Draft Water Supply (Amendment to the Threshold Requirement) Regulations 2011
The Committee consisted of the following Members:
† Benyon, Richard (Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs)
Clarke, Mr Tom (Coatbridge, Chryston and Bellshill) (Lab)
† Doran, Mr Frank (Aberdeen North) (Lab)
† George, Andrew (St Ives) (LD)
† Harrington, Richard (Watford) (Con)
† Jones, Susan Elan (Clwyd South) (Lab)
† Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
† Leadsom, Andrea (South Northamptonshire) (Con)
Moon, Mrs Madeleine (Bridgend) (Lab)
† Munn, Meg (Sheffield, Heeley) (Lab/Co-op)
Paisley, Ian (North Antrim) (DUP)
† Shuker, Gavin (Luton South) (Lab/Co-op)
† Spencer, Mr Mark (Sherwood) (Con)
† Tomlinson, Justin (North Swindon) (Con)
† Watkinson, Angela (Lord Commissioner of Her Majesty's Treasury)
† White, Chris (Warwick and Leamington) (Con)
† Williams, Roger (Brecon and Radnorshire) (LD)
† Winnick, Mr David (Walsall North) (Lab)
Sarah Davies, Committee Clerk
† attended the Committee
First Delegated Legislation Committee
Wednesday 30 November 2011
[Mr Charles Walker in the Chair]
Draft Water Supply (Amendment to the Threshold Requirement) Regulations 2011
2.30 pm
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Richard Benyon): I beg to move,
That the Committee has considered the draft Water Supply (Amendment to the Threshold Requirement) Regulations 2011.
It is a great pleasure to serve under your chairmanship again, Mr. Walker.
The water supply licensing regime introduced by the Water Act 2003 was an attempt to introduce limited retail competition into the water sector. It permits new entrants, known as licensed water suppliers, to enter the market and it enables non-household customers using at least 50 megalitres of water a year to switch from their existing monopoly supplier to an alternative licensed water supplier. To give some idea of scale, I should point out that an Olympic-sized swimming pool contains approximately 2.5 megalitres of water. Currently, there are seven licensed water suppliers to which eligible non-household customers can switch.
A licensed water supplier is permitted to purchase water from the incumbent water company and to supply those customers who are eligible to switch away from their existing supplier. The size of the non-household market is approximately 1.1 million customers, of whom an estimated 2,200 are currently eligible to switch their water supplier.
Since the introduction of the water supply licensing regime in 2005, it has become increasingly apparent that the regime is not working effectively. Most customers cannot switch supplier, and incumbent water companies have little incentive to offer additional services that would help customers to reduce consumption. To date, only one non-household customer has managed to switch supplier.
The independent review of competition and innovation in water markets carried out by Professor Martin Cave and published in 2009 considered that better value in water and sewerage services could be obtained by enabling greater competition. His report identified a number of reasons why the water supply licensing regime has been ineffective and made a number of recommendations for a step-by-step approach to introducing competition.
Professor Cave recommended increasing the size of the contestable market as the first step. That would be achieved through a reduction in the threshold at which non-household customers could switch supplier. The regulations amend the Water Industry Act 1991 by reducing the customer eligibility threshold from 50 megalitres to 5 megalitres. That will significantly increase the size of the contestable market from 2,200 to 26,000 non-household customers in the area of those water companies that are wholly or mainly in England.
The regulations represent a low-risk way of extending the market without the need for further investment. Further market reform changes as identified by Professor Cave will be considered in the water White Paper, which will be published in the coming days. At this stage, however, we expect lowering the threshold to stimulate interest in the market, reinvigorate new entrants’ efforts to gain market share and incentivise existing water companies to improve services if they are not to risk losing customers.
Roger Williams (Brecon and Radnorshire) (LD): The Minister explained the territorial extent of the regulations, which do not apply to Wales, but there is an issue with a number of water companies. Severn Trent, for example, is mainly in England, but it supplies some properties in my constituency. Similarly, Welsh Water is mainly in Wales, but it also supplies Hereford. Do the regulations also apply to those water companies or the areas they supply?
Richard Benyon: I am very grateful for that intervention. As I said—this may need a bit of explaining—the regulations will increase the competition available to 26,000 non-household customers in the area of those water companies that are wholly or mainly in England. I recognise that there are cross-border issues, but the whole purpose of the regulations is to increase the competition available to companies. I hope people in the hon. Gentleman’s part of the country will find that the provisions are available to them and can benefit as a result.
The potential benefits associated with lowering the threshold could take the form of lower bills through keener prices, improved customer service and lower consumption due to increased water efficiency. That will lead to environmental benefits, such as a reduction in CO
2
emissions due to less pumping of water and reduced abstraction from river systems, leaving more water for the environment. I hope, therefore, that the Committee will be satisfied that there are many wider benefits than just the obvious cost benefit.Andrew George (St Ives) (LD): On the point about lower bills, what reassurance can the Minister give the Committee that driving welcome competition into the system will not result in the water bills of companies and charities that benefit effectively being cross-subsidised by poorer households?
Richard Benyon: I know this is a particular issue for Members from the hon. Gentleman’s part of the world. We had a debate in Westminster Hall this morning about what the Government are doing to bring household customers’ bills down. The regulations should not result in cross-subsidy of non-household customers by household customers. We are seeking to get new entrants into the market, who will be able to benefit from wholesale prices that were otherwise the exclusive area of some non-household customers, and that competition will reduce prices. The work done by Professor Martin Cave was brought forward by the previous Government, and it was generally accepted across an enormous amount of consultation that these arrangements not only would benefit companies and their profitability through reduced bills, but have wider benefits across the environment.
Another important point is that the regulations will impose no costs on businesses and have no impact on micro-businesses. With those remarks, I stand ready to answer any questions the Committee may have, and I hope it will support the regulations.
2.37 pm
Gavin Shuker (Luton South) (Lab/Co-op): As ever, I am extremely grateful for the opportunity to serve under your chairmanship, Mr Walker. I am glad that no one has so far had to declare an interest in relation to their water bills, given that the regulations bring the threshold down to 5 megalitres, or just two Olympic-sized swimming pools.
The Opposition welcome the regulations, which came out of Martin Cave’s review. It makes perfect sense to expand competition in this way for business customers. However, I would be grateful if the Minister answered a number of questions.
First, the Minister said 26,000 businesses will now be eligible to select their water supplier—that is the size of the pool, as it were. Has he done any assessment of the number of businesses that would be likely to take up the offer to switch suppliers? What work are water companies doing on the back of this legislation to notify businesses and encourage them to look at the options available?
Secondly, there is the timing of the order. We anticipate a water White Paper possibly in the next week, but we are looking at the regulations now. Can the Minister say a few words about his thoughts on competition among business consumers?
Thirdly, what options did the Minister and the Department look at for not only reducing the threshold to 5 megalitres but removing it entirely? Finally, I would be grateful if he said something about his thoughts on competition among residential customers.
2.39 pm
Andrew George: I have three brief questions. I welcome the Minister’s introductory remarks and I strongly endorse this proposal. As he said, it carries forward the previous Government’s work and the conclusions of Professor Martin Cave’s inquiry.
My first question, which I asked to an extent in my intervention on the Minister, is about having some form of guarantee or reassurance for poorer customers—not just in the south-west, although many there are in water poverty because of the significantly higher water bills. We in the south-west welcome the Government’s confirmation yesterday, in the autumn statement, of the alleviation proposal to assist people who pay for water there. Nevertheless, there is a question of whether the market may become so competitive that some companies might find it worth their while to cross-subsidise their pursuit of it, by ratcheting up bills for household customers, many of whom, certainly in a region like my own, struggle to pay those high bills for water.
2.41 pm
Sitting suspended for a Division in the House.
2.55 pm
Andrew George: That was a rather hairy vote on hairdressing regulation. I do not know how many hairdressers would benefit from these regulations, but no doubt the Minister will answer in a moment.
I mentioned the impact of a potential cross-subsidy, the unknown and unintended consequence of that, and the potential for higher water bills for some poor households as a result of the competitive environment that might be created. The second area concerns the way in which those companies that will benefit from the lower threshold will be able to compare price. In his opening remarks, the Minister did not give us an indication of how that might be presented, and how transparent that area of competition would be. No doubt in that competitive environment, it should be clear.
The third area concerns one of the claimed objectives—certainly in the Cave report—of benefiting water conservation. I query the potential of the regulations to achieve that, with regard to those companies that might operate at or around the 5 megalitre mark. In order to benefit from potentially lower wholesale prices by engaging in this manner, they would have to ensure that they did use 5 megalitres of water each year, in order to continue to be eligible. Therefore, at the 5 megalitre mark, there would be no incentive for them to achieve any water conservation, in order to benefit from it. I do not know whether the Minister has any remarks or responses on those points.
2.57 pm
Mr Mark Spencer (Sherwood) (Con): It is a pleasure to serve under your chairmanship, Mr Walker. I draw attention to the Register of Members’ Financial Interests: I own two abstraction licences, whether that is relevant or not.
I would like a brief clarification. I understand that the difference between water and other utilities is that the delivery network is held by the same company. Clearly with electricity, the delivery network is held by a separate company. A business might be at the end of a delivery network, being supplied by a different company from that which held the delivery pipeline. Will the Minister assure such a business that it will not find itself in circumstances where, should there be a fracturing in the water pipeline, it will be held to ransom in effect by a company that does not actually bill them but is responsible for delivering water to them?
2.58 pm
Richard Benyon: I am grateful to hon. Members for their questions; I will try to answer them as fully as I can. The hon. Member for Luton South asked how many businesses might be willing or able to take up the potential offered by competition. An impact assessment has been published alongside these regulations. We do not expect a large number of customers to switch at the early stage. They will wait to see how this measure progresses, and how other reforms recommended by Cave will be taken forward. As I have said previously, those matters will be published in the water White Paper.
With regard to the timing of the regulation, we are bringing it forward today because we can. It was on the cards to be brought in towards the end of the previous Government. We have assessed the full range of
recommendations made by Martin Cave and Anna Walker, and the majority of those form part of the water White Paper. This was a measure we could take forward in this format now. We want to get it up and running because we know that it will be of benefit to many businesses. Much more will come from the White Paper that we want to introduce in the form of legislation, some of which will require primary legislation. I look forward to working with him on that.On competition among consumers and residential customers, research has shown that business customers would like to be able to change their suppliers. The water White Paper will consider the case for extending choice to all non-household customers—in other words, for reducing the threshold to zero. Martin Cave thought that choice could be extended to household customers in future, but he recommended seeing how the non-household market works first. It is right that we walk before we run. That answers some of the questions raised by my hon. Friend the Member for St Ives.
Mechanisms are in place to prevent cross-subsidies from household customers to business customers, which will be monitored and strengthened as necessary. Ofwat remains a crucial guardian to protect all customers, both eligible and ineligible. There is concern that businesses might be incentivised to use more water to reach the
5 megalitres threshold. First, the measure may be only a temporary step, so we may reduce the threshold to zero. Secondly, customers do not have to keep to the threshold to stay with an alternative supplier and, importantly, the threshold applies at the time of switching.My hon. Friend the Member for Sherwood is right that the system is a monopoly. However, with a new entrant in the market, if a business’s relationship with a water company was to break down, or if there were a catastrophic failure in the system, there would be absolutely no risk of that business being in a worse position in relation to getting its water supply—that simply would not be the case.
My hon. Friend the Member for St Ives made a point about the ability to compare prices. The current regime is not transparent. Martin Cave therefore recommended further changes to ensure transparency of wholesale prices in future, which includes a requirement for incumbent water companies to publish charging schemes that clearly outline wholesale charges.
With those remarks, unless hon. Members have any further questions, I throw myself on the mercy of the Committee and hope that it will accept the measure.