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Session 2005 - 06
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Standing Committee Debates

Fifteenth Standing Committee on Delegated Legislation

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Fifteenth Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Joe Benton

Ainsworth, Mr. Peter (East Surrey) (Con)
†Atkinson, Mr. Peter (Hexham) (Con)
Baker, Norman (Lewes) (LD)
†Breed, Mr. Colin (South-East Cornwall) (LD)
†Chaytor, Mr. David (Bury, North) (Lab)
†Cunningham, Tony (Workington) (Lab)
†Dunwoody, Mrs. Gwyneth (Crewe and Nantwich) (Lab)
†Gwynne, Andrew (Denton and Reddish) (Lab)
†Hendrick, Mr. Mark (Preston) (Lab/Co-op)
†Howarth, Mr. George (Knowsley, North and Sefton, East) (Lab)
†Hurd, Mr. Nick (Ruislip-Northwood) (Con)
†MacDougall, Mr. John (Glenrothes) (Lab)
†Moon, Mrs. Madeleine (Bridgend) (Lab)
†Morley, Mr. Elliot (Minister for Climate Change and the Environment)
†Pritchard, Mark (The Wrekin) (Con)
†Wiggin, Bill (Leominster) (Con)
Hannah Weston, Libby Preston, Committee Clerks

† attended the Committee

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Wednesday 13 July 2005

[Mr. Joe Benton in the Chair]

Draft Water Supply Licence (Modification of Standard Conditions) Order 2005

2.30 pm

The Minister for Climate Change and the Environment (Mr. Elliot Morley): I beg to move,

    That the Committee has considered the draft Water Supply Licence (Modification of Standard Conditions) Order 2005.

The Chairman: With this it will be convenient to consider the draft Water Act 2003 (Consequential and Supplementary Provisions) Regulations 2005.

Mr. Morley: It is very nice to see you in the Chair this afternoon, Mr. Benton, for what I hope will be an informative and somewhat technical but short debate.

The modifications arise from the Water Act 2003 and deal with the proposals in that Act to allow competition for large-scale suppliers of water. The Government believe that the properly managed development of competition in the water industry in England and Wales should lead to greater efficiencies, keener prices, innovation and better services for the benefit of customers.

The 2003 Act amended the Water Industry Act 1991 to enable licensed water suppliers to access water undertakers’ supply systems in order to supply water to large non-household customers. From 1 December this year, large water users—those with an annual water consumption of not less than 50 megalitres—that occupy eligible premises will be able to switch from a statutory undertaker to a licensee for their water supply.

Prospective licensees will be able to apply to the Office of Water Services, Ofwat, for a water supply licence from 1 August 2005. The licensees will be bound by conditions determining rights and obligations similar to those applied to statutory water undertakers through their instruments of appointment. After consulting the National Assembly for Wales, the Secretary of State will prescribe standard conditions for water supply licences.

Standard conditions may be modified only in certain circumstances. The director general of water services will be able to propose amendments to conditions of water supply licences by individual agreement, or by a process of collective modification without the need to obtain the agreement of each individual licensee. Certain conditions must be satisfied before an amendment may be made under the collective modification procedure.

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Following public consultation and input from stakeholder advisory groups, the order prescribes the percentages that will apply to such conditions. The consultation published in October 2004 sought views on the detailed policy proposals for collective modifications of standard licence conditions: 34 stakeholders were invited to comment on the proposals and 18 provided responses. One of the conditions that must be satisfied before collective modification may proceed is that specified percentages of licence holders by number or by market share do not object to the modifications.

Mrs. Gwyneth Dunwoody (Crewe and Nantwich) (Lab): I am very interested in this subject because of my constituency experience of a water supplier that is also a monopoly supplier of electricity. Extraordinarily, we cannot get it to spend money on building sewage works that are large enough to deal with existing and developing estates. What would happen if someone wanted to obtain a licence under the order and that supplier objected? Would we be able to get a modification or another licence?

Mr. Morley: The order deals only with the provision of water to non-domestic customers. The licence conditions would apply not to statutory undertakers, but to licensees, which are new companies coming in to supply water. There is nothing in the regulations that would apply to the circumstances that my hon. Friend has outlined. However, I understand her point and I think that she will find that in the current five-year settlement for the water companies the regulator has allowed £1 billion to deal with sewer flooding and sewer problems. If she has local problems, I suggest that she contact her local water and sewage undertaker about them. If she writes to me about the case, I shall be only too happy to look into it.

Mrs. Dunwoody: I have actually done that, but I would be delighted if the Minister did so.

Mr. Morley: I am glad that we have unanimity, Mr. Benton.

The order provides for the threshold in both cases to be 20 per cent. and for market share to be assessed by reference to volume of water supplied to premises based on historical data for the previous twelve months. We believe that the threshold is low enough to ensure that if a significant proportion of licensees object the modification will not proceed, but not so low as to give undue power to any licensee to block proposed modifications agreed by the majority of licensees. If a modification cannot proceed, the director general can seek the individual agreement of licensees. Ultimately, he may refer the proposed modification to the Competition Commission.

The consequential and supplementary provisions regulations make a number of changes to both primary and secondary legislation to give full effect to the introduction of the new water supply licensing regime; the establishment of the Consumer Council for Water and abolition of the Ofwat customer service committees; the establishment of the Water Services
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Regulation Authority; the transfer of functions to the authority; and the abolition of the office of the director general.

The regulations make amendments and supplementary provisions to water and sewage undertakers’ conditions of appointment, and to the Water Supply (Water Quality) Regulations 2000 and 2001 to take account of the establishment of the Consumer Council for Water. They amend the Water (Meters) Regulations 1988 to take licensees outside the regime, because issues about the accuracy of meters used by licensees to charge their customers will be a matter for the contracts between them.

The regulations disapply the provisions of the Food Safety Act 1990 to water supply by licensees, because water quality will be subject to the requirements of the Water Supply (Water Quality) Regulations 2000 and 2001. They also disapply regulations prescribing guaranteed standards of service in respect of licensees, which are more appropriately a matter for licensees’ contracts with their customers. They ensure that regulations governing water fittings, undertakings about water quality and some requirements of water quality regulations are applied to the licensed water suppliers. Applying the regulations establishes the general principle of ensuring appropriate protection of drinking water quality to protect public health, regardless of whether supplies are provided by water undertakers or licensed suppliers.

Finally, under parts 2 and 4 of the regulations, amendments and supplementary provisions are made in various statutory instruments and in water and sewage undertakers’ instruments of appointment. Those changes simply reflect the setting up of the WSRA and the Consumer Council for Water, which replace the office of director general of water services and the customer service committees.

2.38 pm

Bill Wiggin (Leominster) (Con): I echo the Minister’s comments about how nice it is to serve under your chairmanship, Mr. Benton.

The statutory instruments are a consequence of changes to standard conditions for water supply licences under the provisions of the Water Act 2003 that bring into effect the Consumer Council for Water and the WSRA. It is interesting that the Government waited until after the periodic review of water pricing—it was held last year—before making the changes. Customers of eight water companies face increases of more than 15 per cent. this year alone, pensioners are spending 7 per cent. of their income on water bills, and Water Voice has reported that the Government’s attempt to look into the increase in water charges has resulted in

    “A completely inadequate package of measures that fails to address the real problems of water affordability.”

Considering that this is a consequential and supplementary provision, the Government no doubt hope to create many benefits by creating licensed water suppliers that will be allowed to retail water and those that can input water to a statutory undertaker’s
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network. The debate on the somewhat dubious logic behind that has already taken place. As Lord Elliott of Morpeth commented on Second Reading,

    “if there are new entrants”

obtaining water from our current water network,

    “they will attract large customers from the incumbent company in each area. Large customers are always important to every company. Water is a regulated, price-capped industry with income set in advance. Therefore, if large users leave a company, prices for domestic customers will rise.”—[Official Report, House of Lords, 6 March 2003; Vol. 645, c. 982.]

That is a serious problem, which the Minister did not address in his opening comments.

Large customers should not be the only ones to benefit from increased competition—smaller customers should too, but there is no provision for that. Business customers can change their supplier and buy water services from a licensed water supplier, but domestic water customers cannot practically change their supplier. In developing the changes set out in the Act, the Government did not look after the smallest customer—the domestic customer. That is no surprise and it has been made obvious by the recent hikes in water charges that affect the whole country, most noticeably the south-west and Wales.

Customers of licensed water suppliers will no longer be entitled to payments under the guaranteed standards of service scheme. Does that mean that compensation will no longer be due to the customer, or that the customer will have to apply to his supplier or wholesaler for compensation?

I turn to the plans for establishing the WSRA, transferring to it the functions of the director general of water services, and abolishing the office of the director general. Philip Fletcher, the director general, has done an excellent job of holding responsibility for the economic regulation of the water industry. It is sad that the there are no plans to change the WSRA into a body that can act as an appeal judge in assessing the Environment Agency’s decisions. The Government missed the opportunity to provide for that in the Water Act 2003 and have made provision to control the regulation of the water industry themselves, mainly through the WRSA, which consists of a chairman and at least two other members who are nominated and paid for by the Secretary of State. Even the Labour peer Lord Borrie regretted the proposals to replace the director general with a regulatory board. He said:

    “Unless the largely part-time board members are content to confine themselves to broad strategic decisions, we may have slower and less-decisive decision-making.”—[Official Report, House of Lords, 6 March 2003; Vol. 645, c. 984.]

I am also disappointed that we are not to implement any changes to ensure that the power of the WSRA is held in check, for example, by ensuring that its chairman and chief executive are separate posts.

The Water Supply Licence (Modification of Standard Conditions) Order 2005 sets out the percentages and market share criteria in relation to modifications to water supply licence conditions. The 2003 Act grants the Secretary of State the power to determine conditions of water supply licences. We must be assured that the standard licence conditions determined by the Secretary of State are sufficient and
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fair. The order provides that modifications to standard licence conditions cannot go ahead without being referred to the Competition Commission if more than 20 per cent. of licence holders object. Will the Minister explain why that figure was chosen? It seems a reasonably small percentage: surely if 15 per cent. of holders of water supply licences objected to a proposed change, it would suggest that there was a serious problem. What is more, that 20 per cent. relates to both number and market share. I want assurances from the Government that they will strictly adhere to ensuring that both of those requirements are fulfilled.

When the primary legislation was debated Baroness O’Cathain, a director of South East Water, described the arrangements as

    “cumbersome, overly bureaucratic and potentially very costly.”—[Official Report, House of Lords, 6 March 2003; Vol. 645, c. 989.]

I hope that the Minister can convince and reassure us that the changes will benefit both the water industry and the people of Britain as consumers of water, and that they will lead to improved sustainability of our water supplies and more appropriately managed resources.

2.44 pm

Mr. Colin Breed (South-East Cornwall) (LD): It is a pleasure to see you in the Chair, Mr. Benton, and to participate in what the Minister said would be a short, technical debate. I wonder whether it will be.

When I read the titles of the statutory instruments, I thought that they might provide an opportunity for competition and benefit the hard-pressed water charge payers of the south-west. The Minister has participated in I do not know how many Adjournment debates on water charges in the south-west, so he will know that it is confidently predicted that by 2010 many of them will pay more than 12 per cent. of their weekly income in water charges. It is true that the real costs are sewerage costs, but the bills are called water bills and they are extraordinarily high.

One criticism of the privatisation of the water industry is that it lacked competition. The orders, at least on the surface, appear to provide some measure of competition, but it is a pale imitation of what we might consider to be competition, particularly for the vast majority of water charge payers that are domestic users.

For my benefit and perhaps that of other hon. Members, I hope that the Minister will give some examples of the way in which he expects the regulations to operate. What sort of concern might take up the opportunity to supply and what might be the effect on individual water companies, which are commercial concerns? In other markets where very large customers can hawk their contracts around and get better and better prices, the reduction in revenue to companies must be recovered from elsewhere. We see that already in aspects of water metering. As more and more people go on to water metering and substantially reduce their water bills, the revenue from the household, and collectively the revenue to the water
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authority, decreases, so the money is found elsewhere. Other water users must make it up. That seems to be what will happen when the orders are implemented. Competition for big users will have an impact on the water companies, which will seek to recover revenue from other sources. The most obvious means of doing so is, of course, an increase in domestic water charges.

No explanation is given of whether a licensee will have to ensure that it alone is a 50-megalitre user, or whether licensees will be able to gather together a group of potential users to make up that figure. If so, would they have to be in one area, or could they be all over the country? Can the 50-megalitre standard be split between two or three water companies in different parts of the country? Presumably licensees will be able to resell the water, so they might pitch for 50 megalitres but use only 30 megalitres and hawk on 20 megalitres to someone else at, we must assume, a higher price. What regulations are there to prevent significant uplifting of the price of any on-sales to reduce licensees’ costs further? I believe that in the energy and telecommunications markets the charges that can be set for resales are limited.

We need a clear explanation if the regulations are to get a smooth passage through the Committee. I cannot see what is in them for the vast majority of water charge payers, nor do I understand their possible environmental benefits. What effect will they have on water use? Will they reduce it or make users even more profligate than they are now? What safeguards does the Minister propose to ensure environmental controls on use of water under the regulations? We want many more answers before we can even begin to consider the passage of the regulations.

2.49 pm

Mrs. Dunwoody: I must join in the paean of praise for your chairmanship, Mr. Benton. It is always a delight to see you in the Chair.

The Minister was kind enough to explain that the regulations affect water undertakers and commercial undertakings. That is helpful and clear. However, I frankly confess that schedule 7 to the Water Act 2003 has rather passed me by. I lead a deprived life. I am not quite clear how parts 1 and 3 of the regulations will add to the Consumer Council for Water. Do they give the council extra powers? Do they make it easier for those of us who dimly perceive that competition among water suppliers might be exactly as the hon. Member for South-East Cornwall (Mr. Breed) described, in that a competitive system might have been created between very large firms and individual water suppliers, but that it is hardly likely to do a great deal for the finances of individual water consumers?

Bill Wiggin: The hon. Lady is absolutely right, but it is worse than that. Not only does competition between the major water companies mean that money that would have been available to them is no longer available to them—water companies’ prices are, after all, fixed in advance—but they will have to increase domestic prices to continue their income stream. That is the nasty aspect of the regulations.

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Mrs. Dunwoody: My heart always bleeds for the large water undertakers, which are known for their strong commitment to civic duty and the environment. Indeed, in my constituency we are filled with admiration for the work of the water supplier.

I must still ask about the sentence in paragraph 4.1 of the explanatory memorandum, which states:

    “Equivalent changes required in primary legislation were made in the WA03, principally in Schedule 7.”

As I have said to the Minister, schedule 7, by some gross dereliction of duty of my part, does not swim on to my immediate consciousness. I want to know exactly what effect it will have.

I am concerned about the consumer. There is absolutely no point in changing regulations governing the welfare of consumers unless greater powers are given. If that can be demonstrated, then it should be. We also need protection to ensure that the new undertakers maintain the same level of care, but will they in turn be able to use that as a bargaining counter in asking for better terms, which in themselves will make matters more complex for the individual domestic consumer of water, who might have to pay extra charges for what is, in effect, an artificial form of competition created by the undertaker?

I am afraid that I am not very bright, so I do not always follow the reasoning. I am filled with admiration for and commitment to Her Majesty’s Government, but they do occasionally do things that confuse me. Will the Minister therefore explain in greater detail what benefit the regulations offer the ordinary consumer? I can see that there are very real benefits in a new company that wants to enter the business of supplying water being able to ask for the protection of Her Majesty’s Government in order to set up and compete with an existing water undertaker, but there is a lacuna in my understanding: fail to see whom else it benefits. I know that my hon. Friend the Minister will be delighted to tell me.

2.53 pm

Mr. Morley: I most certainly will be delighted to tell my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody), who makes a perfectly reasonable point in her usual robust way.

I should start by saying that this is a debate on the implementation of regulations based on what has previously been agreed in Committee and by the House. I am, however, very happy to supply the background to the regulations and explain why they have been shaped as they have.

The hon. Member for Leominster (Bill Wiggin) seemed to be a little schizophrenic when he said that it was an outrage that there was competition. I did not know that the Conservative party was against competition. He seemed to say that it is outrageous that large companies should face competition, but that there should be competition for small companies and domestic consumers. That is a contradiction.

The hon. Gentleman and my hon. Friend asked about the advantages for consumers and the pros and cons of the argument. The pros and cons are that there was support for competition in water services when we
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considered the Water Bill. The Water Act 2003, which we are discussing today, provides for competition—but for competition that is limited to large consumers of water. That is the safeguard. It is true that if, as in any competitive situation, customers move to companies that compete on the basis of efficiency and price—the sort of things that Conservatives stand for and which they supported in Committee, although they seem to have changed their views on this occasion—that is what we want.

Such competition can, however, have negative impacts. That is why, rather than taking the pathways of the past—for instance, by allowing matters to be determined completely by the free market, without thinking about the consequences for consumers—we are introducing a modest measure that is restricted to relatively few large consumers. It will allow us to gain some experience of competition and its good and bad effects. If, as a result of companies coming into the market, there is greater efficiency and prices are forced down, we might extend the measure to the domestic market. However, we will do so step by step, carefully and cautiously, taking into account negative impacts as well as positive ones.

Mr. John MacDougall (Glenrothes) (Lab): I recollect that Margaret Thatcher privatised the water industry—the Opposition should think about that carefully. I also recall that I was invited to join a board, and to be paid for being a member of it. I rejected that offer, on the principle that I believed that it was not in the best interests of the public—it would not provide them with a better water supply. Competition does not necessarily bring quality. I should be interested to find out how the Opposition would square that circle. Where do they stand? We are in a situation that cannot be reversed, and we have to move forward. The competition is there, so we have to build a framework within that competitive market that protects the public as well as possible. I believe that the Minister is doing everything that he can in the circumstances. However, it is strange that those who voted to open up the water industry, with the threat that that brings, are now trying to protect it.

Mr. Morley: My hon. Friend makes a good point. The Conservatives have not squared the circle; they are going round in circles. They say on the one hand that they like competition and on the other that they do not. It would be nice to know what they do support.

Mark Pritchard (The Wrekin) (Con): Many people are going round in circles today. The Minister welcomes privatisation, but his Labour colleague questions the whole principle. There is no conflict in our addressing, rightly, through our Front Bench spokesman, the issue of protecting small consumers, such as pensioners. The Government should not brush that aside so readily.

Mr. Morley: I am coming to consumers. For now, I am discussing competition. The issue is not privatisation; we are dealing with a privatised industry that we inherited in 1997, and we have strengthened its regulation. My hon. Friend the Member for Crewe
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and Nantwich asked about changes to schedule 7, which are partly to do with strengthening the new consumer bodies—we are looking after the consumer—and I shall come them in a moment.

By allowing limited competition, we can evaluate the impact, positive or negative, on consumers. If the measure is a success, it can be extended. That is the principle behind the Water Act 2003, and these regulations implement its provisions.

The hon. Members for Leominster and for South-East Cornwall asked about domestic consumers. Nothing in the regulations takes away or undermines domestic consumers’ rights or protections. They remain as they are. I agree that the regulator has done an excellent job. The 2003 Act strengthens the regulatory body and brings it in line with the regulatory bodies of other utilities.

I am not clear what the point was about appealing against environmental provisions recommended by the Environment Agency. They are an important element of water provision. The Department for the Environment, Food and Rural Affairs carefully scrutinises the Environment Agency’s proposals, which, when submitted to the regulator, are subject to the same scrutiny as companies’ business plans. I do not know whether the hon. Member for Leominster was suggesting that there is too much environmental regulation in the water industry, but it is essential that we protect consumers and the environment.

The hon. Gentleman asked why the threshold figure is 20 per cent. The figure is consistent with competition provisions for other utilities—for example, electricity and gas. As I said in opening, the figure is not so high as to give unnecessary vetoes to new companies, and it is not so low as to ignore the legitimate concerns of those already established in the market. It is a reasonable figure, and it is consistent.

The hon. Member for South-East Cornwall asked about water charges. The measure does not deal with water charges as such, although it could reduce charges for larger consumers. In the longer term, it could reduce charges for domestic consumers by introducing competition into the sector. During the passage of the Water Act 2003, some consumer bodies said that they would like competition to be introduced into the water industry. My personal belief—it was also the conclusion of the House—is that we should approach competition cautiously, evaluating its pros and cons before extending it to the wider sector. We do not want to introduce competition and then see people’s bills increasing further as a result, but that is a risk, which is why we are approaching it in this way.

The hon. Gentleman asked about domestic regulation, to which there is no change. He also asked whether a new company could obtain a licence to serve a large consumer of water and then sell it on. That is prohibited. Under the regulations, companies are not allowed to sell on to customers with which they have no contract. I hope that he is reassured. I hope that I
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have dealt with environmental standards. They are important to the Government, and they will not be affected by competition under the regulations.

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