Environment, Food and Rural Affairs Committee - Minutes of EvidenceHC 674

Back to Report

Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 21 November 2012

Members present:

Miss Anne McIntosh (Chair)

Thomas Docherty

Neil Parish

Sheryll Murray

Richard Drax

Barry Gardiner

George Eustice

Mrs Mary Glindon

Dan Rogerson


Examination of Witnesses

Witnesses: Richard Benyon MP, Parliamentary UnderSecretary of State for the Natural Environment and Fisheries, Sonia Phippard, Director, Water and Flood Risk Management, Defra, and Gabrielle Edwards, Deputy Director, Water Legislation, Competition and Charging, Defra, gave evidence.

Q261Chair: Good afternoon, Minister, and welcome to you and your team. I commence by apologising for the private business on other issues that ran over. We are extremely sorry to have kept you and your team waiting. We are delighted that you are joining us today for our concluding evidence session on the Draft Water Bill Inquiry. Minister, could you introduce yourself and your team, purely for the record?

Richard Benyon: Thank you, Madam Chair. I am Richard Benyon, the Minister responsible for water matters at Defra. On my left is Sonia Phippard, who is the Director of Water and Flood Risk Management. On my right is Gabrielle Edwards, who is the Deputy Director in the Water Availability and Quality programme.

Q262Chair: Thank you. There seem to be differences in emphasis and nuance between the Water White Paper and the draft Bill. Was this intentional, and was it the same team that drafted them?

Richard Benyon: Pretty much, yes, it was. Our ambitions in the Water White Paper, which were pretty universally welcomed across the piece, remain absolutely on track. The Water Bill is just part of our ambition in delivering that reform agenda. I think it is important to perhaps address head on some of the perceptions in some quarters about this Bill. I know not in this Committee but in some areas there is an institutionalised view that the only way to change things is through primary legislation, which I hope we might tease out in the course of our conversation this afternoon.

Q263Chair: Like SUDS, but we do not seem to be going anywhere on SUDS.

Richard Benyon: I thought that might come up.

Q264Chair: We are coming on to SUDS.

Richard Benyon: I had a premonition, Chairman, that that would come up. With respect, that is to do with the Flood and Water Management Act and the implementation of that. I am very happy to talk about that. But there is a view in some quarters that we have to legislate. I hope to prove to you this afternoon that there is a lot that we are doing now and that we can do outside primary legislation, and that we are developing here a piece of enabling legislation that will see certain parts of the Water White Paper ambitions taken forward.

Q265Chair: I would just like to start off with something that is not actually in the Bill but is deemed to be a precursor to the Bill. The Prime Minister, the Chancellor of the Exchequer and others have said that water companies represent the gold standard for investment in utilities in this country, and they want that to continue. Are you concerned by the events following the modifications to the licences that were proposed initially in December last year by Ofwat as economic regulator and the revised changes that were republished in November?

Richard Benyon: Of course I am concerned when I hear some of the things being said by some of the water companies and some of their investors, and I hope that those concerns can be addressed. Today is Wednesday and the consultation process on this will be closed by Friday. I hope that accommodation can be reached and we can have a way forward that addresses the concerns that water companies and investors have, but also recognises that the current licence system needs some modification. It is important to get that balance right.

We have an independent economic regulator, and Government has to be really careful about how it intervenes here. If that independent regulator starts driving policy, that upsets investors, and it certainly upsets investors if Government starts driving an independent regulator. I have been very careful, along with the Secretary of State and right to the top of this Government. We want to be absolutely certain that we can ensure that we have a continued high level of investment. What the Prime Minister said about the sector is absolutely right, of course, and we want to make sure that we do have a system of regulation going forward that is fit for purpose. We are extremely engaged on this, but we hope we will see this matter resolved in the coming days.

Q266Chair: Do you think it is possible that Ofwat is preempting what is in the Bill in these licence modifications?

Richard Benyon: I would be very keen to separate these two issues. We are very clear about what we want in terms of upstream reform. There are plenty of siren voices telling us that we should be reforming the water industry root and branch, going for full separation and seeing absolutely fundamental change. We did not share that view because we think it is a model that works, but we do think there needs to be some changes to make it fit for the future. I am really keen to separate these two issues out, and I hope we can prove that the upstream reform that we are talking about in the Bill is a very different issue to the concerns being raised about licence modifications.

Q267Chair: It has been put to the Committee that the actions of Ofwat as the independent economic regulator are actually taking away the public interest test and the power of any parliamentary scrutiny. Yet in Defra’s strategic policy statement to Ofwat recently, the Department re-emphasised the importance of a transparent and predictable regulatory regime and maintaining investor confidence. We get the impression on the Committee that there seems to be a misunderstanding between Ofwat and the water companies, which is highly regrettable. Is there a way that you can steer a path between the two?

Richard Benyon: The relationship between an economic regulator and a monopoly industry is always going to be abrasive, and rightly so. If it was too cosy, we would all be very worried. In this circumstance there is a very clear divergence of opinion. In some cases it is misplaced and misunderstood. In other respects work needs to be done to make sure this gulf no longer exists. I am loth to predict where we are before the consultation period has ended. I look at this in the context of other industries and the way they are regulated. We must make sure that water is no different and we have a stable framework.

You will have received lots of information not just from the water industry but from investors and ratings agencies as well. I am not sure I am in a position to really satisfy you with a clear, succinct answer on this, because it is a very complex techy issue that needs to be gone through with the independent regulator feeling accountable for what they are trying to achieve, clearly steered by Government through our strategic policy statement, which I am really glad that you mentioned, with as much clarity as possible about the need to see continued investment. I am dominating here; there are people who are much more involved in this.

Q268Chair: I think this is the heart of the matter, though. The Department says, and we do not disagree at all, that the role of the regulator is to act as an independent, economic regulator. You say in your statement, it "should not anticipate or pre-empt policy decisions that are properly for Government to take". On 29 October, Moody’s announced that "continued uncertainty around licence conditions was credit negative for the sector", so obviously that does set alarm bells ringing about potential future investment.

Richard Benyon: I want the future investment profile of this industry to be at least as successful as it has been, if not more. There is a new Chairman of Ofwat who has been working extremely hard in trying to explain what he is doing and what Ofwat are trying to achieve. I hope that over the next 48 hours assurances can be given, and that water companies, as some undoubtedly will, accept the changes, and there can be a degree of understanding on what we are talking about. We want sovereign wealth funds and the international investor community to continue to see this sector as attractive for its secure, modest yielding but long-term investments, where they know that they are going to get a particular return. They need to be sure that it will not be knocked off course by an overbearing regulatory regime, or a regime that could see Government interfering too much. The investor community might think, "However benign this Government might be, one day in the future there might be a Government that will want to interfere with this." That is not a political point; it is just how the investor community looks at it. We need to get that balance absolutely right. I hope over the next few days that balance on this particular issue will emerge, but I really want to separate that out from what is in the Bill. There has been a lot of talk that the two are absolutely related, and I very strongly believe that the licence modification issue is separate to what we are trying to achieve in this Bill.

Q269Thomas Docherty: I do not know whether the transcript of the evidence we took from Moody’s yesterday has been given to you or your civil servants yet, but despite the squeals from the Water UK lobbyists and others, they were unable to point to any actual investment that was not going to happen because of the action of the regulator. Have you been made aware of any investment that is not now going to go ahead because of this dispute or divergence of opinion?

Richard Benyon: Over the last nine months, which is effectively how long this issue has been ebbing to and fro, I have heard a lot of apocalyptic warnings, some modest warnings, and other people saying it will not make the slightest bit of difference.

I take this really seriously; it is so important that we get this right. You and I live in a world where perceptions are reality. If this Government or its regulator are perceived to be interfering in a way that will be damaging to future investment, that does not just sit at my lowly level of Government; that rings alarm bells right through it.

We are trying to get this right, and we have great confidence in our new Chair at Ofwat, and in Ofwat as an organisation. We want it to remain clearly as the independent regulator that it is by statute, and I hope that we can ease any fears in the investor community. Your particular question was whether I had heard of any bricks and mortar projects that are not going ahead because of this. I have not, but of course investment decisions being taken over the last nine months are really for the next price review period and beyond. The message we want to give out from Government is that this is a stable area for investment that will continue in the way it has for the last 22 years into the future.

Q270Thomas Docherty: We had evidence yesterday from our astonishingly interesting witness-

Richard Benyon: Sorry, who was this yesterday?

Thomas Docherty: From Moody’s. He was unable to point to, for example, the change in the share price of UU, which I think dropped by 9%. When he was pressed, he had to admit that there was no way of identifying if even one percentage point was because of the potential reforms or the dispute. He said it was as likely to be because it had been over-priced six months ago. You obviously are in the know, Minister. Other than the squeals from Water UK’s lobbyists and the siren warnings, so to speak, have you any actual evidence or example that you can point to that makes you genuinely worried?

Richard Benyon: When organisations like Moody’s talk like that, I think it does have an effect. It starts people asking questions. My boss, the Secretary of State, was in China and Hong Kong last week, and was asked this very question. I hope that the answers we give can allay those fears. Maybe a water company can say that they were going to have a degree of investment in a project but it is now questionable, but no one has actually passed that on to me. I cannot say I have any evidence.

Q271Neil Parish: Minister, I take it we are a Government that is in favour of competition. We are in favour of competition in the energy industry, and we have very strong energy companies. We do not shy away from getting them to compete with one another. I am just rather worried that this Bill is a bit timid if there is no competition in there. Surely competition could actually strengthen the businesses as much as weaken them. I have heard these arguments for years, in the old nationalised industry, so can we not actually be a bit more competitive?

Richard Benyon: The last Government pushed the process into gear by getting Professor Cave to write his report. We are proposing some competition into the nondomestic market for precisely those reasons. We think it is healthy for the industry, not just the private sector but the public sector as well. For example, in Scotland schools can now buy their water from one retailer, and so can the health service. There are huge savings to be made in that.

Q272Neil Parish: So will that happen in England?

Richard Benyon: It will, yes, with our reforms. It is quite modest, and rightly so. If we were as radical as some people have been pressuring us to be, I think it would start to test what is the successful model we want to keep.

Competition can help in innovation, which is something that is absolutely key to this White Paper. We want to see companies thinking about things that they did not have to think about 22 years ago, such as climate change and the pressures on their businesses. For example, where a food producer is using an enormous amount of water, they might want to develop a recycling system, which would require some legislative support, because they have to tap in or out of the water company’s pipeline. You have to change the law to make that possible, not in a way that damages the monopoly supplier’s source or sewage outflow management and that investment model, but that allows innovation or, for example, the building of a new reservoir. This is where competition can come in and be a great advantage for the customer as well as society.

Q273Sheryll Murray: If another company is tapping into a company’s pipeline, and I noticed that is what the Bill intends to happen, who is responsible for the maintenance of that pipeline? Will they have to pay for the privilege?

Richard Benyon: The asset, whether it is a pipeline or whatever is providing that water or sewage function, is the responsibility of the water company that built it or owns it. It is their longterm asset, and that is the rock-solid basis on which investment has been so successful. We want to keep that, but we do want to allow new entrants to be able to access the process at some point in order to deliver innovative projects that reduce costs for companies and will be better for the customer and the environment. This is a market mechanism, to answer Mr Parish’s point as well, that can achieve that in a modest way. I do not pretend that we are going for a revolutionary change.

Q274Chair: Could I just look at the draft Bill and competition? You have given little or no detail on how the competitive market that you talk about will operate in practice. Water companies and consumer representatives have told us that a clearer policy steer on issues such as the potential for de-averaging prices and the impact of competition on household customers should be included on the face of the Bill. Is it your intention to put this on the face of the actual final Bill?

Richard Benyon: This is a framework piece of legislation, but we fully intend to issue charging guidance well in advance of the introduction of market reforms. Primary legislation, I put to you, Madam Chair, is not the right place to set this out. We want to consult carefully with all concerned as we develop this guidance. In developing it we really need to strike the right balance. Water companies must be able to generate a return on their existing infrastructure and finance future investment, but we must not constrain innovation and reduce the benefits of this reform package. It is very complex, and it is important to get it right. If we try to write it in on the face of the Bill, that would be too inflexible, but I do give you the absolute assurance that we want to move this forward as we introduce market reforms, not at a later stage.

Q275Chair: You are going to publish guidance. Will this be published in a form that we and Parliament can scrutinise, consistent with your draft strategic policy statement saying that decisions on the fundamental structure of the industry, and presumably competition as well, will continue to rest with Ministers and Parliament? Because we take our responsibilities very seriously, and that goes to the heart of the Bill.

Richard Benyon: I will ask my colleagues to give you the exact way in which we wish to proceed on this.

Sonia Phippard: It would certainly be our intention to consult on that guidance.

Q276Chair: No, no, that is not good enough. We have given prelegislative scrutiny to this Bill, and we want to know that we will have the opportunity to give pre-legislative scrutiny to the guidance that is going to be enshrined for the water companies to follow. That goes to the heart of what you are trying to do.

Sonia Phippard: Just to be clear: this is guidance to Ofwat, not to companies.

Q277Chair: On competition, de-averaging of prices, on the whole thing. Perhaps Gabrielle Edwards could assist.

Thomas Docherty: Have you thought about it before today?

Chair: This is standard procedure. We are not going to give you a blank cheque to go away and write guidance that we are not going to be consulted on.

Gabrielle Edwards: The guidance will be produced under the legislation, so the final version of the guidance would follow from Royal Assent and would not be available at the time it went through the House. I would need to just double-check whether it is statutory guidance or not.

Q278Chair: We would like to know before we put this report to bed. I have to say, going through the Draft Water Bill, that there is huge discretion for Ofwat and you to draft this guidance. The Committee is slightly uneasy about concluding our inquiry into something as substantial as you are trying to do, which for whatever reason has never been tried before in this country or anywhere else, if we are not going to have the chance to scrutinise the implementing regulations.

Richard Benyon: I understand. It is statutory guidance; therefore, it has to be laid before Parliament and you will have every opportunity to look at it and question us on it.

Q279Chair: And the guidance that Ofwat will be issuing?

Richard Benyon: Will that be statutory guidance?

Q280Chair: I am slightly concerned that Ofwat has quite a lot of discretion in this regard. You have issued the statement that I referred to earlier. I am sorry, I do not have the Hansard reference, but it is the recent statement that you issued to Ofwat to say that there will continue to be this public interest test, and presumably this will be exercised by Parliament on behalf of the public.

Richard Benyon: Ofwat’s guidance has to be in compliance with our statutory authority.

Q281Chair: Sorry, you are not answering the point. It has to be compliant, but are we going to have opportunity to comment? Does it pass the public interest test that you have said they must not wave away?

Gabrielle Edwards: The first draft does not set out a procedure like that: for Ofwat to consult Parliament on its guidance.

Q282Chair: So you are asking us to take on trust quite a lot of discretion that will pass from the Secretary of State to Ofwat, where some of the interpretation could essentially be political in nature? We can come on to that and discuss it under the various heads of the draft Bill.

Richard Benyon: I think that you understand our statutory position: that it would be for Parliament to scrutinise this. As far as Ofwat’s guidance is concerned, we need to write to you with a very clear understanding of where the legal parameters are to make sure that we are getting the advice to the Committee absolutely right. I am pretty sure in my mind, but I do not want to say it in case I am wrong. I cannot believe that it could be done to the exclusion of consulting at this level.

Chair: We just want confirmation that the public interest test will still be there and there will be the opportunity for parliamentary scrutiny. We will come on to discuss specifics as to whether it is political or economic in nature.

Q283Richard Drax: I would like to touch on something you said a moment ago. You said access "at some point", Minister, so far as competitors are concerned. Can you just expand on what you meant by that? Are you talking at a pipeline or a certain juncture? How and where?

Richard Benyon: I gave an example in reply to Mr Parish and Ms Murray’s question. Say a company that uses a lot of water was looking at introducing an innovative scheme that meant they would use less, therefore pay less, and perhaps recycle it. Currently they do not have the statutory right to access the water company’s network. We want to give them that right because we want to see that kind of innovation introduced, but not in way that diminishes the ability of that water company to continue to maintain its asset in the way it is invested in at the moment. Perhaps a better example would be a new reservoir. We would like to see a system that would allow a new entrant to find a new source of water, and for that water to access the water company’s network in an agreed way with a clear mechanism whereby that water company might purchase that water. That is the kind of innovation with a new entrant that we want to try to encourage.

Q284Richard Drax: I would like to ask you about how this is going to be costed, and how any new entrant could possibly afford to provide water at a cheaper rate than that already being provided by the original supplier, but perhaps that is not a question I will ask you. Can I move on now to the appeals? Water companies have expressed some concerns about the extent of Ofwat’s discretion under the draft Bill. Will you include a more effective appeals mechanism against the regulator’s decisions?

Richard Benyon: Do you mean their appeals against an Ofwat decision on pricing?

Q285Richard Drax: Appeals against the regulator’s decisions, whatever they are. The question is hinting at the appeals procedure per se. It says here water companies are concerned about the extent of Ofwat’s discretion.

Gabrielle Edwards: There have been a range of concerns that water companies have raised with you and us about the extent of Ofwat’s discretion in this Bill. That is the value of the pre-legislative scrutiny process, because we can look very hard at those concerns and decide whether or not we need to reflect them in the final Bill. I cannot give you a precise answer about the appeals point, but we are very aware of the concerns that have been raised about the level of Ofwat’s discretion.

Q286Chair: And what are you doing about the concerns?

Gabrielle Edwards: We are considering how we would respond to them in the final Bill.

Richard Benyon: We are open to any recommendations you make on this. We want to make sure that we get that balance I was talking about earlier right.

Q287Chair: Minister, we would all like to see more reservoirs. What is happening about the reservoir guidance that was promised so long ago I cannot remember when, to be agreed by Defra and the Institution of Civil Engineers?

Richard Benyon: This is the Reservoir Act. I should have come prepared because I thought you might raise this.

Chair: Indeed, I am very predictable, I am told.

Richard Benyon: I think we are pretty near to hearing from them.

Q288Chair: I think you said that the last time. Do you think Christmas? Spring? New Year? Summer? Which year?

Richard Benyon: We will write to you, Chair. To be perfectly honest, I am not sure, and I want to make sure. I mean I know that this is holding up a very important flood project, although there are some innovative ideas that may possibly be there to solve the problem without this. But I do think it is very over-precautionary, and that is why we asked the Institution of Civil Engineers to look into this.

Q289Barry Gardiner: Minister, originally you said it would provide a benefit of £2 billion from upstream competition to the industry, but your impact assessment on the White Paper showed that there would be a £426 million downside if there were a 1% increase over the base case with no upstream competition. Since the White Paper last year, have you revisited the cost-benefit analysis of the impact of upstream reforms, particularly in relation to the projected increase in the cost of capital?

Richard Benyon: We have talked already about rating agencies. The rating agencies have said that our reforms should not have any significant effect on the cost of capital, which is worth noting.

Q290Chair: As regards upstream?

Richard Benyon: Yes, upstream reforms.

Q291Barry Gardiner: When you issued the impact assessment alongside the White Paper, you said that the net present benefit calculated took into account an increase in the cost of water and capital for water companies of £426 million. That is your assessment. I did not raise the issue of the rating agencies; you did, Minister. I am asking you only of your own Department’s assessment here.

Gabrielle Edwards: No, we have not revisited the impact assessment since we published it just under a year ago. That impact assessment was a very substantial piece of work, which included sensitivity analysis around the increases in the cost of capital. On balance, we would say it took some fairly conservative assumptions throughout because we wanted to be cautious and clear that we were not taking risks. As you say, we factored in the assumption that there would potentially be some increase in the cost of capital, and it still delivered a relatively substantial benefit. We have not seen anything to suggest that it is wrong at the moment.

Q292Barry Gardiner: So you still hold to the figures of £426 million potential downside from the upstream competition, against a £2 billion potential benefit?

Gabrielle Edwards: If that is what is in the impact assessment, those are still the best figures we have.

Sonia Phippard: There is obviously a range of figures in the impact assessment, and those are the central case. In the interim there has been some other work by Ofwat and the Water Resources in the South East Group, which again came up with net benefits of a similar order.

Q293Barry Gardiner: What further analysis of the effects of upstream competition do you propose to carry out before the introduction of the Bill, if any?

Richard Benyon: We will have to have a full, updated impact assessment, not only to satisfy people like you but also the Better Regulation Executive in Government. I think it is worth noting that what we are talking about with the benefits is more about service than price. We have seen an example of one customer receiving over 4,000 paper bills a year, whereas a single national supplier could save that customer between £80,000 and £200,000 a year in administration. It is trying to factor that in across a very divergent, wide range of customers, and making sure that the figures we are presenting as the cost-benefit analysis are robust.

Q294Barry Gardiner: When will Ofwat publish their economic impact assessment?

Sonia Phippard: Sorry, their assessment of what?

Barry Gardiner: The upstream reform.

Chair: The cost and benefit analysis.

Richard Benyon: I am not sure.

Q295Barry Gardiner: You do not think they will?

Sonia Phippard: In terms of developing firm proposals for the implementation of upstream reform, there will be a lot more work to be done by Ofwat with the water companies and Government, similar to the work that will need to be done in developing the detail of precisely how the retail arrangement is going to work. Upstream is obviously in that sense more complicated than retail because it contains different types of access. There is trading between companies and the ability for new players to come in, so there will undoubtedly be more detailed work to be done, but I cannot give a detailed timescale.

Q296Barry Gardiner: You have no date for that then. The draft strategic policy statement for Ofwat says that the regulator will be expected to provide a thorough assessment of the impact of their regulatory proposals on both consumers and investors, including evidence of the costs and benefits. How would you expect that requirement to be fulfilled in relation to the introduction of upstream competition?

Richard Benyon: I would expect them to provide it through the price review process. We would need to have a very accurate figure about what we are talking about here, and this will become apparent as the Bill becomes as an Act.

Q297Chair: I am slightly confused, because the strategic policy statement that Defra published to Ofwat emphasised the importance of thorough impact assessments, including evidence of costs and benefits, for substantive changes to the regulatory framework, which Ofwat’s proposals clearly are. There is concern in the market and amongst water companies that no impact assessment has yet been placed on the table, and you are clearly calling for it in your statement.

Sonia Phippard: We need to separate out history and future a little. We have only just published this strategic policy statement in draft, and it does place some new requirements on Ofwat. The licence modification process, which is where the water companies’ issues arise, is something that has been in train for the best part of a year. When it comes to the further work on retail and upstream reform, we will need to work with Ofwat and water companies to produce that sort of impact assessment as the proposals become more concrete and Ofwat’s regulatory regime to deliver and enable one becomes clearer. We are clearly not there yet, because at the moment we only have the primary legislative framework very much in draft.

Q298Chair: On this assessment that you are asking for, are you saying that there is a real risk that the costs would outweigh the benefits that you think might be brought in by the introduction of upstream competition? Is that a real possibility-that the impact assessment may show that the costs outweigh any potential benefits?

Richard Benyon: We have our best assessment of the benefits and the costs of this, and we will review them, but you have the figures before you.

Q299Barry Gardiner: You are sticking by £1.5 billion benefit to the industry?

Richard Benyon: That was what we produced as part of the Water White Paper, and it is open for challenge; we challenge ourselves on it. It has been produced by economists working within the sectors.

Q300George Eustice: I just want to ask whether there are any particular elements of upstream competition that you think competitors might take up. It seems to me that all the concerns we have expressed about upstream competition are the concerns that monopolies down the generations have expressed about competition: that you are going to duplicate everything and spend capital on things twice when you do not really need to. Actually, there might be certain things such as sewage works or particular elements of upstream supply that an individual company might come in and supply more effectively. Have you thought about which elements of the upstream are more likely to be involved with competition?

Richard Benyon: I hope you will believe that we have not done this in a bubble. This has been the product of a lot of extensive work done by Professor Cave and others who have been advising us. We think there is a real benefit for this, and we have seen it happening in other countries, and we think this is an important way of delivering the kind of innovation we were talking about in the White Paper. Maybe my colleagues can come in with some concrete examples of the kind of innovation that we could see coming out of these reforms that might help.

Sonia Phippard: It is actually quite a range. Most of the intervention is relatively modest. It is indeed industrial supplies being available to the public supply. It may well be co-operation with farmers who have abstraction rights. It may be people who want to provide a more extensive service for new developments than that which can currently be provided by inset companies. So there are a variety of ideas and propositions that currently are not practicable under the current regime.

Q301Mrs Glindon: In their evidence, witnesses have suggested that the draft Bill’s current provisions in relation to upstream reforms would lead to the regional deaveraging of prices. Does the Government believe this is desirable?

Richard Benyon: We very much hold Ofwat to their duty to make sure that we are not penalising customers who live in rural areas because it is more expensive to provide water to them. We think it continues to be a very clear duty on the regulator to make sure that prices are averaged in the right way.

Q302Mrs Glindon: Would you consider that this is really an issue of public policy and should be legislated in Parliament rather than left to the regulator to decide?

Richard Benyon: With respect, we are not leaving it to the regulator, because we have said very clearly in our duties to the regulator that they have to be mindful of this.

Gabrielle Edwards: Also we will be producing the statutory charging guidance that we were discussing earlier, so we can set out very clearly what our expectations of Ofwat are. They will then have to follow that in the rules that they set for charging.

Q303Barry Gardiner: Minister, if I come in as a new entrant into the upstream market and I cherrypick off those areas that are closer to the eventual remediation facilities, then I am coming in and providing competitive advantage because I do not have to deal with much other stuff out there. I am offering a very good price to the people that I am going to be supplying. Are you telling me now that Ofwat will come in and stop me, effectively, providing that competition?

Richard Benyon: No. If a company, Gardiner Inc, has a particularly innovative product or means of financing a cheaper source of water that would be of benefit to the customer, I want it to be able to access the system, which it currently cannot. Therefore, we have to set out in the legislative framework and in the charging guidance a fair means for you to access the system. That is all we are doing here. All the indications are that this will not be a seismic change. We are not going to see a huge disruption of services that water companies provide, mostly very successfully, now. But it does just provide the chance of innovation to come in backed by a legal framework.

Q304Barry Gardiner: The whole issue about deaveraging, surely, is that if I come in here and I can bypass the existing treatment infrastructure, I can provide this service cheaper. You seemed to be saying in response to Mrs Glindon that Ofwat was going to regulate this, and it would not be possible for them to have de-averaging of prices in a given area in that way. I am just trying to get clarity here on quite what it will take for Ofwat to come in, in the way you have suggested, and ensure that this de-averaging does not take place. If I, Gardiner Inc, am going to provide this service, I want to know that I will not have the regulator saying, "Well, you actually can’t charge that lower price."

Richard Benyon: That will be in the charging guidance, and we have to be absolutely clear that we are not going to do anything that would disrupt the investment model, but still provide fair access.

Gabrielle Edwards: The two questions taken together show why this is so difficult and why we were very careful, firstly, not to rush into this, and secondly, not to try to put something very inflexible on the face of the Bill. There were lots of concerns that going down this road might lead to deaveraging. At the same time, how are we going to be sure that we do manage to get some benefits through innovative approaches by enabling competitors to come into the market and deliver something new and gain some benefit from it? Trying to balance those two concerns is quite difficult; therefore, this charging guidance is important, and we need to make sure we take the time to get it right, and talk to people as we do that.

Q305Barry Gardiner: Can I give you an example that was provided in evidence to the Committee by WICS? They tried to give an illustration of the potential for deaveraging. They said, "If a dairy in a rural community were to reduce the strength or volume of its waste, this could lead to the partial stranding of an asset built to serve that customer. It may be the only significant business in population-equivalent terms in the area, and potentially significant costs would now have to be met by those customers that remained, including households, if the asset that was constructed is to be paid for in full. The same would apply if the dairy were to identify an alternative source of water," such as Gardiner Inc-they do not say that-"that would meet its needs." How do you respond to that, given what you have said about Ofwat coming in here and in effect imposing a price control?

Gabrielle Edwards: There are ways in which Ofwat can choose to regulate. You either deal with the stranded assets point by saying that the company takes a loss, and that is the competitive market, or it is reflected in the charging, or there are ways in which Ofwat can regulate to ensure that if a company has sunk investment in a considered way, they are to some extent at least protected.

Q306Barry Gardiner: So they are allowed to put the costs of that on the remaining householders or customers’ bills.

Gabrielle Edwards: Potentially.

Barry Gardiner: So you are raising the bills in the incumbent area. Look, as Gardiner Inc, I feel very reluctant now to come into this market because it seems to me that three people sitting before the Select Committee are not really sure about what my investment risk is going to be. And if they are not sure, I am not sure either.

Q307Thomas Docherty: Minister, you have talked about the regulator. The reality is there are two regulators.

Richard Benyon: Three.

Thomas Docherty: There are WICS and Ofwat.

Richard Benyon: Economic regulators, yes.

Thomas Docherty: As I am sure you are aware, competition law trumps devolution, and this would apply to Scotland. This is not only a problem for my English colleagues. If you do not sort the deaveraging, and I have heard nothing that tells me that you have, this could lead to a de-harmonising of prices in Scotland.

Q308Sheryll Murray: Basically I just wanted to raise the issue of the south-west. I know there is legislation already in place to help South West Water customers, and I would like to say thank you very much for that. But South West Water is worried that the knock on effect on rural customers to cherry-picking of commercial customers in urban areas-upstreaming-could have an impact on household customers again. They estimate, particularly with bad debts of an extra £10 per household, that would eat into that financial assistance that they have already been given. What guarantees could you give to me that this is not likely to happen?

Richard Benyon: This fits very much into the accusation that somehow our modest proposals for greater competition, which would be of massive benefit to a lot of non-household customers, are going to increase the cost of capital. It is not our intention to do anything that increases the cost of capital, and indeed the reforms we have suggested have been given the green light by the rating agencies to say that they will not have that effect. If you follow down a what-if route on a whole lot of examples, you see the sheer complexity of what we are talking about-22,000 abstraction licences, and I am sure we will talk about those at some point. We are talking about a highly complex delivery network that is underpinned by a monopoly industry with a clear regulatory framework. We are just tweaking that slightly to allow the kind of innovation that I think you universally welcomed in the Water White Paper, in a way that we believe will not cause the kinds of problems that you and South West Water raise.

I am not sure I have answered Mr Docherty’s point. Can you just clarify?

Q309Thomas Docherty: Because competition law trumps the devolved settlement, this would have to apply to Scotland. If it goes down the Anglo-Scottish market, Scotland would have to apply the same rules. As Alan Sutherland said in his evidence, and given that Scotland has a large amount of rural areas, you would get de-harmonising and deaveraging of prices. Veolia or someone will come in and, as Mrs Murray has already said, cherry-pick out an area and say that they will serve that or build a new plant and serve it, which is why the Scottish Government is threatening to pull out of this deal. My supplementary question is that when a free marketeer like me and Alan Sutherland are on the same side as Water UK and the existing companies, why are alarm bells not going off in Defra because everybody, apart from Ms Finn, thinks there is a problem, particularly as Alan Sutherland is actually proposing a straightforward solution to this issue?

Richard Benyon: Which would result in-

Q310Thomas Docherty: Which would compel the new entrant to use the cheapest source, i.e. the existing upstream source. Barry Gardiner Inc cannot come along and build a cheaper one to cherry-pick a bit of supply. Why is Defra resisting when everybody else is on the same side?

Chair: It is basically the stranded assets question. You said you do not wish to increase the cost of raising capital, but Gabrielle Edwards said that one possibility is putting it onto the customer. It is the fear, I understand, of both Alan Sutherland and the water companies that it is going to end up putting the cost of the customers’ bills up, which as a rural MP obviously sets alarm bells going for me.

Richard Benyon: Give them the rationale that you were getting at.

Gabrielle Edwards: I was not entirely saying that we would be putting this onto customers. I said there are different ways this could be regulated. No one exactly knows at the moment what that approach would be because this is just a framework piece of legislation. To go back to the Scottish point, clearly there is no intention that by legislating to change the system in England we would change the system in Scotland. This is a framework piece of legislation. There is a huge amount of work to be done as we go through all the implementation. This is not going to be implemented in a short time period, and we really are at the very early stage of working through these practical details of implementation. That is why we have set up a process with the industry and the regulators, including the Scottish regulator and the Scottish Government and the Scottish companies that are active in this field, to make sure that if there are any unintended consequences, we absolutely work those through, because that is not the intention.

Richard Benyon: If you can come up with a form of words so that we could put those safeguards on the face of the Bill, or at least much more clearly in the guidance, I would be happy to do that. But throughout this process I have been very careful not to tie ourselves down with too much detail on the face of the Bill. I am a rural MP myself and I know that causes concerns because it creates a very open situation. If through the pre-legislative scrutiny, and as we develop our thinking, working with WICS and others, we can develop a form of words that satisfies those concerns, then we very much will.

Q311Chair: Can I just come back to the question that Mary Glindon actually asked? Do you recognise that this is a political decision? We have already heard from Thomas Docherty that competition policy trumps all. Albeit it is statutory guidance, but depending on which procedure you bring forward, we would be excluded from actually having a view at that time. I think you need to go away and do a bit more work on this.

Richard Benyon: This is a process that I am very happy to share with you right the way through. You understand better than most in this House the complexity of the system and the care that needs to be taken when you are reforming something successful. We hear lots of voices that were very concerned about Cave, Gray and the review of Ofwat. They were very concerned as we took forward Water for Life, the White Paper, and now they are equally concerned in terms of the legislative framework. Some people are saying that we are not going nearly far enough; some people are saying we are going too far. We are concerned about getting this right. You publishing your report on the draft legislation is just one part in the process. I can absolutely assure you that I am happy to involve you in the production of the charging guidance and anything else.

Q312Barry Gardiner: I do not think anybody in this Committee questions your willingness to be transparent and open on this with us. Absolutely not. But both you and Ms Edwards have highlighted to the Committee how complex this area is, how this is simply framework legislation and that it is not going into the detail; the regulation and so on will have to come later. Yet you are able to calculate that the net present benefit calculated does take into account an increase in the cost of capital for water companies of £426 million. You stuck by your own estimate of £1.5 billion, and yet you do not know what this legislation is going to contain at the end of the day. How can it simply on the one hand be a framework Bill on which no detail has been provided, and yet you have come up with very, very specific estimates of the amount of money or the benefit the introduction of this legislation will bring? As somebody who might look at investing in this, I do not understand the regulations I would be subject to and what sort of environment I will have to be making my money in.

Richard Benyon: As we go through the process, we carry out impact assessments, and they are not just fingers-in-the-air grasps at figures. These are detailed pieces of work that involve economists working with the industry and the regulators.

Q313Barry Gardiner: But they can only do that if they know what these regulations ultimately are going to be.

Richard Benyon: Exactly, and that is why this is an ongoing process. In these circumstances, people throw a whole range of different examples, and we have talked about some today. But as for trying to predict precisely what will happen and what the impact will be, as with all detailed economic factors, there is a range of possibilities. We want to land this in a positive place for investment and impact on customers-and we do not mention customers enough in this. We think we are setting in train something that will take forward modest reform proposals in an effective way.

Chair: Thank you. I am sure we will return to this.

Q314Neil Parish: I made the same point yesterday; we have had both drought and flood in the last six months. This concerns the drought and flooding features on the national register. What consideration have you given to how a more fragmented industry will be able to provide resilience in the face of these threats, especially with new entrants coming in? Are they going to be held accountable by the national register?

Richard Benyon: I think the drought last year proved the benefit of water companies working together with neighbouring water companies and also with agencies. The drought group showed the value of this. The Water White Paper said the best way to deliver resilience, particularly in areas of the south and east of England where water is scarce, is by connecting to areas further west that have more water. That is not, as is sometimes rather easily and glibly suggested, through the construction of a water grid, which would be massively expensive unaffordable, but through better interconnectivity between water companies.

That needs to be firstly progressed through a system that welcomes and encourages innovation, and backed up by a system that encourages bulk water trading. I have been really impressed over the last years with how water companies were taking that kind of thinking forward, and I can mention Severn Trent Water as a particular example. As far as this is concerned, we want to make sure that the construction of more interconnectors is incentivised in the traditional way: that water companies build assets and it goes onto their RCV and they are rewarded, and investors from all over the world like that. But also, where there are other innovative resilience ideas, such as new reservoirs or new watersaving techniques, they can come into the system. That is not fragmenting; it is just adding to the resilience of areas to deal with issues such as drought.

Q315Neil Parish: You just said water saving techniques. One of the traditional watersaving techniques is meters, and the national register will decide whether companies should go into metering across the whole of their piece. Do you not think it would be better if companies who wanted to move into metering could? That is one way of saving water.

Richard Benyon: They can.

Q316Neil Parish: They have that flexibility?

Richard Benyon: There are two water companies that are carrying out universal metering now, and we are watching that very closely. We encourage water companies, through their long-term water resources management plans, to look ahead and say, "This is the demand. What demand measures can we introduce to reduce the amount of water people use?" One of them may well be metering. We do not think a Government edict from on high saying that everyone must have meters is the right way forward, because in certain areas it would just be an impossible cost on those on low incomes, and we have to be careful about that. In your area and Mrs Murray’s area, about 80% of people have got meters, and we all know the reason why. I am not saying that we should encourage price increases to drive that.

Q317Neil Parish: I agree with you that in some places it is very difficult, but are you actually going to stop companies from going for metering if they want to?

Richard Benyon: No.

Q318Neil Parish: If they are not on the national risk register, from the evidence we were taking yesterday, it sounded as though companies would not necessarily be able to go for metering if they wanted to.

Sonia Phippard: They need to be able to make a case to Ofwat for the expenditure. The approach that Ofwat has taken to the next price review encourages extensive consultation with customers, so customer buy-in is pretty important. With the Environment Agency and Ofwat, we are looking at the guidance and the decision framework for Ofwat to see whether there is anything that is stopping companies that do have a good case from going ahead and either completing or driving through universal metering.

Q319Neil Parish: In principle, with energy supply, people pay for electricity. You cannot say, "We use an awful lot of electricity, so we are not going to bill you on the amount of electricity." We always bill people on the amount they use, so why should it be different for water? If people have got difficulty in paying those bills, we can help them in other ways, but if we are keen to save water, then surely metering must be one of the major components.

Richard Benyon: Metering on average saves between 10% and 15% of water usage. There are measures that can be introduced to mitigate the impact: taper relief and various other things. But those areas that are water stressed-and we all know where they are-need to have the full range of measures they can introduce that will result in the kinds of reductions that we want. In certain cases we will see many more properties metered, but we want that to be taken into account through their longterm planning, which they are required to do, through pricing measures that are overseen by an independent regulator, and driven by Government through our strategic policy statement and other measures that indicate a direction of travel. That is going to see an increase in metering: not fast enough for some, at a cost to some, but of benefit, we hope, ultimately to us all.

Q320Sheryll Murray: Could I move on to the market opening? You have said that you are looking at April 2017. Does that remain a realistic target for opening the market? I have just a couple of supplementary questions: is this when you expect both retail and upstream competition to commence, and are you satisfied with the progress of the higher level group?

Richard Benyon: We do not have a timetable for upstream, but the target of 2017 for the retail market was taken on the advice of not least WICS and others. We think it is doable, but there is a lot of work to be done. What was your last question?

Q321Sheryll Murray: Are you satisfied with the progress of the higher level group that has been set up?

Richard Benyon: Yes. It is working well, and I hope that the 2017 target will be achievable and that we will be able to come forward with a date on the remainder reasonably soon, as a result of that group’s working.

Q322Thomas Docherty: It was also the Select Committee’s recommendation, based on three years from royal assent. Are you still confident of having a Bill in the next session?

Richard Benyon: Yes, I am confident. It is not necessarily in my gift, but I know it is a real priority for the Government.

Q323Thomas Docherty: One thing that does not appear in the draft Bill is the issue of cost principles, which as you know was about stopping subsidies of non-domestic customers by domestic customers. That principle seems to have been lost in the draft Bill based on the evidence from some of the water companies. Would you include a provision in the Bill to make clear that despite the abolition of the cost principle, it should still be an underlying objective for the regulators?

Gabrielle Edwards: I think it is primarily for the regulator to ensure that there is no cross-subsidy between households and non-households. Ofwat have been very clear that that is what they would do. Again, that is something that we would want to emphasise to them in charging guidance that we give.

Q324Thomas Docherty: I am going to take that as a no.

Gabrielle Edwards: That we are not planning to put it on the face of the Bill? We do not feel that it needs to be on the face of the Bill.

Sonia Phippard: But it would certainly be in statutory guidance.

Chair: The list of statutory guidance seems to be growing ever longer.

Q325Thomas Docherty: Turning to the issue of an exit route, this is something that you and I, Minister, have discussed on more than one occasion-statist that you are and free marketeer that I am. As I say, it stuns me that I am on the same side as Water UK on this, but all the water companies, both regulators and the Select Committee all think there should be an exit clause. The only people who do not think there should be one are Defra. Why?

Richard Benyon: I will tell you why, Mr Docherty. If we allow exits, we are effectively saying we will allow separation, and I think that is something for Ministers and Parliament to be accountable for. That would be a major policy change. There is nothing to stop a water company outsourcing its functions. That happens now; Bristol Water outsources some of their billing function to Wessex very successfully, and that is perfectly permitted. But if you are allowing a water company to exit from a key part of what they currently do, that is effectively the delivery of separation, which we considered very hard and came down against. I think that is a decision that Ministers should take, because that would be a major change. I know you disagree.

Q326Thomas Docherty: Everyone else disagrees. If you could point me to someone who does not think there should be exit clause, I would be genuinely interested, because as far as I can see, both regulators, the new entrants and the existing water companies all think there needs to be the option. Let me give you an example: a small, made-up water company, Cheltenham Water, has lost the majority of its customers to the wonderful Celts, who have come over the border, or a new entrant such as Southern Scottish, for our example, and makes a decision that it is actually just not viable to the business. Under the current rules, even if it has no customers at all, somebody has to sit in an office with a brass plate on the door, saying that they are the retail arm of this water company, which drives up the cost to that water company and drives up the bureaucracy to the regulators because they still have to regularly inspect their operations and so on, even though they have no customers at all. Is that not lunacy?

Richard Benyon: They have the ability to outsource and they can do that. If those circumstances arose, I think it would be legitimate for a future Minister to look at it. What you are asking me to do is progress a change that could see a very seismic shift in how we structure this industry, because companies would be able to separate their functions, and we think they should continue to be responsible-not necessarily carry out the function themselves-for the delivery of water right through the process, and the removal of sewage at the end.

Q327Thomas Docherty: I am always fascinated when a Labour MP has to give a Conservative Minister a lecture on free market economics, but the bottom line is if you create a market, the better companies will thrive, new entrants will come in and poorer companies will inevitably fail. Everyone on this side of the table thinks that is how a natural free market should work, even with regulation. So why does Defra not recognise that? There are inevitably going to be existing water companies that will fail because customers will get a better deal, but you are actually stopping them from getting out of the business and delivering better value to the customers that they want to serve, i.e. their household customers.

Richard Benyon: Okay, let me just try to nail this one. There are risks from enabling voluntary exits, by splitting licences into separate wholesale and retail licences. The current debate about licence modifications shows the risks around making changes to licences, and we do not want to unsettle the market. When separate licences have been introduced, there has been evidence of discriminatory behaviour, and that is not a risk that we are prepared to take given our policy position on separation.

The people that we always forget in these debates, on a highly sort of technical issue, are customers, and we need to think about household customers as well. They will not be able to choose their supplier, but they can benefit when water companies develop retail businesses and become much more customer focussed. It is not as simple a question, I would respectfully suggest, as you put. I think that there are very real risks from allowing separation in the kind of market that you are talking about.

Q328Thomas Docherty: The whole point of this debate is that the customers want it, through the regulators, and the companies want to do it. This is not a debate about separation. The companies themselves are saying they would like an exit clause, and the regulator says they think we need one, so whose interest are you protecting when everyone else says they want this?

Richard Benyon: I maintain that I am protecting the customers and the integrity of a business that people want to invest in. If we start creating loopholes through legislation that allow a different structure for our water sector, you take a very severe risk with spooking the investor.

Q329Thomas Docherty: I do not think so. The investors do not think that. I could understand if this was one of those arguments about "It’s me versus Water UK", but everyone is on the same page. The very people that you are worried will not get investment are saying they want the ability to exit the market if it does not work for them. That is why I am struggling to understand this, because you have got the regulators, on behalf of customers, and the businesses themselves saying they want this, because they are having to carry a cost.

Sonia Phippard: The water companies’ views are divided. Some of them certainly have suggested that voluntary exit would be important. But the Government have said that integrated water companies with oversight and responsibility for the full range of activities are vitally important. Water companies themselves argued quite strongly for that, and the Government was persuaded. Ensuring that water companies retain responsibility for ensuring that the retail non-domestic part of their business is provided well, alongside household retail and the whole business, is an important principle.

Q330Barry Gardiner: Martin Cave concluded that a single regime for entry and competition into the sector would be more practical in relation to inset appointments. You have said in the draft Bill that once the market reforms are in place, you will stop new inset appointments. Why don’t you go further and bring the existing inset appointments under the reformed licensing regime to simplify the market in that way?

Richard Benyon: These are the crossborder issues, you mean?

Barry Gardiner: No, it is the new appointments and variations regime.

Gabrielle Edwards: We consulted on draft provisions for changing this legislation during the last Government, and there was an appetite generally to continue with insets the way they are. The draft Bill suggests that we maintain that market and, as you say, no new appointees come in. There is also a wrinkle around Wales, where the retail reforms will not be introduced. The Welsh Government have no plans to at the moment, and so you do need to retain an inset regime for Wales.

Q331Barry Gardiner: It is not that there is not going to be a regime. You have already said that you will stop new inset appointments. Wessex Water said they are not sure it is in the customers’ interests to have these micro monopolies for housing estates spreading across the country. I think it would be far better to focus on the bigger issues of retail competition rather than micro inset appointments. It is a fairly simple question: why are you saying you will stop new insets but not actually rationalise the whole area and bring the existing ones under the new licensing regime? What is to stop you doing that, and why would simplification of the market in that way not be in the customers’ interest rather than maintaining those micro monopolies?

Gabrielle Edwards: We clearly could, but there was support last time we consulted on this for maintaining the market as it was. Let’s see what the comments are when we come back this time.

Q332Barry Gardiner: Sorry, I am asking for reasons. You say there was support. Well, of course, those people who would be affected by it will lose their micro monopoly. They will say things should be left exactly as they are. That is not a reason, with respect. I am asking you for the distillation of your thinking on this as to why it is a good idea or a bad idea in terms of what you have proposed.

Gabrielle Edwards: It is a regime that at the moment is working effectively.

Q333Barry Gardiner: But at the moment it does not have alongside it your new licensing regime. My point to you is once you put that new licensing regime in place, you are then left with your new licensing regime and those micro monopolies under the inset scheme, okay? And Martin Cave’s point, not mine, was would it not be more rational to simplify the whole market and say that you will take the inset companies that have grown up and now make them subject to the new licensing regime that you are implementing? It is a simple model; it means everybody is working on the same basis. What is wrong with that?

Gabrielle Edwards: In principle clearly there is nothing wrong with it.

Barry Gardiner: Good. Does that mean we can do it?

Gabrielle Edwards: But the question is over what sort of timescale you can introduce that change. At the moment we are proposing that you do not move to a single model straight away.

Q334Barry Gardiner: No, sorry, I am not proposing that you do not move to it straight away. You are proposing that you do not move to it. Let’s be absolutely clear. What you are proposing at the moment is that once the market reforms are in place, you will stop new inset appointments, but you are not going to change that regime or make them subject to the new licensing conditions. So let’s not pretend that saying one thing is actually doing another, or saying that you might do it later. It is not.

Gabrielle Edwards: There really is an issue around Wales, and there are lots of complications here about having a regime that operates on both sides of the border. We cannot remove a regime that is going to continue to be needed in Wales.

Chair: We will move on to Wales.

Q335Dan Rogerson: Scotland and Wales, perhaps. What progress have you made in discussions with the Scottish and Welsh Governments since the publication of the draft Bill?

Richard Benyon: We have had a lot of discussions, not just with the Scottish Government but also with the regulators. The Cave review, which informed most of the policy in the draft Bill, took account of the benefits that were delivered in Scotland and lessons learnt in other sectors. The inset regime, which was just being referred to, needs to be retained for Wales where the retail reforms may not be introduced. Consultation was carried out by the previous Government, and demonstrated that there was an appetite to continue with insets, so we have decided to allow existing water companies and inset appointees to continue to operate and invest in this market. This is going to require continued dialogue as we progress the details that exist outside the face of the Bill.

Q336Dan Rogerson: The Welsh Government has told us that they are not really happy with the level of engagement over issues around the geographical split of functions. What steps have you taken to improve the engagement over that? Obviously as a Cornishman, I understand the sensitivities around borders; we are very tetchy about these things.

Richard Benyon: I met with the Welsh Minister last week, Mr Griffiths, as part of our regular co-ordination meetings across the devolved Ministers. We agreed to have further discussions in the very near future to make sure that we are ironing out any difficulties that may be perceived to exist across the border on this, so it is a matter we are dealing with.

Q337Dan Rogerson: Mr Docherty raised the issue of de-averaging being a problem in the Scottish context. Do you think there is any truth to rumours that he raised earlier on-that there might be an unwillingness to continue with an Anglo-Scottish market unless that question is resolved?

Richard Benyon: It is a matter that can be resolved, and I hope that we can do this to the satisfaction of all concerned. I feel very strongly about this. It is about protecting consumers in some remote parts of the country, not just in England, but in Scotland and Wales as well. We want to make sure that we are not going to adversely affect those in rural areas.

Q338Chair: Just before we leave this area, it was put to us by two witnesses yesterday, SSE and Business Stream, that they have a very real concern, which I think has been demonstrated by the line of questioning this afternoon, that there is not a level playing field for new entrants as between Scotland, England and Wales. What reassurance can you give the Committee and the panel this afternoon that there will be a level playing field for new entrants coming into the market under the provisions of the Bill?

Richard Benyon: May I ask what particular examples they gave?

Q339Chair: They feel that the market data is not clear. They believe there is insufficient clarity on the face of the Bill and-I am sure colleagues will correct me-they feel confident they understand how it works in Scotland, and they are looking at it obviously with a view to either moving into England or English companies moving there. It is something you could either respond to this afternoon or come back to us perhaps in writing, but it was a very real concern as regards the regulatory framework and a level playing field.

Thomas Docherty: One example using the Scottish model is that Business Stream is required to be transparent on all its codes and all its pricing. As I understand it, and correct me if I am wrong, Minister, you are not currently requiring the same level of transparency for the incumbent water companies, so the concern that the new entrants have is that in effect they will have a different playing field than they would have in Scotland. I do not wish to open up the separation debate again, but because in their view there is not robust separation of functions, not separation, because of that transparency they are disadvantaged. Have I been coherent?

Chair: If you keep the same framework and we do not have legal separation, will this data be available to new entrants?

Sonia Phippard: That is precisely the type of issue that the two regulators, the water companies and the two Governments are working through in the high-level group.

Q340Chair: But the high-level group has only met once. When is its next meeting?

Sonia Phippard: It has met twice. It met at the end of last week. But also, more importantly, it is sponsoring a series of work streams that are led by the industry and are working on a cross-border basis to work through things like the market codes and the data requirements, just as Ofwat, on the English side of the border, needs to look at the regulatory requirements that will provide a level playing field with the rather different structures we have in Scotland.

Richard Benyon: At its meetings it has set up processes that are going to iron out these very difficulties, and there is a real commitment to do that.

Chair: That is very good to know, because that is not the message we are necessarily uniformly receiving from those interested parties.

Q341Dan Rogerson: On another area of potential change, David Gray’s Review in 2011 talked about Ofwat’s role in terms of handling complaints and his confidence that that work would be picked up elsewhere, particularly if very specific complaints on behalf of customers were not to be handled by Ofwat. The obvious potential place for that to go is the Consumer Council. They seem quite happy to take that on if a suitable arrangement can be put in place. Have you, as Minister or a Department, reached a decision on whether that would be something that would come through with the draft Bill?

Richard Benyon: Firstly, we are very keen to give customers improving redress in the water sector, addressing the recommendations of David Gray’s Review. We are assessing the case for giving Ofwat greater flexibility in dispute resolution, as used in other utility sectors. As far as transferring this function to other organisations, and CC Water have been suggested, we are still assessing this. It would need to go on the face of the Bill, because it would be for the Secretary of State to appoint an arbitrator to take on these cases.

We might review customer representation to identify the most appropriate arbitrator, but at this stage we have an open mind. As I say, it would require a change on the face of the Bill if we were going to do that.

Q342Dan Rogerson: So this is something that was up for decision, and at this stage you still have not reached a decision.

Richard Benyon: Through the pre-legislative scrutiny process, we are assessing this and listening to people, and we very clearly got David Gray’s message on this.

Q343George Eustice: Earlier on in the Parliament there was some consideration as to whether the Consumer Council for Water would be on the quango cull, for want of a better term. Is it definitely staying now? I know there are still reviews going on in some of these organisations.

Richard Benyon: We decided to keep CCW. It is a matter that will continue to be under review. I think it does good work, but it has to be looked at in the framework of customer organisations across Government, and we want to make sure that we are fitting in with the Government policy on this. I have the highest regard for CCW; I think it is well led, and I think it does a good function.

Q344George Eustice: And you do not think it duplicates the work of Ofwat?

Richard Benyon: That takes me back to Mr Rogerson’s question. I think that there may be an increased role for CCW on this or we may feel we can enhance Ofwat’s position to give redress to customers.

Q345Chair: Would it not be a little difficult to disband the Consumer Council for Water before all the statutory guidance has been agreed? You are asking Ofwat to approve its own statutory guidance without the voice of the consumer through the Consumer Council for Water. Would it not be a good idea to keep it in place until all the regulations have been agreed, at the very least?

Sonia Phippard: The Government’s current commitment is definitely to ensure that the Consumer Council for Water sees through the price review. You are absolutely right to imply, however, that the development of the framework for market reform will go on for longer, and I think ensuring that there is a consumer voice in that process is essential. Of the various options that have come up at different times, we canvassed the Consumer Council for Water. The role would continue, but we would need to consider whether the disruption of it maybe joining a larger organisation might be too much, given what else is going on.

Q346Richard Drax: Can I just move on to Ofwat’s duties on promoting sustainable development? The Government is "carefully considering" this rather tricky situation in that at the moment it is a secondary duty to promote sustainable development. The question really is what factors will you take into account when deciding whether Ofwat’s duty to promote sustainable development should be elevated to primary status? Further, Ofwat says that its duty is to balance customers’ bills, service equality, etc, to acceptable standards. It says itself that one of the major risks it sees, if it is given this task as a primary task, is to put off developers, who push in £4 billion every year. So what factors will you take into account?

Richard Benyon: There are those who say that this is just words. I think it is more important than that, and undoubtedly we will be tested on this through the Bill whether or not we change its duty from secondary to primary. I want to be absolutely clear where we stand. I think that in his review of Ofwat, David Gray looked at this very carefully, and he came down to the conclusion that a secondary duty was adequate. Ultimately that is a political judgment for Parliament to make through this Bill.

We are certainly open to considering the benefits of giving this equal evidence with other primary duties, but as you rightly say, could that be interpreted by a regulator in a way that could cause concern to investors? I think the definition of sustainable development requires environmental, social and economic factors to be considered, and I have got no fear that we can create a climate where water companies are fulfilling that. The Government’s strategic policy statement has sustainable development at its focus, in which we clarify that this duty should inform Ofwat’s regulatory strategy. As things currently are today, I think that is adequate, but through the processes of this Bill it is something we will continue to look at.

Q347Richard Drax: So at the moment it is likely to remain as a secondary duty; is that what you are saying?

Richard Benyon: Yes.

Q348Richard Drax: Based on that, and as Ofgem has a primary duty to promote sustainable development, and with water resources coming under pressure, and climate change and all the things that we all know, what justification is there to keep it as a secondary duty?

Richard Benyon: I suppose I approached this as an agnostic, but I want all our measures to be restoring our environment to where it should be. At the moment some water companies are sucking aquifers dry to provide water for households and businesses that this economy needs, so we have got some difficult decisions to take forward.

We commissioned a very eminent person who really understands regulation in David Gray, and he knows the Government’s environmental agenda and my Department’s real concern that, through the next price review and over the next two decades in which we are trying to reform the water sector to cope with issues of climate change and overpopulation, we are able to address that. Would we do that by changing this function one way or another? I prefer to be judged on other outcomes and what we are doing both within this piece of legislation and without it. As things stand at the moment, I am happy to go along with David Gray’s recommendation. But if someone can put to me an absolutely sure-fire killer point that would mean that primary duty would make a difference, we would consider it. I am sure we will be tested as part of the whole process.

Q349Mrs Glindon: Some of the provisions of the Flood and Water Management Act 2010 that this Committee was particularly keen to see carried forward quickly, including those on sustainable drainage systems and bad debt, have not yet been fully implemented. Will these outstanding issues be addressed before the new Water Bill is introduced?

Richard Benyon: The issue on sustainable drainage systems is that in August we finished a consultation on the measures that we were going to require principally local authorities to address. We have analysed those responses, and I can tell you that we got a very clear message that this is not a simple new burden that we can apply lightly. So we are not going to be implementing these in April 2013, but we will be implementing them in April 2014.

On bad debt provision, we consulted on a requirement by landlords to inform on the status of tenants when they move. That is quite a big burden. It is easier for a large landlord, an RSL or suchlike to do, and we are working closely with housing organisations to try to achieve that. But a large percentage, and it is particularly large in certain rural areas, of rented property is owned by people who own one or relatively few properties, and that would be quite a regulatory burden. We want to go down the voluntary route before we legislate, but there is also a lot we can do on reducing that £15 burden on our constituents that is the result of bad debt. There are some interesting innovations coming through water companies and the billing systems they use, win-wins and others, which we think can reduce that element quite considerably.

Q350Mrs Glindon: On that one particularly, Minister, the Committee were particularly concerned by the fact that it was unfair on poor customers, and we wanted to see something done urgently. The other issue was the water companies’ solutions to unsustainable abstraction in the next price review. We wanted something done on that as a matter of urgency; you have not referred to that either. What was said was the Department has made good progress, including water company solutions to unsustainable abstraction in the next price review, and that would be in terms of 2014 perhaps. Is that on track for the price review?

Richard Benyon: We are working with the Environment Agency and Ofwat to develop better means of giving incentives to help water companies manage their abstractions sustainably. We are moving funding water company solutions for restoring sustainable abstractions into the price review process, so that is going ahead.

Q351Mrs Glindon: And what about the poorer customers bearing the burden of bad debt.

Richard Benyon: I entirely agree with you. The burden does fall on the poorest. If people are having problems paying their water bill, the chances are that they are having problems paying their utility bills across the piece, so we must not see this in isolation. I do think there are other measures on which water companies should be pushed as hard as they can in trying to reduce this figure. We looked very hard at trying to find the data of those, for example, on benefits, and providing that to water companies, but came across the Data Protection Act in a fairly major way.

Q352Chair: If the customer agrees to lift the Data Protection Act, which is quite within their gift to do so if it was in their interest, why could you not share that information? This was our recommendation in our Flood and Water Management Bill Report.

Richard Benyon: Ofwat evidence shows that 60% of households at risk of water affordability problems do not receive means-tested benefits.

Gabrielle Edwards: I think the question is how to get to the position where the customer agrees, because you need to know that there is an issue there for the customer to be able to agree. So what is the process? Identifying the customers is the issue, and that is why water companies would like to have access to that data.

Q353Chair: We did make a specific recommendation on this point. Obviously it would mean going to the DWP, identifying the customers, asking the customers who were in receipt to agree, and then letting the water company know so that they can benefit from the charitable funds that already exist.

Richard Benyon: Passing the information from the benefits agency to the water company is an illegal act, but the individual furnishing their own information would be legal. How can you do that in a cost-effective way without increasing the burden on the welfare budget? Obviously that is a cross-Government issue, and I am happy to continue that if you have got a clear suggestion as to how we might be able to do that.

Q354Barry Gardiner: If they applied, could they not sign an authority form that the water company could present to the DWP, which would allow all future benefits information to be shared?

Chair: They could tick a box on their water bill. That would cost nothing. Just add a box on the water bill: "If you are in this category, you agree to release this information." There is another thing that I really do not understand; could you just repeat what you said, Minister, about when the sustainable drainage systems regulations now are expected to enter into force? I thought I had gone deaf.

Richard Benyon: April 2014.

Q355Chair: That is four years after the passing of the implementing Act, and you are asking the Committee this afternoon to approve authorisation on trust for a whole plethora of implementing regulations when you cannot even pass two sets. Bad debt was one recommendation, and SUDS was another.

Richard Benyon: I would ask the Committee to look very carefully at the sustainable drainage provisions in the Flood and Water Management Act, because they are very complex. We can be accused of over-consulting sometimes, but I think we were right to consult very clearly on this. We got a pretty collective raspberry from a lot of people who will actually have to be taking this forward. This was a Bill, you will be aware, that was taken forward at the final stages in the wash up of the last Parliament, and it is a provision in the Bill that frankly this Government has had to implement, and we find it extremely difficult. We do not want to create unwarranted burdens, particularly on local government and business, at a time when we want to reduce their burdens.

We do want to get this right, and if we were to implement this in haste-

Q356Chair: I do not think four years is haste.

Richard Benyon: Well with due respect, actually the processes of taking this forward have tested the resources of this Department and others who we have been consulting with quite considerably, and I would really urge the Committee to look very closely at the provisions in the Bill to see how we could have taken this forward in a way that does not cause a completely unwarranted burden on those we are expecting to take this forward.

Q357Chair: Again, we did make recommendations in this regard, and the Committee will have heard what you say and will be extremely disappointed that these have not been implemented.

Richard Benyon: I can only say with absolute vehemence, Chair, we simply could not take this forward in a meaningful way any quicker. To take forward the provisions that were in the Flood and Water Management Act in anything but the way we are would have been very, very difficult, particularly for local government, and that is not something that we were prepared to do.

Q358Chair: I just think you are reinforcing the point that a number of members of the Committee have made earlier. We are not at all comfortable that the detail is not on the face of the Bill. You are asking us to take on trust that you will be passing this statutory guidance when it has taken you four years to pass one set, and not a prayer of another.

Richard Benyon: The sustainable drainage provisions are nothing to do with this piece of legislation. They came in a previous piece of legislation.

Q359Chair: But you are making the point for me.

Richard Benyon: We want legislation to be taken forward in a highly effective and speedy fashion, and we found that the provisions in the Act are not easy to take forward. They were for a new Government to take forward, and we have done that in a way that has really tested the resources of both our Department and others who would have to implement this.

Q360Chair: We shall reach our own conclusions on this.

Richard Benyon: I am sure you will.

Q361Dan Rogerson: An easy, straightforward one for you now: how close are you to reaching an agreement with the insurance industry on a replacement to the statement of principles on flood insurance?

Richard Benyon: I am sure you understand that I cannot give you chapter and verse of our negotiations. It is extremely complicated, but I hope that we will get a solution that is both sustainable, i.e. for the long term, and better than the current statement of principles. I want it to provide insurance that is freely available, which the current system is not, and affordable. That is what we are working really hard to achieve.

Q362Dan Rogerson: One specific thing that was raised with me as one of the many rural MPs, and which has come up repeatedly during discussions, is where there are relatively isolated settlements with a few dwellings, and residents themselves accept that some sort of hard engineering solution to protecting their properties is not the obvious way forward; they accept that flooding will happen. It may be a problem that has occurred more recently than when they bought the property, but they are there now and they have to deal with it. They have taken every possible step to raise plug sockets, block off places where water can enter the property, do all the sorts of things that they can to their own property, but the insurance companies will not take that into account. They look at a postcode and they say, "Sorry". Is this one of the areas that you are negotiating closely? You cannot give us details, but people out there would like to know that the postcode issue is something that is being taken into account, looking at individual properties, and what steps are being taken.

Richard Benyon: It is deeply frustrating. The insurance companies will say that a lot of those provisions are not dependent on the householder being there, but quite a lot of them are. Putting the plug sockets higher is one thing, but you really need the kind of system where doors can be removed, furniture can be moved, but also airbricks can be covered and door secure systems are put in. Insurance companies say, "What happens if the person is at work or on holiday and this happens?" I have some sympathy with that, but only so far. When a householder has gone to the expense, usually driven by the force of experience, they should be rewarded through the premiums they pay or the excess charge that is made to limit that effect.

We strongly believe that there should be more clarity by the insurers as to how they can offer this. One of the most frustrating things we get as MPs is when people say, although they live in the same postcode as somebody who is flooded, it is a completely different circumstance to that particular group of houses. We are getting much better at providing information. The work done since the Flood and Water Management Act, implementing Pitt, has been hugely beneficial in terms of local knowledge and data, overlaying maps with what could happen and a better understanding of surface water management. We have got to get this reflected in insurance.

Q363Dan Rogerson: Yes, quite. You need to reassure people that you are trying to persuade insurers they need to look at a case. It needs examples. We are not talking about the huge majority of people who are looking for insurance; it is those where there is an identified problem that some process could be agreed where a discussion could go on around amelioration.

Richard Benyon: Yes, I can understand that. There is also more assurance that small communities can get flood defences now more easily than they could in the past because of our partnership funding scheme. In the past it was very often the smaller communities that missed out because of the cost-benefit; other schemes came in above them. Now at least they know precisely where they are. Also, the partnership funding scheme is weighted in favour of those on lower incomes because very often they do not have the capacity, not in just cash but also knowing how to progress a scheme. Weighting it in favour of those on lower incomes has been a great advantage, particularly to some isolated rural communities.

Q364Dan Rogerson: Finally, the draft Bill says that legislation may be required to help manage the financial risk of flooding. What is your most recent assessment of whether or not that might be necessary and what form it might take?

Sonia Phippard: I am afraid that comes back to the Minister’s first answer, given that the discussions are quite intense.

Dan Rogerson: We are not there yet, okay.

Sonia Phippard: The structure that might emerge is not clear, but if it involved either financial or regulatory structures or a combination that would probably require further legislation.

Q365Dan Rogerson: So presumably those with whom the Department are negotiating are well aware that the clock is ticking in terms of the need for the legislative side, then.

Sonia Phippard: Yes.

Q366Chair: Written evidence we received indicated there was quite a heavy shift in emphasis from resilience in the original Water White Paper, both in resilience against water stress and ensuring water supplies, but more especially, water companies increasing flood protection. Is it noteworthy that the draft Bill places less emphasis on resilience in those two areas than the actual Water White Paper?

Richard Benyon: Madam Chairman, this comes back to my opening remarks to your first question. We are implementing the Water White Paper. All our ambitions remain absolutely as they were in the Water White Paper. What the Bill looks at is certain aspects of that, but there is much that we can and should be doing now.

I can give you some examples. We are continuing to work with licence holders to reduce abstractions through the Environment Agency’s Restoring Sustainable Abstraction programme, which is seeing water of the quantity that is used by a city the size of Leeds returned to the environment.

Q367Chair: We are coming on to that in a moment. I am talking about specific reservoir provision and ecosystem payments that water companies are required to do.

Richard Benyon: Right. Those ambitions are very much top priority as well.

Q368Chair: But they are not here.

Richard Benyon: They do not need legislation to bring in more catchment approaches and upstream management. That is done through Ofwat encouraging the process through the price review. The building of more reservoirs is part of this Bill in that it encourages innovation and new entrants, but it will also be a duty of water companies to look at future provision in their long-term management planning, which they are now required to do. Legislation is not needed to see that kind of incentive.

Q369Neil Parish: Just before I move on to abstraction, I will make one final point on the insurance. I think affordability is the one thing that really matters. I have got constituents that come in who have insurance companies wanting two or three times the amount to insure them. Regarding postcodes, you have got hamlets and villages that are half a mile between one end and the other. Very often they can be a lot higher at one end than the other, and the whole thing is completely wrong. Are you going to be able to deal with that or not?

Richard Benyon: The Environment Agency uploads its data on a quarterly basis. Some insurance companies pull that data immediately; others do not. Sometimes you are dealing with somebody who understands this very clearly; sometimes you are not. I always encourage people to shop around. It is a particular issue for your constituents with what has been going on today and is forecast over the weekend. I know it is a real concern.

Through the localised resilience planning there is an extraordinary ability for lead local flood authorities to predict what will happen with different weather patterns. The amount of datum points they can put around a community to actually forecast this now is really amazing. We want to make sure that the insurance companies have it, because it can be reflected in people’s premiums.

Q370Neil Parish: I welcome that, and the Environment Agency has done a lot of good work on that. But you have talked about affordability; will it be in the agreement? People can get insurance, but if it is three, four or five times as much as they were paying before, it is not really an agreement, is it?

Richard Benyon: We have stated quite clearly throughout that we want this to make sure insurance is freely available, and that affordability is at the heart of what we come up with. That remains our ambition.

Q371Neil Parish: Okay, I hope you will achieve that. On the abstraction, the current abstraction scheme was introduced in the 1960s and was not designed to protect the environment or manage competing demands for water. Licences were issued on a first come, first served basis. So why have you not included a legislative framework for abstraction reform in the draft Bill?

Richard Benyon: I put this to some people who say it is quite simple to reform abstraction, and we can easily write provisions into a Bill tomorrow. I told them there were 22,000 abstractions in England, most of them providing necessary water for communities and businesses. Some of them are damaging the environment. What is there in legislative terms that we could bring forward quickly tomorrow that would make a difference?

Most of them, particularly those involved in our abstraction group, called the Abstraction Reform Advisory Group, are starting to understand the complications of this, but there is a lot that we can do now outside the Bill. We have talked about the Environment Agency’s Restoring Sustainable Abstraction programme, which is already tackling some unsustainable abstractions. We are able to vary or revoke abstraction licences now without paying compensation. This is a very powerful tool that has just been introduced. This was something that came from the 2003 Act, which we consulted on this year and have now implemented. We are developing a modified charging scheme that will allow a techie thing, which I am sure you understand, but others outside probably will not. The Environmental Improvement Unit Charge can be used to fund changes to rivers to improve them. Defra is working with the Environment Agency and Ofwat on incentives for water companies to manage their own abstractions more sustainably, and I mentioned that earlier. That is being done through the price review process. Ofwat are also implementing their abstraction incentive mechanism, which is something that was in the Water White Paper.

Q372Chair: Could we have a pithy answer?

Richard Benyon: I am trying to give the clear view that there is much we can do now. We do not need a Bill to do it.

Q373Neil Parish: Just one final question on this: is there enough guidance for water companies in drought times to be encouraged more to recycle water? That water could be used for crops. There are nutrients in it as well. This is one of my pet subjects. Are we doing enough to make that happen in this Bill?

Richard Benyon: With the innovation that will come through new entrants, I hope, we will see some new ideas on water recycling. Through the reform of the Reservoir Act and other measures, we are trying to encourage on-farm water storage in winter so it can be used in the growing season. We are also introducing a new system to manage things currently not managed through the abstraction regime, such as trickle irrigation.

Q374George Eustice: When we took evidence on this, the environmental groups were quite clear in saying that when the 2003 Act went through the same arguments were coming from the industry: "Oh, you shouldn’t rush this; it takes time. Give us 10 years and we might then be in a position to do it." Here we are on the brink of 2013. The White Paper concedes that the regime needs reform, but maybe not for another 10 to 15 years. Do you not think it would be beneficial, even if the Bill recognised the complications and the timescale it might take, to at least embark on the journey to do that?

Richard Benyon: I think we have embarked on the journey. We are talking to abstractors, environmental groups and industry to make sure that everybody understands what we are trying to do. We do have a long-stop date that sounds a long way away, but there is nothing to stop us making the changes that we are talking about now, implementing new legislative changes in the next Parliament, which will see the abstraction regime being reformed, and progressing as quickly as possible. I share the frustration of those who see important environments and rivers that we know and value being damaged by overabstraction. We can get on with it. I really encourage people to look at some of the measures that we had in the White Paper that we are able to implement without legislation.

Q375Barry Gardiner: In the Government’s response to this Committee’s report on the White Paper when we said this should be implemented as a matter of urgency, you said that the companies’ solutions for restoring sustainable abstraction were making good progress. So can you assure us that they will be incorporated into the next price review in 2014?

Richard Benyon: We are moving funding of water company solutions for restoring sustainable abstraction into the price review process, yes.

Q376Chair: Minister, you and your team have been very generous with your time. I think we have to conclude that if this was an end of term teacher’s report, progress towards resolving bad debt, sustainable drainage, even more efficient use of water has been very disappointing indeed. I just have to say four years is unbelievable for SUDS, but that is my pet subject so I will park that to one side. What reassurance can you give us that the deadline that you have set, the indication by 2017 for upstream competition reforms, will be anything other than an aspiration?

Richard Benyon: We have talked about dates that have been clearly tested and on which we have received advice in terms of upstream reform, and we think we can deliver that. On the other point, you were in opposition at the time, Madam Chair, and I know that sustainable drainage systems were a strong issue for you then. I urge you to consider what we were left with to implement; it is just not where I would have started. I can assure you that we are working as fast as we can to deliver this with the resources we have. There are certain times when you have to say in Government, particularly in the straitened circumstances that we find, that this is going to take longer than we would all wish. Nobody wants to see a regime for management of sustainable drainage quicker than me, but we have to make sure that it is something that future generations will not curse us for rushing and getting wrong.

Chair: We shall reflect on what you have said and draw our conclusions, and hopefully make some recommendations that will strike home. But we are grateful to you and the team for being so generous with your time and contributing to our inquiry. Thank you very much indeed.

Prepared 31st January 2013