Considered in Grand Committee
That the Grand Committee do consider the Water and Sewerage Undertakers (Exit from Non-household Retail Market) (Consequential Provision) Regulations 2021.
My Lords, the technical amendments in this instrument, which was laid before the House on 21 July, amend the Water Industry Act 1991 to reapply developer service duties to water and sewerage undertakers —generally known as water companies—operating in retail exit areas wholly or mainly in England.
As part of competition introduced into the water sector, a “retail exit area” is where a water company, such as Thames Water, has transferred its “retail”—business or non-household—customers, such as supermarkets, to a separate company or “retailer”. The retailer liaises with Thames Water for the water and sewerage services to be provided to the business customer and the retailer bills the business customer for the services and offers it advice on how to improve its use of water.
This market allows business customers to have all their water and sewerage services looked after by one retailer, saving them time and money in dealing with billing for these services. This was not possible when water companies dealt with business customers directly. The market also enables retailers to work directly with housing developers for their water and sewerage services, which they need when building new homes, as housing developers are of course also businesses.
To set up the developer services for retailers, we disapplied some water company duties through the Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016. These disapplications have had unintended consequences for developer services, which is why we are now seeking to reapply the duties and to set up developer services for retailers in a slightly different way. I should make it clear that all the amendments introduced by this instrument are therefore technical operability amendments and do not introduce any policy changes.
The Water Industry Act 1991 is the principal piece of legislation setting out the duties and functions of water companies in England and Wales. The retail market is a devolved matter and the 2016 regulations applied to English water companies only. The market opened in April 2017, but water companies did not all transfer business customers to retailers when the market opened. The last water company to transfer its business customers to a retailer was in 2019. The effects of the way in which the developer services market was set up were therefore not fully realised for a few years after market opening.
When setting up the market for developer services, Defra recognised that some developers might still wish to work with the water company for the housing developer services, for example. We envisaged that housing developers choosing this route would make their own contractual arrangements with the company. However, in subsequent discussions with Ofwat, the economic regulator of the water industry, and with the water industry itself, it emerged that contractual arrangements are not straightforward. They do not sufficiently replicate the water company duties within the 1991 Act that were disapplied and the unintended consequences include Ofwat no longer being able to determine complaints from a housing developer about the developer services provided, as well as water companies having restricted access to water and sewerage pipes to maintain them.
Retailers are also choosing largely not to be part of the developer services market, for two principal reasons. The first is that, due to the technical nature of developer services and the expertise required, retailers are generally not big enough to be able to provide that. Secondly, as most residents of new developments are household rather than business customers, the retailer does all the work to get the water and sewerage connections made but then must transfer the household business to the water company, so the retailer does not increase its customer numbers.
This statutory instrument is therefore needed to resolve those issues. It makes no changes to the water retail policy for developer services; it just enables us to refine our legislative approach for how we are delivering it. It reapplies developer services duties to water companies but with modifications to those original duties. That will enable water companies to provide developer services to housing developers without the need for separate contractual arrangements.
The SI addresses the unintended consequences, such as Ofwat being unable to determine complaints, but still enables retailers to continue to provide developer services if they wish to do so. We have also modified those duties, so that if a developer first approaches the retailer for the service and they choose to undertake it, the developer cannot then change its mind and ask the water company to provide the services directly to it instead.
My department is presently reviewing progress in the whole retail market through a post-implementation review of the 2016 retail exit regulations. Our post-implementation review will look at progress since the 2017 market opening in the round, and it will be completed in the new year.
Both the JCSI and the SLSC have formally considered this instrument and approved it. In line with published guidance, there is no need to conduct an impact assessment for the instrument; this is because no—or no significant—impact on the private or voluntary sector is foreseen, as the instrument relates to the maintenance of existing regulation. The territorial extent of the instrument is England and Wales. The territorial application of the instrument is England. I commend the draft regulations to the House.
My Lords, I thank my noble friend for talking us through the regulations today. I remember that, when the original legislation went through—rather than the regulations themselves—concern was expressed about what would happen if a retail company were to fail. I do not know whether that has been resolved in the existing regulations; as my noble friend has explained, it seems that these regulations apply to that very narrow area of a retailer providing services to housebuilders.
I want to take this opportunity to ask a question in that regard. My noble friend is aware of my passion for SUDS—sustainable drains. Where housing developers build major new developments, is it envisaged within the original regulations that SUDS could be applied as a condition of planning permission for the work being agreed?
The Explanatory Memorandum says that the instrument—I believe it is the second regulation—will
“reinstate the … duty on undertakers to provide connection services, on request, in retail exit areas”.
Is that deemed to be an automatic right to connect? Is there any leeway to ensure that we can actually insert a condition that SUDS must at that stage be envisaged? That could save any contribution to flooding down the line.
The Explanatory Memorandum says at paragraph 7.3:
“The main retail services provided to non-household customers through the retail market”,
as my noble friend said,
“are billing and administration services. However, with the opening of the market, it was designed so that retailers could also provide new water and sewerage connections services to business customers.”
My noble friend said that this was limited. Has it been so limited as to have never actually happened, or has it happened in literally only one or two cases? Paragraph 7.3 goes on to say:
“These services primarily concern connections to water and sewerage services for new developments, involving predominantly housing developers.”
My noble friend is aware of my interest. I latched on to something he said during the passage of the Environment Bill before it went to the other place: the automatic right to connect no longer being automatic. Will that apply in these as well as other cases?
Paragraph 7.6 goes on to say: “We”—and I presume the “we” is the Government—
“consider that ‘non-household premises’ includes new housing developments which are under construction before anyone is using the premises as their home.”
Does that mean that existing housing developments do not fall into this category? Is there any chance that the regulations before us this afternoon will apply to those existing housing developments? It goes on to say that
“Until people move in, we consider that a development does not fit that definition”,
as given in that paragraph. On what basis has the department reached that conclusion? What background brought it to that position?
Paragraph 7.7 says that
“There are several unintended consequences”,
as my noble friend set out,
“of the 2016 Regulations’ amendments. These concern new connection services, the laying, inspecting, maintaining, adjusting, repairing”.
I still maintain, as I am sure my noble friend is aware, that, when making these new automatic connections automatic, we are dealing with Victorian, antiquated piping. Whether it is the retailer or the water company providing these services, the pipes are deemed to have to connect. At the moment, the water company is not a statutory consultee, whereas the Environment Agency, for example, is; I do not believe that the advice the water company is giving planning authorities has the same legal force as that from the Environment Agency.
I ask my noble friend whether the problems with the regulations set out in Paragraph 7.7 could be avoided by ending the automatic right to connect. It is unacceptable; we have an opportunity, at this stage in the regulations, for the water company or retailer to say that they cannot make physical connections when housing developments are being made and that there will be overflow into the storm drains and the possibility that sewage will come back into either the new developments or, worse, existing developments that have not been affected in the past.
I welcome this opportunity to ask questions on those points, with a special emphasis on whether sustainable drains can be part and parcel of this, and that the water company or retailer should say whether the existing infrastructure simply cannot take the amount of wastewater envisaged to come out of any new houses.
My Lords, I thank the Minister for introducing this SI and for his comments. On the face of it, it seems like a straightforward change in the legislation to bring the retail sector into line with domestic housing arrangements following the changes made in the Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016. I note that this instrument relates only to England, but the extent of it is England and Wales where there are cross-border issues.
The water and sewerage industries were privatised in England and Wales in 1989. In 2014, reform of the Water Act enabled competition in the market. In 2016, the transfer of non-household retail business prevented the provision of retail service to new non-household customers that arose in its area. Given what we now know about the effects of supply and demand on water and sewerage systems, this would seem a sensible step.
Paragraph 7.4 of the Explanatory Memorandum enables
“developers to make new connection requests to their retailer.”
There is no mention in the Explanatory Memorandum, nor in the instrument itself, of whether there would be capacity for new development to be safely connected under the automatic right to connect, which the noble Baroness, Lady McIntosh of Pickering, has already mentioned.
The Minister will know that during the passage of the Environment Bill there were many debates about the effect of effluent being discharged into rivers, lakes and other watercourses and the extremely detrimental effect this has on both water quality and the wildlife that previously inhabited those areas. I ask the Minister whether the local relevant sewerage and water capacity will be part of the consideration when developers apply for connection for retail. The automatic right of developers to connect for housing developments has caused considerable problems, not only in effluent discharge, but has contributed to localised flooding during prolonged periods of rainfall.
This is a minimal change to the legislation, but the legislation relating to domestic properties is far from perfect. Once the drainage and sewerage management plans are in place, that should ensure better collaboration between developers and those dealing with the supply of water and disposal of sewage. But these are not yet in place. Duties in Section 41 and 45 no longer apply to premises in a retail exit area. To indicate that new households under construction are not classified as household premises until people move in is somewhat late in the day to deal with capacity issues and whether sewerage systems are able to cope with the additional demand.
A Section 98 duty to comply with sewer requisition is the duty to provide a public sewer or a lateral drain. This appears not to apply in relation to premises in the retail exit area that were not household premises. Just what is the legal obligation to ensure that there is sufficient capacity in the sewerage system for new connections from retailers? This might be a small retail outlet, or it might be retail premises relating to an already overlarge housing development, which would be a much larger connection.
I am sure the Minister can understand my concerns and I would be grateful for his reassurance that capacity will form part of the connection requirements. I note that a consultation period took place between 29 April and 25 May 2021. This period included a bank holiday. Seventeen responses were received but the EM does not say whether Water UK or the Consumer Council for Water were among those. However, I understand from officials that, since there were responses from some water providers if not from Water UK itself, there seems to have been a general positive agreement in the industry in response to this SI.
I would be grateful for the Minister’s clarification on the consultation exercise. I understand why Defra has introduced this new measure but remain extremely concerned about the effect on flooding of connecting retailers to the sewerage system without first checking that the system has the necessary capacity.
My Lords, I thank the Minister for his introduction to this SI. I am sure he will be relieved to hear that we accept that it is broadly technical in nature and, as such, will not be opposing it. It deals with relatively small consequences of the reform of the water industry and the right of water companies to exit the non-household retail market in their sector. As the Minister has said, several unintended consequences have arisen from the new provisions and this SI deals with one such anomaly relating to new housing developments.
I have to say I was amused to read the Commons Minister Rebecca Pow stating when introducing this measure that it was underpinned by the Government’s commitment to
“strong, independent regulation that protects customers and the environment”—[Official Report, Commons, Delegated Legislation Committee, 22/9/21; col. 4.]
because, arguably, that is exactly what we do not have. This is why water companies such as Southern Water get away with regularly pouring sewage into our rivers and sea with no comeback from their customers or for their customers. But I accept that that is a slightly wider issue than the SI before us today.
The Minister in the Commons also argued that while water companies did not have to provide the water connection service for new development under the existing regime, they
“have stepped in to carry out the role even though, legally, it was not actually in their power. They did not have to do it, but out of the generosity of their hearts they have carried on doing it.”—[Official Report, Commons, 22/9/21; col. 6.]
This generosity is a whole new side of the water companies that many of us will be rather unfamiliar with, but I am interested in the consequences of changing the regulations in the way that is being proposed. As the noble Baronesses, Lady McIntosh and Lady Bakewell, have said, many of us have been concerned for some time with the expectation that water companies are obliged to connect new developments to existing water and sewerage systems, even when they know that the infrastructure does not have the capacity to carry this extra load.
Will water companies be able to operate with more discretion about which housing developments they provide connection services for under these new provisions? Would they be able to insist that the system must be underpinned by sustainable drainage systems before they connect them? In other words, what new flexibility and powers will the water companies have under these changes? Can the Minister also clarify whether there will be any additional costs when they are no longer acting out of the generosity of their hearts, and will those costs be passed on to the customer?
Finally, can I ask about the devolution implications of this provision? This SI deals with the water and sewerage industry in England. Given the complexities that have been thrown up by the changed legislation and the 2016 regulations, do the devolved nations have an equivalent scheme, or have they found a more straightforward way of regulating the supply of water to the non-household retail market, which has not thrown up these anomalies? Is there an opportunity to learn from what might be better practice in the devolved nations?
I look forward to the Minister’s response.
My Lords, I thank noble Lords who have contributed to this debate. If nothing else, it has highlighted the complexity of the water industry and the legislation which governs it.
My noble friend Lady McIntosh takes a very keen interest in this issue, as I have discovered since taking part in these debates. The right to connect is an issue that she has raised before and which has been discussed at length in connection with the concerns raised during the passage of the Environment Bill over storm overflows, in particular the right to connect surface water drains to foul sewers. This is outside the remit of developer services and these regulations, which concern only the construction of new sewers and the connecting of new homes to wastewater sewer services. However, in providing developer services, water companies will often proactively discuss with the developer how they will drain their sites, suggesting ways to avoid connecting surface water drains to foul sewers.
The issue of possible failure is being considered as part of the post-implementation review, and Defra is reviewing SuDS as part of our review of Schedule 3. My noble friend raised the issue of retailer involvement. Some retailers have been involved with the new connections but mainly with retail developments. Most retailers are referring developers to water companies.
The noble Baroness, Lady Bakewell, raised issues around network capacity. Amending the duties to reference capacity would effectively be a new duty on water companies and would therefore also be out of the scope of these regulations. Also, reapplying Section 98 would also reapply Sections 99 and 100, which concern the financial arrangements regarding any new public sewer. Section 100(4) enables the water company to include in the costs charged to the developer the costs reasonably incurred in providing new public sewers and any reasonable proportion of costs incurred to provide additional capacity in existing sewers that have been constructed in the previous 12 years.
My noble friend also raised the issue of drainage and sewerage plans. Plans are currently being produced now for drainage and sewerage management. Draft plans will be consulted on in April next year, and these are currently non-statutory. My noble friend asked whether the Consumer Council has responded to the consultation. The answer is yes. We also spoke at length with Water UK, which agreed with the changes.
Many of the hugely important issues raised by the noble Baroness, Lady Jones, were debated during the passage of the Environment Bill. She raised the case of Southern Water, whose pollution of our waterways has been met with a reaction from the courts, leading to fines and so on. The regulatory regime that governs water companies and the pollution of waters and rivers is an issue that has been raised effectively by my noble friend the Duke of Wellington through various amendments. There is no doubt that the water companies will have to step up and that Defra will have to take a more robust approach to dealing with them. I do not think that anyone in the country regards the pouring of raw sewage into our waterways as a routine matter, as opposed to an emergency situation for the prevention of deaths. It is not acceptable, and that is our view in Defra.
We have been working closely, and discussions will continue, with my noble friend the Duke of Westminster —the Duke of Wellington. I can only apologise to my noble friend, for the fourth time; it is becoming a tick that I cannot rid myself of. Someone is playing games with me.
It is my noble friend Lady Bloomfield.
I look forward to meeting my noble friend the Duke of Wellington shortly to discuss progress on some of the issues that he raised.
The noble Baroness, Lady Jones, raised the devolved nations. Scotland has its own process; Wales does not have a retail system in place. We are exploring the Scottish process with it, as part of the post-implementation review.
The noble Baroness also raised the issue of water companies providing the developer services. Water companies have provided services, in discussions with developers, and ensure that discussions about connections to sewers and SUDS provision occur to reduce surface water being sent to public sewers.
I think that I have answered the questions that were raised, so I will close there. All the changes introduced by this instrument, as the noble Baroness, Lady Jones, noted, are technical, operability amendments required to ensure that we are able to continue to operate the regulations and the retail market appropriately. They make no changes to water retail policy for developer services; they just enable us to refine our legislative approach to how we deliver them. I therefore commend the draft regulations to the House.