Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.

Donate to our crowdfunder

Water Bill

– in a Public Bill Committee on 3rd December 2013.

Alert me about debates like this

[Mr James Gray in the Chair]

Photo of James Gray James Gray Conservative, North Wiltshire 8:55 am, 3rd December 2013

I welcome you to the first of nine sittings to consider the Water Bill in Committee. Those of you who have not done this before might need to know that we have two evidence sessions today, one this morning and one this afternoon. On Thursday, on the Committee Corridor in a Committee Room to be decided, we will set about the proper business of considering the Bill in detail.

I have a couple of preliminary remarks. Those of you who know me well will not be surprised to hear that I tend to the traditional side of chairing things. Eating and drinking—coffee, for example—are not allowed in the Committee Room. Order of dress and behaviour are the same as we would normally conduct ourselves in the main Chamber. Equally, anyone whose mobile phone goes off at any stage in Committee will be buying the rest of the Committee drinks for the rest of the year.

Now we have a couple of procedural matters. First, I and my fellow Chair will not be calling starred amendments that have not been tabled with adequate notice. The notice period in Public Bill Committee, as you will all know, is three working days, so amendments are to be tabled by the rise of the House on Monday for consideration on Thursday, and by the rise of the House on Thursday for consideration on the following Tuesday.

Before we set about the evidence sessions, we have to get through a number of formal motions, which we will do as swiftly as we can. First, we will consider the programme motion, which was agreed by a Programming Sub-Committee last week but can be debated for up to half an hour. We will then move on to motions to report written evidence and for the Committee to deliberate in private, as well as a number of other formal matters that we will talk through at the time. After that, we will move briefly into private session and I will ask members of the public to leave the room. We will move into our proper oral evidence session thereafter.

Motion made, and Question proposed,

That—

(1) the Committee shall (in addition to its first meeting at 8.55 am on Tuesday 3 December) meet—

(a) at 2.00 pm on Tuesday 3 December;

(b) at 1.00 pm on Thursday 5 December;

(c) at 8.55 am and 1.30 pm on Tuesday 10 December;

(d) at 11.30 am and 2.00 pm on Thursday 12 December;

(e) at 8.55 am and 2.00 pm on Tuesday 17 December;

(2) the Committee shall hear oral evidence in accordance with the following Table:

Date

Time

Witness

Tuesday 3 December

Until no later than 10.15 am

Water Services Regulation Authority (Ofwat)

Water Industry Commission for Scotland

Water UK

Business Stream

Tuesday 3 December

Until no later than 11.25 am

Consumer Council for Water

Dr Peter Kenway, Director, New Policy Institute and co-author of The Water Industry: a case to answer

Which?

Tuesday 3 December

Until no later than 3.15 pm

Association of British Insurers

National Flood Forum

British Insurance Brokers’ Association

Council of Mortgage Lenders

Tuesday 3 December

Until no later than 3.35 pm

Environment Agency

Tuesday 3 December

Until no later than 4.05 pm

Blueprint for Water Coalition

Chartered Institution of Water and Environmental Management

Tuesday 3 December

Until no later than 4.50 pm

Department for Environment, Food and Rural Affairs

(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedules 1 and 2; Clauses 2 to 4; Schedules 3 and 4; Clause 5; Schedule 5; Clauses 6 to 35; Schedule 6; Clauses 36 to 40; Schedule 7; Clauses 41 to 44; Schedule 8; Clauses 45 to 50; Schedule 9; Clause 51; Schedule 10; Clauses 52 to 57; new Clauses; new Schedules; remaining proceedings on the Bill; and

(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 17 December. —(Dan Rogerson.)

Amendment made:

That, in the Table in paragraph (2) of the Resolution agreed by the Programming Sub-Committee at its meeting on Thursday 28 November, in the second entry for Tuesday 3 December, leave out ‘Which?’.—(Dan Rogerson.)

Main Question, as amended, put and agreed to.

Ordered,

That—

(1) the Committee shall (in addition to its first meeting at 8.55 am on Tuesday 3 December) meet—

(a) at 2.00 pm on Tuesday 3 December;

(b) at 1.00 pm on Thursday 5 December;

(c) at 8.55 am and 1.30 pm on Tuesday 10 December;

(d) at 11.30 am and 2.00 pm on Thursday 12 December;

(e) at 8.55 am and 2.00 pm on Tuesday 17 December;

(2) the Committee shall hear oral evidence in accordance with the following Table:

Date

Time

Witness

Tuesday 3 December

Until no later than 10.15 am

Water Services Regulation Authority (Ofwat),

Water Industry Commission for Scotland

Water UK

Business Stream

Tuesday 3 December

Until no later than 11.25 am

Consumer Council for Water

Dr Peter Kenway, Director, New Policy Institute and co-author of The Water Industry: a case to answer

Tuesday 3 December

Until no later than 3.15 pm

Association of British Insurers

National Flood Forum

British Insurance Brokers’ Association

Council of Mortgage Lenders

Tuesday 3 December

Until no later than 3.35 pm

Environment Agency

Tuesday 3 December

Until no later than 4.05 pm

Blueprint for Water Coalition

Chartered Institution of Water and Environmental Management

Tuesday 3 December

Until no later than 4.50 pm

Department for Environment, Food and Rural Affairs

(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedules 1 and 2; Clauses 2 to 4; Schedules 3 and 4; Clause 5; Schedule 5; Clauses 6 to 35; Schedule 6; Clauses 36 to 40; Schedule 7; Clauses 41 to 44; Schedule 8; Clauses 45 to 50; Schedule 9; Clause 51; Schedule 10; Clauses 52 to 57; new Clauses; new Schedules; remaining proceedings on the Bill; and

(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 17 December.

Resolved,

That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Dan Rogerson.)

Resolved,

That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Dan Rogerson.)

The Committee deliberated in private.

Examination of Witnesses

Cathryn Ross, Alan Sutherland, Rob Wesley and Mark Powles gave evidence.

Photo of James Gray James Gray Conservative, North Wiltshire 9:10 am, 3rd December 2013

May I welcome you all to this first evidence session on the Water Bill? I particularly thank our four witnesses who have agreed to give evidence to the Committee this morning: Cathryn Ross, chief executive  of Ofwat; Alan Sutherland, chief executive of the Water Industry Commission for Scotland; Rob Wesley, head of policy for Water UK; and Mark Powles, chief executive of Business Stream. Thank you all very much for coming today.

We have, broadly speaking, decided on a line of questioning for you. We have until 10.15 am, so we will try to keep questions and answers light and swift and not get bogged down. If we do get bogged down, I am a rude, tough and difficult Chairman and I shall interrupt people. First, I call Dan Rogerson.

Q 1

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

Good morning. I will start by asking about the balance between what is in the Bill and what might come later in terms of regulation and guidance. Does the panel feel that the right balance has been struck?

Cathryn Ross: I suppose the first thing to say is that we welcome the strategic policy steer that we are receiving from DEFRA, which is very helpful. The thing that we are slightly nervous about is the requirement in the Bill for us to act “in accordance” with that statement. We think that that is a strong steer. I am sure that that is what is intended, but it seems to go against the thrust of independent economic regulation. We would be more comfortable with something that said we would have to have regard to it, take it into account, give it due regard, or something like that. “In accordance with” is quite a strong statement.

Photo of James Gray James Gray Conservative, North Wiltshire

You do not all have to answer the questions, but chip in if you have a particular view.

Alan Sutherland: It is understandable that the balance of the Bill has been struck in the way it has been, given the experience of the Water Act 2003. It has a less prescriptive approach after what was perceived to be a very prescriptive approach, but I do not think that that learns what I would see as the biggest lesson as to why nothing happened after the 2003 Act, which is a reliance on negotiation between those who want to enter the market and those already in it.

In addition, we should also bear in mind the corrective actions that were required in the Utilities Act 2000, which essentially had to deal with issues of a similar nature. We should learn those lessons and make sure there is a demonstrably level playing field. So how would I do that? I would make it an absolute requirement for each business to publish a wholesale charges scheme; no negotiation; no dubiety as to what is on offer for the entrant; introduce a statutory commitment to the creation of a level playing field, with the incumbent having a legal duty to behave, consistent with the level playing field, with a suitable governance code to make sure that that was going to happen; and I would make it very clear in the Bill that whatever codes are in place will apply equally to all, whether they are an incumbent or a new entrant.

Without such measures—confidence-boosting measures —I do not think you will get the entry that we desire, and, without that, you will not get the innovation or dynamism that the market should deliver.

Rob Wesley: The water companies had concerns about the balance between legislation, regulation and guidance in the draft Bill. We support the changes that have strengthened the role of Ministers and Parliament, and  we feel that the balance is now broadly right. I differ somewhat from Cathryn on the phrase “acting in accordance” with the strategic steer given by the Government. Independent economic regulation is crucial for giving customers and investors confidence in the sector, but our view is that it should be within a strong policy framework set by the Government. Our view is that the Bill now strikes the right balance between legislation, regulation and guidance.

Mark Powles: I would echo a lot of what the other people have said. I look at the retail part of the reforms. Business Stream is in a fairly unique position because we are an incumbent retailer in Scotland but a new entrant trying to break into England. In many ways, the Bill and the guidance have started to put right some of the things that are wrong in that retail market today. There are 27,000 eligible premises, but only about three customers have switched in that regime. The Bill will start to put right some of those things, for example by abolishing the access pricing regime and introducing sewerage services. It is light on the level playing field issue. I would like to see the Bill strengthened to put more obligations on the incumbents to show no undue preference and to ensure that there is transparency, fairness and openness in the way they deal with new entrants and their incumbent arms.

There is also the question of exit: should incumbent companies be forced to be retailers in a new market? I have never seen someone be successful in a vibrant retail market by being press-ganged into becoming a retailer. The market could become very complex if we have 22 wholesalers and up to 40 retailers fighting for 1.1 million customers. That sort of retail market will not be successful because you will not benefit from economies of scale. I question why that has not been included in the Bill.

Q 2

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

On Mr Powles’s point about exit, is there anyone here who does not agree that there should be an exit mechanism?

Rob Wesley: We have said in the past that water companies should have the option to make their own choices about competing in or exiting the market. Our view is that an exit mechanism is desirable, but we are not convinced that it is essential for the opening of the competitive retail market. Ofwat has a range of regulatory tools that can be used to ensure that there is a level playing field, and they will be strengthened by the Bill. I wonder whether the question of exiting the market can be returned to at a later date, rather than being resolved at this point.

Cathryn Ross: I am not entirely in agreement with Rob on that point. 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.

Alan Sutherland: I completely agree with Cathryn. I find it strange that in December 2012 the Office of Fair Trading published a report that said that orderly exit was essential to the functioning of any market. It specifically  included public markets, and specifically said that Governments would sometimes be tempted to stop it, but that it would always end in tears. I am paraphrasing, but that is what the first four paragraphs of the December 2012 document say.

I cannot see how you can require people who are inefficient to stay in a market. It does not make any sense and it bakes in cost. The thing is that, whatever the parliamentary intention, the crafty guys in the City will work out a way of disposing of the asset in some shape or form. Once they have done that and once that has happened in a way that takes it somehow to the edge or outside of the regulatory ring fence, enforcing good behaviour by retailers that are on the other side will be incredibly difficult, because the only mechanism would be through the licence. If it is just small, low-level bits of bad behaviour, such as not reading meters on time, are you really going to take an enforcement mechanism through the licence and the wholesale business to get to that retail entity? I do not think so. It is quite a flaw in my view.

Q 3

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

Scots are always very canny, but I am sure that lessons could be learned from how Scotland went about introducing reforms. Mr Sutherland, as a regulator for Scotland, what lessons can be learned? Has DEFRA learned them in preparing the Bill?

Alan Sutherland: I know that there has been a lot of conversation and dialogue between the Governments. There are three or four things on which there could be usefully be more clarity and the lessons have not been fully learned. One of those is separation. It was absolutely on the face of the Water Services etc. (Scotland) Act 2005 that Scottish Water had to separate an entity—that is functional separation—and it chose to go further and separate legally. That was one lesson.

The second lesson is that there were clear steers in getting the right incentives. A no detriment clause was put in for the wholesaler. Why is that important? That clause ensures that when the retailer is doing its thing—giving water efficiency advice and so on—it will not in some way be hindered, hampered or discriminated against by the wholesale business that fears loss of volumes in its business and therefore potential loss of profit.

The third lesson is that there was a clear statutory commitment to creating a level playing field and to ease of entry for potential new entrants. I am not sure that the Bill goes far enough. It goes back to the earlier experiential thing about what happened in 2003 and not wanting to put too much in the Bill. I can understand that, but there is a difference between being specific on inputs and being specific on the outcomes that you want to see. The Committee might want to think about that.

Q 4

Photo of George Hollingbery George Hollingbery Conservative, Meon Valley

Mr Sutherland, can you explain something to me? As an noviciate in this area, I am not familiar with regulated markets and I find them very complex. In your original reply, I think you said that the City and others would find mechanisms through which retail could be separated out by the companies that did not wish to do it any more. That will make regulation extraordinarily difficult, because the regulation will apply only to the original retailer, rather than the one to whom it is licensed. Is that correct?

Alan Sutherland: Yes.

Q 5

Photo of John Penrose John Penrose Assistant Whip (HM Treasury)

You mentioned, Mr Powles, that you thought that exit was a good thing and you said that you thought, among other things, that it baked in cost. Is there not also an issue with the speed of competitive change? Presumably, if people are not leaving the market, entrants or would-be entrants such as yourselves will find it harder to get in and it will slow you down. Is that an issue, or am I inventing that?

Mark Powles: If I can build on what Mr Sutherland was saying as a way of answering that, we need to think about what we are trying to do. We are trying to create a market that benefits customers, and benefiting customers is about giving them more service or more innovation or keener prices. The more players there are in the market, the more cost and complexity you build into the model, for one. The more complexity, the higher the cost to serve is for retailers and the benefits we can share with customers will be less. One of the benefits of the model in Scotland is that it is very focused on the end customer, and I would use words like “fair”, in that new entrants and incumbents can compete on equal terms.

There is a level playing field. I have got the scars on my back from being the incumbent who was driven by a regulator to be totally separate and focused on customers and not getting an unfair advantage by being part of an integrated water company. I have some licence conditions that are there to slow me down, because I started with 100% of the market and it is always harder for a new entrant to come in and try to take customers away than it is for the incumbent to hold on to them. Those fairly tough conditions create that balance between a new entrant and an incumbent. I think that we need to create a fair, transparent and efficient market, because the more efficient it is, the bigger the benefits to customers.

Q 6

Photo of John Penrose John Penrose Assistant Whip (HM Treasury)

May I take that point on to Mr Wesley? The free marketeer in me says that if people are bad at something, allowing them to get the heck out of the way so that new entrants who are better at it can pick things up surely must be sensible. What is it about your organisation that makes you think that regulators can do that better than customers interacting directly with a supplier and choosing for themselves?

Rob Wesley: We would absolutely agree with the objective of a level playing field to allow retailers to compete on their merits for customers. The logic of, in time, allowing more flexibility in the structures to allow retail exit and entry would seem to be strong. The question to our mind is whether it is essential, at this stage of implementing the new market, for that to happen.

Within the sector, we are all working co-operatively and collaboratively to deliver the Government’s target for market opening in April 2017, but a significant amount of work needs to be done to achieve that objective. We wonder whether exit could be returned to at a later stage.

Q 7

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

There was some debate on Second Reading about costs and benefits. Mr Sutherland and Mrs Ross, what do you estimate the benefit in terms of savings to the taxpayer and businesses could be from retail competition? Mr Sutherland, I think you did specific work on the loss of potential savings if we do not have exit.

Alan Sutherland: In terms of cost-benefit, our view, having looked at the numbers in Scotland and reading those across to England, is that the current impact assessment understates the value of retail competition quite considerably. If you were to compare on a like-for-like basis, we would say that there is potentially a net present value of about £750 million, compared with just less than £200 million in the DEFRA impact assessment. Even if I were to remove any allowance for dynamic efficiencies, I would still say more than £200 million in net present value just for Scotland, so I think that an estimate of less than that for the whole of England seems on the light side.

In terms of exit, we did a bit of work with Oxera, the economic consultancy, to look at the latest round of declared costs at retail issued by companies in England. To my mind, those looked very light, but we might get to that question.

Photo of James Gray James Gray Conservative, North Wiltshire

We will get to that question.

Alan Sutherland: If they are right and they have been completely transparent and declared all their real costs in retail, not allocated them to wholesale slightly on the sly, and 40% of their customers—the public sector and the larger multi-site customers—were to be lost by 75% of the industry, on the assumption that 20% of their costs are fixed, the net present value of not having exit in loss would be about £400 million.

Photo of James Gray James Gray Conservative, North Wiltshire

We have a lot to get through, so I ask that questioners and answerers be as swift as they can. Mr Docherty, have you had enough?

Q 8

Photo of George Hollingbery George Hollingbery Conservative, Meon Valley

Mr Wesley, Water UK and others in the industry were pretty concerned about the upstream reforms and the possible effect on pricing. Are you satisfied that the Bill now addresses those concerns?

Rob Wesley: Maintaining investor confidence is crucial to the sector as water companies will need to continue to invest, to maintain and enhance services, at about the current level of £5 billion a year. Funding that directly from customer bills would need bills to be about a third higher than at present, so companies raise finance from the external financial markets. Ongoing support from investors is needed, and the investor’s perception of risk is crucial there, as a 1% increase in the cost of finance would result in bills increasing by more than 5%.

We had concerns about the arrangements in the draft Water Bill, but with changes having been made in that, our view is that investor confidence can be maintained, provided that the upstream reforms are implemented sensibly. We all have an interest in ensuring that that happens. Much detail still needs to be developed on how that is best done, but all members of this panel and others are working together with the Department to ensure that the implementation approach delivers benefits without risking the loss of the investor confidence that is crucial to keeping water bills affordable.

Q 9

Photo of George Hollingbery George Hollingbery Conservative, Meon Valley

I am struggling slightly. Is that a general yes, or a general no?

Rob Wesley: The changes from the draft Water Bill are positive and have helped in that regard. Much needs to be worked out in the detail, but there is time to work that out and, if implemented sensibly, we are confident that the reforms could deliver both customer and environmental benefits and safeguard investor confidence.

Cathryn Ross: First, I want to say that the upstream reforms in the Bill are really important. To go back to Mr Docherty’s earlier question we think that, when combined with the retail reforms, the upstream reforms will deliver about £2 billion of benefits, so they are really significant.

We see a couple of missed opportunities in the Bill as it stands. First, it envisages what we refer to as a closed market for upstream trading in the sense that incumbent water companies will be able to trade with each other, but not with other potential water providers. Given that, at the moment, water companies extract about 50% of available resources, that is a much smaller market than could be the case. I understand why it is like that, but it is a missed opportunity.

Secondly, there is the restriction in the Bill on being able to introduce into the system only the water that you can demonstrate that you will take out of the system. That is an unhelpful restriction, which could constrain companies from dealing with system imbalances that could otherwise be dealt with efficiently through trading. Those are two points that we would like to see changed.

Q 10

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

My question is partly to Mr Sutherland and partly to Ms Ross. Scotland has one wholesale company, so dealing with greater retail competition is perhaps easier there than in England and Wales, where we have a number of companies. Is there enough competition in the Bill? Will it be easy enough for people to come in and out of the sector? Will we get real benefits from competition? In every other sector, and especially in energy, we say that more completion is better, yet I fear a little vested interest by the water companies. Perhaps I am being unkind.

Alan Sutherland: Mr Penrose asked whether the lack of exit would prevent entry, which is a crucial point. If I were an expert in business-to-business retail, how would I get into the water market? I cannot go out and acquire customers; I have to win one customer at a time. If I am a big player, am I going to commit capital and strategic management time to getting into the sector and generating the sorts of dynamism that one wants to get from markets if I cannot actually get a rump of customers in fairly quick order? I think there is a real question as to whether we are actually putting in place a free market that will allow real competition.

In terms of multiple wholesalers, the real question is how to make sure that those retailers that choose to stay in the market—hopefully there is exit—are able to trade with all of them on a transparent, straightforward basis. If we get the level playing field right, we will get real competition. Scotland is very instructive: although Mark Powles and Business Stream did not lose market share quickly, they found the need to behave very differently with their customers, and customers fed back to us that the change in behaviour was immediate and dramatic.

As long as the exit is there and there is clarity on the level playing field, you will get the competition and the benefits that will flow from that. If you do not do that, of course you will spend a lot of money setting something up and it will not work.

Cathryn Ross: I completely agree with Alan that exit and the level playing field are critical. The big challenge for us all is to make sure that at this point we really set ourselves up to succeed with this market. There are a couple of issues: one is the retail exit point that we have already talked about, and as the regulator we are concerned with the level playing field issues. There are a couple of things in the Bill that do not really nail that. The Bill does not contain provisions for us to modify water company licences on a collective basis, which will tie our hands somewhat in establishing the level playing field. Also, we are restricted to a period of two years after the relevant provision comes into force for making consequential licence modifications. Frankly, I do not think that that gives us enough time to see how the market is working and to make corrections to establish the level playing field. So it is not a bad job, but it could be better.

Q 11

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

Some companies act almost as monopolies. Are you worried that you cannot break that?

Cathryn Ross: That is the question we are looking at at the moment. Are we setting ourselves up to succeed, first, so that the monopolies we have already got can compete with each other—the business customers—and, secondly and crucially, so that we get challenger entry? That goes back to the points I made before.

Q 12

Photo of Hywel Williams Hywel Williams Shadow PC Spokesperson (Education), Shadow PC Spokesperson (International Development), Shadow PC Spokesperson (Work and Pensions), Shadow PC Spokesperson (Health)

The situation in Wales is somewhat different in that the Government have decided not to go ahead with the upstream and retail changes contained in the Bill. What effect do you think that that would have on the effectiveness of the markets in England and possibly in Wales as well?

Mark Powles: I have customers in Wales now who, if the market was available, they would like to switch to me. You have to think about multi-site retailers and commercial businesses that have branches or outlets both cross-region and cross-border, whether that be Scotland, England or Wales. It seems strange to some of the customers that they will be able to switch their sites in England and in Scotland, but not their portfolio in Wales. Ultimately, the buyers in the companies want one or perhaps two suppliers that can provide them with one electronic bill that enables them to manage their whole portfolio. There is a level of frustration among some that they will not be able to do that across the whole of England, Scotland and Wales.

Rob Wesley: While I have the perspective of a retailer wishing to provide services, I am a representative of Water UK, not Water England, and we work with all the Governments of the United Kingdom and respect their right to develop their own policies based on their own view of their national interest. We are working hard with others to ensure that the competitive market in England is effective and delivers benefits to customers. We will also work with the Welsh Government to ensure that the legal and regulatory framework in Wales also delivers benefits to customers there.

Q 13

Photo of Hywel Williams Hywel Williams Shadow PC Spokesperson (Education), Shadow PC Spokesperson (International Development), Shadow PC Spokesperson (Work and Pensions), Shadow PC Spokesperson (Health)

Welsh Water of course provides to some customers in England, and Severn Trent provides in Wales. Mr Powles, you referred to customers in Wales, and perhaps Mr Wesley would like to comment  on this question. What proportion of the market is thus affected? Is it a high percentage of customers, a few, or only one or two? Much is made of the border, but is it actually an issue?

Mark Powles: I do not have the level of analysis to be able to give you an answer today; I do not know whether Mr Wesley has. I think there are a lot of customers in Wales who would benefit from a competitive market, but that is down to the Welsh Assembly and yourselves. Welsh customers are not going to be able to benefit in the same way as English or Scottish customers are going to.

Q 14

Photo of Sheryll Murray Sheryll Murray Conservative, South East Cornwall

Clause 16 will place a duty on the Government to issue guidance to Ofwat about the content of its rules on the charges scheme. Do you support the introduction of that mandatory guidance and when should it be published to be most effective?

Cathryn Ross: We support the issuance of Government guidance on charges and think it should be issued as soon as possible. As you know, we will be taking decisions about charges as part of our periodic review in the coming year, so as soon as possible would be great.

Q 15

Photo of Sheryll Murray Sheryll Murray Conservative, South East Cornwall

Are householders sufficiently protected from subsidising competition in the non-household sector through the issuance of ministerial guidance and Ofwat’s price review?

Cathryn Ross: We believe so, yes. Ministerial guidance will be helpful, I am sure. As the regulator, one of the things we have been doing for some time is working with the companies to ensure that we have great clarity about the costs that are associated with the competitive and the non-competitive parts of the market, so that when charges are set for those parts of the market, we do not end up with unfair cross-subsidy between the two.

Alan Sutherland: One caution from our experience in Scotland is that guidance can only take you so far. Competition law could trump guidance, and we should remain acutely aware of that. As long as you allow a retailer to backward-integrate into the resources area through direct contracts or whatever, there is the risk that local costs and margin squeeze cases, such as the Shotton case, would start to apply. You could have a situation where the Government says something such as, “We do not want any deaveraging among businesses,” but because of competition law you end up with deaveraging for businesses.

If you want to go in that direction, that is a decision for Parliament. I have to say that in Scotland there would be a huge amount of nervousness about what would happen with deaveraging. We have done some work with Scottish Water, looking at all 260-plus water supply zones. The most expensive of those zones has a unit cost 60 times the cheapest. So be careful what you wish for when it comes to the risks of deaveraging.

Photo of James Gray James Gray Conservative, North Wiltshire

Do the Opposition want to ask question 8? They do not. We will move on to question 9.

Q 16

Photo of Matthew Offord Matthew Offord Conservative, Hendon

Ms Ross, I particularly want to ask you about clause 22, which places on Ofwat a duty to ensure resilience of water and sewerage provision. Do you think that any other concerns should be taken into account in achieving that objective?

Cathryn Ross: I have to say that we do have some concerns about the proposition on the resilience duty. Obviously, it is for Parliament to decide what statutory duties we have, but our concern is that a resilience duty might lead to a conversation concentrating on capital investment and might be seen by the companies in particular as a licence to build, which is precisely what we have been trying to move away from with some of the innovations in our periodic review.

We do not quite understand the problem that this is intended to solve. Looking back at decisions that we have taken in the past and thinking about how we might have done things differently with a resilience duty, it is hard to see that this duty would have changed the outcome in terms of standards of resilience compared with things we have done in the past because, obviously, resilience is a big part of the industry. It is important that supplies are resilient. It has been for some time, and we have taken that into account.

Q 17

Photo of Matthew Offord Matthew Offord Conservative, Hendon

Mr Wesley, perhaps you would also say a few words about sustainable development, and whether resilience should take priority over that.

Rob Wesley: On the resilience duty, we take a somewhat different view from Cathryn. We see the introduction of the new duty as one of the most important clauses in the Bill. Customers’ No. 1 priority is safe, secure and reliable supplies of water now and in the future, and resilience was a central theme of the water White Paper, which was well received. Cathryn is right that companies have always been focused on resilience; it is in their DNA. We think that the new duty is a helpful reminder for us all in the sector to ensure that we continue to be focused on that. If we need a reminder of how important it is, we need only think back to the droughts last year and what could have happened if a second dry winter had been followed by a third or even a fourth.

Regarding Cathryn’s point about whether this could be seen as a licence for capital expenditure, I give credit to the changes that Ofwat has made to the regulatory framework. It has reweighted incentives between capital and operating schemes by introducing a new totex—total expenditure—approach bringing capital expenditure and operating expenditure together as a single assessment, and made other changes to lead to a more balanced approach. We saw the first fruits of that yesterday in companies’ business plans submitted to Ofwat. The duty refers to demand management explicitly and we see that as a positive.

Regarding the sustainability duty, we are aware that the point has been raised by others, but we have never been convinced that there is a need to change the current arrangements for that duty. The changes that Ofwat has brought in are going a long way towards achieving more sustainable outcomes, with companies working towards those in their business plans submitted yesterday.

Q 18

Photo of Matthew Offord Matthew Offord Conservative, Hendon

Mr Powles, do you have anything to add from your perspective?

Mark Powles: Not really, but as a retailer many of the services that we provide to customers are provided by wholesalers, so we want a stable, well funded and efficient set of wholesalers to make sure we can give customers the right services. In terms of sustainability, I think it is  almost in the DNA of retailers to help customers to use less product and to use it more efficiently, thereby reducing cost and carbon. We welcome anything that does that, but be under no illusions: retailers looking to secure customer loyalty will do a lot of that on the demand side of the business.

Q 19

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

Consumers are always concerned about affordability. Mr Wesley, perhaps I can ask you first about bad debts. There was in previous legislation the ability to require disclosure of information by landlords to water companies, which was never enforced; what happened instead was a voluntary code of practice and an ongoing pilot. My water company, South West Water, is concerned that that is not the way forward and would like the legislation to be properly enforced. I am interested in your view, representing the water companies across the piece.

Rob Wesley: Yes. The short answer is that we agree absolutely. Bad debt in the water industry is a serious concern, adding around £15 to the bills of customers who do pay. Companies have two hands tied behind their backs in trying to manage bad debt. They cannot cut customers off—not that they would wish to do so—and they do not have contracts with their customers and so do not have enough information, particularly on who is living in rented properties. In the industry, we are spending more than £1 million on establishing a national website for landlords to provide information to water companies, and we have promoted that extensively with landlords. DEFRA has been very supportive of the measure, but experience has shown that a voluntary approach simply does not work.

Q 20

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

Why? What is it about it being voluntary that makes it unworkable?

Rob Wesley: An example of practical experience on the ground is that of Northumbrian Water, which for two and a half years has had an easy-to-use website for landlords to provide information. It has promoted that with landlord representatives but after two and a half years, only 7% of all rented properties are registered with the website. By and large, it is those landlords who previously provided information who are making use of that more efficient means of providing information. That is good and is a benefit, but it does not go far enough in addressing the problem.

We are pleased that the Welsh Government are proposing to make provision of information by landlords mandatory, so that companies in Wales or companies operating in Wales will have the information they need to bear down on the cost of debt. We continue to urge the UK Government to do the same in relation to England as well.

Cathryn Ross: Just to add to what Rob was saying, I am completely on board with the idea that bad debt is a really serious issue. The only thing that I want to emphasise is that companies have a number of tools in their toolkits to deal with it. Part of that is social tariffs, part of that is managing bad debt working with Citizens Advice, working in the community, and so on, but it would be helpful to have some statutory hook in the Bill that we can require access to information so that people are aware of who is eligible for the social tariffs. That would be a big help.

Q 21

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

You have taken us on to part two of the affordability issue, which is the social tariff. It is a real challenge for all water companies to address that. Although there has been the opportunity for water companies to introduce their own social tariffs in addition to the Government’s own WaterSure programme, only three have taken it up—I am pleased to say that my local company is one. Why have the companies not taken it up? Was it the wrong approach? What can we do about the gap that is left by WaterSure, which, frankly, does not cover all of those with affordability problems? What can we do to make it work better?

Cathryn Ross: I agree that there is scope for water companies to do more on social tariffs. I know from the business plans that we are seeing that some of them have done that. There are two issues for water companies: one is the extent to which social tariffs might be cost beneficial in themselves in how they reduce bad debt overall and in how they reduce the £15 that Rob said flows through on to the average bill from bad debt. The tariffs might be cost beneficial in themselves. There is an extra dimension, which we are starting to see come through in business plans, of companies’ customers saying, “We are willing to pay for a fairer tariff—a social tariff,” even where that goes beyond the extent to which it is cost beneficial. I am really optimistic that we will start to see more of that in the future.

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

I can see Mr Wesley champing at the bit. What are your thoughts?

Rob Wesley: Every company has a wide range of measures to tackle water affordability issues. This is not just about social tariffs; there are social funds, charitable trusts, flexible payment methods, restart schemes and support through Citizens Advice, and those things support hundreds of thousands of hard-pressed customers. Last year, after quite a delay, the Government published the guidance that companies have to follow to have a new social tariff approved by Ofwat, and already three companies have introduced a new social tariff at the earliest possible opportunity. I am confident that more will follow next year—subject of course to regulatory approval, as companies cannot just introduce new tariffs without them being approved—and in the year after. In the business plans published yesterday, many companies have set out plans for new social tariffs to come forward in April 2015.

The challenge that companies have faced is developing an approach to social tariffs that has broad support from their hard-pressed customers. Some companies are finding that they are having to go through two or three iterations to develop an approach that gets customer support, but they are very much committed to making progress on affordability through both social tariffs and a wide range of other measures.

Q 22

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

You are both saying that it will happen, and I suspect that if I asked you whether we need to go that step further and make it mandatory for the water companies to provide subsidy, you would say, “No, it is going to happen. What we have in place is sufficient.” Is that your position?

Cathryn Ross: It is. It is not necessary to make it mandatory, although were Government to choose to do so, that is entirely reasonable. I would echo Rob’s point: it is not a magic bullet; it is an important part of the toolkit, but it is not a universal panacea.

Rob Wesley: Likewise. There would be risks in a mandating approach. The current arrangements allow each company to develop an approach that is appropriate for their company’s region and customers, and allow innovation. It would be a shame to lose those innovations and that flexibility for companies to adapt to their local circumstances. Yes, the current framework is working. Earlier guidance would have been helpful, but now that companies have the guidance they are making good progress.

Q 23

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

We all recognise that water companies are the heroes of our communities, Mr Wesley, and are being held back by the regulator and DEFRA from making progress, but is not the reality that we are three and a half years into a process but only three water companies have actually done it? We are looking at 2015 at best before we make real progress. Is not the reality that almost as many people are going to Citizens Advice because they are struggling with their water bills as are going because of their energy bills? Finally, is it not that the debate is not around whether there should be a centrally imposed, standardised social tariff, but around whether Government now need to step in and say that you must, by a certain date, have come up with your own scheme, which Government will sign off on, because too many customers are struggling to pay their bills?

Rob Wesley: Companies have to operate within the legal framework that they are given—they have no choice but to do so. I would say, from my discussions with companies, that they are finding Ofwat very helpful in terms of identifying what is needed for a social tariff to be approved. I would not characterise the situation as there being any blocks on progress, but the guidance was only published last year, which has meant that the companies have not been able to move as fast as they would like.

Affordability is a real issue. That is why companies have a wide range of measures to address it, including working closely with Citizens Advice. We held a workshop with Citizens Advice last week on precisely this sort of question: how companies can work in partnership with Citizens Advice at local level. Progress is being made. We see no need for intervention, because measures will be coming forward; they are already in place in some areas, and more are coming forward next year and the following year. This is just one of the many tools with which companies address the challenge of water affordability. Almost all customers who come to Citizens Advice with difficulties paying their water bills also have problems paying all their other bills. It is fundamentally a problem of hard-pressed consumers, and water companies have a role to play in helping to make water bills more affordable.

If I could pick up on something Cathryn raised earlier, it would be very helpful for water companies, in providing greater assistance, to have help from the Government in targeting that assistance. One of the real challenges is knowing who is in need of assistance, and the Government have the best available data on that from means-tested benefits. Allowing access to data from the Department for Work and Pensions would significantly ease the task for companies in providing the assistance that they wish to give.

Q 24

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

I want to put a question to Cathryn Ross. One of the crucial roles that Ofwat will play is in the discussion about bills generally in future—the discussion not just about the bills of those struggling now, for whatever reason, but about winning the case among customers for social tariffs. If there is going to be some element of dealing collectively with the problem—that is, through bills generally—then the lower the bills are, the more likely we are to win customer approval for such schemes. Would you agree?

Cathryn Ross: Completely. The single most important thing that we as the regulator do to help people struggling to pay their water bills is to challenge the companies really hard to keep bills down across the piece. That is exactly what we are doing in the periodic review. I completely agree.

Q 25

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

Where we probably agree, Mr Wesley, is that the take-up of WaterSure is simply too low. Are there any specific measures that water companies could take, either voluntarily or by mandate, to promote awareness further? For example, they could include with bills information about eligibility and how to go about applying for WaterSure.

Rob Wesley: Water companies do promote WaterSure and eligibility through a wide range of measures. However, I would return to the point previously made: water companies do not know who is in receipt of the means-tested benefits that are part of the eligibility criteria for WaterSure. It is others who hold that information.

Q 26

Photo of Thomas Docherty Thomas Docherty Shadow Minister (Environment, Food and Rural Affairs)

Forgive me if I was not clear in my question, but I was not saying that you should target customers. I appreciate that you believe that water companies are perfect, but it might be a not unreasonable step to include in the bill information about what WaterSure is and how to apply for it if someone thinks they are eligible.

Rob Wesley: Different companies would be likely to take different approaches to communicating with their customers, but all companies will be looking to communicate eligibility for measures that could help people to afford their bills, both directly and—a key point—indirectly through trusted third parties such as Citizens Advice and local bureaux. Rest assured that each company actively promotes the affordability measures that it has in place—not just WaterSure, but their whole suite of measures.

Q 27

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

I am keen that people struggling with their bills should be helped through WaterSure. However, there is also an element of perhaps £15 going on to bills because some people are not paying. Some of them will not pay, rather than not being able to pay. Is there enough in the Bill to deal with people who wilfully will not pay?

Rob Wesley: As far as I am aware, there is nothing in the Bill to deal with that. There is unfinished business here from previous legislation that was passed with strong cross-party support. We urge the Government to finish that business.

Photo of James Gray James Gray Conservative, North Wiltshire

I call John Cryer. We must discuss things that are in the Bill, rather than things that are not.

Q 28

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

Mr Wesley, you said earlier that the companies are struggling to make bills more affordable. The fact that bills have risen by 60% in the last decade would suggest that that is not quite the case.

Rob Wesley: To maintain services, it is absolutely necessary that there is sustained investment—

Q 29

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

Which has fallen since 2007.

Rob Wesley: Investment has been maintained at a steady and high rate of around £5 billion a year. Year on year for individual companies, there can be some fluctuations, but overall investment is at a sustained and high rate.

Looking forward in their business plans submitted just yesterday, companies are maintaining that high and steady rate of investment to ensure that customers across the country can continue to rely on their services, but they have looked hard at how they can constrain prices. Almost all companies have kept their plans in line with inflation—in some cases, significantly below inflation—both through challenging themselves to be more efficient every year and through reducing returns to investors to keep bills low.

Companies are much attuned to the need to respond to the hard-pressed environment for customers. Companies have been engaging and consulting their customers for a year or more, and we saw the results of that yesterday in the plans that they put forward, which will now be considered by the regulator, that keep bills in line with—or, in some cases, significantly below—inflation.

Q 30

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

So you have not seen the Metro this morning, which says that Thames Water is planning to increase its bills by 11%.

Rob Wesley: It is inevitable that there will be a financial consequence when one company has an investment project of a scale that the sector has never seen and that is equivalent to a tunnel the size of the channel tunnel in London. It is a large investment project that is necessary to meet statutory guidelines. The overall national picture is that, according to companies’ plans, bills will be in line with or less than inflation.

Q 31

Photo of John Cryer John Cryer Labour, Leyton and Wanstead

So why do you think only three companies have introduced social tariffs? Are you seriously telling us that they are actually held back by the Government and the regulatory framework? Is that the only reason why only three companies have introduced social tariffs?

Rob Wesley: As with regulators, companies have to act within the legal and regulatory framework that they are given by Parliament and Government. The guidance that companies have to follow to have their tariffs approved was issued last year. Three companies implemented social tariffs at the earliest possible opportunity. Subject to regulatory approval, more will come forward next year and the year after.

I assure members of this Committee that there is no reluctance on the part of companies to implement social tariffs. Indeed, if I may go back to the Flood and Water Management Act 2010, it was very much with the support—indeed, the encouragement—of companies that the clause specifically enabling social tariffs was  introduced. We very much welcomed and supported that and look forward to a wider range of social tariffs in future.

Q 32

Photo of Chris Evans Chris Evans Labour, Islwyn

What is the average profit for a water company?

Photo of James Gray James Gray Conservative, North Wiltshire

I think that is slightly beyond the scope of the Bill.

Photo of Chris Evans Chris Evans Labour, Islwyn

I am coming to my point. Do you have that figure?

Rob Wesley: Water companies, because of their major investment programmes, which total £116 billion over the past 25 years, have to raise finance from external markets. That is tightly regulated by the economic regulator, which makes an allowance for the return that investors, who have a choice whether to invest in the sector, would need.

In the current period, the overall return to investors is broadly in line with the assumptions made at the last price review of a return on the regulatory capital value of around 5%. That return will come down in the next period, as put forward in companies’ plans.

The point I would highlight is that one of the distinguishing features of the water industry is the sheer scale of capital investment. Routinely, investment on an annual basis is around half of the industry’s turnover —a far higher proportion than any other sector, even those that might traditionally be thought to be high- capital investment sectors, such as pharmaceuticals or petrochemicals.

Due to that massive investment, companies need to raise finance from external markets, otherwise bills for hard-pressed customers would be much higher. That high-level investment requires significant operating profits to provide a return to investors. Without providing such stable and predictable returns to investors, we would all be worse off, as our bills would all be much higher.

Q 33

Photo of Chris Evans Chris Evans Labour, Islwyn

That seems a very long answer to a very simple question. Some £37 billion has been paid in dividends since privatisation. In the same time, only three companies have signed up to social tariffs. What is the average debt of a water company customer, considering that water is essential for life? Why are water companies so slow in introducing affordability schemes for hard-pressed customers when they have such massive profits?

Rob Wesley: With respect, companies have a wide range of affordability measures, such as social funds, charitable trusts, flexible payments, restart schemes and support for Citizens Advice. Hundreds of thousands of hard-pressed customers are supported every year.

Social tariffs are just one tool to address affordability. As Cathryn said, they are not the silver bullet to address affordability. Companies are addressing affordability now, and they will be addressing affordability in the future. In companies’ plans there are further measures to address affordability. We are well aware of the scale of the problem, and we are acting on it.

Photo of James Gray James Gray Conservative, North Wiltshire

We are rapidly running out of time. I think you have probably made your point slightly wide of the Bill. We have only two minutes left, and we ought to give the Minister the final question.

Q 34

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

I want to pick up Mr Wesley’s point on access to DWP data. I understand why the companies feel that that would be handy for them, but does he not feel that customers might prefer more information with their bill, rather than having their private data passed over to a private company?

Rob Wesley: To tackle the affordability challenge, a range of measures will be needed. The Minister is quite right that companies need to communicate effectively through a wide range of measures, both directly, via their websites and call centres, and through trusted third parties such as Citizens Advice. Additionally, we think it would greatly assist the desire of all parties and all members of this Committee for further progress on affordability measures if companies had access to the best source of information on who would be an appropriate target group for further affordability assistance.

Photo of James Gray James Gray Conservative, North Wiltshire

I thank you all very much for your evidence. This has been a lively and interesting session that I think will advise the Committee’s deliberations on the Bill. I hope you have not found the session too stressful.