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Water Supply Licence and Sewerage Licence (Modification of Standard Conditions) Order 2017

Volume 779: debated on Thursday 9 March 2017

Motion to Consider

Moved by

That the Grand Committee do consider the Water Supply Licence and Sewerage Licence (Modification of Standard Conditions) Order 2017.

My Lords, these regulations will enable the implementation of important reforms arising from the Water Act 2014 to extend competition in the retail market for water services. The three statutory instruments form part of a larger package of measures that will deliver the regulatory framework required to deliver choice in water services for non-household customers. Last year we considered affirmative regulations required to allow incumbent water companies to exit the non-household market. Last week the Government laid three negative procedure statutory instruments that include a number of protections for customers.

This new market in water and wastewater services, which opens on 1 April this year, will be the largest of its kind in the world and will allow all businesses, charities and public sector customers in England to choose a new water supply and wastewater supplier. We know that non-household customers are keen to have this choice, and the Government’s decision to expand retail competition was made in response to clear demand from business customers. Our reforms will mean that they are free to negotiate for the package that best suits their needs. They will continue to receive the same water through the same pipes but will be able to benefit from more efficient customer service, water efficiency advice and, I hope, a better deal on price.

The water codes appeals regulations will allow water companies that are materially affected by an Ofwat decision to take forward proposals to amend statutory codes designated under the regulations to apply to the Competition and Markets Authority for that decision to be reconsidered. These companies may also launch an appeal if Ofwat decides not to take forward such amendments following a consultation.

Codes form an important part of the regulatory framework because they contain the terms and conditions that must be included in agreements between incumbent water companies and new entrant companies operating within the retail market. They also include the processes that must be followed for customer switching and settlement between incumbents and new entrants. The code appeal regulations incentivise Ofwat to propose amendments that benefit the retail market and provide a transparent and predictable fast-track appeal mechanism for water companies to challenge Ofwat’s decisions.

The water supply and sewerage licence modification order sets the percentage of water supply or sewerage licensees by market share that must agree proposals made by Ofwat to change standard conditions in their licences before such changes may be imposed on all licensees. These regulations provide a means for Ofwat to modify standard licence conditions when at least 80% of licensees by market share agree to those changes. This prevents a minority of licensees blocking or delaying the implementation of important changes to licences. Where more than 20% do not agree to an Ofwat proposal, the matter may be referred to the Competition and Markets Authority for a determination. The regulations will contribute to the smooth running of the retail market by ensuring that Ofwat can make important changes to licences without negotiating individually with each licensee.

The consequential amendments order includes amendments to primary and secondary legislation that are required because of changes introduced by the Water Act 2014. The amendments are mainly related to the opening of the retail market in April this year and are minor and technical in nature. Among other things, the order makes changes to legislation relating to the existing water supply licensing regime and provides for the introduction of sewerage licences for the first time.

These three statutory instruments form a small but important part of the overall regulatory framework, which also includes primary and secondary legislation, licences and statutory codes. I beg to move.

My Lords, I rise merely to pursue a continuing degree of pressure on the Government not for what is in these statutory instruments but for what ought to be in them. We in Britain have a system that enables us to regulate the charges for connection—I notice that in effect it is referred to here under “Connection charges”—but connection itself is statutory. That means that even though a water company is not a statutory consultee, it can be required to provide connections when such a connection significantly overloads the provision of sewerage or allows the building of homes in places where such building should never take place.

It is some time—two years, I think—since the Committee on Climate Change sub-committee that is dealing with preparing ourselves for the immediate effects of climate change pointed out that it is an unacceptable situation that, first, the water company is not a statutory consultee and, secondly, it has to do something that is clearly contrary to our interests when it comes to flood prevention and dealing with adaptation to climate change. I know that my noble friend the Minister will say this is neither the place nor the time to do this, but if I do not go on reminding the Government that there has to be such a place and a time then it will not be done—and it needs to be done. It is a pity to take up parliamentary time for what is, frankly, a pretty unnecessary series of crossing “t”s and dotting “i”s when there is so much more to be done if we are to make the changes that the whole world, irrespective of party, religion or any other device, believes to be necessary. I am very sorry that the department has still not come forward with proposals in this area.

I shall come to the aid of the noble Lord and say that it is an absolutely appropriate time for this to be raised. He will be aware that Defra is undertaking a review of sustainable urban drainage, so if we cannot raise this issue now in advance of the review, when can we raise it?

We have raised this issue frequently: in the Housing and Planning Act last year, when discussing automatic connection rights; and noble Lords will know that we have been addressing this issue rather more recently in the Neighbourhood Planning Bill. It is an absolutely fundamental issue that underpins not only the building of houses that are sustainable in the future but addressing the water shortages that we will face, given the challenges of climate change and population growth in the foreseeable future.

Will the Minister say a few more words about the likely timing of the department’s review to ensure that it is in advance of the Adaptation Sub-Committee’s forthcoming review in May? If it is not, that will be a seriously detrimental step. While, as the Minister said, these are small measures pertaining to delivering better solutions for our water industry, we must look at the bigger issues around automatic connection and sustainable urban drainage and, in the future—I hope this will be in the White Paper—a Bill on abstraction. If those things are not addressed, the Government are seriously failing in looking at the water challenges of the future.

My Lords, first, I am very pleased to associate myself with the comments of both the noble Lord, Lord Deben, and the noble Baroness, Lady Parminter. They have raised a very important issue, which I know we have debated on other occasions. I would be very happy to continue to add to any pressure we can bring to get the Government to take this issue seriously. The noble Lord set out the case extremely well as to why it was such a huge urban and rural challenge in terms of planning, flood prevention, and so on. Both noble Lords made the case extremely well.

I guess it now falls to me to make some comments about the actual regulations before us, which I fear will not be as interesting. I am grateful to the Minister for setting out the purpose of the three regulations. As he made clear, they are all consequent on the Water Act 2014, which received very detailed scrutiny in your Lordships’ House. The opening up of the new non-household retail market in April 2017, and the ongoing challenges of delivering greater competition in retail water and sewerage systems, will inevitably need modification and refinement. In this context, we accept that these new regulations are both technical and necessary.

However, I have a couple of questions for the Minister. First, the water supply licence and sewerage licence orders are mainly concerned with the percentage of licensees that must agree Ofwat’s decision to amend licence conditions, as the Minister spelled out. We agree that a 20% level of objection is a reasonable requirement to trigger a referral to the CMA. However, the consultation on that regulation also flagged up some concerns about the way in which sewerage licences were to be calculated, given that there is very little metering of wastewater output from premises. I do not disagree with the rather pragmatic conclusion that in the absence of metering of sewerage, it is best to base the calculation on the clean water supply to the premises. Given that there is an overarching environmental need to encourage businesses to manage and limit wastewater, the department could do more to encourage people to manage water supply—I am talking about both clean and dirty water—and put in place more effective processes for charging for wastewater disposal in the future. There are good initiatives out there but many businesses are happy to pour very highly polluted water down the drain in large quantities.

Secondly, the water industry designated codes regulations set out the arrangements for appeals to the Competition and Markets Authority. Again, I do not disagree with the rather pragmatic approach taken in these regulations, which suggests that we need to establish a fast-track appeals process, similar to the energy code appeals. However, these are short-term pragmatic solutions that are necessary to get the new system up and running in time for the April start.

However, we need to see how the codes and appeals bed down and whether—as is often the case—their application has unforeseen consequences. I would be grateful, therefore, if the Minister indicated how the operation of these regulations, and the others to which he has referred, will be kept under review as the retail market matures. In response to the consultation on the codes, the Government said:

“It is to be expected that the regulatory structure around a healthy, well-functioning market may need to evolve when competition has become long-established”.

We agree with that, but it would be helpful if the Minister set out the process by which this evolution will be monitored and how Parliament can best be enabled to play a full role in that review. I look forward to the Minister’s response.

My Lords, this has turned out to be a rather more interesting debate than the one I thought I was embarking upon. As I said, however, the Government are committed to opening up the retail water market on 1 April, giving business, charity and public sector customers choice over their water company. The regulations debated today are an essential part of the framework, including primary and secondary legislation codes and licences, which will allow the market to function, evolve effectively and provide safeguards for customers.

I am most grateful to the noble Baroness, Lady Jones of Whitchurch, for her endorsement of what are pragmatic measures. She asked what steps are in hand to charge more effectively for wastewater disposal. More than 90% of non-household premises are metered for the purpose of calculating water use, but a much smaller number are metered for measuring the discharges of wastewater to which she referred. While there are currently no plans to push for more wastewater metering, we believe that the introduction of the sewerage licensing regime could lead to the development of the market for wastewater meters, with the purpose of reducing charges.

We also expect that sewerage licensees will work with their customers to provide advice on the recycling of wastewater, the collection and re-use of rainwater and surface water, and other water efficiency measures. This is primarily to reduce the demand for water and provide savings on water charges, but it would also automatically lead to lower wastewater charges for unmetered sewerage customers. I was very taken, therefore, by what the noble Baroness said, and by the essential belief that we all share in the importance of using water wisely.

The noble Baroness also asked about how the water code appeal regulations and the retail market will be kept under review. Ofwat will be implementing a market monitoring framework that will closely scrutinise the performance of the market on a range of measures. No new market will be perfect on day one—that is the human condition—but benefits will consolidate over time. Customer switching levels will be an important measure but clearly not the only one. It will be important to see that customers are able to negotiate the right deal for them and that competitive markets are fair, transparent and efficient. My department will look in particular at how these regulations contribute to supporting an effective and transparent market. We will also review the effectiveness of the CMA code appeal regulations, as new codes are added to the appeals regime.

I must applaud my noble friend Lord Deben for his customary tenacity in raising an issue that I know is close to his and many other hearts. The noble Baroness, Lady Jones of Whitchurch, assisted me slightly by saying that the measures before your Lordships relate entirely to the non-household sector, but my noble friend and the noble Baroness, Lady Parminter, have given me a sharp reminder, which I take on board. The Water Industry Act 1991 sets out the circumstances in which a water company is required to make a connection. It is a qualified duty. I could set out the circumstances in which a water company is required to make a connection, but the most important thing for today’s purposes is that I shall write to those of your Lordships who have attended and contributed to this debate.

I am confident that these regulations represent another marker in the Government’s journey to reform the water market and provide more choice to non-household customers. For those reasons, I commend the regulations to your Lordships.

Motion agreed.