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
With this it will be convenient to discuss new clause 25—Exit from the non-household retail market—
(a) the retail market, or
(b) the wholesale market only.’.
I am most grateful for the opportunity to serve under your chairmanship, Mr Gray. It was a pleasure to serve with you on the Procedure Committee, so it is with some trepidation that I say that I hope I do not fall foul of procedure rules this afternoon—that would be doubly mortifying.
I will speak briefly to the new clause and address the broader points in the lead amendment. This is a technical issue, but it is critical to the operation of the retail market. The Opposition have had dialogue in the past few days with Ofwat, and Members will notice that we have tabled two different new clauses. Obviously, when we come to the votes, we will move the appropriate one. We will have to work with the Minister to ensure that he is content that we propose the right changes to the Water Industry Act 1991.
This debate is about how an effective market should work. I feel slightly embarrassed that I have to lecture Conservative Members of Parliament on how a market operates—slightly less so with the Liberal Democrats.
I apologise because I did not quite catch what the hon. Gentleman was saying. He said something about two new clauses and choosing the right one. Humble Back Benchers are not entirely in the loop on that. Please will he explain a little further what that means?
Two new clauses have been tabled. The decision is on which of section 17 and section 6 of the Act is the correct one to amend. That is why there are two.
The ruling, as I am reliably informed by my learned friend the Clerk, is that new clause 36 was tabled last night and is therefore starred, but could be unstarred if that is the will of the Committee. In other words, it could be debated with this group if that is the will of the Committee. Can I presume that that is the will of the Committee? There being no dissenting voice, I presume it is and, therefore, the Committee can presume that new clause 36 is unstarred and part of this group.
I am most grateful to the Minister for his spirit of co-operation. I hope that, as the afternoon goes on and in future sittings, we will be able to work together in a similar manner.
I feel slightly awkward having to explain to Conservative Members of Parliament how a market works. One would think they understood that. For a market to operate effectively, people must be able to enter and exit. That would seem an obvious thing to know. Some of the finest economic minds, such as the eminent Scot Adam Smith, have been talking about that for 250 years. For an effective market to operate there must be an element of competition. When a company fails to deliver an effective product, it should be able to get out of the market.
We heard compelling evidence on Tuesday, which I will touch on later. Both sides of the debate recognise that an exit must be conducted in an orderly manner. I am sure the Minister has read the Office of Fair Trading report from December 2012, which talked about the orderly exit from a market. I will not read the whole report to the Minister as I know he has a copy and has been briefed on it, but the executive summary states:
“The exit of firms is a vital part of competition.”
The next paragraph states:
“Public markets should be no different.”
Later, it states:
“There is a risk that government responds to failures in public markets by preventing provider exit.”
It is not in anyone’s interest that companies are forced to stay in a market when they have no or very few customers. They are then burdened with an unfair, unrealistic level of red tape, which in turn drives down their profits and crowds out the market. We heard on Tuesday that it could end up with 40 companies chasing just 1.1 million customers.
We agree with the Minister that an orderly exit from the market is required. That is why the Opposition, supported by both regulators—the Water Industry Commission for Scotland and Ofwat—propose that the exit should take place only when the Secretary of State gives express permission in order to avoid a company, a small business, a local authority or a charity being left without a supplier. The Secretary of State would allow that company to stop providing that service only when he or she is satisfied that all its customers had been handed over to another retailer.
That is important for the water companies themselves. As hon. Members have probably detected, I am not the biggest fan of the water companies, so I do not know whose is the greatest chagrin, mine or theirs, but it is interesting that many of them want the exit clause. I accept that not all of them agree—we heard from some of their lobbyists on Tuesday to that effect—but the Office of Fair Trading, Ofwat and WICS call for the exit clause as, of course, does the Select Committee on Environment, Food and Rural Affairs in its report on the draft Bill and its subsequent report. For those hon. Members who have served, or continue to serve, on that Committee, I will not recount the whole history, but the Committee was unanimous in seeing an exit clause as a crucial component of making the market work.
The very limited evidence we heard on Tuesday against allowing an exit clause is disconcerting. I hope the Minister will reflect on my concerns in his response. The first argument that was used—an argument that civil servants tend to cling to—is that we need to prevent exit in order to maintain a vertically integrated water company, where the company is a wholesaler, a retailer and a domestic supplier, because that makes it more viable. It is interesting that neither the regulators nor any water companies agree with that, but, given the evidence we heard from Dr Kenway on Tuesday afternoon on ensuring a level playing field, it is against natural justice that the Department for Environment, Food and Rural Affairs appears to be trying to favour those incumbent water companies. Surely Members on both sides of the Committee can agree that we want the best value for the taxpayer and small businesses, and for new entrants to have no disadvantage in the process. I hope the Minister will clarify that he is not going along with his civil servants, who have been blindly arguing that it is in the vested interests of those incumbent water companies not to allow them to do that.
We heard another argument from Mr Smith of the Consumer Council for Water. To be fair to Mr Smith, he is not opposed to exit, but sceptical. His argument is that exit would prevent cross-subsidisation. Again, one of the key points is that we do not want cross-subsidisation of the two markets. The regulators are clear and I think that the Minister is clear that we do not want cross-subsidisation. I would be grateful if the Minister sets out that he does not agree with the principle of cross-subsidisation between domestic and non-domestic customers.
If new entrants believe there is not a level playing field, it makes it harder for them to have confidence to come into the market. We heard repeated evidence from the obvious new entrants that that is one of the two most critical issues for them, and later this afternoon, assuming that we make enough progress, we should reach the issue of level playing fields more broadly.
To bring my remarks to a close, an orderly exit is a fundamental principle of a free market. It is necessary in order to ensure new entry confidence, it reduces bureaucracy, which I think both sides of the Committee want, and it avoids the ludicrous situation in which, even if water companies have no customers whatever, they are required to have an arm that sits in an office somewhere with a plate claiming to be the retail arm of the water company. It is backed by both regulators, by the Office of Fair Trading, by many water companies and by the Environment, Food and Rural Affairs Committee.
I have said throughout the Select Committee process and elsewhere that there is not enough competition in the Bill so that water companies, especially on the retail side, may come in and out of delivering services, thus creating competition and driving down prices so that there is a much better deal. I am interested in how companies will go into the business if they do not believe they can get out of it successfully, and if there will be a lot of bureaucracy involved in doing that. I am absolutely certain that a great deal of light will be shed on this by our Minister. We need to take the matter seriously because we do need enough competition under the Water Bill.
It is a pleasure to serve under your chairmanship once again, Mr Gray. This is my first opportunity to get that on the record. We served alongside each other examining such issues as members of the EFRA Committee in the previous Parliament. I know that you take a keen interest in water, as well as other issues for which my Department is responsible.
The hon. Member for Dunfermline and West Fife has made his argument in a number of arenas, not least through the line of questioning that he pursued. Amendment 130 would provide Ofwat with a power to make changes to water supply licences to allow the holder to exit from the non-household retail market. It would mean that Ofwat would be able to make the change for licensed water suppliers that operate in the existing water supply licensing regime.
New clause 25 would allow the licensed water supplier to choose whether it wished to provide services in the retail market or the wholesale market, which would mean that the eight licensees in the existing market, and any others that enter the market between now and Royal Assent, may stop providing retail services. Instead, they could just provide upstream services under the existing combined licence to customers that use 5 megalitres of water in the areas of incumbent water companies in England, or 50 megalitres of water in Wales. The hon. Gentleman has also tabled a further new clause that deals with this issue from a slightly different perspective, and that is probably more in line with the argument he made.
Clause 1 and schedule 1 include provisions for the existing combined licence to be unbundled in the areas of incumbent water companies in England, through the issue of separate retail and wholesale authorisations in a water supply licence. The restricted retail and supplementary authorisations preserve the combined licence in the jurisdiction of Welsh Ministers until they commence clause 5 and schedule 5. However, judging by the title of new clause 25, I do not think that early unbundling of the combined licence is what the hon. Gentleman intends. As I said, he has since tabled a further new clause that refers to incumbent water companies.
The Government have made their views on voluntary exits clear. The desire of some incumbent water companies to exit the market is not about making it easier for them to deal with potential discrimination within their organisations. It is about bolstering their subsidiary licensee so that it has a stronger placing in the new market, or about those incumbents that cannot compete in the new markets looking for a way to transfer their non-household customers for a tidy profit. In such circumstances, non-household customers may be forced to move to a new supplier and household customers would be left stranded with an incumbent water company that is not incentivised to invest in retail services.
That key point also reflects the concerns of Mr Smith and the Consumer Council for Water that we heard in our evidence sessions. There were customer service issues for household customers, which is an argument on which I have been persuaded. In this early stage of introducing competition, we want to ensure that companies that are subject to competition, and are therefore improving their retail services to be more competitive, will use their experience to improve the lot of household customers. We do not want to lose this integration, and most of the cross-over benefits identified for household customers in our retail impact assessment could therefore be lost. It was incumbent water companies that warned us about the risks involving planning future resource needs and the effect of dealing with network problems if the wholesale side of the business was cut off from its main customer base.
I am following this with some fascination. The Minister does not sound any more convinced by these arguments from his officials than I am. Will he explain why he wants the new entrants in the first place? If his logic is that domestic customers should not be disadvantaged, what is the point of having companies come in that do not offer services to domestic customers? He is trying to advance a strange argument.
It is not strange at all. It does not ignore the fact that there are millions of residential customers. Obviously new entrants will bring their expertise and will challenge the incumbents on what to provide to businesses, charities and public sector organisations, but we must not forget that we want benefits for residential customers, too. On Second Reading, several Members—they are not members of the Committee—would have been keen to push forward with retail competition in the residential sector now as well. We want benefits for residential customers and consumers.
I agree with the Minister to an extent, but have not the Government been taken in by the water companies who are a little bit fearful of competition and therefore say, “Please don’t give us too much competition because then the retail sector and the consumers in your constituency may suffer”? We have to be careful that we do not go down just a water companies route.
I thank my hon. Friend for his intervention. As the hon. Member for Dunfermline and West Fife pointed out, some water companies take a different view. I do not think it is as simple as just saying that this is in the interest of the water companies. The key point for me is that we have to consider the interests of all consumers across the sector. I sense that my hon. Friend understands that argument, even if he is keen to press ahead with as much competition as possible.
We heard evidence that incumbents can contract out their retail functions, although ultimately not their legal obligations. The key point is that someone has to be responsible for looking after all customers. With new entrants, licensees can exit whenever they want, so we are focusing particularly on incumbents in this case.
Let us have another go at this. The Minister has just said that he is in favour of new entrants being able to come back out of the market if things do not work, so why is he against the OFT, Ofwat and WICS—all the regulators of competition—which think that his proposal is anti-competitive. Let me just read to the Committee—
I am sure that the hon. Gentleman will make his points when he responds to my argument.
The arguments are focused on the benefits of retail competition that we want for customers in private sector companies, public sector organisations and charities. Competition will bring that about, so we want new people to be encouraged to come into the market. However, as a Government, we also need to have regard to residential customers to whom we are not making that benefit available. We do not believe that this is the appropriate time to do that, and I do not think that the hon. Gentleman suggests that that is a step we should take at this juncture. We therefore have to ensure that we see some of the benefits that the evidence we have received says would accrue to them through changes in customer service, for example.
If I understand the Minister correctly, he is trying to argue that he has concern for the domestic customer, so will he address the point that if the Secretary of State had positively to allow an exit, it would be an orderly exit? That would mean that if the Secretary of State genuinely believed that an exit was not in domestic customers’ interests and would be detrimental to them, he would have the power to block it. Why does not the Minister accept that argument?
The hon. Gentleman seems to be arguing that there would be a barrier to entrants coming into the market. He extols the virtues of a free market, which is what will encourage that entry, but if people looking to invest are of the mindset that a lack of incumbent companies’ ability to exit would represent a barrier, I doubt that they would be reassured by the Department having an ultimate decision on that, as the matter would still be out of their hands.
I appreciate that the hon. Gentleman is a Liberal Democrat, but he is still bound by Government collective responsibility. The Cabinet Office called for the Office of Fair Trading to produce a document and wants orderly exits. Will he explain why he does not want the Secretary of State, under specific circumstances, to have the power to say, “We agree that there is no detriment to our domestic customers. You can now exit the market”?
First, it is about not just detriment, but benefits. I was not making a point about exiting the market being just a choice in terms of disadvantaging customers. There is also a benefit, which is that those companies that remain and focus on retail, and bring competitive elements from other sectors, will learn lessons and improve their performance, thereby offering a better service to household customers. We want that benefit to be retained.
While many organisations supported mandatory separation, many now support voluntary separation, because they know that the impact is much the same. A number of the hon. Gentleman’s questions indicate his concern that the market will not operate, but I do not share his view. He made his focus clear: opportunities for competition in the non-household sectors. It is our determination, however, that we see benefits from savings not just there, but for household companies as well.
Some of these issues can be revisited as the market develops, but the Government believe that the Bill can deliver good outcomes for competition and efficiencies, with some benefit passed back to household customers, who will be watching to see how the market will move forward and how they could benefit. I urge the hon. Gentleman not to press his amendment or new clause to a Division.
As the Minister knows, we cannot press the new clause to a Division today. After three years, I am still genuinely baffled about why civil servants cannot get their heads around the idea of an orderly exit process, underpinned by powers for the Secretary of State if there were to be detriment. Let me move away from detriment a moment to the broader question of the interests of the customer base as a whole. Why cannot they get their heads around that?
The hon. Gentleman is trying to get away from the fact that this is the Government’s position. No doubt he will point out that I came into this process as Minister part way through, but our decision, which was based on the advice we received from the water sector—I accept that there are differing views in the sector—the Consumer Council for Water and others, is based on us wanting benefits for all customers.
I was not going to draw the Minister’s attention to the fact that he changed his mind 30 seconds either side of being made a Minister by the Deputy Prime Minister. As a member of the EFRA Committee, he signed up to a report, which we agreed to unanimously—[ Interruption.]. He chunters that he did not sign up to it, but the formal minutes of the meeting at which the report was considered, which he attended, show that it was agreed to unanimously. We may quibble over whether he signed up to it or voted for it, but the fundamental point is that the Minister’s name is on the Select Committee report, although I was not going to go down that road.
I would counsel the shadow Minister to be careful with this line about the Select Committee report. There will doubtless be times in this debate when he is challenged on a similar basis on similar clauses that were not part of the Select Committee report that he could have dealt with but did not at the time.
I am looking forward to finding the section of the Select Committee report where I will dissent. I have laid down a gauntlet there to a number of colleagues to have a good, hard think.
The fundamental point is that the proposed new clause is supported by Ofwat, WICS and the recommendations of the Office of Fair Trading. I will read paragraph 2.7 of the OFT report, for the benefit of the Minister, whose officials, I suspect, have not shown it to him; he may indicate otherwise. The OFT report, which was commissioned by the Cabinet Office, says:
“Competition backed up by the credible threat of exit and failure is more likely to ensure that weak firms exit markets in an orderly fashion, and that robust firms survive. By contrast, if there is a suspicion that authorities will prop up weak firms to ensure service continuity, such firms may be tempted to continue in the market, thereby risking eventual financial or operational failure and disruptive exit.”
I am grateful to the hon. Gentleman for giving way. There are two points. First, as I have sought to demonstrate, after the Bill comes into force there will be two groups of customers: those who are able to take advantage of competition and those who are not. I think that is different. If we are talking about one market for providing a service, it is clear. However, there are two sets of customers and we have to ensure that we look after them.
Secondly, new clause 36 would give powers to the Secretary of State to intervene anyway. If the hon. Gentleman is talking from a pure market perspective, as the OFT report seems to, it would not necessarily give peace of mind.
I am happy to send the Minister a copy of the report, which his officials seem to have withheld from him. He probably should have had a chance to browse through. The OFT report specifically talks about orderly exit and continuity regimes in public markets. That is, it is possible to get out only when the Secretary of State or the regulator is satisfied that there is no detrimental effect. That is why this proposal is crucial, because it would avoid a disorderly exit.
There is a fundamental danger. I take the Minister at face value; I think he is genuinely trying to put the best face on a fairly weak case put by his officials. He talks about damage to customers. If one of the smaller water companies, of which there are many, finds itself with no or very few non-domestic customers and has to fund a fully regulated retail arm, where does the Minister think that money is going to come from, if not from the company’s overall costs? That would have the unintended consequence of forcing bills to remain higher than they should otherwise be for domestic customers. That would be a drain, if you will pardon the pun, Mr Gray, on the water company’s resources.
The hon. Gentleman’s argument assumes that all incumbent companies are bad and will want to get out ultimately. We hope that some of the incumbents will improve the services they offer and become more competitive and stay in the market. We will have a range of options for consumers.
I am not sure how the Minister jumped from what I said to claiming that I thought all the incumbents would fail. Of course they will not. Mr Gray, you will know as a good free marketeer, that there are always winners and losers in any normal, functioning market that is not artificially restrained. Some of the incumbent water companies should do better than others. We must not artificially support failing water companies that do not raise their game. I think we would all agree on that, Mr Gray. I am sure that you have had correspondence from small businesses in your area about the quality of the service that they are currently getting from their water company.
You are an expert on the issue, and on many other things. I am sure that the House would agree, and that all Committee members have received correspondence from businesses in their own areas about poor quality of service.
The Minister is right to say that retail competition will make companies raise their game—that is why the Opposition support the principle of retail competition. In fact, we proposed it, because it would appear that we are the true marketeers, unlike the dead state hand of the Government. We want a functioning and vibrant market—[Interruption.] The hon. Member for Tiverton and Honiton says that it is yet to be tested. May I remind him who introduced retail competition in Scotland? It was the Labour-led Scottish Executive. I also gently point out that the Liberal Democrats were part of that coalition.
The hon. Gentleman makes an interesting point about the situation in Scotland. I agree with him on some points. Scotland has one wholesale company, Scottish Water, so it is far easier to deal with the retail side. The problem in England is that we have so many companies. I do want to see greater competition, but the Scottish and English situations are not exactly the same.
I have a huge amount of respect for the hon. Gentleman, but he knows fine well that those two issues are not interlinked. We will come on to the issue of market codes later on, but I will resist the temptation to get drawn into that argument now. The hon. Gentleman knows that that is a red herring. The issue of retail competition at this point has no impact on whether or not there is one or many upstream providers.
I want to make one more point about the issue I keep raising—household customers. Companies that provide retail services to household customers will need to maintain those services. The picture that the hon. Gentleman is painting—of a little office down at the end of a corridor, with cobwebs and one person with a phone that never rings because they have lost their commercial customer base—does not hold. They will need that arm to look after their household customers.
I do not wish to suggest that the Minister has not quite mastered his brief, but he will know that the proposal is actually that the regulatory requirements for retail customers are going to be slightly different from the regulatory requirements for domestic customers. I know that he did not mean to suggest that they are the same—[ Interruption. ] The Minister is chuntering, which he can do if wants to. I do not wish to detain the Committee on the issue any longer. The Minister has about 10 days before we vote on the new clauses. I strongly urge him to read the OFT report—he might want to ask his civil servants why they did not think it might be advantageous for him to see it. I will let the Committee draw its own conclusions on that.
With this it will be convenient to discuss new clause 27—Abstraction reform—
‘(1) The Secretary of State may by order (the “commencement order”) appoint a day on which section 1 is to come into force.
(2) The Secretary of State may only make an order under subsection (1) if—
(a) new primary legislation on the licensing of abstraction has been passed; and
(b) five years has expired since the passage of any legislation under paragraph (a).’.
I have a sense of déjà vu, Mr Gray. Perhaps it would be helpful if I drew the Committee’s attention to the explanatory statement that I have tabled. I apologise for not saying so earlier, but I have sought to table an explanatory statement for each and every one of our amendments, as the Procedure Committee has recommended. I am slightly disappointed that the Minister has not done the same for all his amendments. Perhaps he could be so good as to explain that when we debate Government amendments later in Committee.
Amendment 132 and new clause 27 concern abstraction reform and upstream competition. I thought we had an excellent debate on Second Reading, which I commend to the House. It was genuinely thoughtful. The hon. Member for Broxbourne (Mr Walker), who chairs the Procedure Committee, made a most interesting speech and talked about chalk streams, of which he is a long-standing champion. The hon. Member for Meon Valley also made an interesting speech on Second Reading, second only to that of the hon. Member for Broxbourne.
We heard evidence on Tuesday—we have all heard it before—that we face a water crisis in the United Kingdom. Despite the weather we are currently enjoying, we are facing drier and drier winters. I did not know until I became a member of the Select Committee—it is amazing what we learn on such Committees—that it is in our interests to have wet winters. We might not think so when we take shelter from the rain, but it is critical that we secure sufficient water from the sky during the winter months to give us adequate supplies during the—somewhat shorter—warmer, drier months.
As the hon. Member for Broxbourne and others have commented repeatedly, there has been no significant construction of a reservoir or a new water facility in England for—the Minister might correct me—40 years. We are heading into a period of what is called water stress in more and more areas, where there is simply not enough water. I am sure we all recall the hosepipe bans.
I will give the Minister some credit; it is slightly churlish when parties that are not in power accuse the Government of being responsible for droughts. It is fair to say that no Secretary of State can make the rain fall, although I think one or two of them over the years have had delusions that they could. However, Government are responsible for making sure there is a sufficiently robust regime for abstracting water from the ground, from streams, from reservoirs, from lakes and from other parts of the water table. They need to make sure not only that there is enough clean, fresh water for the taps in our houses, for hosepipes and for industry, but that we are not having a seriously detrimental effect on the environment.
The hon. Member for Broxbourne has been a long-standing champion of chalk streams and has talked about the impact on them. I do not intend to talk at length about chalk streams—I think all members of the Committee are familiar with them—but there is clear and compelling evidence that chalk streams are under real threat, because more and more water is being taken out of them.
We had a really good evidence session on Tuesday when we heard about fracking. I shall not get drawn into the merits of fracking, but, as we heard from the Environment Agency, fracking will place an additional burden on the water table. We support the need for licence reform and we believe that upstream reform is necessary. The Minister might have the date to hand, but it is 40 or 50 years since there was licensing reform. Our concern, which I think is shared by Government Members and the Select Committee, is that unless we also do abstraction reform, there is a danger that we will actually make the process worse.
We do not seek to wreck the process. I hope the Minister will accept that we are genuinely trying to be supportive. We welcome the need for upstream reform, but unless we have abstraction reform before we implement upstream reform, we will create a disaster down the road. I think the Minister genuinely wants reform, but I think the civil servants have put it in the “difficult-to-do” box. Without doubt, abstraction reform is difficult, and there are tough choices. Many hon. Members think the solution is to build more reservoirs. There are others who would probably suggest that that is not the environmental way forward. That debate needs to happen and we, as Opposition Members, would welcome that and look forward to working consensually on it. To simply say, however, that abstraction reform is difficult and therefore the Department will not do it is a dereliction of duty. I do not blame the Minister for that; I blame others. I think that he knows who I am talking about.
I think I am right in saying that the Department has never said that it will not do abstraction reform. In fact, it has made a real commitment to doing exactly that. The Department has said that that process will be started as soon as possible, but that the Water Bill will have gained Royal Assent before that process is finished. Is that not correct?
Well, our scepticism about the fact that the Department has not exactly been speedy in bringing forward the Bill is shared by Blueprint for Water, which, as the hon. Gentleman knows, is the umbrella organisation for the NGOs. He will be well aware that the Bill has been, if you will excuse the pun, Mr Gray, three and a half years in the pipeline—see what I did there?—and it is unlikely that we will get another water Bill on abstraction reform any time in the near future.
While I, like the hon. Gentleman, do not want to be boring about the past three and a half years and how long it has taken for the Bill to come forward, abstraction reform has been required for many decades. I note that nothing was done on it during the 13 years of the Labour Government. Why the sudden urgency?
The urgency comes from the upstream reform. Apologies if I have not spent long enough explaining that. It was clear in the evidence session on Tuesday—I thought the hon. Gentleman was paying close attention and heard it—that water commentators and the NGOs are genuinely concerned that the planned upstream reforms will place far greater stress on abstraction, because they will bring licences into play that, frankly, have not been used.
Mr Mark Spencer (Sherwood) (Con) rose—
I am grateful to the hon. Gentleman. Hopefully, he has not put a trap down for the Minister. Given the nods of approval by his hon. Friends who sit behind him, they expect the Minister to set out exactly what steps are being taken. I welcome that helpful intervention, and I look forward to the Minister setting that out. [ Interruption. ] If the hon. Member for South East Cornwall wants to chunter, I will give way to her.
Order. The hon. Lady is making a perfectly sensible point, but she should not use the word “disingenuous” in relation to hon. Members. She might like to withdraw that word.
I am most grateful for the hon. Lady’s apology and I regard the matter as closed. Returning to my substantive point, we support the principle of upstream reform. We believe, however, that the situation will become worse, unless abstraction reform takes place. New clause 27 would allow DEFRA to proceed, by all means, with upstream reform, but that could not be implemented until abstraction reform had been implemented.
It occurs to me that one of the solutions to our long-term water problems is to find new sources of water. It may well be that there are sources out there that no member of the Committee knows about. To proceed with upstream reform as it is right now seems sensible. One can make a business proposition on finding new sources of water and bringing them into the system. The hon. Gentleman may not agree with that supposition, but, if he does, does he think that there is any level of regulation that will protect the supply side, to ensure that there is no environmental damage?
I am grateful for that intervention, and will try not to go out of order, Mr Gray, but perhaps I may draw the attention of the hon. Gentleman to later amendment groupings; he will see that we propose some further regulatory powers to address that point, in part.
As to the first point that he made, about the possibility that there are water supplies that we do not know about, I am reminded of a former US Defense Secretary who talked about known knowns and known unknowns. I think that if I get drawn into the argument, there is a danger that that is where we will end up. It would be great to tap a new water supply in the United Kingdom, but I suspect that after 2,000 years we have a fairly good idea where most of the substantial water sources are. I do not think it would be reasonable to take a big punt on the future of the natural environment by banking on that as the way forward.
I do not want to detain the Committee unduly; other colleagues may want to speak in this important debate. I hope that the Minister will reflect on the evidence that we have heard this week about the concerns of the Environment Agency, and more importantly, of Blueprint for Water, which the Select Committee echoed.
It is a pleasure to serve under your chairmanship, Mr Gray. You and the rest of the Committee will be glad to hear that I intend to be brief.
I do not think anyone would suggest that I am not a champion of abstraction reform. I have banged on about it for a considerable time, and, indeed, it was one of the principle demands that came from a chalk stream summit in which I took part, attended by 100 or 200 people at about this time last year in Stockbridge. I hear the right sounds coming from the Government about that.
I gently suggested earlier to the hon. Member for Dunfermline and West Fife that there might be supplies of water that are not yet known to be economic. Perhaps that would have been a better way to put it. Clearly, we will not find any new water in this country, unless we take into account things such as desalination, but there may well be sources that it is not currently economic to transport, or new technologies, which the upstream reforms may allow us to exploit.
My view is that unless we can be 100% certain that the environmental integrity of such sources of water and the places they come from will not be threatened by the new process and the transfer of water, we should not transport the water. It should not be allowed into the system. However, the Minister has listened to the concerns of Members, NGOs and other groups on the issue, and has made changes to the Bill, and tabled new clauses, to require the opinion of the Environment Agency on such matters before any supplies are allowed to be made available.
As long as we can trust Ofwat to listen to the Environment Agency before licensing the supply, and be reassured that it will take its advice, we must get on with trying to exploit such potential new sources of water, or at least create an impetus for looking into them and trying to provide water. It is no longer possible to sit and wait for abstraction reform. We must do something now about supplies of water throughout the country.
Does the hon. Gentleman accept that the purpose of the Opposition amendment is to force a sense of pace? I think we agree on a cross-party basis that there is a need for abstraction reform. The problem is that if we do not make it a condition of the implementation of upstream reform, the officials will not get around to it.
I simply do not believe that the Government are not committed to abstraction reform. The previous Minister, my hon. Friend the Member for Newbury (Richard Benyon), with whom I have talked at great length, was absolutely committed to abstraction reform in the short term. I have had the same conversation with the Secretary of State and the current Minister. My understanding is that the Government are absolutely committed to conducting a short-term and a medium-term analysis of the problem, and to finding solutions to make abstraction fit for the 21st century, after 50 years of nothing being done.
However, it is an extraordinarily complex business. Re-tooling the abstraction regime to make it fit for our current living conditions is an enormous challenge. The reform will not happen tomorrow or in two, three or four years, however expeditious the Government are. It will happen in stages, and it will have to be carefully considered. If we can properly regulate the upstream reforms and find new sources of water, we must do so.
I asked questions at some length in Committee on Tuesday about safeguards. I believe that they are in place and will be effective. Sections 3.6 to 3.9 of “Defra’s strategic policy statement to Ofwat incorporating social and environmental guidance” make it absolutely clear that Ofwat must have regard to the sustainability of the water system. With all those pieces of legislation in place, I am reasonably confident.
The hon. Gentleman is making a compelling argument. I might have to revise my interpretation of his speech on Second Reading. Does he accept that the Environment, Food and Rural Affairs Committee has said that the earliest that reform would happen is 2022, and that we hear from the Government that it could happen in the middle of the next decade?
I do not disagree for a second that reform is something we must do with the greatest expeditiousness. We must get on with it because there is a real crisis in this country. We dodged a bullet in 2012—we almost ended up with standpipes on the streets of southern and eastern Britain, which would have been unacceptable.
To deal with the crisis, we must find new water supplies, whether from winter reservoirs, or by recharging aquifers or building new reservoirs. Upstream reforms are a part of making new supplies viable. We must encourage businesses and put them in a position in which they can afford to do projects of that sort. If we simply wait, we will miss the opportunity. We can change abstraction at the same time. I hope the Government introduce abstraction reform as quickly as possible. I am not in the Government, and I do not know what their intentions are for the mid part of the next decade or the decade after that. However, I am confident that they sincerely wish to reform abstraction. As I have said, nothing has happened for the past 20, 30 or 40 years.
It is a pleasure to follow my hon. Friend, who has a strong record on this issue. He characterised himself as banging on about it, but he has been far more impressive than that implies and has made cogent, well informed contributions to the debate. I, too, pay tribute to my predecessor as Minister, the hon. Member for Newbury, who has done a huge amount to take this forward. It is right and proper that I put on the record my gratitude for all the work he has done and the position in which he has left me. The Secretary of State has also been very interested in the issue.
I thank the hon. Member for Dunfermline and West Fife for his amendment, and I am grateful for his comments on explanatory notes. As he knows, the procedures of the House that will come into force in January mean that that will become accepted practice for all debates. I have provided the Committee with explanatory statements on all Government amendments up to clause 15, and we will circulate statements on all other tabled amendments this week. He will therefore have all of them, although some of the amendments were tabled rather late. I hope he is satisfied by the fact that we sent letters explaining the purpose of all the amendments when we tabled them. Members can find in the room a commentary on the flood reinsurance new clauses, which were tabled rather late. I thank him for the spirit in which he has approached those issues.
The amendment would prevent clause 1 from coming into force until five years after Royal Assent to future primary legislation on abstraction reform. It would significantly delay not only upstream reforms, which was the hon. Gentleman’s key point in his contribution, but our retail reforms. As he has said, he is a huge supporter of pressing on with retail reform, but the amendment would delay our implementation of both retail and upstream reforms until 2022, or later if the abstraction reform process moves on that timetable.
The Government and the Open Water programme, a partnership between the industry and regulators, are working towards the retail market opening in 2017. We therefore cannot justify the delay caused by the amendment. Our retail reforms are widely supported by customers, who will benefit from improved customer services as a result of the changes, and by the hon. Gentleman, as so passionately expressed in the previous debate. Non-household customers are, of course, free to negotiate the best package that suits their needs. Customers with multiple sites will benefit hugely from being able to negotiate for a single bill from a single supplier. Improved customer services will have knock-on effects for household customers too.
Upstream reforms will be introduced at a much slower pace, beyond the 2019 price review, because we recognise that they will require careful planning and close working between the water industry, regulators and customer representatives. However, it is important to press ahead with upstream reform because the current regulatory model is not delivering the kind of efficient resource use and innovation we need.
Our reform will help to drive growth, create employment and keep bills affordable, and it will benefit the environment. We estimate that the upstream reforms will bring benefits of up to £1.8 billion over 30 years. There are sufficient safeguards in the existing regimes to prevent an unsustainable increase in abstraction by non-water companies in response to the implementation of upstream reform. In looking at current unsustainable abstraction, we have a twin-track approach. In parallel to developing reform proposals, we are ramping up our efforts to reduce damaging abstraction now, by making better use of our existing tools.
We continue to work with licence holders to reduce abstraction through the Environment Agency’s restoring sustainable abstraction programme. It takes time to do that. We may know that a particular abstraction is damaging the environment, but if, for example, the water supplies a major conurbation, we cannot just switch it off overnight. Ways of reducing that damage have to be considered and alternative sources of water investigated.
I reassure my hon. Friend that the Government very much support looking at how water can be recycled. However, it is not something that needs to be legislated for now. A number of schemes, such as new housing developments, are coming forward where that is happening. For example, I recently visited a development in Gloucestershire where water is recycled and comes back into the system to reduce the amount of drinking water that those properties take in. My hon. Friend makes a good point about the various options we can explore to bear down on the need to abstract water from the environment.
The Environment Agency will soon use its powers to revoke or vary abstraction licences without compensation where they cause serious damage to the environment. That follows our recent consultation on how to assess serious damage. The Environment Agency is also considering a modified charging scheme that will allow the environmental improvement unit charge to be used to fund changes to river channels and protect water ecosystems, following a consultation. DEFRA is also working with the Environment Agency and Ofwat to develop better tools and incentives to help water companies manage their abstraction sustainably.
It is a pleasure to serve under you, Mr Gray. The Minister talks about the Environment Agency, but in an article this week, which is probably true, an expert on water said that the Environment Agency is suffering massive cuts to staffing. If more emphasis is being placed on what the agency has to do, is the Minister confident that it can manage with its level of staffing?
I am grateful to the hon. Lady, because it gives a further opportunity to reflect on the evidence from our earlier session. My hon. Friend the Member for Meon Valley asked witnesses from the Environment Agency if they had the resources available to tackle these issues. They were confident that they would have those resources. We can be reassured that that is the case. The hon. Lady is right to point out that we are asking the agency to do what it does very efficiently. It will reduce its numbers. We have to keep the matter under close scrutiny—I know hon. Members on both sides of the Committee will do so. We can be reassured that the agency was very clear that it has the resources and is looking forward to taking up the opportunities to get to grips with the problem even more.
The Bill includes one significant change that will enable a more effective approach to tackling over-extraction by water companies. We will remove the water companies’ statutory right to compensation for losses resulting from modifications to, and revocations of, their abstraction licences. That fulfils a Government commitment in the water White Paper to consider a framework that integrates water company schemes to restore sustainable abstraction into their mainstream business planning, and to provide funding through the Ofwat price review process. We are doing something in the Bill, although, as we have heard, the process of abstraction reform happens on a parallel track to what we are discussing. The Government are fully committed to abstraction reform. That will not be upset or put off by that measure.
It is a pleasure to serve under your chairmanship, Mr Gray. Given the interest of so many hon. Members, will the Minister make it clear that abstraction reform will not be dealt with by secondary legislation, because of the amount of scrutiny that is needed on such an important issue?
My hon. Friend is absolutely right. We have to ensure that there is proper scrutiny because the measure is crucial both to the environmental considerations we have been talking about and to the desire to ensure resilience. My hon. Friend the Member for Meon Valley has made that point, too. We never want to have to resort to rationing water for domestic use for essential uses. It is important that we get it right for that purpose. Moreover, to deliver growth in the economy, we must ensure we have sufficient resource for new employers and organisations who want to make efficient use of water.
I made it clear on Second Reading that we will publish consultation on abstraction reform this month. That is still our intention. Hon. Members can be reassured that both processes—reforms to improve efficiencies and opportunities in the industry, and abstraction reform—will continue and will be broadly in parallel with each other.
We welcomed that expectation of consultation. May I press the Minister to say a little on the time scale for that consultation going into 2014?
The hon. Gentleman knows how Government works. I have to ensure that I reflect the correct position of how the consultation is expected to proceed, and those details will be published in due course. We are committed to getting it out. The hon. Gentleman and all hon. Members will have the opportunity to consider those proposals and contribute to that consultation, along with some of the organisations that we heard from during our evidence sessions.
I am convinced that there are sufficient safeguards in the existing regime to prevent an unsustainable increase in abstraction by incumbent water companies and inset appointees for the purpose of water trading or bulk supply agreements. The Environment Agency and Natural Resources Wales have wide powers to address any issues around the draining of one area of water to supply another under the Environment Act 1995. Water companies themselves have statutory environmental duties, including a duty to have regard to river basin management, when deciding whether to enter into bulk supply arrangements.
I also assure the Committee that the Government are committed to abstraction reform. We aim to legislate for that reform early in the next Parliament with a view to implementation in the early 2020s. Finally, we are committed to ensure that the implementation of our upstream and abstraction reforms is carefully co-ordinated, with the timetables for the expansion of upstream water resource markets and the transition to a new abstraction regime likely to be broadly similar. This will enable abstractors to take decisions about managing their water use with good information about how future regulation will operate and the role that markets might play in enabling them to meet their water needs. I hope that the hon. Member for Dunfermline and West Fife will be reassured and will therefore withdraw the amendment.
I do not intend to keep the Committee very long, but I want to refer hon. Members back to the observations made by the EFRA Committee. I welcome what has been a genuinely good exchange this afternoon. Our central problem, which is shared by the wider community, is that there has not been any sense of urgency from the Department, although that is not a criticism of the Minister as he is relatively new in his post. The Select Committee, non-governmental organisations and those with a passion about abstraction believe that we are just not seeing enough progress. The Select Committee said:
“In our report on the Water White Paper, we were critical of its lengthy timescales for abstraction reform and we recommended that the end date for the reforms should be brought forward to 2022.”
It is clear that the Department sees abstraction reform as happening well beyond 2022, but if the Minister wants to clarify that, I will be more than happy to take an intervention.
We have made it clear that we want to make progress. We are talking about progress in the early 2020s, but I hope that that hon. Gentleman will concede that we have to get this process right. I quite understand the pressure for urgency, but there are many other considerations that have to take into account. We have to make sure that everybody has the opportunity to be consulted, and that we get a process that is robust for coming decades and will not need to be revisited directly afterwards.
That was not quite the reassurance I was anticipating from the Minister, given his body language some moments ago, but he is right when he says that we need to get this right. Labour Members we do not believe that taking a decade-plus to do something necessarily suggests that the Government are going to get it right. The Bill is a good example of how length does not always lead to accuracy, given the number of Government amendments that the Minister has felt the need to table. It is not enough just to punt abstraction reform not just off to the next Parliament, but the one after that. I expect that I will press new clause 27 to a Division later in our proceedings, but I beg to ask leave to withdraw the amendment.
The amendments introduce a requirement for Ofwat to consult the Environment Agency and/or Natural Resources Wales before it grants a water supply licence or issues a code on an agreement under the water supply licence. They also add a requirement for the Secretary of State to consult Natural Resources Wales, and for Welsh Ministers to consult the Environment Agency, before they each publish a strategic policy statement under clause 24. The Secretary of State will also consult Natural Resources Wales before giving a direction on the basis on which a water resource management plan is to be prepared under clause 27.
We know that we are facing growing pressures on our water resources as a result of changing climate and population growth. That is why we want to encourage more upstream competition in the water industry under the Bill and, as my hon. Friends have pointed out, we also hope to see benefits for the environment and indeed customers, and more resilience as a result. It is therefore important to designate the Environment Agency and Natural Resources Wales as statutory consultees as they are the regulators responsible for protecting and improving the environment and promoting sustainable development.
Amendment 126 adds a requirement for the Secretary of State to consult Welsh Ministers when determining standard licence conditions under schedule 7. That relates only to the authorisations that will apply to water supply licences operating in the area of Welsh incumbent water companies, as my hon. Friend the Member for Brecon and Radnorshire will be interested to hear. That is because the Welsh Government have decided not to implement our retail competition or upstream competition reforms for Welsh incumbent water companies. However, it is important for Welsh Ministers to feed into the process for determining the standard licence conditions for those water supply licences that will continue to operate in Wales.
I do not intend to say much, but we welcome the amendments as a sensible step forward. We will have a broader debate about other consultees later.
With this it will be convenient to discuss new clause 28—Standardised terms and conditions for new entrants —
(a) offered comparable terms and conditions as any company granted a water supply licence prior to Royal Assent of this Act; and
(b) all terms and conditions must be subject to scrutiny by the regulator.’.
New clause 28 deals with the other part of the market debate. As it stands, any new entrant would have to negotiate terms and conditions individually with each of the wholesalers. As we heard in compelling evidence on Tuesday from Peter Kenway, the regulators and Business Stream, that is the single biggest impediment to new entrants getting a grip. Some of the water companies have a 25-year head start on new entrants and will not offer as favourable terms to new entrants as they do to their own in-house water companies. There is also additional bureaucracy. The idea of a regulated market is not to make it more difficult for people to get in, but to ensure that neither the consumer nor the vendor is unfairly treated. The new clause is simple—I genuinely think the Minister is in a good place over the next 10 days to reflect on whether we can reach an accommodation—as it proposes that when a new entrant comes into the market, they must be offered the same terms and conditions as any other vendor or, indeed, the incumbent water companies.
In the Bible, David beat Goliath, but I am not sure that that would happen with water companies. As it stands, there are large water companies with powerful vested interests. If we are to get true competition, we must let smaller retailers into the market. I will be interested to hear what our very able Minister has to say about the matter.
On the subject of David and Goliath, I will have to bow to the hon. Gentleman’s longer service, because I was not around at the time.
I shall go into a little detail for the benefit of the Committee. The new clause would ensure that there was transparency in the market. There would be comfort for new entrants, Parliament and the regulators that no company would be given unfavourable or favourable treatment by the wholesale provider. Each water company should be treated in exactly the same way when trying to reach an agreement.
I accept that the new clause is largely technical, but it would form a critical part of making the market work. We believe it would be dangerous for the market simply to be allowed to operate for a while so that we can see how it works, and then come back to offer a change. It is important that on day one in 2017—I am sure that the Minister will confirm that the Government’s goal is still to open up the market in that year—every new entrant is working on the same assumptions.
We should want commonality in the costs involved in the charging regime in the marketplaces, such as for getting water out of the ground and to the right place. As the Minister knows, the industry is worried that not all wholesalers will behave in an entirely honourable way, so a level playing field would help to avoid that happening.
I genuinely hope that I will receive a more favourable response from the Minister that I did in our earlier debate on market reform. I will be grateful to hear the Government’s position on the new clause.
We have had a wide-ranging debate on many aspects of clause 1, so I shall address my remarks to new clause 28, which would require that any terms and conditions offered to a company issued with a licence following Royal Assent must be comparable with those offered to license water supply before Royal Assent, and that the regulator must be able to scrutinise those terms and conditions.
As I understand the new clause, it would mean that incumbent water companies would have to offer the same terms and conditions that they negotiated with existing licensed water suppliers to those issued with licences after Royal Assent, up to and after we commence provisions that will allow charges to be set by Ofwat’s rules, and other terms and conditions to be set through codes. The cost principle would remain in place, as would existing terms and conditions already negotiated. Licensees would remain at a competitive disadvantage in negotiating terms.
At present, all access charges must be set on the basis of the cost principle. Any agreements to provide services to customers are negotiated individually between every incumbent and all licensees that wish to enter the market. Ofwat-produced guidance includes draft terms and conditions, which the parties to existing agreements may adopt if they wish. If we were to agree to the new clause, it would be either the template agreements, or purely negotiated agreements, that would determine the future terms and conditions for the market. In a case when an incumbent water company has different agreements with each licensee currently in the market, the new clause does not specify which agreement should apply. For those reasons, I have some concerns about the details of the new clause. If the hon. Gentleman were to press it to a Division, I would urge my hon. Friends to resist it.
I am genuinely disappointed. The Minister’s argument is probably the weakest that the civil servants have come up with so far. It flies in the face of common sense and of making the market work, which is probably why the civil servants are against the new clause.
The Minister rightly set out the existing arrangements, but he is again advocating the status quo. As the Committee knows, there is already a market for—I apologise to the Committee if I get this wrong—more than 5 megalitres. The reality, as we heard in evidence on Tuesday, is that only three companies have switched in the decade-plus that that has been operating. One of the reasons is because it is time consuming for new applicants to have to try to negotiate with each and every water company.
If the Minister is saying that he has a genuine concern about the specific wording of the new clause, we have some time prior to the end of the Committee’s deliberations in which I am more than happy to work with him on the technical wording. However, if his argument is that the status quo has worked up to now and we should not change things, it is, frankly, bizarre.
I appreciate that the hon. Gentleman is trying to be helpful. We agree that entrants must be able to compete on equal terms, but I do not share his view that access will always have to be negotiated. The Bill clearly allows for regulated access based on market codes, and that is the approach that we have taken.
The market codes simply do not go far enough, however. When we heard evidence from Business Stream on Tuesday—I know that all members of the Committee were paying close attention—it flagged up the market codes as its single biggest concern about the Bill.
The hon. Gentleman has met Business Stream several times—before and after he became a Minister. I am genuinely surprised, given what the regulators and new entrants are saying, that his civil servants continue to resist a logical and simple change. If he has a specific concern about unfairly penalising the existing poor water companies, or if he can point to some failure in the wording of the new clause, we will be happy to work with him over the next 10 days to see whether we can tighten things up.
If the Minister is trying to protect those water companies—it sounds like he is—I urge him to think again over the next 10 days. If we end up with a situation in which existing water companies have an unfair built-in advantage, 25 years’ knowledge and preferential rates, it will lead to market failure. How on earth does he think that that will lead to new entrants having the best chance of succeeding? I intend to press new clause 28 to a Division at the appropriate time, unless the Minister is prepared to work with us to improve its wording.