do not share his faith in a national affordability scheme. I use the word “faith” advisedly because, like the noble Baroness, Lady Byford, I think that the amendment is a little light on the details of what a national affordability scheme might comprise.
My understanding is that eight of the water companies already have social tariffs, or will have by the time we get to Third Reading. Perhaps the Minister will be able to comment on that in his concluding remarks. However, there are one or two laggards, including Yorkshire Water, which has undertaken research into a social tariff but says that the results do not justify it proceeding. This is not good enough; it should be working with the Consumer Council for Water, as 11 water companies are, quickly to identify a way forward.
You would expect water companies to try hard to do this as, in addition to being the right thing to do, social tariffs are, as the noble Earl, Lord Selborne, rightly pointed out, one way to help to tackle the bad debts, which put £15 on all our water bills. Where there has been some reluctance to introduce them, it appears that that has had more to do with limited customer support for the company’s initial proposals, because crucially water company customers have to buy in to the social tariffs as they are cross-subsidising them.
Like my noble friend Lady Bakewell, I welcome the new social tariff guidance from this Government and the Welsh Government. It means that more companies can now introduce social tariffs, but of course these schemes must be tailored to local circumstances. The cost of living, average incomes and the cost of supplying water and sewerage systems vary substantially from region to region. In Committee, my noble friend Lord Whitty acknowledged the importance of taking account of regional variations, saying:
“We recognise the desirability of companies taking notice of the configuration of their own consumers and the particularities of their region, and therefore it is better that companies are left to decide their own schemes which will suit their own circumstances”.—[Official Report, 6/2/14; col. 326.]
Like my noble friend Lady Byford, I believe that the Front Bench opposite has not quite spelt out what the national affordability scheme would comprise, saying that it is up to the department to come up with something appropriate which equally allows for regional diversity of delivery.
The issue is not that the majority of companies are not taking this forward; the issue is fundamentally about who pays for the scheme. The Consumer Council for Water has done research which consistently shows that customers are reluctant to pay above £2 as a cross-subsidy. Does the Front Bench opposite think that its national affordability scheme should top up that sum from general taxation? Should schemes be imposed on people unwillingly or from a levy on water companies? That begs the question of whom it would be levied on, given that the overwhelming majority of companies will have agreed to a scheme by next year.
In addition to concerns about a lack of clarity as to what a national affordability scheme would comprise, I am not persuaded by arguments from the Benches opposite about affordability when it will not support further moves to encourage water metering. The independent Walker review, commissioned by the previous Government, recommended a widespread switchover to metered charging, considering it the “fairest way” to address the affordability problems inherent in the current system. Therefore, it is disappointing that the party opposite—I exclude the noble Lord, Lord Whitty, from my condemnation—is opposed to even minor amendments which I raised in Committee and which the noble Lord, Lord Oxburgh, will be raising again later to help to encourage metering. Such a move could help people to take control of their household bills. On that basis, I do not support these amendments.
My Lords, I thank the noble Lord, Lord Whitty, for explaining his amendments and I thank all noble Lords who have contributed to this debate. It will not surprise those of your Lordships who sat through Committee on this Bill to learn that I will not be supporting the noble Lord’s amendments.
I shall deal, first, with the Opposition’s national affordability scheme. The Government take the view that companies are best placed to work with their customers to develop local solutions concerning affordability. After all, it is those customers who foot the bill. That is why the Government’s approach is focused on company social tariffs. The companies’ own business plans show us that by 2015-16 most will have put a social tariff in place voluntarily following a process of engagement with their customers. I am struggling to see the advantage of a national affordability scheme in comparison with the guidance and framework for social tariffs which is already in place and which has, as my noble friend Lady Bakewell said, now been in place for a year.
The Government’s social tariff guidance sets minimum standards in a light-touch way. It does so taking into account the reality of diverse regional circumstances. The minimum standards set in the guidance allow water companies to talk to their customers—the ones, as I said, footing the Bill—and to innovate. Imposing more specific minimum standards on water companies would limit their scope to address the unique circumstances of their respective areas. It would disincentivise companies from coming up with something more creative and more targeted. We should not ignore how different the affordability issues facing the water sector are in different parts of the country.
Our social tariff guidance provides a clear steer on the factors that must be taken into account in the development of a social tariff. However, it leaves final decisions for companies to take in the light of local views and local circumstances, rather than seeking to impose schemes from the top down. The most important requirement of our guidance is for effective customer engagement in the development of a social tariff. The Government believe that some customers should not have to subsidise others without being properly consulted.
All the companies have begun that process of consulting with their customers on whether a social tariff is right for their area and, if so, what form it should take to address local needs. The guidance requires that the companies must work closely with the CCW to ensure that their proposals align with customers’ views of what is acceptable. Undertakers will need to be able to demonstrate that they have listened to customers and organisations representing customers. The social tariff guidance applies to both the companies and Ofwat. Where a company brings forward a social tariff that complies with this guidance, there is a clear presumption in favour of approval by Ofwat.
It is crucial that those who are struggling to pay their water bills get assistance, but the difference between what is suggested and what we have in place is our recognition that local people should have a say. Local factors should be, and are being, taken into account.
I turn now to Amendment 56, which concerns billing information. First, I thank noble Lords for raising a very important point about the WaterSure scheme As noble Lords are by now aware—but sadly many customers are not—the scheme is a mandatory safety net for low-income customers. It is available for customers who have a meter and, for reasons of ill health or because they have a large family, use greater than average amounts of water. I have said before that it is unfortunately a feature of all such means-tested benefits that take-up fails to match eligibility. People who are eligible simply do not sign up. Through informing people that WaterSure exists, I am confident that we can increase uptake. That is why it is important that billing information includes details about WaterSure.
However, that is already happening, and it has been happening for years. The Consumer Council for Water has confirmed to me that information on WaterSure and other similar schemes operated by companies is included with bills. CCWater works closely with each water company on the information provided on household bills to ensure that customer interests are met. Its very practical advice is that customers are likely to be put off by too much additional information on the face of the bill. Taking the other suggestions in the amendment, such as requiring all water companies to provide information about tariff structures and the lowest available tariff, I must confess that I find this requirement rather bizarre. What tariffs are we talking about? This is not the energy sector. Water companies simply do not have complex tariffs. In fact, as I pointed out in Committee, the situation is quite the reverse. There are just two tariffs: charging by a meter, or by the rateable value of a customer’s home.
Water companies provide advice to customers on whether or not they might benefit financially from the installation of a meter. They have to fit one free of charge, if asked. The recent publication of water companies’ business plans has demonstrated how this system can work to claw back benefits for customers using the price review process. By taking account of lower financing costs, Ofwat estimates that the next price review could significantly reduce pressure on bills from 2015 by between £120 million and £750 million a year. Most water companies are proposing flat or declining customer bills from 2015 to 2020.
The amendments are well intentioned and raise important questions about the water sector and help for those who are struggling to pay. I thank the noble Lord for bringing the issues again before the House, but I believe the amendments will not help. I have explained my reasons The Government are absolutely committed to helping hard-pressed customers where we can, and I hope that I have demonstrated that adequately today. On that basis I ask that the noble Lord withdraw his amendment.
My Lords, I thank the Minister for that, and I thank everybody else who has taken part in this debate, even though there was a marked lack of enthusiasm for the exact proposition that I put before the House. I think that there was also some degree of misunderstanding, but I shall clear up one or two points.
The noble Earl, Lord Selborne, rightly raised the issue of the impact on bills because of people who will not pay their debt, as well as those who cannot pay their debt. In some water companies, the level of debt is horrendous. We are bringing before the House later tonight—probably, if we make it—a couple of amendments that will address precisely that problem. On the one hand, a lot of the unpaid bills arise in private rented property. There was a provision in the 2010 Bill that would have allowed the Government to introduce secondary legislation to require landlords to indicate who was responsible for those bills. In areas such as the Thames Water area, this is a huge part of the company’s unpaid debt. The present Government, however, declined to implement that part of the Bill on the ground that it was too much of a burden on landlords. The alternative is that landlords themselves should be responsible for the bill and recover it through the rent, which is another way of approaching it. We are attempting to address that problem and the costs of debt which get transferred on to the rest of the consumers.
To put it at its mildest, some companies are rather more aggressive than others in chasing the debt among the “won’t pay” element. We have another later amendment referring to Ofwat. If a company was clearly at a higher debt level than the average due to its own failure to pursue the debt, Ofwat could, in the next price review, refuse to cover it in the price settlement. Therefore, there would be pressure at the company end and pressure on landlords to produce the names of the people they regard as being responsible for their bills. There are things that we will do. My noble friend Lord Grantchester will be pursuing this later for those who can stay. We are addressing that dimension as it has an impact on bills. The noble Earl, Lord Selborne, is absolutely right, as he was in his report six years ago.
The proposition for a national affordability scheme is to push along the developments that people are saying, again, are already happening. The noble Baroness, Lady Bakewell, spoke eloquently about the range of social tariffs and similar schemes being provided by Wessex Water. I am also a customer of Wessex Water and I am pretty satisfied with it in that regard, as in others. Not many companies are as advanced on that front as Wessex Water, and some are well behind. Even in Wessex, if there are only 14,000 on the various tariffs—in, effectively, most of Somerset, Dorset, Hampshire, what was Avon and parts of Wiltshire—those who are eligible to be covered by the scheme are not taking it up.
It is true that with all quasi-means-tested benefits there is a lower take-up than the optimum, but this is far worse than in other fields. It is important to give a kick not only to the introduction of schemes but to companies to ensure that those who are eligible know about them and apply for them. My proposition is not that the companies should not be innovative and creative and relate the schemes they operate within their own areas to the kind of demography and costs they face.
In reply to the noble Baroness, Lady Byford, I would say that you cannot specify a national figure because the average charges differ company by company. So you would probably have a minimum level, which was a proportion of the average scheme, company area by company area. We have deliberately left that for the Minister to pursue in defining the minimum standards of a national affordability scheme. It would allow for the maximum flexibility, both geographically and creatively, of the schemes the companies could go for.
The record of the companies so far, and the failure of Ofwat to pursue them, is the reason why we need a push at national level to get them all involved. There could be a variety of schemes, from a discount to a particular tariff based on a proportion of the average or, in the metered sector, to the level of usage required, as the WaterSure scheme does. There is all the scope in the world in my proposition for different schemes to apply in different areas as long as they meet the minimum requirement. At the moment, however one defines the minimum requirement, eight companies are not, as of today, offering such schemes, and those that do have attracted to them only a small proportion of those who are potentially eligible. That is why we need a kick-start to this, and the national affordability scheme would allow for that kick-start.
I hope that the House will recognise that some of the criticism of what I am proposing is misplaced. Obviously, I have failed at successive stages of the Bill to carry across the argument, but I hope that I have now spelled out clearly what the position is.
On the information scheme, I recognise that most companies provide some information on tariffs and that there will be more tariffs. The exposition of the noble Baroness, Lady Bakewell, of the position in Wessex shows that many schemes are particularly geared to classes of consumer. If all consumers were told about those, that would be useful. We do not have the 2,000 or so tariffs which exist in the energy sector, so I was a little surprised when the Minister described as bizarre our proposition that we should inform consumers of what tariffs are available and what is most likely to suit their needs. That is exactly what has recently been put into the energy regulations at the behest of the Prime Minister. I am therefore surprised that the Minister takes a different view on water. It would be simpler and easier to do than in energy and I see no reason why water companies should not take on the obligation of informing their consumers, via their bills, of what options are available.
I am sorry that the Government seem unable to take up this scheme, even though it gives them maximum flexibility in how they implement it. The issue is so important, and there is such a huge lacuna in the totality of what is covered by the Bill, that it would be remiss of me not to attempt to take the opinion of the House. I think the Government are in the wrong place. If they had come up with an alternative proposition, I would obviously have considered it. However, there is not even that on the table, and I therefore wish to test the opinion of the House.
Amendment 56 not moved.
Clause 16: Charges schemes
Amendments 57 and 58
57: Clause 16, page 52, line 33, at end insert—
“(6ZA) The Authority must issue rules (and, if it revises rules it has issued, must issue revised rules) about consulting the Council about proposed charges schemes.
(6ZB) The rules must require a relevant undertaker that proposes to make a charges scheme to consult the Council about its proposed scheme.
(6ZC) If the Authority considers that a relevant undertaker has not complied with those rules, it may give the undertaker a direction to do, or not to do, a thing specified in the direction.”
58: Clause 16, page 52, line 35, after “(6)” insert “or (6ZC)”
Amendments 57 and 58 agreed.
Amendments 59 and 60 not moved.
Clause 22: Primary duty to secure resilience
61: Clause 22, page 63, line 20, after “promoting” insert “—
My Lords, in moving government Amendment 61 I shall also speak to the other amendments in this group. I shall address Amendments 61 to 63 first. I am grateful for the support of my noble friends Lord Redesdale and Lady Parminter, who have added their names to these amendments. During scrutiny of the Water Bill we have debated the important question of how to ensure sustainable outcomes in the context of regulation of the sector. As part of that debate, we have returned repeatedly to the need to promote the efficient use of water so that all parties—Ofwat, the water companies and their customers—are encouraged to use water as efficiently as possible.
There is already a duty on undertakers to promote the efficient use of water by their customers, and Ofwat has a role in enforcing this duty. As noble Lords will know, we consider water efficiency to be an important priority. A compelling case for additional clarity on this issue has been put forward by noble Lords in Committee and in subsequent discussions. We therefore propose to make a further alteration to the resilience duty to make it absolutely clear that Ofwat is expected to promote the efficient use of water by water companies. We want to avoid any doubt on that score. This ensures that the resilience duty embraces all relevant action, such as the capture and retention of water by investing in new water storage or by tackling leakage. It will ensure that Ofwat promotes action to ensure that water is managed by the companies as efficiently as possible and encourages them to take action to encourage customers to use water efficiently. All such activity will support the overall objective of reducing pressure on water resources.
I also wish to speak to Amendments 65 to 70. I hope that it will be clear how seriously we take the crucial matter of getting the right balance between social, environmental and economic considerations in the regulation of this sector. We know that noble Lords across the House share this concern. It is with the intention of further strengthening that balance that we are bringing forward these amendments today. They require that when setting strategic priorities and objectives for Ofwat, the Secretary of State and Welsh Ministers must have regard to Ofwat’s duties and must have regard to social and environmental matters as well.
My noble friend Lady Parminter tabled a similar amendment in Committee and, supported by the noble Lord, Lord Whitty, made her case forcefully. I thank both noble Lords for rightly flagging this issue. Briefly, Clause 24 clarifies and strengthens existing guidance- giving powers. It enables the Secretary of State to issue a single consolidated statement setting out social, environmental and economic policy priorities in the round. The purpose of this is to help Ofwat weigh all of the relevant considerations appropriately when making regulatory decisions, and Welsh Ministers will have an equivalent power. We agree that the consolidated guidance must include social and environmental considerations. That is why we made it clear in the drafting of the Bill that social and environmental matters should stay. However, we share the concerns of noble Lords on the issue of the status of that guidance, and for that reason we are bringing forward an amendment to resolve the issue.
I thank noble Lords for their constructive and well informed engagement, and I hope that they will welcome these amendments. I beg to move.
My Lords, I thank the Government, after some considerable debate about the issue, for the alacrity with which they have taken steps to introduce water efficiency. At the previous stage I raised the issue of sustainability, and I see that the noble Lord, Lord Whitty, has tabled an amendment covering it as part of this group. However, what I am most concerned about is the issue of water efficiency.
The resilience amendment talks about demand management. In the parlance of the water industry, demand management is very much about the reduction of leaks, whereas I believe that water efficiency is much more about the use of water and how it is a partnership between the water companies and water users on how water is to be used. We still have to bring about a massive behaviour change in customer use to make sure that the biggest leak we have in any system is the tap that is not turned off or used inefficiently. That is a movement which we have to take forward.
I hope that these provisions will bring about a degree of behaviour change within Ofwat itself, as happened as a result of the changes made to its core duties in the 2003 Act. I believe that Ofwat is seeking to change the way that it looks at such a scarce resource. With climate change, we are going to have to look at a very different system of determining how much water is available and how we use it. Indeed, in a few minutes Ofwat will be holding a reception just down the road to discuss these issues with stakeholders. I am glad that the Government have brought forward these amendments, which I am sure will help the regulator in its duties.
My Lords, I, too, thank the Government for listening so assiduously to the concerns that I and colleagues around the House raised in Committee. The Government have listened very carefully to those concerns, and I particularly welcome the new amendment which outlines that the resilience duty includes promoting the efficient use of water. This powerful commitment to water efficiency is testament to the tenacity of my noble friend Lord Redesdale. It also delivers the Liberal Democrat party policy agreed five years ago to reform Ofwat’s remit to put water resource efficiency at the heart of water company plans.
I also sincerely thank the Minister and the Bill team for accepting my genuinely strongly felt concerns about the necessity of the Government taking account of social and environmental matters when formulating the strategic guidance with which the regulator has to conform. Their amendment to Clause 24 reflects that and I am extremely grateful.
My Lords, I, too, welcome all the government amendments in this group. However, I do not understand why they have not gone the full hog towards what the noble Lord, Lord Redesdale, the noble Baroness, Lady Parminter, and I were arguing to begin with, which is that if you give Ofwat a responsibility or a primary duty for sustainable development, these things would naturally flow from that. These are criteria that are applied to other regulators. Everything that has been said in this debate and in the White Paper, including everything said just now by the noble Baroness, shows that you need to have a holistic approach to the management of water. This is not about just one dimension or aspect, but about the cost to consumers and to business, about providing infrastructure for the country, about water quality for consumers, about whole ecosystems and catchment areas, about maintaining water resources against climate change pressures, about resilience and about efficiency.
Resilience and efficiency have now been written into this, but not very much of the rest. I, too, admire the noble Lord, Lord Redesdale, for the pressure that he has brought to bear regarding water efficiency—he has won a notable victory here—but this still baffles me, and my amendment reiterates the need to provide a broader primary duty. The Government have obviously recognised some aspects of upgrading that responsibility because they have, rightly, taken up the earlier amendment tabled by the noble Baroness, Lady Parminter, that changed,
“may have regard to social and environmental matters”,
to “must” in respect of the Minister’s statement. They recognise sustainability in general and that it is an important part of how we manage in the context and framework within which Ofwat works.
As there are multiple regulators in this system, it has traditionally been assumed that Ofwat is primarily an economic regulator, the Environment Agency primarily an environmental regulator and the Drinking Water Inspectorate primarily a quality regulator. However, they actually overlap: the Environment Agency has serious economic responsibilities in its remit, very specifically about water resources, while Ofwat has a secondary sustainability duty and now, as a result of the amendments on resilience, broader aspects of its responsibilities relate to sustainability. I appreciate the references to resilience. When sustainability was being pushed in the Commons, the Government came up with the resilience criteria, and when it was being pushed in the Lords, they pleased the noble Lord, Lord Redesdale, with the water efficiency criteria.
However, the argument still remains that you need a broader view, which is what my amendment provides. The problem with the term resilience is that it is essentially a passive term. It means that you have to protect the system against pressures, whether climate change, demographics, development pressures, changes in technology or whatever. We want an active form of sustainability, which is why “sustainable” and “development” are put together in that concept, so that you are moving forward in response to social, environmental and economic pressures. You move on all fronts at all times; there are different points of priority, but it is nevertheless a holistic approach. I find it odd that the Government are not prepared to accept that.
I hope that the Minister can perhaps tell me why the Government have not been prepared to do that. At that point, I will have to consider my amendment somewhere down the line. I do not want to sound as if I am negative towards the government amendments before us, because they are good, but I think that they could have gone at least one step further.
My Lords, I apologise that I was not able to play a large enough part in Committee. However, I wonder whether the noble Lord, Lord Whitty, can tell me what Ofwat does not have. My understanding, having had earlier briefings from Ofwat, was that it already had a sustainable development plan duty, which the Bill will further introduce and strengthen. What is missing from the responsibilities that Ofwat already has? I am a little confused.
I am sorry; I did not think that that was necessary at this stage—I hope I am correct. That is my question for the noble Lord, Lord Whitty. I am slightly confused about what is expected of Ofwat in terms of its sustainability duties. I thought that that was written in and already exists. Hence I am not sure where the amendment of the noble Lord, Lord Whitty, would take us.
My Lords, I contributed to the Bill in Committee but that was all on the Flood Re insurance aspects and did not relate to this part. However, in listening to the debate on sustainability and resilience, I was struck by the points about whether the Bill was worded strongly enough as regards the importance of sustainability. I recall the reply in Committee from the Minister, my noble friend Lord De Mauley, when he made it absolutely clear that Ofwat has had a stand-alone statutory duty to contribute to the achievement of sustainable development since 2005. In response to what the noble Lord, Lord Whitty, has said, I would like to turn it a different way round and say that this is actually about the outcome produced, and whether sustainability is strongly enough part of the Bill.
I pay tribute to the work of my noble friend Lord Redesdale in this respect. With this amendment, the Government have delivered the outcome that we want. The question is whether Amendments 61, 62 and 63 are sufficient to meet the arguments that were put forward in favour of the word “sustainability” at that stage. I think that these amendments are sufficient, and I have two reasons for concluding so. First, the resilience duty now requires the promotion of increased efficiency in the use of water. Additionally, the amendments made on Report in the House of Commons mean that the resilience duty includes a requirement that the sustainable management of water resources should be promoted as part of that resilience duty. In practice, therefore, the sustainability test is now being met.
Secondly, the Blueprint for Water coalition of environmental groups, which includes the World Wide Fund for Nature, the RSPB and the Wildlife Trusts, makes it clear in its comprehensive briefing for this Report stage that the Bill satisfies its previous call for Ofwat’s secondary sustainable development duty to be raised to a primary duty. I find its support for the Government’s position reassuring in this respect.
With the other proposals relating to abstraction reform, together with Ofwat’s existing trading and procurement code, which includes a sustainability clause, I think that the Government have made their case and should therefore be supported. Again, I pay tribute to the role of my noble friend Lord Redesdale and his advocacy on this issue. His efforts in Committee have produced the amendment that we are debating today.
My Lords, perhaps I can be of assistance to the House, particularly the noble Lord, Lord Whitty. Paragraph 8.137 of the Companion to the Standing Orders says quite clearly:
“On report no member may speak more than once to an amendment, except the mover of the amendment in reply or a member who has obtained leave of the House, which may only be granted to … a member to explain himself in some material point of his speech”.
My interpretation is that provided the noble Lord, Lord Whitty, gets the leave of the House, he is able to answer—if he so wishes, of course.
I am not sure whether the leave of the House is divisible business. With the leave of the House, I will explain to the noble Baroness, Lady Byford, that the sustainable development duty under the current Ofwat remit is a secondary duty. For several other regulators, including Ofgem, it is now a primary duty. That is what my amendment seeks, and it would cover social, environmental and economic matters, not simply resilience and water efficiency.
My Lords, I thank my noble friends Lord Redesdale, Lady Parminter and Lord Shipley and the noble Lord, Lord Whitty, for their thanks for the government amendments. I hope that noble Lords around the House are pleased that there has been so much positive engagement between Committee and Report. The noble Lords who have spoken are right to emphasise the importance of the environmental context of everything we are doing here. I am very glad that my noble friend Lord Redesdale can go from here to a meeting to celebrate what has been achieved.
Turning to Amendment 64, tabled by the noble Lord, Lord Whitty, I make it absolutely clear that we agree that sustainable development must be at the heart of all that the regulator does. I hope that that reassures him and is also of interest to my noble friend Lady Byford. That belief is at the heart of the Government’s statutory guidance to Ofwat, the strategic policy statement. That guidance requires the regulator to report on an annual basis on its contribution to the Government’s sustainability objectives. I am pleased to be able to say that Ofwat is making such a contribution.
Much of the broader debate about Ofwat’s sustainable development duty dates from the 2009 price review. Much has changed over the past five years. Ofwat has made good progress; for example, it has taken active steps to correct the perceived bias towards capital investment. The current price review is very different from previous price reviews. For the first time, there is a balance between capital and operational solutions as a result of Ofwat’s new approach, which now looks at total expenditure rather than at capital expenditure and operational expenditure in silos.
Ofwat has been working with water companies and Infrastructure UK to halt the up-and-down cyclical investment that has affected the sector for many years. This change in approach has had tangible outcomes; for example, Ofwat has recently given permission to water companies to bring forward £100 million of investment into 2014 to smooth the investment profile and benefit the water-supply chain.
All of this is reinforced by what we have been doing to move the horizon from the short-term view of the next five years to a sustainable long-term focus. That is why the Bill will introduce a new duty of resilience that deals directly with the long-term pressures facing the water industry. The new resilience duty encourages investment in additional water storage. It pushes the sector to tackle unsustainable abstraction. It places the focus squarely on the responsible management of water resources. Importantly, it promotes the reduction of pressure on water resources, and reducing demand for water.
Noble Lords will also be aware that the new duty was amended in another place to be absolutely clear and unambiguous about what that means. It is about managing water resources sustainably. We have now made further amendments to be absolutely clear that the resilience duty means that Ofwat is expected to promote efficient water use by companies. I thank my noble friends again for their welcome of this.
We recognise the importance of preparing the water sector for the future. We recognise the need for a strategic response to climate change. We recognise the demand on resources that future population growth will cause. It is because we agree with the aims of the noble Lord, Lord Whitty, that we have addressed this at all these levels. The changes that the Bill introduces, and the changes we are already seeing in the regulation of the sector, show how much this debate has moved forward. I hope, therefore, that noble Lords will accept the Government’s further amendments—it sounds as if everybody welcomes those—and that the noble Lord opposite will be willing not to move his amendment.
Amendment 61 agreed.
Amendments 62 and 63
62: Clause 22, page 63, line 21, after “and” insert “(ii)”
63: Clause 22, page 63, line 22, after “ways” insert “, and to increase efficiency in the use of water”
Amendments 62 and 63 agreed.
64: After Clause 22, insert the following new Clause—
“Primary duty of sustainable development
(1) Section 2 of the Water Industry Act 1991 (general duties with respect to water industry) is amended as follows.
(2) In subsection (2A)—
(a) omit the “and” at the end of paragraph (c);(b) after paragraph (d) insert “; and(e) to contribute to the achievement of sustainable development.”(3) In subsection (3) omit paragraph (e).”
Amendment 64 not moved.
Clause 24: Strategic priorities and objectives
Amendments 65 to 70
65: Clause 24, page 64, line 15, leave out “and”
66: Clause 24, page 64, line 16, leave out “may” and insert “must”
67: Clause 24, page 64, line 16, leave out “amongst other things” and insert “and
(c) may have regard to such other matters as the Secretary of State thinks fit.”
68: Clause 24, page 65, line 11, leave out “and”
69: Clause 24, page 65, line 12, leave out “may” and insert “must”
70: Clause 24, page 65, line 12, leave out “amongst other things” and insert “and
(c) may have regard to such other matters as the Welsh Ministers think fit.”
Amendments 65 to 70 agreed.
71: After Clause 24, insert the following new Clause—
“Collection of debt from tenants
(1) The Water Industry Act 1991 is amended as follows.
(2) After section 147 (charging for emergency use of water) there is inserted—
“147AA Charges to recover losses from bad debt
(1) The Secretary of State, or the Authority, may prohibit losses to an undertaker due to non-payment of bills from being recovered through charges on customers.
(2) Where an undertaker does not have information about a resident in a property who is using water, if the occupants of that property are tenants, the landlord must, on request, provide to the undertaker contact details for the tenants.
(3) This section comes into force on the day after the Secretary of State has laid before Parliament a report setting out how water companies have failed to take action on these matters.””
My Lords, the issue of bad debt, particularly in the private rented sector, was debated in Committee. Amendment 71 seeks to prohibit water companies from making good their losses due to non-payment through increased charges on good, bill-paying customers.
Under this amendment, water companies must follow up on any debt with the specific resident customer. However, getting the details of the customer can be difficult in properties where the resident customer is a tenant in the private rented sector. The landlord of the property will be required by proposed new subsection (2) to supply details of the tenant to the water company to enable it to chase up the debt. This is an improvement on the present system, where the company simply makes good the shortfall across all other customers.
Ofwat estimates that 80% of bad debt originates from the private rented sector. As stated in Committee, it is estimated that about £15 is added to honest bill-payers’ water bills to cover bills left unpaid. We are aware that there are people who have difficulty with affordability—we have discussed this already today—but on the other hand there are those who can pay but simply do not. This is effectively stealing water from other genuine bill-payers, adding an unnecessary cost to their bills. The situation can be rectified by this amendment.
This approach is supported by the Consumer Council for Water, Ofwat, the EFRA Committee in the other place, and water companies. In June 2012 the EFRA Committee said:
“It is simply unacceptable that, at a time when so many are struggling to afford their water bills, customers face the additional burden of subsidising those who refuse to pay what they owe”.
The Government have shown a preference for a more voluntary approach, but it is simply not working and a tougher stance must be taken to ensure the following three things: first, that tenants cannot get away with not paying their water bills; secondly, that water companies can effectively get in touch with and track down those who refuse to pay; and, thirdly, that honest customers do not have to foot the bill.
We must provide an incentive for water companies to collect their debt, which this amendment seeks to do. It forms part of a package of amendments which would make sure that the water companies and industry acted responsibly when dealing with issues such as affordability and customer service.
Although it must be recognised that some water companies such as Yorkshire Water are doing well and have already started to tackle these issues, there are still many more which have not. It is simply not fair that customers should pay for water companies’ inability to collect their own debt.
The Flood and Water Management Act 2010 made provision for secondary legislation to be introduced to deal with this problem, but none has been forthcoming. Apparently, the Government consider it to be a great burden on landlords simply to tell the water companies who their tenants are. Meanwhile, they consider it reasonable to require landlords to check the immigration status of their tenants. Perhaps the Minister can speak on his department’s views. In the absence of implementation of regulation, we could make sure that we corrected the situation with this amendment. Water companies must take bad debt more seriously and pursue those who could but do not pay rather than impose greater financial burdens on those who do. I beg to move.
My Lords, we all agree that bad debt in this sector must be tackled effectively. However, we believe that the best ways to do this are through the sector-led voluntary approach to information-sharing and by Ofwat getting the regulatory penalties and incentives right.
While we strongly support the aim of the amendment, we cannot agree that it is necessary because, as noble Lords will be aware—the noble Lord, Lord Grantchester, made reference to this—very similar provision already exists in primary legislation. Without anything changing in the Bill before us, the power exists for the Government to bring forward regulations to require landlords to provide water companies with details of their tenants. This could happen if it seemed appropriate.
However, after consulting widely with all those who would be affected by this measure, we decided that a voluntary approach would be more suitable than imposing those regulations. Landlords felt that it would not be fair to penalise them financially for the debts of others. Having looked carefully at all the evidence, we took the view that there was much more that the water sector could do to address the issue, and there is evidence that some companies are already doing it. It is important that we make decisions based on the evidence; and the evidence showed us that good practice in tackling bad debt is not applied consistently across the water sector.
On earlier amendments on affordability, the noble Earl, Lord Selborne, and others suggested that water companies’ hands were perhaps tied on bad debt. Several companies have excellent performance in the recovery of bad debt—there are many things that they can do—but many others do not. Water companies can, and many already do, use the courts to pursue debtors. However, too many companies still fail to use all the debt collection tools at their disposal and we want improvements in performance in this area.
By way of illustration, perhaps I might give noble Lords some examples of what we identify as good practice. Yorkshire Water is an outstanding example of good work on bad debt. It partners with Experian’s credit account information-sharing service. Yorkshire Water assesses all new customers’ credit histories, which enables it to tailor services to each individual, supporting those in financial difficulty and providing sanctions for those who avoid payment. Another effective scheme is the arrears allowance scheme run by United Utilities, which supports 8,300 customers. For the first six months, the company matches customers’ repayments pound for pound; then the company matches every £1 paid with a £2 allowance until arrears are cleared.
However, at the moment, by no means all companies use these approaches. We wish to see such approaches become much more widespread, and the regulator wants to promote this, too. The methodology for the current price review places a much stronger focus on the responsibility of the company to collect its debts.
The sector as a whole is now starting to respond to this challenge. It is working with landlords’ organisations to establish a new voluntary scheme. Soon, it will launch a database that enables landlords to provide tenant information voluntarily. Crucially, this scheme is supported by the industry through Water UK and the main landlords’ organisations. We wish to give this new system a chance to work and we hope that noble Lords opposite will do so, too.
Ofwat decides which costs may be recovered through the price review; it is absolutely central to what it does. It is clear that Ofwat is using the current price review process to bear down on the costs of bad debt, which is clearly very important. The regulator has been very clear to companies about how bad debt is viewed. Companies must demonstrate high performance in debt collection. They are obliged to show that any increase in bad debt is genuinely beyond their control.
I shall refer to a point made by the noble Lord, Lord Whitty, again in relation to the earlier group of amendments on affordability—the noble Lord, Lord Grantchester, may have referred to it just now as well. The noble Lord suggested that bad debt was mostly in the private rented sector. There is no evidence that bad debt is disproportionately in the private sector; nor does provision in the Flood and Water Management Act, which the noble Lord wishes to see implemented, focus on private rented properties. It would make all landlords, both private sector and social landlords, financially liable for their tenants’ debts. We may have misheard or misunderstood the noble Lord, but we wanted to put that clarification on the record in case that that was how the noble Lords opposite viewed the situation.
Intervention in the setting and recovery of charges is a job for the independent economic regulator. Ofwat has all the tools necessary to enable it to do this job, and it is absolutely right that it is allowed to do so independently. Although we share the view of the noble Lord opposite that those who seek to avoid paying for the water provided when they can pay should not push those costs on to others, I hope that he will accept that progress is being made in the way that I have described and will therefore be content to withdraw his amendment.
I thank the Minister for her comments. We were perhaps talking at cross purposes on the amount of bad debt in the private rented sector. The point here is that local authorities and housing associations are much keener on water companies chasing up tenants and therefore reveal to them the details of those tenants far more readily than do landlords in the private rented sector. That could explain the preponderance of bad debt in the private rented sector.
Nevertheless, I contend that the voluntary approach is simply not working fast enough. It is evident that things are going on in this respect—I pay tribute to what is being done—but I am concerned that not all companies are working as assiduously as they could to reduce this problem.
Given that provision already exists in primary legislation, I urge the Government to press forward a little more keenly than they appear to be doing. I beg leave to withdraw the amendment.
Amendment 71 withdrawn.
72: After Clause 29, insert the following new Clause—
“Duty to provide a supply of water etc for fire fighting
(1) The Water Industry Act 1991 is amended as follows.
(2) In section 57 (duty to provide a supply of water etc for fire fighting), at the end of subsection (1) there is inserted “, including service pipes connected from those mains to consumers’ premises, where equipment is installed for extinguishing fires such as fire suppression systems, and this water may be taken via manually operated or automatic apparatus.””
My Lords, I must apologise to the House and to my own Front Bench for bringing this matter before them not in Committee but on Report, and for not having had the opportunity fully to brief them. However, as my head hurts trying to understand the amendment that I am about to move, perhaps I may explain why I am in this current state.
The issue is this. As I understand it, water connections made through fire suppression systems—which, in the form of sprinklers, have become the new kid on the block, as it were, in recent years—are now classified as non-domestic supply. That in turn means that the water companies, which are exercising discretion on the matter, can attach conditions which are deleterious to our objective of promoting access to water supplies for the purpose of firefighting.
Indeed, there is a patchwork of reactions from water companies across the land. I understand that some companies, because they charge the connection out to some other supplier, charge as much as £3,000 a time, whereas in Scotland, for instance, where we are told that it is a matter of very few coppers to attach the system to the water sprinkler system, no such charges are made.
The problem has been growing over the years and was in part dealt with by a protocol signed off by the then Minister, my noble friend Lord Knight who, unfortunately, is not in his place this evening. That protocol tried to get a balance between the water companies and ensuring the water supply for the purposes of fire suppression. Time has passed since that 2004 protocol, which is why I seek to change Section 57 to ensure that the legitimate use of water to fight fires is clarified and made absolutely apparent.
In doing so, I must thank the noble Lord, Lord De Mauley, and the noble Baroness, Lady Northover, for agreeing to meet me and some of my colleagues recently to get their advice. I should be very grateful if, in response to this probing amendment, we could have a reply that gives some hope that this matter, which we had hoped to have dealt with in the House of Commons by Dan Rogerson, can be dealt with here—albeit that it is a matter that has been brought late into the games.
I should also say that the cost of hydrants, which are available outside buildings to be accessed to suppress fires, are not apparent in the same way as some water companies are now charging those who want access to a sprinkler system. We now have a body of evidence that shows that the fixing of sprinkler systems has been successful in suppressing fires. The problem that we now have is that sometimes people resile from fitting sprinkler systems. I would be very grateful for any hope that the Minister can give me that this could be dealt with sympathetically, and how.
My Lords, I am so grateful to the noble Lord, Lord Harrison, for tabling the amendment and bringing this important matter to the attention of your Lordships. I well know that the noble Lord is an active member of the All-Party Parliamentary Group on Fire Safety & Rescue. He kindly brought the honorary secretary of the group, Ronnie King, to see me last week so that I could hear more about this matter, and I am very grateful for that opportunity. Mr King was a senior firefighter and has now dedicated himself to trying to save even more lives by campaigning on issues of fire safety. He wants more people to install sprinklers. He wants the barriers that might stand in the way of the installation of more sprinklers to be knocked down. The amendment would result in fire suppression systems, known to most of us as fire sprinklers, being referred to explicitly in legislation as water for firefighting.
I understand that a key driver behind the amendment is the problems that can arise between fire sprinkler installers and water undertakers when connections for fire sprinkler systems are required. Those problems include undertakers requiring meters to be installed on the connections, smaller connection sizes than would be ideal for the fire sprinkler system and requirements for internal storage.
The intention behind the amendment is to refer explicitly to fire sprinklers in the legislation to make those conversations easier and therefore facilitate more fire sprinkler installations. As fire sprinklers are not referred to directly as water for fire-fighting, they can default to being classified as water for non-domestic use.
I am happy to put the facts on the record. The Water Industry Act 1991 already states that water companies cannot charge for water for firefighting, so water used in fire sprinklers cannot be charged for. I do not believe that fire sprinklers need to be explicitly referred to in the legislation to be counted as providing water for firefighting. Plainly, that is what they do.
That is not to say that there is not a problem here, but I must say that I think that the problems which we have been made aware of would not be affected by whether fire sprinkler connections were explicitly defined in legislation as connections for firefighting. The water industry and the fire sprinkler industry have worked together to create a voluntary protocol, with the aim of it being used to inform individual water companies’ policy on connections for fire sprinklers. The protocol is designed to assist the conversations between water companies and fire sprinkler installers by providing guidelines regarding the requirements for connections.
I am aware that a previous version of this protocol was not always followed by companies, and that has led to the revision of the document. I put on record that the Government are very supportive of that document. I propose to write to all the water undertakers to demonstrate that support and to encourage them to update their policy documents.
Having heard about those problems for myself, I have asked my officials to follow this up with Water UK, the body which represents all the water companies. Water UK also supports the protocol and wants to make sure that it works. It recognises that, although all the chief executives of water companies are signed up to the protocol, we need to make sure that its guidelines are properly understood at an operational level. Water UK wants to work with us and the water companies to ensure that the protocol is followed and to eliminate those problems.
I hope that I have managed to reassure the noble Lord, Lord Harrison, and hope that he will feel able to withdraw his amendment.
Amendment 72 withdrawn.
Clause 37: Appeals relating to revisions of codes
73: Clause 37, page 87, line 19, at end insert—
“( ) In section 213 (powers to make regulations), in subsection (1A) (affirmative resolution procedure to apply on first exercise of power), for “each of sections 89 and 90 above, the instrument” there is substituted “—
(a) each of sections 89 and 90, and(b) each of sections 207A and 207C and Schedule 16;the instrument””
Amendment 73 agreed.
74: After Clause 38, insert the following new Clause—
“Restriction on undertakers’ power to require fixing of charges by reference to volume
(1) The Water Industry Act 1991 is amended as follows.
(2) In section 144B (restrictions on undertakers’ power to require fixing of charges by reference to volume), after subsection (1) there is inserted—
“(1A) Subsection (2) below shall not apply where the water undertaker considers that the fixing of charges by reference to volume is required to allow it to meet its duties under section 37(1)(a) (providing supplies of water) or section 93A (duty to promote the efficient use of water) and that measures for fixing of charges by reference to volume have been included in both the water undertaker’s draft water resources management plan as set out in section 37B and any such plan published as set out in section 37B(8)(a).””
My Lords, I begin by declaring an interest in a company that designs and manufactures smart meters for gas, electricity and water; the amendment is about water.
I shall not rehearse the arguments about water metering, which were well aired in Committee. The present situation is clear: a householder who wants a water meter is entitled to have one. However, no one is charged for their water by metered volume unless they want to pay in that way or they live in an area designated by the Secretary of State as one of water stress. As has been pointed out by the noble Baroness, Lady Parminter, that situation obtains despite the fact that in 2009 the independent Walker review of water charging set up by Defra concluded that charging by water volume was the only fair and sustainable basis for charging.
In Committee, I pointed out that regardless of the considerable fairness, efficiency and environmental benefits of metering, there were two other important considerations. First, because meters are relatively expensive to install on a one-off basis, it is much more cost-effective if a whole street or neighbourhood is done together. Secondly, because we live in times of changing climate and weather, an area that previously enjoyed an abundant supply of water may become water-stressed quickly and unexpectedly. If meters are already in place, it would be possible to respond to the changed conditions much more quickly. This means that there are good reasons to allow water suppliers to install meters at their discretion and convenience, while leaving the decision on whether to use those meters for water charging with the Secretary of State or the householder. This would allow meter installation at minimum cost and permit a timely response to water stress, if needed, and it was the essence of the amendment that I introduced in Committee.
In subsequent discussions with the Minister, his officials and the supporting Front Bench team, for which I am very grateful, the view was that water companies already had the authority to carry out general meter installation and that this amendment was unnecessary. Numerous communications which I have had since that time—I continue to receive them—suggest that this fact is not well known. I have tabled the present amendment at least in part to allow the Minister to make an authoritative statement on the present situation.
I will make a couple of comments on today’s amendment, the wording for which was offered by WWF and several collaborating organisations. First, I have to apologise to them and to the House that the wording in the amendment is in fact not the most recent wording—but never mind, it gives us an opportunity to discuss the general problem. The amendment would allow water companies to introduce universal metering if, after consultation with customers through the existing water resources management plan and business plan processes, it is found to be the most affordable option for customers overall as well as being the best option for water resources management. This will be consistent with the new resilience duty of Ofwat, and I strongly endorse that proposal. The present procedures for metering approval need widening and are glacially slow even when all those directly affected are in agreement.
Secondly, the text of the amendment provides an excellent illustration of the need for the Secretary of State to supply a clear and authoritative statement on metering to clarify the tortuous complexity of the present legislation. It is hardly surprising if water companies are confused about the law, if indeed they are. The subject matter is not intrinsically complicated, but successive layers of amending legislation, laid one upon the other, make the present state of the law difficult to discover without a great deal of work. At an earlier stage the noble Baroness, Lady Northover, assured me and the House that codification of water legislation would receive the attention of the department. I wonder whether the Minister could simply comment on any progress that has been made.
In conclusion, I believe that metering is important both to give consumers a fair deal and to help the environment. We ought to make it less expensive and easier to accomplish. I beg to move.
My Lords, in supporting my noble friend Lord Oxburgh I realise that we are swimming against an overwhelming political current here. However, it is sometimes the duty of Cross-Benchers to point out the political follies of some of the main parties in this House. It is clear to me from having spoken to many Members of this House—including some very important Members, many of whom are here today—that on a personal vote this amendment, or something like it, would sail through the House. To put it bluntly, a lack of imagination at the other end of the Palace is preventing this happening. One might even say it was a lack of leadership. I say “lack of imagination” because it is quite easy to devise a tariff system or to further enhance or better promote WaterSure or some of the other systems so that large households on low budgets, for example, can continue to pay as little as they do for their water at the moment, or even less.
It has been my ambition throughout the passage of the Bill to ensure that water is valued more by all parties: government; businesses, including energy, which are great water users; farmers; and, above all, domestic consumers. Having read the Committee stage—I apologise that I was not in Committee when this was discussed—I know that it has already been said that no one will value it unless we measure it. That includes those who might be getting assistance. Everyone would value water more if they measured it. What seems strange is that that is the overwhelming view not only of Members of this House but of environmentalists and of most customers, when they are asked—you have only to read the Walker report to see that.
It is also the view of water companies that we should work towards 100% metering. Your Lordships might think that slightly counterintuitive because, if customers value their water more, surely they will buy less. However, water companies know that the costs and delays in providing ever-expanding infrastructure and water supplies to cater for an ever-expanding demand would cripple their balance sheets. In January, some of us heard that a mere extension of a reservoir in Essex took 20 years to achieve: 10 years to prove the case and 10 years to go through planning. How much longer would it take for the many new reservoirs required to cater for this system of unlimited demand? There is no doubt that a reduction in demand by around 15%, which is often cited as what can be achieved by universal metering, would be the equivalent of several new reservoirs. Metering is therefore so much quicker and cheaper, and infinitely better for the environment.
I want to tell your Lordships a small parable from India. In India, water was considered to be a commodity that was given by God and therefore should be free to all people. Because no one was paying for it or valuing it, the investment in infrastructure by the state and the private sector was therefore negligible. It was even worse than our water industry was before privatisation. So as a result of this paucity of investment, communities in both cities and rural villages often got water only for an hour per day, or sometimes two at the most. Anyone who has listened to any debates on overseas development in this House will know that poor sanitation caused by lack of water is the biggest killer of children in the world. Anyway, the Indian Government realised that everyone had to value water more and so changed the law about not charging for water. Almost immediately, a giant leap forward was taken in water supplies and sanitation across India, although it is not perfect and they have a long way to go yet.
Your Lordships may be thinking, “What on earth does this have to do with universal metering?”. However, as I said, it is a parable rather than a parallel because the Indian Government had learnt that you do not want to use water as a political or social tool to iron out the inequalities of life. Apart from anything else, water is one of the heaviest commodities on the planet. It is difficult and expensive to move around. It is best to put the proper value on water and then ensure through other measures that people have the wherewithal to pay for it; that is what I mean by a lack of imagination. Nearly all Western countries have universal metering and most of them, from what I can gather, have some sort of WaterSure scheme or an equivalent which relieve those who might get into financial difficulties. Universal metering is going to happen here eventually, as in the rest of the world, However, I am reminded of the German philosopher—I think it was Otto Mencke, although I cannot be dead certain—who said: “When the end of the world comes, I want to be in England because everything always happens 50 years later there”.
I thank the noble Lord, Lord Oxburgh, for raising this issue, which I, along with other colleagues around the House, moved an amendment on in Committee. I am not going to repeat the argument that I and others made at that time, but there has been new information since then. In preparation for Report, Water UK contacted all water companies, asking for their views on this issue. They all saw the requirement to seek permission from the Secretary of State for metering as an unnecessary constraint. They think that the water stress status should not be a requirement for metering; rather, they should be able to decide what to put in their water resources planning framework on the merits of the case, including what customers want.
Wessex Water and Northumbrian Water have gone on the record separately on this issue, Wessex Water saying:
“In our WRMP we considered the pros and cons of compulsory metering, even though being in a non-water-stressed area we couldn’t introduce it. Our analysis showed that metering on change of occupancy was a better approach as it gave greater long-term water savings whilst retaining customer acceptability. Metering on this basis will be put in our WRMP and business plans, even though we can’t introduce it”.
This seems to me to be a reasonable amendment. All it does is give companies the right to speak to their customers and manage their businesses to their benefit and that of increasingly scarce water resources. I respond to the noble Lord, Lord Cameron, by saying that it is not just Cross-Benchers who are prepared to swim against the tide; the Liberal Democrats are well used to being out of step with the other two main political parties, and on this occasion I am happy to join fellow Cross-Benchers to support them on this important issue.
My Lords, I think those on the Conservative Benches should support the noble Lord, Lord Oxburgh, as well—as indeed I am sure many of us do. I agree very much with the noble Lord, Lord Cameron, who says that we simply have to value our natural resources. We in this country are totally out of step with the whole movement towards valuing natural capital and understanding the extent to which our natural resources underpin our economy and our quality of life. It makes obvious sense, therefore, that we should all be aware of our footprint, and if we think that we have the right to buy water at a rate that reflects some old rateable value as opposed to our actual consumption, we are simply denying our responsibility to understand our long-term impact.
As I understand it, this amendment is tabled more in order to demonstrate that the water companies can already do what the amendment seeks that they do, so I expect that the Minister will say that it is unnecessary, but it is certainly not unnecessary if it demonstrates what is obvious. I cannot understand why anyone should say that it is against the tide of the day; it is my understanding that every party supports the idea that we should value our natural resources properly, and who could say, therefore, that water should be exempt from that process?
My Lords, I thank the noble Lord, Lord Oxburgh, for laying this amendment, and I think I thank the noble Lord, Lord Cameron, for his contribution, with all his liquid metaphors. I was pleased to speak at the WaterAid reception last night, which he attended, so I assure him—I think he knows it—that we recognise the importance of water, whether it is in developing countries or in the United Kingdom.
We have thought carefully about metering in bringing this Bill through Parliament. Our position on metering seeks to strike a balance between the benefits that metering brings and the consequences that it can have for customers and their bills. We agree that metering is a fair basis for charging, but we are also concerned about the potential impacts on struggling customers. As the noble Lord, Lord Oxburgh, has observed, any customer can request a meter. The company must then fit a meter for free. That customer has a year to decide whether to revert to paying according to the rateable value if it turns out that they are worse off.
We are already seeing increasing levels of metering across the country. Next year will see the number of metered households reach 50%, with a trajectory towards 80% by 2040. Where there is a credible economic case, any company may install meters across all or part of their area. The only restriction is on imposing metered charges on customers without their consent. Companies could, as the noble Lord, Lord Oxburgh, suggests, install a complete street or neighbourhood at the same time; and to answer my noble friend Lady Parminter, companies can put in meters throughout.
The evidence shows that the case for imposing metered charges on all customers in an area can be made in water-stressed areas where there is an insufficient supply of water to meet projected demand. The amount of available water varies around the country. When it makes social, environmental and economic sense to do so, charging all customers according to a meter is already a possibility, but in areas where water resources are not under pressure, imposing meter charges is restricted because of our concerns about affordability.
There are two sets of costs that must be considered here. First, the investment cost of installing meters across an area can put up bills for all the customers in that area. Secondly, imposing metered charges across an area can increase the bills of some of the worst off in society. This is not something that anyone wishes to do in areas that have sufficient water to meet demand.
The balance will doubtless change over time. With climate change and population growth, the case for universal metering in particular areas will no doubt shift. That is why we revised the water stress designation last year: to take better account of long-term climate projections and information about environmental pressures. We wanted to ensure that the designation of serious water stress is forward looking. It is also updated on a regular basis, and we will continue to keep the situation across the country under review. I hope that that does something to reassure noble Lords.
The noble Lord, Lord Oxburgh, asked me to clarify the circumstances in which companies can install meters, and he made the point that a number of organisations were not clear about the situation. I hope I have answered his question, but for the avoidance of doubt let me do so again for the record. Water companies are able to install meters wherever there is a good case for doing so. There is a variety of reasons why they may choose to do this, including to improve leakage detection and enhance their understanding of consumer behaviour. A number of companies already do this. What the companies are not allowed to do is to impose charges by reference to that meter without the householder’s agreement. The exception to this rule is in areas of serious water stress, for the reasons that I have mentioned. It is not the installation of meters, therefore, that is restricted; it is making people pay a metered charge without their consent in other areas. I hope that answers the noble Lord’s question.
The noble Lord also mentioned the complexity of the legislation in this area. We agree that the prescribed conditions regulations, which govern the restrictions around metering, are complex and hard to follow. I am glad to be able to confirm that under the Government’s Red Tape Challenge, we have a commitment to consolidate these regulations by April 2015.
Water companies can install meters wherever it makes sense to do so, but it is the householder who decides whether they wish to be charged by reference to it in the areas where that is permitted. There is flexibility to allow universal metering in the wider interest of water efficiency in areas of serious water stress. This is a careful balance. I hope that the noble Lord will be willing to withdraw his amendment, although I am sure he will do so with great reluctance.
My Lords, I thank the Government for their constructive response, and indeed for the clarification, which I think will be welcomed by many of the water undertakings that have expressed their concern about the present legislation and its lack of clarity. I would just comment that there is some concern, in so far as the noble Baroness referred to it, about the recent reclassification of areas of water stress. There is some disagreement that it is sufficiently forward looking. I am delighted to hear that the legislation is being looked at under the Red Tape Challenge. May we encourage the department in its efforts in that direction?
One disappointment is that, given the progress that has been made, the Government do not feel able to take the last step and say that there does not have be water stress if there is general agreement in an area that this would be the most cost-effective and generally acceptable way of charging. However, under the circumstances, I beg leave to withdraw the amendment.
Amendment 74 withdrawn.
Clause 39: Exercise of adjudication functions by other persons
Amendments 75 to 77
75: Clause 39, page 91, line 31, leave out from “section” to “House” in line 32 and insert “may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each”
76: Clause 39, page 91, line 34, leave out from “section” to “the” in line 35 and insert “may not be made unless a draft of the instrument has been laid before, and approved by a resolution of,”
77: Clause 39, page 91, leave out lines 36 to 48
Amendments 75 to 77 agreed.
78: After Clause 44, insert the following new Clause—
“Duties of undertakers to furnish the Secretary of State and Authority with information
(1) In granting, reviewing or renewing licences under this Chapter, the Authority will be required by the Secretary of State to take into account broader issues when conducting or reopening a price review and such broader issues may include for any licensee or applicant licensee—
(a) their corporate structure and financial structure;(b) the total amount of investment in England and Wales;(c) the total amount of dividends paid to owners and shareholders;(d) their taxation structure;(e) their company and group overall performance; and(f) their corporate social responsibility strategy.(2) Licensed water undertakers must furnish the Authority and the Secretary of State with information on the above and publish such information in an annual return or otherwise.”
My Lords, I think this is the last business of tonight for us. Amendment 78 deals with an area which has overshadowed the debate on the Bill and the public commentary on the water industry. It is concern about the overall structure of the industry as it stands, and is likely broadly to stand for a considerable time, despite the attempt to introduce a degree of competition in a small sector of the market.
Nearly 30 years after privatisation, the water industry consists primarily of huge private regional monopolies whose public reputation is variable, according to area, but in some cases is pretty low. Relatively recently, commentaries on the totality of the way in which the water industry operates have been pretty scathing.
I am the first to acknowledge that since privatisation we have achieved a very significant amount of investment in the water industry, and much of it has been very effective in delivering the service. In that context, there have been some investments that it would have been sensible to pursue that, because of the combination of company interests and boundaries and Ofwat’s priorities, have not been made, including interconnection between the various water areas; nevertheless, there has been very substantial investment. It has been in a context where company behaviour and the regulatory structure have focused primarily on capital investment in large-scale improvements and maintenance and relatively little on water efficiency matters and related subjects.
In terms of the finances of the companies, we have seen very substantial increases in their capital value. In some cases, they have gone dramatically through successive changes of ownership to the benefit of their past and present shareholders, but not noticeably to that of British consumers and British business. We have seen very substantial payouts of dividends to those successive owners. Indeed, in the last full financial year, more than 90% of profit was paid out in dividends. We see very low levels of UK taxation, partly because of the structure, and that is again anomalous in the eyes of many commentators and the public. This results, in most cases, from a very high level of gearing. The investment has been largely paid for, and is increasingly largely paid for, out of money raised on the markets.
At the point of privatisation—the noble Lord, Lord Moynihan, is no longer in his place, but he was there at the time—I do not think that that was envisaged by its proponents. I was not one of them, but nevertheless I do not think it was what they envisaged would happen. It was envisaged that there would be a series of UK companies, probably financed by the Stock Exchange, whose investment would largely be funded through equity off the balance sheet rather than through going to the market, whose ownership structures would be based primarily in Britain and would be transparent and open and which would therefore pay UK taxes proportionate to their turnover and profits.
Instead, we have ownership which is, in many cases, overseas, which is not a problem in itself depending on the behaviour of the companies which are so owned. Dividends, to which I have referred, are paid, and UK taxes are going downwards. Largely, the investment the companies have benefited from has been financed from international markets. Issues arise, the most obvious being that if money is being financed through the markets, you have to cost it in the price reviews. The biggest failure of regulation in the past two or, perhaps, three price reviews has been that the regulator allowed a significantly higher level of capital cost than actually applied in the markets. That enhanced profits, at no great expense to the company, and allowed for dividends to be paid in the way I have described.
In the normal price review, these broader aspects of corporate behaviour are very difficult to fit into Ofwat’s assessment of an appropriate price rise. At an earlier stage, I argued that Ofwat should have the right to reopen price reviews if large changes to the environment, such as the changing cost of capital, happen. I have been told that Ofwat thinks it has that right, but it has never been exerted, unless the companies have previously reopened the case on their own behalf, as happened recently with Thames Water. Ofwat has that right—I have checked on it—but only when such changes are equivalent to 10% of the turnover or, in other circumstances, 20% of the turnover of the company. In other words, there have to be pretty big changes before Ofwat has the right to do so, and the fact is that it has not done so, although companies have frequently reopened price reviews.
This amendment would allow Ofwat to have systematic information on those broader issues and to take them into account, if necessary, in the context of the price review or of a decision to reopen the price review. I am told that some of that information used to be routinely given to Ofwat in the June review. I understand that that is no longer systemically continued. It seems to me that Ofwat needs that kind of information, at least as far as this amendment provides, so that it can judge the total context of the regional monopolies with which it is dealing. Ofwat should have the ability to request that information, whether it does so in a reinstated annual review or otherwise.
There is a pretty substantial public interest in the totality of the behaviour, financing and structure of the water companies. It attracts particular attention around the time of the price review, but it is there the whole time, and it is not currently reflected in the regulatory framework and practices. This amendment would allow issues such as dividend policy, the structure of decision-making within the companies and their taxation requirements, as well as broader corporate social responsibility, to be taken into account by Ofwat when setting the price review. Ofwat would probably rarely use that power significantly to change the price review, but if it needed to, it could. At the moment, I do not see that it can. The public, certain elements of the media and consumers in general all have an interest in this, and I think Parliament should too. I do not think that water companies have yet been effectively called to account, by either the parliamentary process or the regulatory process. This relatively straightforward amendment would at least allow Ofwat the possibility of so doing. I beg to move.
My Lords, I support the amendment of my noble friend Lord Whitty. The privatisation of the UK water industry occurred as long ago as the late 1980s, and it was accomplished in a fashion and manner that paid scant attention to the need for an attentive regulation of the industry.
A provision for the public regulation of privatised industries was an integral part of the concept of privatisation but, in many cases, only lip service has been paid to this aspect. The light-touch regulation of the water industry has provided a case in point. It is arguable that, had there been a more active regulation of the industry, it would be in far better shape than it is at present. An active regulator might have prevented the firms of the industry from becoming the pawns in financial manipulations of foreign owners that have had the motive solely of private enrichment.
The firms have been used as tools in strategies of leveraged corporate acquisitions and takeovers that have borne no relation to the ostensible purposes of the industry. The investments in the water industry have fallen short of what they might have been if the profits had been ploughed back. Instead, they have been used to pay large dividends to the owners and to the shareholders.
Finally, it is questionable whether the majority of the firms in the water industry have any clear concept of their social responsibilities. A full provision of information is required to enable interested parties, including the Secretary of State, to assess the performance of the industry. Then steps could be taken to redress the abuses that have occurred in the past and that are liable to occur when there is insufficient regulation. That is what the amendment calls for.
I hope that the Government will be able to accept the amendment. There used to be the so-called “June review” which was assembled by the regulator, Ofwat, but it has since fallen into abeyance, as we have heard. The amendment would reinstate that review, but it would give it more force and it would ensure that it could not fall into abeyance in the future.
My Lords, I thank the noble Lord, Lord Whitty, for moving his amendment. We have heard about asking water companies for information, much if not all of which is already freely available in their annual reports and accounts. I have said before that the amendment would, to that extent, simply duplicate existing powers.
What we are really talking about is Ofwat’s ability to examine what companies are doing to ensure that they are not profiteering at the expense of their customers. Although I disagree with the amendment before us, I most certainly agree with the principle that water companies must be effectively regulated. I believe that the regulator is doing its job robustly.
The focus of the amendment is, in particular, on reopening a price review. In fact, Ofwat already has the power to reopen the price review in two ways. It can do this under the “substantial effects” clause of a water company’s licence or by making an interim determination. It is clear that Ofwat has the power to revisit price determinations, if it so wishes. In fact, in October last year, Ofwat consulted on whether or not it would be right to utilise this power with respect to Thames Water. However, given the fundamental importance of regulatory stability in the water sector, it rightly utilises these powers with caution. Ofwat considers carefully whether any intervention it might make would be in the overall interests of customers.
Of course, it must be right that Ofwat does this with the bigger picture of stable economic regulation firmly in mind. The objective of setting prices for a five-year cycle is to create a period of stability during which companies are able to invest and deliver the outcomes that they have agreed with the regulator. They have a period during which they are allowed to receive the benefits of that settlement and then, at the end of the period, prices are adjusted to capture those benefits for customers.
That is what is currently taking place through the price review process. Ofwat believes that by taking account of the current low cost of borrowing it will be able to limit price increases from 2015 to 2020 by between £4 and £25 a year. Accordingly, I am unable to see what purpose the proposed annual returns will fulfil. We should look to the future and look at what Ofwat is doing. Let us be clear about the direction of regulation in the water sector. Ofwat is already taking action to improve standards of corporate governance across the sector. It is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance. Ofwat recently published new principles relating to board leadership, transparency and corporate governance. These set out clear standards for the sector and a clear timetable for their introduction. The response from the water companies has been positive and I welcome this. Ofwat is also consulting on principles for holding companies covering risk, transparency and long-term planning. It has made it clear that the companies’ licences may need to be brought up to date to reflect these reforms and it is already discussing this with the companies. Further reporting burdens will not contribute positively to this process. I hope that the noble Lord will agree to withdraw his amendment.
My Lords, I did not really expect the Government to fall over themselves to accept this amendment today. However, I am glad that I have raised the issue because I think that the Minister is right that Ofwat is now taking greater cognisance of the broader picture. The early years of Ofwat regulation were undoubtedly seriously light touch, even though it required an enormous amount of information from the companies. My aim here is not to duplicate the provision of information but to allow Ofwat to use that information and, if it was inadequate, to require more from the companies. The overall picture is very difficult to justify. The level of borrowing, the level of dividends and the level of taxation, taken as a whole, is very difficult to justify to the British people over a set of companies which is supposedly regulated tightly, and which plays such an important part in their lives. I therefore think that we need to find some mechanism which does not transgress the lines that the Minister set down about regulatory stability and Ofwat acting primarily in the interests of customers; I do not wish to upset either of those objectives.
However, there is an oddity about the structure of this industry that, at some point, some Government or regulator is going to tackle. I am very appreciative of Ofwat’s latest moves in the general direction of tightening up and looking after consumers better. The reason for me saying that is not that when we finish here I am going to the Ofwat reception over the road. I think that it is improving and broadening its role without imposing pernickety regulation. In fact, it is getting rid of some regulation in terms of provision of detailed information.
Ofwat is moving in the right direction, but it is a big problem. I would have hoped that the Government could have recognised it a little more explicitly, because I think it may come up at some point and bite whichever Government are in power when something goes seriously wrong with one of these companies. We have been close to that once or twice in the past 30 years, and I do not think that current Ofwat powers, and certainly past Ofwat practice, were up to dealing with that.
I thank the Minister for his reply. I will not return to this issue, but I suspect that somebody else will at some point in the next few years. I beg leave to withdraw the amendment.
Amendment 78 withdrawn.
Schedule 7: Further amendments
Amendments 79 to 86
79: Schedule 7, page 175, line 20, leave out sub-paragraph (2) and insert—
“( ) In subsection (1), for the words from “the following” to the end there is substituted “the powers and duties conferred or imposed on the Secretary of State or the Authority by virtue of any of the relevant provisions.””
80: Schedule 7, page 176, line 7, leave out paragraph (a) and insert—
“( ) in paragraph (a), for the words from “the provisions of” to “water suppliers” there is substituted “the relevant provisions”;”
81: Schedule 7, page 176, line 9, leave out ““153,”” and insert “the end”
82: Schedule 7, page 176, line 12, leave out from “3A),” to end of line 17 and insert—
“(ii) any of sections 37A to 38, 38ZA, 39, 39ZA, 39B to 39D, 40E to 40J, 42, 51CD to 51CG, 63AC to 63AF, 66B, 66CA to 66H, 66K, 66L, 66O(2), 95, 95ZA, 96, 96ZA, 99, 105ZF to 105ZI, 110F to 110J, 110L to 110O, 117E to 117O, 117R, 117S, 143B to 143E, 144ZA to 144ZF, 153, 181, 182, 185, 192A, 192B, 195, 195A and 201 to 203 below, or (iii) section 42 of the Water Act 2014.””
83: Schedule 7, page 176, line 18, leave out paragraphs (c) and (d) and insert—
“( ) paragraphs (b) and (c) are repealed.”
84: Schedule 7, page 202, line 10, at end insert—
“ In section 158 (powers to lay pipes in streets), in subsection (7)(a), for the words from “section 66B(3)(a)(ii) above” to “section 66B(3)(a)(iii) above” there is substituted “section 66B(4)(a)(i) or (b)(i) which is used for the purpose of supplying water other than for domestic or food production purposes or laid in pursuance of section 66B(4)(b)(ii)”.”
85: Schedule 7, page 205, line 25, leave out sub-paragraph (2) and insert—
“(2) In subsection (1)—
(a) the words “17D(8),” (inserted by section 35(2) of the Flood and Water Management Act 2010) are repealed;(b) the words “or 17D(8)” (inserted by paragraph 49 of Schedule 8 to the Water Act 2003) are repealed (if they remain in force to any extent);(c) before “or 105A” there is inserted “, 66M”.(2A) After subsection (1) there is inserted—
“(1ZA) The requirement in subsection (1) does not apply in the case of regulations made by the Welsh Ministers under section 17D(8).””
86: Schedule 7, page 210, line 27, at end insert—
“ In section 35 (provision of infrastructure), in subsection (2), in the words inserted into section 213(1) of the Water Industry Act 1991, the words “17D(8),” are repealed (if section 35(2) remains to be brought into force to any extent).”
Amendments 79 to 86 agreed.
87: Before Clause 45, insert the following new Clause—
“Report on water abstraction reform
(1) The Secretary of State must prepare a report setting out progress made in reforming the arrangements for managing water abstraction in England.
(2) The Secretary of State must lay before Parliament a copy of the report.
(3) The report must be prepared and laid before the end of the period of five years beginning with the day on which this Act is passed.”
Amendment 87 agreed.
Clause 49: Environmental regulation: procedure
88: Clause 49, page 107, line 18, leave out subsection (12) and insert—
“(12) If the statutory instrument contains any regulations which, on their own, would make the instrument subject to the affirmative resolution procedure, the instrument is subject to that procedure.”
Amendment 88 agreed.
Consideration on Report adjourned.