Clause 10 — Agreements by water undertakers to adopt infrastructure

Water Bill (Programme) (No. 2) – in the House of Commons at 1:11 pm on 7th May 2014.

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Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs

The Lords amendments relate to the subject of market reform, and in particular to retail exits. By that I mean allowing an incumbent water company to exit from the market for retail services to non-household customers.

Lords amendments 15 to 30, 43 to 48, 101 to 103 and 107 to 147 are minor technical or consequential amendments to the market reform provisions in the Bill—for example, changing wording from “a code” to “the code”. Some are minor and technical amendments relating to cross-border pipes. Lords amendments 32 and 33 ensure that the Consumer Council for Water is consulted on water company charges schemes. The Government are keen to ensure that customers are protected, and are grateful to Opposition Members for highlighting the important work done by the council on behalf of customers. We expect it to contribute to all discussions about the future of the industry, and we are pleased to have been able to enhance that in the Bill.

Lords amendments 49 to 52 would implement recommendations made by the Delegated Powers and Regulatory Reform Committee in another place. We are very grateful for the Committee’s scrutiny of the Bill. I do not propose to refer to the amendments in detail, but I shall be happy to respond to any specific queries.

Lords amendments 53 to 64 deal with the issue of retail exits, which we have discussed previously in the House. The Bill seeks to introduce a range of reforms that will enhance and extend competition in the water sector. The Government believe that the development of competition in the sector will bring real benefits to customers. They listened to, and acted on, well-argued contributions to the debate on market reform, especially the calls for incumbent water companies to be able to choose to exit from the non-household retail market.

I think it would be appropriate for me to expand on the retail exit amendments, as the House is not familiar with the clauses involved. The amendments differ in some crucial ways from amendments on the subject that Members have seen before. When drafting the amendments, we were particularly careful to ensure that customers were protected, both the non-household customers who will be transferred to a different retailer and the household customers who will remain with the incumbent. Non-Government amendments tabled by Members here and in another place have not reflected those safeguards fully.

The Lords amendments relating to retail exits contain three core principles. Exits must involve non-household customers only, they must be undertaken voluntarily, and they must ensure the ongoing protection of customers. Any exit will be possible only with the consent of the Secretary of State. Other amendments that the House has considered did not grapple with those key issues. These amendments create broad, permissive powers in what will be a very complex area. Further work will be required to consider the practical implications of exits, and to develop the detailed policies that will underpin the use of the powers. We will therefore be consulting widely with all interested parties as we develop our approach and produce exit regulations.

So what do the Lords amendments actually do? They give the Secretary of State powers to establish, through regulations, a framework that permits incumbent water or sewerage companies—with the consent of the Secretary of State—to stop supplying any retail services to current or future non-household customers in their areas of appointment. The services will then be provided by one or more retail licensees. Any incumbent water company whose area is wholly or mainly in England will be able to apply to the Secretary of State to exit from the non-household retail market for that area.

This approach reflects amendments tabled by parties in both Houses, but builds on them by increasing safeguards. These amendments ensure, for example, that in allowing retail exits we will not make forced separation possible, which an amendment tabled by Thomas Docherty would have done. We do not want to take risks with a successful model, given the challenges that we face in building the resilience of the sector, which is a crucial aim of the Bill and our programme of water reform. We cannot risk damaging investor confidence.

The amendments are enabling only, and we are committed to full public consultation on how best to implement the provision for retail exits. We will consult on the content of draft regulations by the end of the year. We will work closely with incumbent water companies, Ofwat, the Competition and Markets Authority, the Consumer Council for Water and others as we develop our approach and produce the regulations. We will also send a copy of the draft regulations to the Environment, Food and Rural Affairs Committee to give it an opportunity to comment. In addition, Ministers will make themselves available to Members of both Houses for further discussions as we develop the regulations, given the limited opportunities for parliamentary scrutiny of this part of the Bill.

Let me explain some key elements of the regulation-making powers. They provide for the protection of both household and non-household customers who are affected by the exit. As I have said, it is of paramount importance that we ensure that customers are protected. The regulations may provide for the transfer of customers, and set out what will happen in an area where a company will no longer be providing retail services for non-household customers. They must ensure the protection of any non-household customers who are subject to a transfer, as well as household customers who remain with the incumbent. The amendments enable the Secretary of State to make regulations that establish strong safeguards.

That extends to requiring the exiting incumbent to take certain steps before making an application, such as consulting its customers.

Our intention is that any exit must be voluntary, and must be delivered in a way that ensures continued protection both for non-household customers and for householders who will not be able to switch their suppliers. In order to prevent forced separation or exit, the amendments require the Secretary of State to consent to any application to exit.

Lords amendment 54 also sets out some of the grounds on which an application to exit could be refused—for example, if the company could not demonstrate that exit was in the best interests of customers or in the public interest. Lords amendments 59 and 61 also underline our intention that exits should be voluntary. In developing the exit regulations, we recognise the regulatory independence of the competition authorities, and the provisions are not intended to undermine it.

The Enterprise and Regulatory Reform Act 2013 reaffirmed the importance that the Government ascribe to an independent competition regime. Lords amendment 61 enables the Secretary of State to make a statement about the Government’s policy on voluntary exits. Any statement issued would fully reflect the Government’s wider approach to competition and the independence of the regulators. Lords amendment 62 provides a power to make changes in the duties and powers of a number of public bodies, including Ofwat and the Competition and Markets Authority. The amendment is necessary because the exit regulations are likely to involve changes in the existing legislative regime. Its scope is limited to the necessary adaptations of the framework governing the exit arrangements in the water sector. Any changes will be very specific to retail exits.

Let me end by welcoming Angela Smith to her new position. While we may disagree on matters of policy from time to time, I have the greatest respect for the contribution that she makes in the House—and it is good to have someone of Cornish descent facing me across the Dispatch Box.

Photo of Angela Smith Angela Smith Shadow Minister (Environment, Food and Rural Affairs) 1:15 pm, 7th May 2014

May I start by thanking the Minister for his kind comments?

As it is some time since the Bill was debated on the Floor of the House, I want briefly to refresh the memories of Members on it. It includes many important reforms that attempt to build on three important reviews taken forward by the previous Government: the Pitt review on flooding, the Walker review on affordability, and the Cave review on competition.

Throughout the Bill’s long passage through Parliament the Opposition have been supportive. In the Commons we voted for it on Second Reading and on Third Reading. In the other place, although we raised legitimate concerns and challenged the Government, again we remained broadly supportive of the Bill. We have backed measures to increase competition. We have supported measures that will provide a statutory basis for agreement on flood reinsurance, providing affordable insurance to households who would have otherwise not been covered. However, as my hon. Friend Maria Eagle pointed out on Third

Reading, there still remains even now a major hole at the heart of the Bill, and at the heart of the Government’s water policy: the absence of any serious attempt to tackle the impact of rising water bills on household budgets, which is adding to the cost of living crisis.

Unfortunately, the Government have failed to back a new national affordability scheme that would have ended the current postcode lottery in which companies choose whether to offer a social tariff and set the criteria for eligibility. Last year the industry made £1.9 billion in pre-tax profits, of which they returned £1.8 billion to shareholders, yet fewer than 25,000 people are eligible to benefit from social tariffs offered by just three water companies. In many ways, therefore, the Bill represents a missed opportunity and remains seriously flawed, despite its being improved by amendments made in the other place.

Although we will not vote against any of the first group of amendments, that does not mean that we believe that the Bill could not have been made stronger and more effective through the adoption of our amendments. We are where we are, as they say. While, as the Minister pointed out, most amendments in the group present a series of technical and drafting changes, amendments 32 and 33, amendments 49 to 52 and amendments 53 to 64 make significant changes to the Bill that was debated in the Commons.

Amendments 32 and 33, which were originally introduced in Committee by Lord Grantchester, give a new role to the Consumer Council for Water. They will require Ofwat to issue rules that will mean that the CCW must be consulted by water and sewerage undertakers on all charges schemes. That will allow the CCW to play a role at an early stage in the charges process and will enable it to flag up problems, before the relevant bills start arriving on customers’ doorsteps and further problems occur. For example, as Lord Grantchester pointed out in Committee, the CCW had previously challenged the charging plans of some companies that restricted half-yearly payment options for those on direct debit payments. Some customers prefer to pay on a half-yearly basis, as it better enables them to manage their money.

Although we welcome the amendments, which we promoted in the other place, it is a pity that the Government have not gone further by accepting our argument that we need to tackle the impact of rising water bills on household budgets. As I said, the Government could have backed our plans for a new national affordability scheme that would have ended the current postcode lottery in which companies choose whether or not to offer a social tariff, with no minimum standards in place to ensure fair and effective affordability measures.

Amendments 49 and 50 introduce parliamentary scrutiny for any regulations that the Secretary of State may deem fit to introduce under clauses 37 and 39. The amendments, which were introduced at a very late stage—I think on Third Reading in the Lords—mean that the affirmative procedure will now apply on the first exercise of those powers. That is quite right, especially given the importance of the regulations in question. It is a pity, however, that the Government have been forced into this position and have had to be pushed into introducing the amendments by Labour Members and the Delegated Powers and Regulatory Reform Committee in the other place. That Committee made firm recommendations in this regard, and has rightly argued that the Secretary of

State would have enjoyed so-called Henry VIII powers over many parts of the Act if the Bill had remained unamended, so Parliament is right to assert its right to scrutinise the relevant regulations as and when they see the light of day.

Amendments 53 to 64 deal with retail exit. I want to put it on the record that we have also backed measures in the Bill that increase competition to support businesses that wish to enter the retail market for non-domestic consumers. The measures are similar to those that have been a success north of the border; Scotland became the first country in the world to introduce competition to the non-domestic water market in 2008. We find it odd, however, that the Government have repeatedly dragged their feet in relation to allowing such businesses to exit this market. Without our persistence, which was shared by peers on the Government Benches, the Government’s original proposals would not create a market at all.

Retail exit enjoys a great deal of support, including from Ofwat, the Environment, Food and Rural Affairs Committee and some of the major water companies. Indeed, in Committee, amendments introduced by the Chair of the Select Committee, Miss McIntosh, were not supported by the Government. In the other place, Lord Whitty commented that there was bemusement in all parts of the House as to why the Government were so resistant to the concept of exit in the new retail market, and introduced an amendment that would have allowed it. His arguments were not, however, supported by the Government, who gave the lame reason that such a measure would cause investor insecurity. On Report, Lord Moynihan introduced an amendment that would have gained our support, but he withdrew it on advice that the Government would introduce an amendment on Third Reading. Although we welcome the Government’s late conversion, we have to wonder why they resisted such a measure during most of the Bill’s progress through this House and the other place. Surely it would have been more appropriate if the amendments had been brought forward earlier, to allow adequate parliamentary scrutiny. Once again, however, we are where we are.

It is also right that, when and if regulations are brought forward by the Secretary of State, they will be laid before both Houses under the super-affirmative procedure. I pay tribute again to the work of the Delegated Powers and Regulatory Reform Committee in highlighting the need for that even at the 11th hour of the Bill’s passage through Parliament.

Photo of Anne McIntosh Anne McIntosh Chair, Environment, Food and Rural Affairs Committee, Chair, Environment, Food and Rural Affairs Committee

First, I welcome Angela Smith to her new position, and pay tribute to her predecessor, Thomas Docherty. I understand that they have performed a job swap. The hon. Gentleman has made a big contribution to this debate and, in the past, to the work of the Environment, Food and Rural Affairs Committee. I can only apologise to both Front-Bench teams that there are not more colleagues from the Committee here today. The reason for that is that we are undertaking a farm visit this afternoon. I had to give my excuses and will be joining colleagues later for the completion of the visit today and tomorrow. It would be churlish of me not to congratulate my hon. Friend the Minister and welcome both the outbreak of common sense in the other place and in the Department and a very welcome and worthwhile amendment.

I shall briefly go over the deliberations in the Select Committee and the earlier proceedings in this place. In our report on the draft Water Bill, the Committee strongly recommended that the Bill should include provisions to enable incumbent companies to exit the retail market voluntarily. Indeed, as the hon. Member for Penistone and Stocksbridge mentioned, the Committee tabled a new clause in my name on Report to provide for retail exit. Also, during the course of the inquiry both regulators—Ofwat and the Water Industry Commission for Scotland—the incumbent companies and new entrants were united in calling for the Bill to include an exit route. WICS provided a welcome and helpful explanatory note, and I hope the amendment it proposed during the Commons stages of the Bill will bear fruit today.

In the Public Bill Committee, Opposition Members proposed a new clause to allow the incumbent companies to choose to provide to the retail market or wholesale market only, subject to approval by the Secretary of State. Regrettably, that amendment was lost, but we heard some powerful arguments in favour of allowing retail exit, which include the following: an exit clause is needed to allow the market to function as a normal competitive market; a company should be able to organise its business in the way it considers best for the interests of shareholders and customers; and an exit clause facilitates entry by new entrants, particularly larger ones, into the water and sewerage retail market, as they would not have to win one contract at a time. Without today’s amendment, economies of scale would work against new entrants, either preventing them from entering the market or, at the very least, reducing the benefits they could provide to new customers because of the higher costs of entry. It is also not in the interest of the companies or customers to force companies to stay in a market when they have no or very few customers. It is, therefore, entirely appropriate that the amendment recognises that this is about the proper functioning of the market.

Many of the amendments in the group are technical and I do not propose to comment on them, but I believe they go some way towards resolving issues with the drafting of the Bill or addressing concerns expressed during the Lords stages of the Bill. Clearly the amendment on retail exit is the most substantial. I echo the hon. Lady’s concerns, as I am sure other hon. Members would, about the lateness of the hour of this move, but the amendment is before us today and we should welcome its content. I believe the Minister recognises that there are a wide range of views in the industry on this subject, and all companies will wish to have the opportunity to provide input on the detailed arrangements that would be needed to ensure that any option for companies to exit voluntarily the non-household retail market did not have unintended consequences. Therefore, we should welcome the positive development of the amendment providing appropriate opportunities, as he explained, for full engagement and consultation with all interested parties and for consideration of all potential implications of allowing voluntary exit from the non-household retail market. I particularly welcome the role that will be played by the Consumer Council for Water, because it has, certainly in my area, a positive role to play.

I ask the Minister to elaborate on one comment made by Lord De Mauley in the other place when these amendments were discussed on Third Reading. He said that regulations made under these provisions on voluntary exit would be subject to an “enhanced affirmative” procedure, whereby draft regulations would be laid before the House. I have not heard that expression before, so I would welcome any clarification the Minister can provide on it. The right for companies to exit in this way reflects market conditions and it can only enhance investor confidence, because anything else would have been an intolerable situation, as a company would not have been allowed to exit, thus placing both company and its customers in a difficult position. Obviously, it is pleasing to note that the draft regulations will be subject to the full scrutiny by the Select Committee on Environment, Food and Rural Affairs, and our having the earliest sight of the regulations will permit us to perform that scrutiny within the timetable he has set out. I also welcome the fact that the Department has allowed a full consultation. With those remarks, I welcome this small group of amendments, as I recognise that allowing a voluntary exit can only enhance the Bill’s provisions in this sector.

Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs 1:30 pm, 7th May 2014

First, may I welcome you to the Chair, Ms Primarolo? I thank Angela Smith and my hon. Friend Miss McIntosh for their contributions today, and the latter for the contribution she has made as Chair of the Select Committee, both throughout this process and long before any Bill was formally considered in both Houses.

The hon. Member for Penistone and Stocksbridge raised a number of issues and returned to the issue of affordability. The Government have made it clear that the best thing we can do on affordability is keep bills low for everybody by having a robust regulator and setting out to that regulator the policy framework to which we aspire in order for things to happen. The regulator has taken good action to explore with companies what they can do to keep bills lower; that is the trend we are seeing into the next price review period, with some companies bringing it forward into the current period as well, to the benefit of all consumers. Of course, this Government took action to deal with the acute situation in the south-west, where bills were much higher than everywhere else in the country. The hon. Lady rightly points out the contribution that social tariffs can make and the fact that three companies have introduced them. Other companies are bringing them forward in the next year or so, following consultation with their customer base. It is important that that consultation takes place, because introducing social tariffs involves a funding mechanism.

The Opposition have talked of a national scheme, but they did not introduce one when they were in government. We can continue to debate that, but my concerns with such a scheme, and those of the Government, are that the situation in each water company area is different.

Therefore, one scheme mandated across the whole area will have different impacts on different customer groups across those water company areas and may have perverse impacts on the bills of some, given the different demographics and mix of bill payers. We are not convinced of that approach, but I welcome the Opposition’s support for social tariffs where they have been introduced.

The hon. Member for Penistone and Stocksbridge raised the issue of parliamentary scrutiny, as did the Chair of the Select Committee. We have listened to concerns and examined the use of the affirmative procedure where necessary. When we get into the realms of the super-affirmative procedure I bow to those with more experience of the range of options at the House’s disposal and how such a procedure might be used. We feel that the affirmative procedure is the correct one to take things forward, but we very much welcome the work done by the relevant Committee in another place to make suggestions on how to ensure that Members of both Houses, and those observing our deliberations externally, will have confidence that we have got things right.

I spoke earlier about the position on retail exits, but there are a couple of further things to say in response to the two speeches we have just heard. First, the Government’s position has never been that such exits should never happen and that we would never make proposals for them. We said at earlier stages that we had concerns, given the range of opinions held across the industry. Both regulators have supported such provisions throughout, whereas the Consumer Council for Water had a much more nuanced position. Some companies were very concerned about it, as were some investors, particularly with regard to pressure for the forced separation of companies. We know that investors would be concerned about that, and we want to see continuing investment in improving resilience, which is a key feature of where we are going with our programme. We are very concerned about the position of household customers, who will not have the options under this Bill that non-household customers have.

With that in mind, we have introduced amendments that take heed of arguments made by Opposition and Government Members, as well as people outside the House, and which put in place safeguards that make sure that all customers are protected throughout any process of change. There will be further consultation, as my hon. Friend the Member for Thirsk and Malton has said, which is crucial, and the question of forced separation, for example, can be addressed. On that basis, the amendments introduced by the Government allow us to move forward on the potential for retail exit in a measured way. That is the difference between the earlier debates on the Bill and where we are now. I thank the hon. Member for Penistone and Stocksbridge for her contribution, and I thank my hon. Friend the Member for Thirsk and Malton and the Committee for the work that they have done.

Photo of Anne McIntosh Anne McIntosh Chair, Environment, Food and Rural Affairs Committee, Chair, Environment, Food and Rural Affairs Committee

I am most grateful for what my hon. Friend has said, but would he clarify the enhanced affirmative procedure?

Photo of Dan Rogerson Dan Rogerson The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs

When the House considers options on the enhanced affirmative procedure there are a range of processes that can be used, but we believe that the affirmative procedure is the correct one with regard to most of the changes that we have discussed this afternoon. I thank hon. Members for their contributions to the discussion on this group of amendments. I hope that the House approves the amendments and that we can agree the changes made in another place.

Lords amendment 15 agreed to.

Lords amendments 16 to 30, 32, 33, 43 to 64, 101 to 103, 107 to 147 agreed to, with Commons financial privileges waived in respect of Lords amendment 142.