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I beg to move amendment 108, in schedule 2, page 105, line 9, leave out ‘review’ and insert ‘revise’.
With this it will be convenient to discuss Government amendments 109, 114 to 118, 120 to 123, 60, 64 to 66, 71, 73, 76 to 81, 14, 84 to 86, 18, 19, 21, 87, 90 to 92, 25, 93 to 95, 97 and 98.
I am grateful for the opportunity to speak to amendment 108 and the other amendments grouped with it. Charging rules and charging guidance are a vital element of the Bill. Our reforms establish a number of new charging regimes and clarify the regulatory frameworks within which the existing regimes operate.
The Bill sets out a clear hierarchy for the setting of charges by water companies. We amended the Bill following pre-legislative scrutiny to make it a duty for Ministers to produce charging guidance for Ofwat. That guidance will embrace all relevant charging matters and establish a clear framework that governs both the company schemes for charging users and the new competition regimes. In addition, the Bill provides in a number of instances for the publication of more technical guidance on the detail of individual charging matters.
The amendments encompass a large number of minor technical changes to the Government’s charging guidance and Ofwat’s charging rules. They are all designed to improve the drafting, consistency or clarity of the Bill. For example, they ensure that a consistent approach is applied throughout the Bill in the use of the terms “rules” and “codes”. They substitute the word “revise” for the word “review” in a number of places. In addition, in combination with amendments tabled to clause 36, they ensure consistency regarding the requirement on Ministers to produce general charging guidance that covers all the charging matters addressed throughout the Bill and any charges rules produced by Ofwat.
Ministers must produce the guidance to ensure that the regime is proportionate. There is a power but not, in most cases, a duty for Ministers to issue further guidance or guidance on more technical details. The final charging guidance must reflect the debate in Parliament during the passage of the Bill. It will be issued in draft for formal consultation with all interested parties. Furthermore, the Bill provides Parliament with the opportunity to debate and vote upon the charging guidance following the consultation process.
The Committee will have further opportunity to discuss the charging guidance in detail when we debate clause 36. The amendments simply ensure clarity and consistency on matters throughout the Bill.
May I seek some guidance, Mr Gray, on how you would like me to proceed? Would you prefer me to discuss the specific issue of market operational codes now, or, as the Minister alluded to, tie it in with the issue of de-averaging? I am happy to do it either way and do not wish to detain the Committee unduly.
Amendments made: 109, in schedule 2, page 105, line 16, leave out
‘code proposed to be issued’
‘proposed code under section 66DA’.
Amendment 110, in schedule 2, page 105, line 22, at end insert—
‘(ba) the appropriate agency;’.
Amendment 111, in schedule 2, page 105, line 35, at end insert—
‘(ba) the appropriate agency;’.
Amendment 112, in schedule 2, page 106, line 31, at end insert—
‘(10A) In this section “the appropriate agency” means—
(a) the Environment Agency, in relation to section 66D agreements made with water undertakers whose areas are wholly in England;
(b) the NRBW, in relation to section 66D agreements made with water undertakers whose areas are wholly in Wales;
(c) both the Environment Agency and the NRBW, in relation to section 66D agreements made with water undertakers whose areas are partly in England and partly in Wales.’.—(Dan Rogerson.)
I beg to move amendment 113, in schedule 2, page 107, line 20, at end insert—
‘( ) publication of the charges that may be imposed.’.
The amendments enable Ofwat to require publication of certain charges made by incumbent water companies and inset appointees. That means that Ofwat will be able to use its rules to ensure that incumbent water companies and inset appointees publish their charges to licensees, developers and other incumbent water companies or inset appointees in the same way that it can require the publication of charges schemes under clause 16. That is important to improve transparency on charging and to increase consistency throughout the Bill.
Under the new competition framework introduced by the Bill, Ofwat’s rules cover: the access prices that incumbent water companies and inset appointees use to charge water suppliers sewerage licenses for using part of the network; charges for connecting premises to the system and for the adoption of pipes laid by developers; water trading or bulk supply agreements; sewage sludge trading or main connection agreements between incumbent water companies and inset appointees; and, finally, the charging schemes that incumbent water companies and inset appointees use to charge customers for water supply and sewerage services.
As the Bill is currently drafted, Ofwat’s rules on charging schemes under clause 16 may include a requirement for the publication of charges schemes, but the same does not apply to other market participants, such as licensees and developers. The amendment allows Ofwat to introduce the requirement for incumbent water companies and inset appointees to publish their charges to other market participants. That will stimulate competition by informing market participants about current charging arrangements.
I beg to move amendment 142, in schedule 2, page 107, line 28, at end insert—
‘(3A) The rules must include provision for and in connection with ensuring that there are no variations between charges, or the amount of charges, imposed by a water undertaker under different section 66D agreements in consequence of the location at which the duty or duties to be performed by that undertaker under such agreements fall to be performed.’.
This amendment rules out de-averaging of charges with a single, company-wide wholesale access price except where variations are agreed by wholesalers and retailers.
With your permission, Mr Gray, I will cover the de-averaging of charges and the charging codes at the same time. Charging codes are so phenomenally technical that even water nerds such as the Minister and I do not stay up at night thinking about them. As the Minister outlined, the codes are basically the rules under which retailers and water and sewerage companies engage with each other. Their purpose is to ensure that there are fair, equitable, clear and consistent rules, and standard levels of services to which all retailers operate. They are therefore critically important.
The Minister and I agree that there is a difference between the Scottish and English models. There is just one wholesale provider in Scotland—Scottish Water—and about a dozen upstream wholesale water companies in England. If the Minister gets inspiration he can correct me if I have got that number wrong. Members on both sides of the House therefore recognise that it will be more challenging to get the market to work south of the border. The Select Committee on Environment, Food and Rural Affairs and others have said that it is useful that we can lean on the Scottish model, but more work is required. I therefore welcome the technical changes that the Minister proposed.
The Bill proposes a large number of market codes. The Minister knows that I do not share the Government’s vision and that I think it can be done in a simpler way. There is a danger, which amendment 142 seeks to address. If I were being charitable to the Department, I would say that it had focused so much on the codes that not enough attention was given to the charging regimes that will operate in each area.
I will give a couple of examples to illustrate the purpose of amendment 142. The Minister will be aware of the case of Shotton paper mill in Wales, as will the hon. Members for Arfon and for Brecon and Radnorshire.
My hon. Friend needs no introduction. There are a number of Welsh colleagues in the room who can testify to the long-running saga of the paper company and Albion Water.
The Minister is half-lucky then. He is a full-blooded Celt—is that the right way of putting it? [ Interruption. ] I appreciate that not all Members are so lucky as to be Scottish, but Welsh is also good.
On the serious example from Wales, there has been a prolonged, protracted legal battle between the water company and the paper mill owner, which has resulted at every stage in defeat for the water company. It has led to a regrettable situation for the wider community, where the paper company has been able to argue that it is cheaper for it to be serviced by another water provider. It has, in effect, introduced de-averaging into the market. I suspect—the Minister may wish to clarify this—that that bad experience of de-averaging is one of the main reasons why the Welsh Government have been so reluctant to pursue retail competition.
Amendment 142 seeks to make the market more robust. It is a technical solution that is backed by the Select Committee and others. It would ensure there is no cherry-picking by either wholesalers or new entrants into the market through de-averaging.
Committee Members will recall that I was very much on the side of new entrants earlier and firmly against incumbents. On this occasion, it is the reverse. The Bill as it currently stands has the potential to give new entrants an unfair advantage over the incumbent water companies. The bit that should be of particular interest to south-west Members—I see heads snapping up—is that the area most likely to suffer from de-averaging within England is the south-west region.
I think more than one head snapped up. Perhaps the hon. Lady did not notice that her colleagues also seemed to find that bit interesting.
The fundamental point is that where there is a diverse geographical area and the water supply is some distance away from the end user, there is a real danger, as the Bill currently stands—I hope the Minister will accept that we tabled the amendment to improve the Bill and make it more robust—that there could be cherry-picking of customers by new entrants. They would be able to say, “You are quite close to your water supply, so we can bring down the costs.” Customers who are not switching would be left with a higher charge, because they are in effect no longer subsidised.
Averaging and de-averaging is a subsidy within a region. No matter how far away someone lives from the water supply, they are given the same charging regime. Whether they were 50 ft or 50 miles from the source, the charge would be the same. That is something that all parties have always thought of as a principle. We therefore urge the Government to accept the amendment, which is offered in a spirit of genuinely trying to help them. It is backed by the regulators, particularly WICS. The Minister will recall from his time on the Select Committee that it was a specific issue. It is also the one issue that may actually cause the Anglo-Scottish market to collapse. The Minister will also recall—I am sure his civil servants have reminded him—that there was a great deal of correspondence from the Scottish Ministers to their counterparts in DEFRA about their concerns.
I look forward to the Minister’s response. I say to colleagues from the south-west, “Be careful what you wish for”, because this measure might cause a real price increase in the south-west region in particular.
I am sure the hon. Gentleman did not mean to suggest that I had lost the plot. I can clarify that we believe in a regulated market, not an unregulated one.
Following on from the earlier debate about the Celtic roots of various members of the Committee, the hon. Member for Islwyn, who is no longer in his place, pointed out my heritage, and, of course, my hon. Friend the Member for Weston-super-Mare, who is sitting next to me, has a great Cornish surname. This thing could continue at length.
You have quickly called me to order, Mr Gray, as you told us you would when we step out of line.
The hon. Member for Dunfermline and West Fife is keen to be helpful to me and I am very grateful for his help. He has been proffering it throughout these exchanges and in that spirit I will set out the Government’s position. His amendment requires Ofwat’s rules to regulate charges between water supply licensees and incumbent water companies in order to prevent the agreements that would allow reduced charges to be imposed because of the location of the services to be provided. This, as the hon. Gentleman says, is to prevent the breakdown of geographical cross-subsidies and the de-averaging of charges, which could lead to some customers being charged more for the same services as other customers, purely because they are not located close to sources of water or treatment works. The hon. Gentleman demonstrated his keen knowledge of the south-west of England and, indeed, Cornwall.
A number of issues could have an effect, not just in rural areas, but in urban areas. If we are talking about distance and therefore the cost of supplying, it is not so much an urban-rural divide as distance from source or treatment. Amendment 142 therefore requires Ofwat to produce charging rules, despite what ministerial guidance might have to say about de-averaging. As the Committee will be aware, the Government have published charging principles to help the debate on what ministerial charging rules might cover when they are produced for the retail market opening in April 2017, and the upstream market which is intended to happen after the next price reviews.
On de-averaging we said:
“Averaging of charges is common practice in sectors that have much greater scope for contestability than the water sector does. Ofwat has a number of tools to limit the effect of de-averaging on customer charges. They will use these to ensure that any marginal changes are introduced in a measured fashion and, above all, that they are in the overall interests of consumers”.
The introduction of competition does not require de-averaging. Many competitive markets include average charges: a supermarket will sell milk at the same price all over the country, for instance. These are regulated markets in which changes will be set according to Ofwat’s rules, which will follow our guidance. Our charging principles already address this. With this amendment, Ofwat would have to disregard the views of Ministers and stick to an inflexible provision which, being included in primary legislation, would be difficult to change if its appropriateness is challenged by Ofwat.
The ministerial veto would be rendered useless where rules specifically cover location-based charges. It effectively puts incumbent water companies at a competitive advantage—as the hon. Gentleman said, it is a danger in this area—because its own customers are not subject to these rules. Incumbents could make agreements under section 142(2)(b) of the Water Industry Act 1991 to retain customers by charging them on a more cost-reflective basis rather than lose them to a licensee. This will make licensees unable to compete. We are increasing transparency around the creation of special agreements under clause 31 by requiring these agreements made by incumbent water companies to be reported to Ofwat when they are made.
We are also allowing Ofwat’s rules on 66D agreements to allow customers to retain the benefit when they switch, if they have a special agreement under the new 66E(3) in schedule 2. However, customers who currently enjoy discount because of their location would be prevented from switching if we were to accept this amendment.
Concerns have been raised about competition law and its interaction with Ofwat’s charging rules. It is important to explore that a little more. The Water Bill will set the rules for entry in the market and the basis on which licensees may compete with incumbents. We will amend the Water Industry Act 1991 to provide for setting rules for determining the terms and conditions in agreements, which will continue to be governed by sector-specific legislation. The Secretary of State may veto Ofwat’s rules and make Ofwat think again, particularly if draft rules are not consistent with ministerial guidance. Incumbents or licensees may challenge Ofwat’s decisions on the setting of rules through a judicial review, but this would not be a merits appeal of Ofwat’s decision.
The Competition and Markets Authority and Competition Appeals Tribunal do not have the jurisdiction to challenge Ofwat’s rules. The CMA would be able to investigate how well the water market is working in England and Wales, but it may only make recommendations to Ministers to amend legislation, or for Ofwat to change its rules. However, any changes proposed by Ofwat would still be subject to ministerial veto.
Those who have called for a ban on de-averaging tend to describe a world in which there is no regulation of competitive markets. We are sure that the regulation will be in place to ensure that people are confident that the system is fair, robust and achieves the aims that I hope we share.
Again, I am slightly surprised by the brief given to the Minister, because it chooses to ignore the central fact that we have already seen an example of de-averaging in Wales. Shotton Paper has now won its court cases, against the express wishes of the Welsh Government. That case of one company has added £2 million in costs to the other customers’ bills in the water area. If that were repeated five or 10 times in, for example, the Minister’s region, which is the one most likely to suffer, south-west Members would soon be writing to him to ask how it had been allowed to happen.
The complacency from DEFRA on the matter has been staggering. It has been raised repeatedly by the Environment, Food and Rural Affairs Committee, WICS and others. The Minister has not provided reassurance that anything in the Bill would prevent the Shotton Paper example in Wales from happening in England. For that reason, we will press the amendment to a vote.
Amendments made: 114, page 108, line 1, in schedule 2, leave out ‘review’ and insert ‘revise’.
Amendment 115, page 108, line 2, in schedule 2, at end insert—
‘( ) The Authority must issue revised rules if—
(a) guidance is issued under section 66EC, and
(b) the Authority, having regard to that guidance, considers that it is appropriate to revise the rules.’.—(Dan Rogerson.)
The amendments make changes to the various provisions dealing with Ofwat’s powers to produce rules on charges, including the requirements to consult relevant persons, and the power of Ministers to intervene in Ofwat’s charges rules.
In producing its rules relating to the various charging regimes addressed in the Bill, Ofwat is required to consult relevant persons. Amendments 15 and 22 require Ofwat to specify a consultation period for the proposed rules relating to agreements to adopt water and sewerage infrastructure under clauses 10 and 11. That will ensure that the consultees are aware of the length of time available to make those representations. That mirrors provision made elsewhere in the Bill for other charging regimes.
Amendments 16 and 23 allow for a ministerial veto in relation to Ofwat’s charging rules that relate to agreements for the adoption of water and sewerage infrastructure. That mirrors provisions elsewhere in the Bill for other charging regimes. The amendments specify a period of time within which the directions must be issued, and establish that the rules may not be published before that deadline. The Bill allows Ministers to direct Ofwat not to issue any set of rules within a specified period after its statutory consultation period. It provides a suite of linked duties and powers for Ministers to issue charging guidance—the hon. Member for Dunfermline and West Fife has said that he wishes to explore that as we move through our consideration of the Bill—to Ofwat on matters relevant to all charging regimes covered by the Bill. Ofwat will be required to publish all charging rules in draft and to consult all relevant persons about the draft. The amendments ensure consistency in requiring Ofwat to specify a consultation period for the proposed rules.
Ministers will have a power of veto over all charging rules issued by Ofwat. That will allow them, within 28 days of the conclusion of the statutory consultation period, to direct Ofwat not to issue any sets of rules. Such an intervention could require Ofwat to revise the rules, which must be made in accordance with ministerial guidance. The amendments make clauses 10 and 11 consistent with that approach.
I do not wish to delay the Committee. It would perhaps be helpful if the Minister could set out in 30 seconds who those consultees are likely to be.
I may well have the opportunity to do so when inspiration strikes. I should like to go a little further in explaining the rest of the amendment, and then clarify that point for the hon. Gentleman, which is a perfectly reasonable one.
The amendment removes a further power that would have enabled Ministers to direct Ofwat to make specific changes to the rules. We felt that that went further than our intention and could have blurred the important distinction, which we have explored in Committee, between Government policy making and regulatory independence. I am satisfied that there are robust safeguards in place to ensure that the regulator’s charging—
I am satisfied that there are robust safeguards in place to ensure that the regulator’s charging rules appropriately reflect the Government’s policy for customers and the industry. The amendments also make a small change to the regulation-making power in clause 12 to bring it in line with the approach taken to codes in the rest of the Bill, so that we have a consistent approach in the Bill. It is important that, in introducing the amendments, we draw back from too much ministerial interference in the regulatory approach we are taking in the Bill. Clearly, our intention is to issue guidance and maintain a safeguard for Ministers, but we do not seek to unduly influence the regulator in that regard.
To answer the hon. Gentleman’s question, the Bill provides for consultation of relevant persons, as I set out in my first few remarks. It would include, for example, the Consumer Council for Water, from which we have heard evidence, the Secretary of State, Welsh Ministers, incumbents and relevant parties. Those are the sort of groups who could expect to be consulted. I am happy to put that on the record.
I am most grateful. It would be helpful if the Minister could write to me afterwards with a full list. I do not wish to delay the Committee but I should like to explore that at some point.
I would be happy to do so, but any such list may well include more people than we envisage at the moment. We would seek to consult as widely as is appropriate. I am happy to write to the hon. Gentleman in those terms but the term “relevant parties” would allow us to ensure that we cover all those who need to be consulted.
Before I put the question, it has been brought to my attention that one or two comments that have been made by members of the Committee are not being adequately heard by those who are listening. Therefore, those who take part in the debate might like to speak more loudly and clearly, like me.
I beg to move amendment 46, in schedule 2, page 109, line 28 at end insert—
‘( ) This section is subject to section 66EBA.
66EBA Rules under section 66E: minor or urgent revisions
(1) This section applies if the Authority proposes to issue revised rules under section 66E and, in the view of the Authority, the revision or each of the revisions proposed to be made is—
(a) a revision for which consultation is unnecessary, or
(b) a revision that it is necessary or desirable to make without delay.
(2) Section 66EB does not apply to the proposed revised rules.
(3) Before issuing the revised rules, the Authority must give notice to the Minister of its intention to issue revised rules.
(4) Before the revised rules are issued, the Minister may direct the Authority not to issue the revised rules.
(5) A direction under subsection (4) must be given within the period of 14 days beginning with the day after the day on which notice is given under subsection (3), and the Authority may not issue the revised rules in question before—
(a) that period of 14 days expires, or
(b) the Minister notifies the Authority that no direction under subsection (4) will be given in relation to the revised rules, whichever is the sooner.
(6) Once the Authority has issued the revised rules, it must give notice as soon as reasonably practicable of—
(a) the issuing of the revised rules, and
(b) as regards each revision contained in them, whether in the view of the Authority the revision falls within paragraph (a) or (b) of subsection (1).
(7) Notice under subsection (6) is to be given to such persons as the Authority considers appropriate.
(8) Unless the Authority gives notice that a revision in revised rules is in the view of the Authority a revision falling within subsection (1)(a), the revision ceases to have effect at the end of the period of six months beginning with the day after that on which the revised rules are issued.
(9) In this section “the Minister” has the meaning given by section 66EB.’.
I will attempt to speak up, because I would hate to think that my contribution making the case for the Government amendments was not reaching all members of the Committee or other relevant interested parties. The amendments make minor changes to the provisions dealing with Ofwat’s powers to produce charging rules, to make them more consistent. New provisions will allow Ofwat to make minor or urgent changes to its rules without carrying out a consultation. Those provisions align Ofwat’s powers to make minor or urgent changes with its powers to produce codes.
A minor change might include a small change to contact details. Urgent changes may be necessary to protect customers, licensees, developers and others that are subject to any of the charges covered by the rules. An urgent change might, for example, address issues that arise relating to double charging, or where hidden costs are identified. Instead of consulting on a change that it considers minor or urgent, Ofwat will issue a notice giving the relevant Minister notification of its intention to make such a change to the rules. The Minister may, within 14 days, direct Ofwat not to make that change or state that he does not intend to issue such a direction. In the latter case, Ofwat may go ahead and make the change, and set out a notice of the change to the rules to persons with an interest.
Any changes considered urgent will expire at the end of six months following publication of the revised rules, to give Ofwat sufficient time to consult on making the change permanent, or to develop and consult on a replacement provision. It is important for Ofwat to be able to make some changes to its rules without having to carry out a statutory consultation every time a minor amendment is needed. We have provided the fast-track procedure for urgent changes so that Ofwat can immediately deal with serious issues that impact on customers’ bills or the competitiveness of licensees. I clarify that the provisions are specifically designed for minor or urgent changes. The ministerial check is a safeguard to ensure that the process is used only for changes that are minor or urgent.