The Committee consisted of the following Members:
John-Paul Flaherty, Committee Clerk
† attended the Committee
Aidan Kerr, Assistant Director, Association of British Insurers
Paul Cobbing, Chief Executive, National Flood Forum
Graeme Trudgill, British Insurers Brokers Association
Paul Smee, Director General, Council of Mortgage Lenders
Trevor Bishop, Head of Water Resources, Environment Agency
Pete Fox, Head of Strategy and Investment (Flood and Coastal Risk Management), Environment Agency
Dr Rose O’Neill, WWF-UK, Freshwater Programme Manager (UK Rivers)
Rob Cunningham, RSPB, Head of Water Policy, Blueprint for Water Coalition
Colin Fenn, Chairman of Water Resources Panel, Chartered Institution of Water and Environmental Management
Gabrielle Edwards, Deputy Director for Water Reform, DEFRA
Dan Osgood, Deputy Director for Flood Risk Management, DEFRA
Dan Rogerson MP, Parliamentary Under-Secretary for Environment, Food and Rural Affairs
Examination of Witnesses
The Chair: Good afternoon. We will now hear oral evidence from the Association of British Insurers, the National Flood Forum, the British Insurance Brokers’ Association and the Council of Mortgage Lenders. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill, and that we must stick strictly to the timings in the programme motion the Committee agreed to. I hope that I do not have to interrupt mid-sentence, but will do so if need be. Please would the new witnesses introduce themselves to the Committee for the record?
Q 7474 Sheryll Murray (South East Cornwall) (Con): New clause 1(1)(a) establishes that the Flood Re scheme will apply to household premises only. The Government have confirmed that there will be no legislative intervention for the provision of insurance to small and medium-sized enterprises. Is this approach justified? I know that there are slight differences between insurance policies for commercial premises and those for private premises, but is this justified?
Aidan Kerr: The first thing to say is that over recent years we have built up a compelling body of evidence from our members and other sources, finding that there is a systematic problem in the UK for households. We think there are around 200,000 households that could struggle to get affordable flood cover in a free market. We simply do not have the same evidence basis for SMEs in the same period. There are some reasons for this. The main reason is that in comparison to the household market—which is very much a mass market, very much a homogeneous, standard product—SMEs tend to have more of an individual relationship with brokers, and tend to have their insurance designed for their specific needs.
The obvious point is that there are much fewer SMEs than households, but it is also the case that their products are designed for them, and so there is much less of an affordability issue with SMEs. That is not to say that there are not places which we have seen in the media that have struggled, but Flood Re is not the solution for SMEs anyway, in the ABI’s view. Flood Re is predicated on affordability and on judging affordability according to a council tax band, which is not perfect but is good enough for households. You do not have that same ability to judge what is affordable between one SME and another SME, and they will have all sorts of different needs depending on the type of business they are, the stock they hold and their business interruption needs. We will monitor the market over the coming years to see if an issue emerges, but even if it does, Flood Re just is not the answer for SMEs.
Aidan Kerr: As I say, it may be that a flood insurance scheme of some sort can be developed that could incorporate SMEs, but their insurance needs will vary widely from one company to another even though you may categorise them in a similar way. The evidence is not there at the moment that this is a national issue for SMEs. There is a national issue for households, which is why we are proposing the national framework of Flood Re. The same does not exist for SMEs, which is why this industry would not be willing to support SMEs being in Flood Re, and nor do we think it would make sense for them to be in it.
Q 76 Sheryll Murray: As a supplementary question, if somebody is living above business premises, and their private residence is above a business, is there a case for including them in an insurance scheme?
Q 77 Anne Marie Morris (Newton Abbot) (Con): I hear what you say with regard to business premises being very different from domestic premises, but the Federation of Small Businesses is certainly concerned that very small businesses that have affordability problems are not covered in any way. While they clearly do not pay council tax, they do pay business rates. Is there no system that you could sensibly look at, based upon rateable value, which will enable you to introduce a similar system? You also say that you have absolutely no evidence of any problem of insurance for very small businesses. That seems a little unlikely.
Aidan Kerr: A few months back, we commissioned the Oxera consultancy firm to look at how something like Flood Re could be extended to SMEs. The conclusions from that work were shared with the Federation of Small Businesses, who at the time were saying “They actually get that.” What I am not saying is that there are no problems for any SMEs in the country. Clearly—we saw it in Todmorden last year, we saw it in Cockermouth high street—there are places where SMEs may struggle because they live in that particular high flood risk.
What I think I am saying is that a national intervention such as Flood Re is not appropriate for SMEs because we just do not have the evidence for SMEs. Actually, when the Government went out to consult on Flood Re they asked for evidence of it; there are anecdotes from various groups, but again there is no evidence that says that this is a national scale issue.
Aidan Kerr: Over the coming years we will monitor the market to see both how the market adjusts to Flood Re being implemented and how SMEs adjust to a free market. If evidence emerges then that suggests that there is more of an issue than we think, we would work with Government and the broking community. Most of this is actually sold through brokers, so there could be scope for a broker-led solution in this—I don’t know. If that evidence develops, at that point we could think, “What is the solution to this issue?” What we do know now is that Flood Re cannot be the solution for them because the framework is just not set up for SMEs.
Q 79 Anne Marie Morris: If I may, I shall move on to the proposed exemptions, which will clearly be in delegated legislation. At the moment, the proposal is really in three areas. One is band H and beyond, and I believe the logic for that is that they should be able to afford and obtain a property insurance. You then have the group that is post-2009 construction, which is related to historic evidence. Then you have the category of genuinely uninsurable, and that is a very interesting phrase which seems to require a great deal of thought as to definition and interpretation.
Will you clarify for me why those three? Do you believe now that all three are right and justified, and should there be others which have perhaps been put forward which the Government have not taken forward as other exemptions?
Aidan Kerr: Maybe it is easier to cover those in reverse order. Genuinely uninsurable is an interesting one, which we have looked at over the last three months. I think that this is a principle that our chief executives wanted in there—that Flood Re cannot be something that is opened up to properties that just cannot get insurance now. We pushed back to say, “This isn’t something that we are able to track, because how do you define what is uninsurable as opposed to somebody who cannot afford insurance?” We have looked at this, and so what we are proposing now is that Flood Re has no concept of genuinely uninsurable.
Households can use Flood Re; there is no condition, apart from those other exclusions, that says they cannot use Flood Re. What will then happen is that Flood Re will build up some data which shows the extent to which those houses flood over the next five or 10 years. It will be able to start working out, in a more productive way, which households flood very frequently—twice in five years, three times in 10 years, or whatever that might be. You can then think, “What’s the solution for those households?” So “genuinely uninsurable” is not something that is being proposed in the framework for Flood Re. That is the first thing which I think should be quite good news.
On the 2009 development point, my view, and the view of the ABI, is that inappropriate development is clearly the biggest risk for flood risk in this country. The Government have stated their intent in terms of flood defence investment, which we very strongly welcomed. But on the other side of it, where the properties are built, is, I believe, the single biggest driver behind increasing flood risk. We need to have something in here that states very clearly that this is sorting out a legacy issue; it is not providing a framework to incentivise inappropriate development. So the 2009 cut-off was put in place for good reasons in 2008, at the last revision of the statement of principles, and we feel that that should be kept in place for 2009.
Q 80 Anne Marie Morris: Would you clarify why 2009 was thought to be the right cut-off date? Secondly, some towns and cities are on floodplains, so when you talk about ensuring that properties are not built where there is a problem, some towns, villages and even cities would not have any development and I do not think that is realistic.
Aidan Kerr: The cut-off of 2009 was set because the statement of principles was revised in 2008 and we need to think back to the year before, 2007, when the floods hit. That set off some intense work in all sorts of aspects of flood risk, not least in developing a better understanding of all sources of flood risk: not just rivers and the sea, which the Environment Agency had a good handle on, but surface water through flood maps. That was the start of finding a way for local authorities to have a better understanding of which areas were at risk of flooding, regardless of the source.
That is why 2009 was set in place: because it was the first time that we had some understanding of surface water flood risk. That is a complex area. It will develop over the next 25 years and even then we will still need to make more improvements to our understanding, but that is broadly why it was set then. For me, the issue with amending that is that that would send a message that every time it is reviewed, it will be amended. Part of the Flood Re framework is to have five-yearly reviews. We are keen that the message on this is stern; 2009 was a valid cut-off date when the final incarnation of the statement of principles was agreed and that should stay in place now.
Paul Smee: I think that, given that this is a clear-cut debate, the risk may have to be priced into any mortgage offer, but at least the lender will have some clarity in their mind: they will know the status of the security on which they are lending. In some cases, that might cause some difficulty, and it will certainly cause a pricing issue, but there will be clarity.
Q 82 Anne Marie Morris: Mr Kerr, do you foresee individuals with houses built after that time having trouble getting any insurance at all? Will the problem be simply about cost, or might it be in obtaining insurance?
Aidan Kerr: The first thing I would say is that, without this restriction, the number of properties that have been built in an inappropriate place would have
People with properties that have a 20% or greater chance of flooding in any given year may find it hard to find insurance at all, because most insurers will think that there is not an economic business case to write cover. Others who have, for example, a one in 50 chance of flooding will probably be able to find insurance, but that will be increasingly priced at a risk basis. If it costs about £30,000 every time your property floods and you have a one in 50 chance of flooding in any given year, for the flood element you are probably looking at £1,500. That is a very simplistic calculation, but there will be a mixture of some who will find it hard to afford the home insurance because of where they live and those who cannot find it at all because the insurer cannot offer it at an economically viable price.
Q 83 Anne Marie Morris: I hear two conflicting messages from what you just said. I understand that some properties will not be able to get insurance, yet when we talked about the genuinely uninsurable, you said that at this point they would be covered and then you would look at the information year on year.
Aidan Kerr: The “generally uninsurable” relates to those properties built before 2009. We are saying that for the existing, pre-2009 issue, there is no way of defining “genuinely uninsurable” because you cannot split that from people who find it hard to afford insurance. Pre-2009, there is no concept of genuinely uninsurable for Flood Re. Post-2009, there is a mixture of those who will find that they can get insurance but that that is quite expensive and others for whom insurers cannot offer an economic price.
Paul Cobbing: It certainly does and we think it is slightly more complicated than that, because within that category there are properties which were given planning permission before 2009, but which were built after 2009. There are also those which may have been built in perfectly reasonable circumstances, but which, because of growing development or changing weather patterns, have become a flood risk. The third category is properties where we did not have an understanding of what the flooding risks were at the time. Aidan mentioned surface water as being a particular example and we have a new set of surface water maps due to come out next week, which will be the first fully comprehensive maps.
So there are groups within that post-2009 category who you could argue would be unable to get insurance or to get it at a reasonable price through no fault of their own. I can offer a suggestion. We need to ask for proposals of how we are going to deal with those categories: we could do it either through an arbitration panel or some other mechanism that will allow us to identify those people who have truly not chosen to go and live in a flood risk area in the full knowledge that they are in a flood risk area post-2009—it is not their problem.
Q 85 Anne Marie Morris: This sounds to me both urgent and important and not something we can just leave, because in my experience of flooding and water locally in the south-west, you would land up with a big fight about who is actually responsible: you have the home owner, the Environment Agency and the rest.
Paul Cobbing: So we need a mechanism, because at the moment what very often happens is that everybody says: “It’s not my fault”, and then passes the buck. We need a mechanism in place to be able to sort that.
Graeme Trudgill: Talking about a mechanism to help those people who cannot actually find insurance, we have one in place for other difficult, defined areas in insurance services, called signposting, where perhaps older drivers or older travellers going on holiday cannot access insurance. Since we launched a scheme with the support of Government and the ABI last year, we have helped nearly 100,000 motorists and travellers of older age to find cover.
We think that if property owners who are having difficulty accessing flood insurance are signposted to the British Insurance Brokers Association, a not-for-profit trade association, we would be able to find a home for the majority of those policies that are rejected by insurers. So, if a particular insurer does not want to insure someone because it is perceived as too high risk, then if it comes to us, we have brokers who have schemes that can insure, typically, 95% of those rejected by the insurers, which is the vast majority. If you sign up for the Environment Agency flood alert systems and you are prepared to put in place air brick covers when the warnings come, then we can work with most policyholders to find insurance for them. That would be a good mechanism to help those people who are having difficulty accessing insurance and are not covered by Flood Re.
Graeme Trudgill: I think that the last time we looked there were about 14,000 who were very difficult, but they did not sign up to the Environment Agency flood alert system and were not prepared to do anything to help their property. Therefore, we were not able to convince the underwriters to cover it. We are keen to work with policyholders so they can try to get cover. There are lots of flood insurance products now in place and the National Flood Forum advertises as well, so that, even if people live in the very highest risk area, they can get these things and we can find a way to insure them in specialist markets.
Q 87 Thomas Docherty (Dunfermline and West Fife) (Lab): Obviously, we are all trying to grapple with all the new clauses that have gone down, but bringing in the point from Anne Marie Morris, I will take Mr Kerr right back to this issue about those who are uninsurable. As I understand it, you are saying that it is a theoretical exercise at this point. As I read it, new clause 13 provides a review and an appeal. My assumption is that this relates to those people who may emerge in the future. Is that your understanding of these clauses?
Aidan Kerr: I think the review and appeal thing relates to the flood insurance obligation first of all, rather than to Flood Re. I might be wrong about that, but if you have been assigned into the area—that is, the scope for the flood insurance obligation rather than for Flood Re—then you can appeal about that inclusion. I might be wrong, but I think that is what that refers to.
What I am saying about the genuinely uninsurable properties is that when we agreed the memorandum of understanding in June, one of the principles that our members said they wanted to have in there was this concept of, “Well, if something is genuinely uninsurable, Flood Re shouldn’t be able to help it.” We went away and thought, “Well, how would you define that?” and our conclusion is that, actually, there is no fair way of defining that. Therefore, for the purposes of Flood Re, other than the other exclusions around 2009, bands H and I and SMEs, there is no concept of genuinely uninsurable.
Aidan Kerr: What Flood Re will seek to do is that, if you have homes that flood very often and they are in Flood Re, Flood Re will start to generate the data that show which properties will flood most often. What Flood Re will then try to do is to say that when you have your repair work done the second time, third time, or whatever it is that Flood Re defines as the number of times within a certain period of time that you flood, you will need to have resilient repair done, or we will have to work with the home owner to get resilient repair done, and only through doing that will you continue to have access to Flood Re.
It is important to know that Flood Re will be a reinsurer for the insurance company, and by law the insurance company cannot insist on that customer having resilient repair work done to their property—that has to be the customer’s choice. But if Flood Re is setting out that you will no longer be able to get access to Flood Re if you do not have that resilient repair done, that is the way that Flood Re can incentivise the right sort of behaviours.
Q 89 Thomas Docherty: I have to say that I sort of share the concerns of Mrs Morris. You appear to be saying on one hand, Mr Kerr, that there is no such thing as an uninsurable property, and then you promptly set out the series of steps that lead to someone being uninsured. So, which is it?
Aidan Kerr: Well, we are saying that in order to be included in Flood Re when it begins in June 2015, there is no concept of a genuinely uninsurable property. The second thing we are saying is that once you have properties in Flood Re, we will want to find a way of making sure that resilient repair—that action that owners can take for themselves—is put into the process. So, if a property floods quite frequently in a short period of time, Flood Re would seek ways of ensuring that that property owner takes action to reduce not only the cost of flooding of that property but the amount of time they spend outside that property. So, I am not saying that, once Flood Re starts, “genuinely uninsurable” will become a concept. I am saying that once Flood Re starts, it will
Q 90 Thomas Docherty: Okay. As I understand it, there are no clauses that will allow an individual to appeal against being classed as uninsured, but the Minister may provide clarity when he speaks later. First, is that the panel’s understanding as well?
Q 91 Thomas Docherty: I think that Labour Members are surprised by that. So what would you propose if Parliament was minded to introduce some sort of appeal mechanism? How would the panel suggest that is done? Should it be the Financial Conduct Authority? Should it be Ofwat? Who does the panel think is an appropriate appeal body?
Paul Cobbing: There are examples in other areas whereby one could set up an independent arbitration panel to pick up particular cases. That would be one way forward. I am not suggesting that that is the final way forward, but it is one way forward.
Graeme Trudgill: The FCA already has a rule that says the insurance industry has to treat a customer fairly, so I think we already have that regulator. We probably would not suggest we have any more. It is probably best if it would fall within the FCA’s remit, as it already has that duty upon us to treat customers fairly.
Aidan Kerr: The FCA clearly is the right sort of regulator in this space. I think that we would have to be clear on exactly what the appeal process is for, but if there is going to be some body that would manage that process, the FCA appears to be in the correct position.
Q 92 Thomas Docherty: As I understand it, some time post-2015, a person initially—if we are all on the same side and on the same argument—complains to Flood Re if, for whatever reason, Flood Re has decided that it no longer wants to insure them, meaning they are uninsurable. If, funnily enough, the person does not agree, what is their recourse, so that Flood Re does not simply get to chuck people overboard, if you will pardon the pun?
Aidan Kerr: I suppose the issue we have is that you could set up Flood Re as just a pure financial mechanism and nothing else, but I do not think that any of us thinks that that is doing it justice. If Flood Re is truly to work, it has to contain some mechanism whereby, if properties are extremely high risk, customers are incentivised to do something to change the way their property is repaired. You either do that, or you think, “Okay, if they do not do it, there have to be some repercussions, ” so if they are not taking action themselves—if they are not agreeing to resilient repair, for example—they may not have access to Flood Re. It seems slightly conflicting with that objective to then say that there should be an appeal process to allow a home owner who has not taken action for themselves still to have access to Flood Re.
Q 93 Thomas Docherty: At the risk of hogging the time available, I think the point is that Flood Re has taken somebody out of Flood Re and made them uninsurable in the scenario that you have talked about. I think all Members of Parliament have had casework with various bodies where the public body, if I can call Flood Re that, takes a decision on the corporate level that does not reflect the particular circumstances. I genuinely have a concern that we are providing no mechanism where it is possible that Flood Re has made a mistake.
Q 94 Sheryll Murray: Could you just clarify this, perhaps, in language that we all understand? I have a case where somebody was flooded. They were told that they could go 10 years flood free, and they would then be able to get insurance. Basically, they were flooded again nine and a half years down the road. That does not mean that they will not be able to access Flood Re, because their historic flooding record means that they will be treated the same as everybody else at the beginning and they can enter the scheme. Am I correct?
Q 95 Sheryll Murray: If that person was flooded two years later and they did not do any remedial work to prevent future flooding, and then in 12 months’ time they were flooded again, you would say that, eventually, if it was a trend, they would actually fall into the category of genuinely uninsurable.
Q 96 Sheryll Murray: If I can continue: basically, if somebody is constantly flooded and they do not carry out the repairs to their property or provide any remedial work, there is no need for an appeals procedure, because you have genuine, real-time evidence. If you have genuine evidence, it is very difficult to appeal against that, so there is no need for a costly body to conduct an appeals procedure where there is genuine evidence. Am I correct?
Aidan Kerr: Yes. In the first case, that person would have access to Flood Re. That is the first thing to say. As an aside, even if that person floods twice in 10 years, they could still be at a low risk of flooding. They may just have been unlucky. Once they are in Flood Re, what I am saying is that you have the unique ability to work with that person and to think, “How can we work to make this experience much less unpleasant for you next time it happens?” You are trying to work with the customer, but if it keeps happening and they continually refuse to have work done that would make them more resilient to flooding in the future, there may be some things that Flood Re can do to incentivise that. We have not developed anything like how that process would work, but Flood Re has the potential to try to drive that behaviour once it has the data on people and how often they flood.
Q 98 Mrs Emma Lewell-Buck (South Shields) (Lab): I am curious to know whether the panel is concerned that, under the proposals in the Bill, the Secretary of State will be able to bring forward details of the flood insurance schemes via secondary legislation, which would bypass adequate parliamentary scrutiny.
Aidan Kerr: From the insurance industry’s perspective, in an ideal world, we would like to have seen more detail in the primary legislation simply because it gives the industry more clarity about how it would work. The insurance industry are not renowned for being wild risk-takers. They would rather have as much certainty as possible about how this stuff works. But we are also realists. We know that the MOU was signed at the end of June. Between the end of June and now has been a short amount of time to get the clauses put together. In an ideal world we would like to see more detail, but we can understand why the Government have taken the approach of having quite a high level at the primary stage, leaving more of the detail to the secondary stage. But we think there should be sufficient scrutiny at that secondary stage because that will be very important.
Paul Smee: I would agree with the previous speaker. It is always a very fine balance to strike between me sitting here and saying we want more on the face of the Bill and me sitting here and saying that you build in inflexibilities if you put things in statute. Possibly the way through is to ensure that there is adequate consultation and scrutiny of these draft regulations before they come into force.
Q 100 Thomas Docherty: Just two quick questions and if you want to put your answers in writing afterwards that would helpful. Going back to the earlier points about the post-2009 category and the band H, it would be helpful to get something in writing about what you believe the costs would be if Parliament were to extend this. I think both sides of the Committee would find that helpful. Secondly, I have talked to the ABI about this previously and I know it was working on the figures and I am sure it has just forgotten to give them. I understand there are figures floating around of the estimated number of households affected in the four nations of the United Kingdom. I appreciate that you have not done it by water companies but you have done it roughly by nations. Could the Committee have those figures? If you have broken it down any further I am sure the Committee would welcome that information as well.
Aidan Kerr: Yes, we can look into that. On that second point, the reason why we have not shared the information yet is because we are doing another data collection of our insurers which will give us the most up-to-date analysis of what households will get put into Flood Re. Once we have that, which I think will be the end of December or early January, we will certainly send it through, if that timing works.
Thomas Docherty: We would accept that these are rough figures and we will not hold you to them. But the Committee would find it helpful to get an understanding of how many properties are affected. I suspect, looking at colleagues on the other side of the Room, that if you had figures for, say, the south-west, it would help many Members and equally figures for the north-east of England too.
Q 102 Hywel Williams (Arfon) (PC): I am slightly concerned. You seem to be thinking about flooding incidents in terms of individual properties and modifying individuals’ behaviours so that they put up better flood defences. But with climate change and our experience, especially in Wales, of large-scale catastrophic floods such as those at Towyn, will we be facing such events into the future which would, forgive the use of the term, swamp any reinsurance scheme?
Aidan Kerr: The basis of all of the parameters that we have designed Flood Re around, restricting new build, having as part of the discussions the absolute need to make sure that there is targeted flood defence investment, alongside the need to have something that incentivises people to take action for themselves, means that we are taking more of a holistic view of flood risk than just property by property by property. Flood Re can be adjusted to take account of climate change. As we have seen over the last decade we have had so many more flood events than compared with the previous decade. Some of the climate change predictions suggest that that will become more and more frequent.
Flood Re has been designed in such a way that you can make changes to it. You can adjust the various premises in Flood Re to take account of climate change. So if it starts to look as if flood risk is much worse because of climate change, Flood Re can adapt accordingly. It should be a comfort to people who live in areas at risk of flooding who used to be at moderate risk but are now at significant risk because of climate change, that Flood Re will be in place for the foreseeable future to protect them from the increasing risk of climate change.
Q 103 Hywel Williams: I am concerned that there are some places where it is not economically viable to build proper flood defences, because the capital value of the properties that might be flooded is so low, such as individual rows of houses in country areas. I am concerned that they will never be able either to be safe from floods or to insure their properties so that they can get some recompense if the worst happens.
Paul Cobbing: We are doing quite a lot of work, for example, through the Department for Environment, Food and Rural Affairs flood resilience community pathfinder scheme to explore different ways to get community involvement in delivering flood risk management, rather than flood defence. That is using the full range of measures to help with that.
We also need to think of this measure as an opportunity. If we keep on at the current rate and come to the end of the 25 years, we will actually be in the same position as we are now, in terms of numbers of houses that are still at flood risk, given increasing population, changing weather patterns and so on.
We must use this as an opportunity to engage much more effectively in a collaborative and partnership-based way, including the insurance industry. That is why the public benefit aspect of Flood Re is really important, so that we can maximise the opportunity to have flood risk management and increase the scale of its operation. The danger is that, if we do not, we will be sitting back here again in the future. We have got to see it very much in that light. We will obviously actively participate in trying to take those measures forward.
Q 104 Roger Williams (Brecon and Radnorshire) (LD): The Environment Agency flood maps are produced by a technology that I think is called LIDAR. As I understand it, there is a difference in accuracy between some of the maps. Indeed, insurance companies produce their own flood maps as well. What criterion will be used for those who will benefit from Flood Re and those who will not? Which map will be used?
Aidan Kerr: Actually that is one of the key benefits of Flood Re: no map will be used. The criterion for whether you are deemed by the industry to be at high flood risk is if you have to pay an insurance premium above a level deemed as affordable. If there are a dozen different insurers using different mapping approaches, and 11 of them result in a premium above that threshold but one, with more sophisticated mapping and approaches, comes up with a premium below that, that person will take the business and you do not go into Flood Re. It is a way to ensure that Flood Re reflects the market’s understanding of flood risk, rather than rely on the subjective issues with one type of mapping. The Environment Agency uses LIDAR, which is very accurate, but when that is taken in and put with the other methodologies you get the flood risk for an area of land—
Aidan Kerr: Precisely. So they will not rely on that because that will not give you an understanding of the flood risk of a property, just for the area of land in which the property sits. That is why Flood Re is more dynamic than some of the other solutions that came up over the past two or three years, because it does not rely on one single source of mapping and modelling technique.
Q 106 Thomas Docherty: Just following on with that line of questioning, how easy will it be for the consumer? My scenario is that I am looking to buy a house and want to check whether the property is going to fall into Flood Re. How do you envisage a member of the public being able to check that, if there is not going to be a map that you can look at?
Aidan Kerr: I guess, to be honest, I have not really thought about that. I suppose the current ways to do it would be to have an envirosearch report when they buy a house, or to look at the Environment Agency website. As you say, that would not necessarily translate to going into Flood Re.
I would say that Flood Re collects data for claims. In addition, the insurance industry more widely has committed to share claims data with the Environment Agency. That will help to inform the Environment Agency’s maps and help make them more accurate. At the moment there is no way to see if their property would or would not go into Flood Re. I suppose they could call up and
Q 107 Thomas Docherty: But surely, if you are a potential house buyer, it is not unreasonable that you would want to know. It strikes me that Flood Re has got all these data and knows whether my property or Mr Williams’s property is on the register. Forgive me for asking the question, but is not the solution for someone to access or to do a search through Flood Re? They can say, “I am thinking about buying this property. This is the postcode or the street, and Flood Re holds the data.” Is not that the simplest way of taking this forward?
Aidan Kerr: Of course, it could be. Ultimately, the Flood Re data will exist and will be available for the partners and for Government to use as they see fit. If that is one of the uses for it, I cannot see why that would be a problem.
Q 108 Neil Parish (Tiverton and Honiton) (Con): On the overall principle of the scheme, if the scheme gets going and there are not any major floods in the first year or two, I suspect the fund will build up and it will be quite resilient. What happens if—I hope this does not happen—there are major floods in the next year or over this winter? How robust will the scheme be? Will you be straight back to the Government with your hands out saying, “Let’s have some more money”?
Aidan Kerr: Okay. If that happens, it is envisaged that Flood Re will buy commercial reinsurance, and our work on that assumption at the moment is that you would buy commercial reinsurance to cover an annual loss of between, say, £250 million and £2.4 billion. The £2.4 billion is our initial assessment of what a 1 in 200 year would look like. So Flood Re will have income from the premium and from the levy, but there is a chance that you have a flood that exhausts that income and you have not got enough money to take it to your reinsurance threshold. If that happens, the industry has agreed to provide the funding to Flood Re, so insurers will provide the funding to Flood Re to allow Flood Re to then pay the claims back. So that is the industry saying it is happy to provide short-term funding to allow claims to be paid.
Aidan Kerr: I’m used to it; it’s fine. The idea is that the industry will be fine to provide that. It is important that the industry is able to provide that funding to Flood Re in a way that does not cause volatility to its profit and loss accounts. We believe we have come up
Q 111 Neil Parish: One final question. As far as affordability is concerned, you are absolutely convinced that under this scheme you will not price people out of the premium. It is all very well saying you will insure them, but if you are going to insure them for £1,000, £2,000, £10,000 or whatever, that is not affordable insurance.
Aidan Kerr: No, and this scheme hardwires affordability into it, because you have the affordability set according to council tax bands. That is not perfect, but it is the best available approach to have a proxy for ability to pay. It is not only that the premiums will be affordable for home owners who live with flood risk; the excesses will be set at a level as well. So there will be a standard excess of £250 under Flood Re, and that should prove to be extremely good news for home owners who worry about having £10,000 or £20,000 excesses.
Aidan Kerr: I guess this is one of the reasons why we have fed back through this consultation process as we have. The simpler Flood Re can be made, the better, because that will incentivise insurers to use it. The premium thresholds will be set according to what is affordable. They will be set for the foreseeable future, and the excesses that Flood Re offer will also be standard.
Paul Cobbing: It is really important to say that of all the mechanisms that have been proposed over quite a long period, Flood Re is the one that addresses affordability more than the others. Secondly, there will nevertheless be people—the Joseph Rowntree Foundation has done some work on this—in council tax bands A and B, and some even in band C, who are basically still income-poor, capital-rich within those parameters. There may be people who cannot afford those.
I think we also need to be clear that in all these exemptions and exclusions, there are people who are going to be outside this, and we need to target resources—in this case, the lead local flood authority role in flood risk management and co-operational partners—to identify who those people are, improve their flood risk management and effectively create a mitigation. There may not be high numbers, but we need to know what those numbers are, and we need to be able to intervene. Flood Re is the best model that we have available, but there will still be some people outside it.
Q 113 Roger Williams: Mostly, insurance premiums, if there is not a big flood risk, will be linked to the rebuilding costs. You could have a relatively small property on a low council tax band, but because it is a listed building, or because of the particular materials that it is built from, it would have a high rebuilding cost. How does Flood Re deal with that situation?
Aidan Kerr: If you have a property such as that, which has a particularly high rebuilding cost because it is a different type of property, first, there are more specialist insurers out there who can help out with such property. In terms of how Flood Re deals with it, it really is going to be up to the insurer to know whether
Q 114 Thomas Docherty: Regarding the interesting discussion about bandings—forgive me, but we are coming into this slightly blind—what happens if there is a rebanding exercise at any point? I see straight away that there seems to be some amusement from the panel. What will happen if a property currently is not in band H, but there is a rebanding process and it finds itself in band H? Would they find themselves falling out of Flood Re?
Aidan Kerr: The simple answer is that we do not know yet. That is something that will have to be established as we carry on the implementation of Flood Re, to allow us to consider it. At the moment, we do not know.
Paul Cobbing: This is slightly tangential, but I have had some correspondence with some of my colleagues in non-governmental organisations in Scotland and elsewhere who have concerns to ensure that the bandings that are used in those countries that are different from our own tie in effectively with the pricing of premiums and excesses. They are keen to ensure that there is a mechanism. Certainly, that is something effective if it is analogous.
Q 115 Thomas Docherty: When you say that there has been discussion with your colleagues, have they had discussions with Welsh or Scottish Ministers, or has that been all through DEFRA and the Treasury?
Paul Cobbing: As I understand it, the Scottish and Welsh Ministers have been talking to DEFRA and the Treasury. The Scottish flood forum, which is a charity that we created earlier this year, has been talking to me, and I have had discussions elsewhere about, “So what does it mean for Scotland? Our banding rates are different. How does this apply? How do we ensure that the default bodies have consulted properly?” That is the nature of the discussions.
Q 116 Hywel Williams: Can I take that a little further? It is not just that it might not be comparable between England and Wales, but Wales went through a rebanding exercise some years ago, which was then abandoned as far as England was concerned. You might see large-scale changes in England, but not similar changes in Wales, hopefully at least, because the rebanding exercise was—[ Interruption. ] Thank you. It was a disaster in some ways. Many properties were wrongly placed, and the appeals process was protracted. Ultimately, it was successful for many property owners. That is more of a comment, I am afraid.
Graeme Trudgill: Our view is that actually, we do not believe there should be an exclusion for band H. A little old lady who has inherited a big house cannot necessarily afford to pay a big insurance premium on her own, so we think that maybe the simplest thing is to let everybody apply, and then rate the premiums accordingly.
Q 117 Hywel Williams: As we are mining into the detail—as my colleague said, slightly blindly—can I ask about residential park homes, which are typically in places susceptible to flooding? I am thinking of properties on the riverside and so on. It is typical for them to be placed near floods. They are homes to many people. Will those homeowners be at a disadvantage?
Paul Cobbing: As I understand it, they are covered by separate and specific insurance policies. That brings up the SME question. Micro-businesses have been talked about. There are small-scale private landlords who are not covered by the scheme, there are the camping and caravan sites that you just mentioned and there are flats covered by management agreements. Those are all different aspects of the SME mix, as well as micro-businesses.
At the moment, micro-businesses covered by a council tax band are included in the scheme, but all the others are not. Our view is that for reasons of flooding and many other policy reasons such as fuel poverty, it should be a legislative requirement that private landlords should have insurance that includes flood risk insurance, as many do not. On SMEs trading in the community, the issue for us is that the impact assessment has been done on national lines, but for many communities, networks and community economic resilience are the issue. Because the impact analysis is done on national lines, evidence has not come forward about the impact on SMEs. It is not the individual businesses per se that are the issue; it is the wider community, and we need the evidence. For the Committee, it would be a useful exercise to all of us for that evidence to be gathered.
Q 118 Sheryll Murray: To return to Mr Docherty’s point about a change in council tax banding, property values change all the time, and most insurance policies are based on property value. If we had something rigid on the face of the Bill about council tax bandings, surely that would not give you the flexibility to change policies as time went on.
Aidan Kerr: Yes. The flood part of a policy cover will obviously depend on the household’s risk of flooding. The council tax band basis is the most readily available proxy for ability to pay, but one of the things that I will take away from this session is that we need to make sure we have processes in place to ensure that council tax banding, which is dynamic, can deal with flood, and that the process does not suddenly leave a property high and dry, if you will pardon the phrase, because it happens to have been reclassified from band G to band H. That is certainly something we will put into the implementation work on flood.
Examination of Witnesses
The Government have recently confirmed that they will seek to amend clause 1, which requires Ofwat to consult the EA over abstraction licences. Will you outline roughly the circumstances in which you might object to an abstraction licence?
Trevor Bishop: We operate a series of tests regarding an application for an licence. First, is there proof of legitimate need? If people apply for a licence on a speculative basis, they are locking up resources that could be used for economic growth or other aspects, so that is quite important. Is it efficient, in terms of the efficient and proper use of water, which is part of our duties under the Water Resources Act 1991? Would it have a negative effect on any other abstractor and is it sustainable with regard to environmental duties? Those are the three principal tests and we would object if it failed one of those.
Trevor Bishop: We grant licences, so we have the power to grant or not grant licences subject to those tests. Ofwat is not looking for the power to grant licences; what Ofwat may do, with upstream competition and also, I think, with clause 12, is encourage or even force bulk transfers of water between participants, and that could affect the use of an abstraction licence. If it does so, we would need to be consulted, because a change of use in an abstraction licence could cause a problem for another abstractor downstream by using more water, or it could actually affect the water framework directive. It is important that we are able to protect against deterioration.
Q 122 Mr Spencer: What differences do you identify between those who are abstracting from a watercourse and those who are abstracting from an aquifer below ground? Which is the best one to abstract from, to be blunt?
Trevor Bishop: It depends on the uniqueness of the situation. We would apply exactly the same tests to both. We generally find that if you take water from a river, if it is going to have an effect that effect is immediate on the environment and on downstream abstractors,. With groundwater, we tend to find that the effect is delayed, because when you take water from below ground there is a lot of storage which is removed
Trevor Bishop: Very much so. About a third of the country has now fully utilised its water resource in terms of year-long abstractions and that is why we are increasingly encouraging people who want to use water to take it at times of high flows and where they can store that water for when there is a deficit in supply. There are certain ways we can encourage and incentivise that. We have recently worked with the farming community to give them advice on storage reservoirs, winter storage reservoirs and so on.
Q 124 Mr Spencer: Clause 41 basically aims to tackle over-abstraction by removing the right to compensation—you can withdraw a licence without having to pay compensation. The EA has estimated that about 40% of licence-abstracted volume is not being used. If you go down that route, how many of those sleeping licences might suddenly pop up?
Trevor Bishop: First, clause 41 allows us not to pay compensation to water companies only. For all other types of abstraction, whether it is food, energy, goods and services or growth, we will still be required to pay compensation. It is only for water companies, and it will only apply when the licence fails one of those tests. Many licences were granted up to 50 years ago, and the environmental standards that we wanted to achieve from our legislation were different then. As the environmental agenda has increased, some licences have become unsustainable, whether under the habitats directive, which is statutory, or due to local concerns and issues. About 2% to 4% of the 21,500 licences are unsustainable as they stand. In what we call our RSA programme, we go through a process with the abstractor to understand the consequences of taking the licence away and whether there is genuine evidence to prove that there is damage. Very often we find that there is no evidence, and we all walk away.
Q 125 Mr Spencer: Can you give the Committee a bit more detail about the compensation packages? If you withdraw a licence from an abstractor, how far can the compensation go? If you withdrew it from someone who is producing a crop that is of a small size, you could put a value on the crop at that point, but you could also put a value on its market value at the end of the process in eight or nine months’ time.
Trevor Bishop: In the majority of cases we have changed the licences through voluntary negotiations with farmers and individuals. We have looked at the evidence, seen its impact and assessed the value of the licence and whether we can come to an arrangement. When we cannot, we unfortunately end up in a litigious situation, which has only happened a couple of times so far, and an independent planning inspector will adjudicate a hearing to understand what the right level of compensation is. Some people have built their businesses
Trevor Bishop: We have sections 51 and 52 of the Water Resources Act 1991, which require us to take licences away, but we must go through a process whereby the individual is able to claim compensation. Clause 41 is incredibly important because we simply do not have the financial resources to do that for the water industry. Clause 41 means that it is far more effective for customers’ affordability and the environment, because instead of us paying water companies a lump sum of cash at the end of an agreement, the claim would go through the planning process and we would often find the least costly solution for the loss of the licence to the water company. It really is a very good option for everyone involved.
Trevor Bishop: The fracking industry obviously uses fairly new technology. We have not seen a great deal of onshore oil exploration in England historically. Potentially, fracking could be many orders of magnitude greater than what we have seen historically, and a different process. We are working with the fracking industry to understand it. We have found that if fracking takes off moderately above the high-level scenario that is planned it would probably increase UK abstraction for the environment by 0.2 of 1%. That sounds like a very small percentage, and it is, but locally there could be issues. We are working with the industry to find out to what extent it could recycle the water on site to reduce its demand for water, particularly if it plans to do fracking in areas that are already water-stressed and where there is already environmental damage due to historical over-abstraction.
Q 132 Roger Williams: To what accuracy are the maps going to be published? I have had some difficulty locally because a map was produced that led to quite a lot of concern, and we were told by the Environment Agency that it was not going to do the most accurate ones because few houses were involved.
Pete Fox: The maps that we publish do not go to property level, so they do not identify individual properties. The level of accuracy is determined in part by the amount of building in an area. The intention is to provide as much accuracy as we can. We are striving to improve accuracy all the time.
Pete Fox: It depends on the amount of modelling information that we have for a particular area. When we prepare a proposal for a flood defence scheme, we will go into quite detailed modelling to provide an accurate assessment of the benefits accruing from an investment in flood defences. In that case, we may well have maps that are down to property level, but across the whole country, we cannot guarantee that level of accuracy, I am afraid. There is some variance.
Q 134 George Hollingbery (Meon Valley) (Con): Just returning quickly to the bulk supply licences, the Government have already said that they are going to bring forward a new clause to deal with the issue of people entering the market as new suppliers. Presumably these bulk water transfers will come from people who are already suppliers—I think that is the thought. There is also some thought from Government that there is a need for the Environment Agency to look at the scale of those water transfers, because who knows what might happen in the area where it is being abstracted from? Has the Environment Agency any thoughts on that? Do you think that that would be a good thing to be able to do?
Trevor Bishop: Yes, I believe an amendment may already have been tabled to ensure that Ofwat will consult the Environment Agency. That is important to ensure environmental protection and protection of other abstractors. The vast weight of evidence is that there is not a latent demand for water to be released and therefore we are not likely to see a significant increase in abstraction; it will be a redistribution of abstraction. Because so much of the country is already fully utilised, what you do not want to do is redistribute to areas where there is already stress on the environment and other abstractors.
It is also important in the clause that water is a closed market, so water companies will only be able to share between water companies or other inset appointments. That is very important, because water companies also have responsibilities under the deterioration in the water framework directive. They have duties to make sure that they act properly and with due regard for society, the environment and people in this respect.
Q 135 George Hollingbery: Does the arrangement that you see in the amendment give you any teeth or are you merely advisory to Ofwat? Would you expect Ofwat always to take your advice, or do need to have powers to impose it?
Trevor Bishop: No, we do not need powers, because we already have them under the Water Resources Act 1991 to take those licences away. Because we do not need to pay compensation, which will be dealt with through the planning process, we have a back-up position that we are not constrained by financial availability; we follow through a very streamlined process which would be far more affordable for customers as well.
Q 136 George Hollingbery: Finally, it seems to me there is quite a lot of new work for you in here. I am involved with the Environment Agency in other areas where they are always pleading poverty. Do you have the resources to be able to deal with this new level of work?
Trevor Bishop: Yes, we do. You will be aware that grant in aid to the Environment Agency is being reduced. We need to be a more efficient organisation, so we are moving from three tiers to being a two-tier organisation; we will be locally based with just a national interface.
What is also important with regard to water resources is that they are funded through charges and fees as opposed to any other income, so that figure is flatlined for a number of years and is not currently being reduced.
Q 137 Thomas Docherty: Returning to the fracking exchange that we had slightly earlier on, I am not an expert, but my understanding of some of the correspondence I have seen from my and other MPs’ constituents that there is concern that if fracking goes wrong, it may pollute the water table. From your nod, Mr Bishop, you are vaguely aware of what I am trying to get to. Given that this is an emergent technology, is the Environment Agency or DEFRA having discussions with DECC about who should pay the compensation if that goes wrong?
Trevor Bishop: I could answer your question right up to the point where you said, “Who pays compensation?” which I am afraid I am not in a position to answer. We are working with DECC and the Health and Safety Executive, which has an important role in ensuring that the design of the well is sufficient to protect both the groundwater and surface water from contamination. We also have responsibilities and duties on the design above ground and ensuring that that is all coherent. I am afraid I cannot help you on the compensation aspect.
Q 138 Thomas Docherty: So when you are looking at the licence conditions for fracking, considering how fracking licences should be granted and ensuring that there are robust procedures in the first place, is that one of the things that you are actively looking at?
Trevor Bishop: Very much so. In many respects, a fracking facility is not considerably different from many other industrial processes, such as onshore well site drilling, which we are familiar with; it is about the storage and use of contaminants above ground and the integrity of the well. What is different with fracking is that you are injecting muds into the ground, generally 1, 2, or even 3 or more kilometres down, and the likelihood of those coming up to the surface is absolutely minimal in most situations. Organisations such as the British Geological Survey are reviewing and assessing that risk and making recommendations to DECC, the Environment Agency and other organisations to ensure that this new technology does not introduce a risk that we do not have the tools in the toolkit to deal with. At the moment, we do not believe that that is the case.
Q 140 Hywel Williams: Can I just take you a little further on the fracking issue? If you are considering granting an environmental permit for fracking activities in an area that is water-stressed, would you consider the potential necessity of transferring large amounts of water from a water-rich area? To be plain with you, I am thinking about fracking in the north-west of England and the flooded valleys in Wales.
Trevor Bishop: It would not be our duty or responsibility to advise a private company on where to get its water. We would restrict, if appropriate, its access to water in the local environment, and if it chose to transport water by whatever means, we might have a role in that, but that would predominantly be for the operator of that site. For example, if it decided to tanker in water, our only real role—as long as that water was licensed and available where it was extracted and tankered from—stops with the large water resources. We would have an interest where the quality of the water had changed in the fracking process, and in how that was disposed of in the environment or otherwise.
Q 141 Anne Marie Morris: Mr Fox, I think you probably agree that prevention is better than cure. One of our challenges on flooding is ensuring that the Environment Agency is well aware and properly consulted when there will be development and new sites. Can you clarify whether you are happy and content, and if you feel, as a statutory consultee of the Environment Agency, that there is enough consultation through the planning process when a new development is envisaged and at the point of connection? I would also appreciate your thoughts on whether the water companies should be consulted—and should be statutory consultees—during the planning process and at the point of connection. That would ensure that, whenever we have a new development, we would be able to put in place, in a sensible and measured way, appropriate water supply and flood prevention mechanisms.
Pete Fox: Wow; thank you very much for that. We are a statutory consultee and we seek to work very closely with local planning authorities that have responsibility for determining planning applications. We provide them with general information that they can use for all applications. The flood risk maps, which have already been mentioned, will be a fantastic resource for them.
In addition, we provide bespoke advice and views on those applications that we consider to have the greatest flood risk. That is only a small proportion of the total applications made to local authorities but, nevertheless, when we object to an application on flood risk grounds, evidence demonstrates that local authorities take our advice and reject the application in more than 95% of all cases. Responsibility for granting planning permission, however, rests with the local planning authority. I think it is clearly in everybody’s interest to get the best information when making those decisions, so it would be helpful for local planning authorities to take into consideration other information and information from water companies. The actual determination as to whether that happens is a consideration for the Government, but we strongly support the view that local planning authorities should take a full range of information on board when making their decisions.
Pete Fox: I cannot tell you off the top of my head, I am afraid. We have a full suite of shoreline management plans, which are agreed and signed off by the relevant local authorities along the coast, that set out the management options for a range of epochs—eras of time—up and out to 100 years hence. The intention is to provide people who live and work on the coast with some degree of certainty as to how we expect the coast to change over that time period, and what they can expect in protection measures and investment from the public purse. There have been estimates of the likely change locally within shoreline management plans and I will do my best to furnish you with some details on those afterwards.
Q 143 Dr Matthew Offord (Hendon) (Con): This morning we had the opportunity to put questions to Ofwat about clause 22 and its duty on resilience of supply. It would be useful for us to hear your opinion on that duty. In particular, do you believe that that should be given priority over Ofwat’s second duty of sustainability?
Trevor Bishop: The relative priority is a question for the Government and due process. The drought of 2010 to 2012 really polarised for many people the fact that, in the water resources we plan for in this country, we do not plan for zero risk. That seems obvious, but when you drill down and understand the level of risk that we do plan for, the advice we—Ofwat, ourselves and DEFRA, in joint guidance—give to companies is to plan for the worst drought on record. That is very reasonable, but that means that we have a resilience of only somewhere between one in 60 years and one in 100 years for most of the country. The reality is that, sooner or later, the world will change and we will go outside that situation.
Resilience is therefore really key, because if you work through what would happen if our public water supply system were not to survive a drought situation, the economic and social consequences might be very significant indeed. Whether we have a resilience duty is very much for DEFRA, the Government, Parliament and so on, but certainly the importance of resilience is high in our mind. That is the guidance we get from the Government and others, and I can say that in the latest set of 25-year water resource management plans that we received from all the companies, and audited on behalf of the Government recently, there was no increase in resilience. We are still planning for what is actually quite a modest resilience for water resources.
Q 144 Dr Offord: Thank you. It would be useful if you could give any examples of environmental damage happening as a result of the sustainability duty. Do you have any experience or knowledge of that occurring?
Trevor Bishop: Most of the damage due to over-abstraction is because the licences were passed a long time ago. Our expectations and duties with regard to the environment have changed and licences could not keep up with those. I do not think that I can give you any examples of when the current regulatory regime has directly resulted in environmental damage. I think the question is much more about whether we could put
Trevor Bishop: I guess we already do with our ability to curtail abstraction when it is inappropriate to do that. Clauses in the Bill will certainly strengthen that yet again and make it easier for us to act, but we have not got to that situation. The way we work hand in glove with Ofwat, as a fellow regulator, ensures that we do not end up in that situation. That is why, whether it is explicit or implicit, we both operate under the principle of sustainable development, trying to find that dynamic balance.
Q 146 George Hollingbery: In answer to my previous question, you talked about reaching maximum capacity of supply and expressed worries about long-term resilience. I understand that we can do more about loss through the system due to such things as leakage. Is it your opinion that the only way to create greater resilience on the supply side is to increase storage capacity?
Trevor Bishop: No, that is very much not the case. Storage is certainly part of a solution, but as we enter a period in which our climate is likely to get more uncertain, reservoirs are extremely good to deal with differences between wet winters and dry summers, even when you have two dry summers. However, having worked in a water company for a large amount of my career, I know that when you watch a reservoir going down and you end up in a three or four-year drought, they are not so good.
What you need is a mixed portfolio of water resource options: managing down demand; increased storage; and innovative technologies, which could be aquifer storage and recovery, whereby rather than putting water in a reservoir above the ground, you pump it underground into vacant aquifers, or desalination such as Thames Water has done. In the water resource management plans, one of the new things that companies are very much looking at is whether we should use our waste water more in future, and recycle it for non-potable or potable use, to create more of a closed-loop system in our catchments, rather than letting all the water flow to the sea.
Q 147 George Hollingbery: I therefore put it to you that the answer is yes. It is not necessarily just reservoirs—I did not say reservoirs; I said storage capacity. Refilling aquifers is clearly an ideal and wonderful method, as the evaporation is much less, the filtering is better and you get cleaner water out of the bottom. On the use side, I accept that there is a lot we can do through building regulations and so on, but on the supply side, we do need more capacity of one sort or another.
Trevor Bishop: Absolutely. We produced work called “The case for change” in support of DEFRA’s 2011 water White Paper. That showed us that even if we carried out quite exceptional demand management over
Q 148 George Hollingbery: I presume you accept that resilience necessarily means redundancy in some way, shape or form, and that therefore there is a cost to consumers. One understands that there is no use having cheap water if there is no water, but is there an understanding at the Environment Agency that that inevitably means that there will be some cost to consumers on that?
Trevor Bishop: Absolutely, and that is why we do not have a high level of resilience today, because if you build a reservoir for a one in 100 year drought, it will sit there being paid for by customers for a large amount of time without ever being used. If you manage demand for water down, there is less redundancy within that option, but there is only so far you can take it. There is a cost to customers in increasing resilience.
Q 149 The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Dan Rogerson): In terms of resilience and management of the resources, and following on from what Mr Hollingbery was saying, if we are storing and increasingly trying to encourage other people to look at ways in which they could do that, would you agree that it would help if it were easier to transfer some of that resource around? That means that if redundancy is built into the system, the water can be used in different ways at different times, depending on where the demand is.
Trevor Bishop: Very much so. One of the difficulties with the way that we manage water resources in this country is that our water supply companies have generally come out of quite small unions around single resources, which have slowly become amalgamated. However, they still operate as relatively discrete units supplying their own customers. We therefore have companies with a surplus in juxtaposition with companies that have a deficit, so the clauses in the Bill that will encourage water to be shared more evenly between those respective areas are helpful. That is very often one of the most cost-effective solutions.
Q 150 Dan Rogerson: I was also thinking about in areas, so perhaps water that is not supplied into the mains water supply usually, but is used for other purposes. It is not so much having huge water mains across the whole of the country tying together, but looking at management within each area as well. Is that the sort of thing that could be helped by some of the measures in the Bill?
Trevor Bishop: Very much so. Part of the Bill enables water companies to take water from third parties. Public water supplies are about 40% of the abstraction licences—50% to 60% is used for other means. The interaction between those other third parties, whether they are farmers, energy companies, or goods and services industries, is relatively little. The Bill will potentially enable the use of that water more effectively within catchments, and that has a tremendous advantage. We do not know the size of that market yet. We have all done some work to anticipate it, but I think that market forces will dictate that in the fullness of time.
Q 151 Dan Rogerson: On the concept of the duties—I am sure we will hear a bit more about this with the next panel—is your understanding of resilience just focused on the human part of that triangle you were talking about, or is it also in terms of environmental resilience?
Trevor Bishop: It is resilience for the economy, people and the environment together. The aspiration with elements of this Bill, particularly clause 41, is to ensure that we can get our catchments back to a sustainable balance as quickly, efficiently and cost-effectively as possible, which is really important. Resilience for one has added resilience for those other two components as well.
Examination of Witnesses
Q 152 The Chair: We shall now hear oral evidence from the Blueprint for Water coalition and the Chartered Institution of Water and Environmental Management. Would the new witnesses please identify themselves for the Committee?
Q 153 Dr Offord: I have been asking the other witnesses this morning and this afternoon about clause 22 of the Bill, which requires Ofwat to have a primary duty to increase the resilience in upstream sewerage water supply. Do you believe that such a duty should take precedence over Ofwat’s secondary duty, which is sustainability?
Colin Fenn: I will kick off and I am sure the others will be interested as well. Yes, absolutely. One of our concerns in the institution is to attain the balance that Mr Bishop talked about, between the trilogy of people, business and the environment. If there is a primary duty with the economic regulator to balance two, but not the environment as a third, inevitably at the point of trade-off, the balance between those trade-offs will not be sufficiently protective of the environment, in our view. So we would like to see the environment brought into the same position on the negotiating table as affordability for customers and financeability to discharge functions for water companies.
Rob Cunningham: Absolutely. We would very much like to see resilience and sustainability on an equal primary footing. I think resilience has a lot of merits in terms of providing a framework to analyse the industry: so is it resilient to shock? But it is very different from sustainability and at some point, particularly in the very narrow framing of the Bill—where resilience is framed in terms of ability to provide supplies to customers and maintain sewerage services—one potential way of
Dr O'Neill: In the last price review there are a few examples of why there is a clear need for the sustainable development duty to be raised to a primary level. We saw examples in Hertfordshire where the water company put forward a number of metering and leakage schemes. Ofwat actually forced the company to remove that from their plan because they deemed the area to be in sort of water surplus, even though that surplus is just an illusion based on the abstraction licences that are really out of date and need to be reformed.
We think that there is a case already, and with the new powers that are in the Bill, specifically around upstream competition and clause 41, which means that Ofwat will have a yay or nay veto on compensation on the abstraction scheme, we think it is even more important.
Rob Cunningham: There is an enormous amount of literature out there on resilience. It is kind of both blessed and damned by the fact that it means everything to all people—a bit like “sustainability”—so there is a need to frame it in some way so that we understand what we are talking about. When you think about resilience and what the industry is about, you could absolutely consider the fact that the industry, through its operations—tackling pollution, managing demand, managing river flows—can contribute to the resilience of the natural environment to shocks like climate change.
You could broaden resilience to think about how the industry contributes to the resilience of the natural environment. You could also think about how resilient the industry is to financial shocks. There is a lot of interest in the press about the financing of these companies—the cost of debt and the levels of debt—so resilience is a concept that could be applied equally to the financial situation of the companies.
Colin Fenn: The environmental resilience is important to that. The wording of the clause currently has the ability to be resilient as providing security of supply to people and business against environmental constraints, or pressures I think was the word. That, to me, does not place the environmental on an equal footing with the needs of people and business, and all three ought to be entailed and included in the definition of resilience. It is about resilience to the greater volatility, which the challenges of population growth, climate change and lifestyle change inevitably bring towards us.
One area that the Bill does not cover is the installation of universal metering. As you know, that only occurs in water-stressed areas at the designation of the Secretary of State. Do you agree with the Government’s view that the best way forward, upon ensuring the availability of water meters, would be at discussions through consumers and the water companies themselves, or do you see an alternative?
Colin Fenn: I believe that demand management and using ways that demonstrate the relative scarcity and value of water to people in households, business and
In our view, we need to introduce a basket of tariffs that take care of the legitimate needs of those members of society who are vulnerable and need protection, whilst making sure that the cost of water for essential uses is kept affordable for all, but sends us those signals and gives us the wherewithal to respond to changes in availability while also providing disincentives to wasteful use of high levels of discretionary water use.
Dr O'Neill: We urgently need to see more on demand management. It is such a disappointment that this is a water Bill and it does not really have anything in there to address the demand issues. We have the latest set of water resource management plans from the companies, which aim to get to 145 litres per person by 2020. We think that this is incredibly unambitious, and it shows that more needs to be done on the demand side. Metering is the tool to address demand. Not only does it provide customers with a financial incentive, it also allows you to target households that are using large amounts of water and provide water efficiency support. It allows you to find out where all the leaks are, especially on the customer side and on the supply pipes. Metering really is fundamental.
As a minimum, we would like to see the Bill allowing water companies—in consultation with their customers through the water resource planning process—to select metering as an option where it brings clear benefits, regardless of where they are and whether or not they are water stressed. Above and beyond that, we would like to see more Government leadership, saying that metering should be part of a resilient and sustainable water industry.
Dr O'Neill: We watched what happened in Scotland with interest. We saw that retail competition there has allowed much greater water efficiency, and much more focus on the service that the company provides. We see that as a good thing.
Rob Cunningham: One of the things about which some of us certainly might have concerns is driving behaviours among domestic customers and creating a sense of place, ownership and location. It is about the relationship between yourself and your local environment, which is quite important in thinking about the link between your water use and driving down water use. There could be some risks for personal behaviours if you bought “easy water”. If you break the geographic link with where you are, why should you actually care? We saw this after privatisation in the 1995 drought. There was a blip of anti-efficiency behaviours, because people thought, “I pay my bill and these are private companies”. Thankfully that has dropped off, but that geographical link for domestic customers could well be very important.
Q 157 Thomas Docherty: We had some exchanges this morning when I commented on a sense that people are not as well educated about water as a finite resource—perhaps not scarce, but finite—as they are about how they use energy. There was evidence from the panel that this was true. Do you think that is a fair assessment? If you do, what can the ever-charming Minister, Ofwat or indeed anybody else do to encourage greater understanding of the finite nature of this resource?
Rob Cunningham: When I attended a water industry customer care conference—fascinating as it was—there was a lot of discussion about the fact that most companies have an aspiration to be the silent service, and to operate under the radar without people being aware of them. Interestingly, there is a recognition that that is no longer the way to go, because water companies need to be more engaged around water use, reducing demand and changing behaviours.
It is not only about reducing demand. It is also about all of those human behaviour issues such as what people put down their toilets, causing blockages and sewer flooding. It is about becoming much more engaged with the customer base. I think part of it has stemmed from what is perhaps an understandable sense that, “Well, we are successful if no one talks to us,” which is now turning into, “We are successful if we talk to people and we can change their behaviours.”
Colin Fenn: We would be very keen to see a greater connection and understanding by people about the consequence of taking more water, perhaps more than is needed. There is an effect, and the more we take the less is left in the environment. In certain places and at certain times, that brings the potential of damage to the environment, to aquatic species and species living alongside rivers and elsewhere in catchment areas. We welcome activity by companies—which exists and should be supported—but the pressures upon water resources are increasing and will increase. If we are to move towards sustainability and resilience, and being able to provide water without creating damage, we need to have a greater understanding of the place of water and we need to put a value on it. Anything that helps us to do that through education, awareness, tariffs and metering is to be welcomed.
Q 158 George Hollingbery: Unsurprisingly, this group of NGOs is very concerned about the sustainability duty. As am I. I am chairman of the all-party angling group. It is very important to me that we have water flowing down our rivers and we do not have it flowing down our rivers in too many places. There may be a little bit of a red herring here about the sustainability duty. It seems to me that the resilience duty and sustainability duty, as long as the Environment Agency is clearly involved in the process of setting this up, are very closely allied. We have just heard from the Environment Agency. It will have control over bulk transfer licences. It will have control over a change of use of water. It will be fully inputted in the sleeper licence reactivation issues. The financial compensation has been removed from the extraction changes.
We also have the Government document from May of this year and the strategic policy statement of Ofwat, incorporating a social and an environmental guidance. Sections 3.6 to 3.9 make it absolutely clear that sustainability must be part of what goes on. Are we basically all
Colin Fenn: Unless that primary duty is there to safeguard the environment, the nature of the pull will act against the environment and will require it to take advantage of the secondary safeguards that exist. If we are convinced that sustainability as well as resilience matters are being attended to effectively already, it seems to me that there is no extra cost involved in raising the duty to a primary level as opposed to leaving it at a secondary one.
Rob Cunningham: My understanding of the Bill, and my understanding of the bulk supply protection that was discussed in a paper from DEFRA in November, which talks about the Government amendments, the specific protections for bulk supply apply to bulk supply orders made by Ofwat. My understanding—I am not a lawyer—is that those orders will be made where companies cannot agree a bulk supply between them. So it is very specific circumstances. If the system works well, Ofwat should not have to get involved. If Ofwat does not get involved, under the system and under the amendments that are made here, the Environment Agency will not be consulted on those bulk supplies. So that particular safeguard will operate only where two companies do not agree.
Rob Cunningham: It does. I noted that. That is worth looking into. The Water Resources Acts of 1963 and 1991 gave authorities wide powers to revoke licences with compensation to amend, to redistribute and all of these wonderful things, which they have hardly ever, if ever, used. On paper the Environment Agency could do a whole bunch of things, but the Water White Paper showed us and the evidence underpinning that from the Environment Agency and the abstraction reform advisory group work show that those systems have not worked and will not work. I do not have any great faith that that phalanx of historical legislation that is yet to work after 50 years will somehow spring into action in this new dynamic trading system. So I do not have great confidence myself.
Dr O'Neill: There is also the issue of clause 41. Effectively what clause 41 does is end the compensation for water companies and puts it into the price review. That is welcome because we have heard that the current mechanism for funding compensation was not working. It pretty much gives power to Ofwat to decide whether these abstraction licences should be reduced through their price determination. It is really important that they consider the sustainability as well as just the short-term cost to customers when they are making that decision.
Q 160 Dan Rogerson: I am interested in the issues around the duties on Ofwat, which we are discussing here. First, Mr Fenn, your concerns seem to be around how resilience is interpreted. Returning to what Mr Cunningham was saying and the discussion I had
Q 161 Dan Rogerson: Coming back to colleagues from Blueprint, I am interested in the evidence that we were given about what is in place at the moment—you feel it has not yet delivered the results that it had the potential to deliver. A lot of this will be around abstraction reform, which is something we were talking about and, as you are aware, on which we will soon be consulting. Would simply having a sustainable development duty on the face of the Bill necessarily mean that the behaviours you want to happen would happen? Would we merely be ticking the box that says, “Sustainable development, job done,” without necessarily delivering some of the outcomes that you want to see? My worry is that we could just be saying, “Great, we’ve done it,” but unless we are serious about what we do on the ground, then it will not change anything.
Dr O'Neill: I feel that clause 41 coupled with the sustainable development duty would give us a lot more and bring us a significant step forward in terms of addressing the current levels unsustainable extraction.
Rob Cunningham: That is the key thing. There you have the power to do or not to do something, in this case pay compensation, and the duty which provides interpretation in terms of how Ofwat then responds to that signal. I would not sleep well at night if we cut everything out and just gave Ofwat a sustainable development duty. I would not expect that suddenly to lead to a transformation. How the measure works in concert with other parts of the Bill will help to shape the way in which Ofwat acts and responds to those signals that are in the Bill.
Q 162 Dan Rogerson: Bearing in mind your earlier caveats about the things you would like to see in the Bill which have a long track record in terms of abstraction reform, those are the areas we need to get right in order to deliver the outcomes that you want to see. Just putting a sustainable development duty on Ofwat is not necessarily going to be the silver bullet that will deliver everything.
Q 163 John Cryer (Leyton and Wanstead) (Lab): The Bill seems to establish a broad framework and many of the details are going to be filled in. In fact, a lot of your intentions will be in the form of statutory instruments, secondary legislation and guidance. Can you explain the reason for that?
Dan Rogerson: We have discussed in evidence sessions —which looked a little different when sitting over there— the key elements of the Bill, for example, around market reform, where what we want to do is to set in place a framework for the regulator to regulate and make sure that they get it right. I think there has to be a clear statement of intent from the Government about where we go and what the shape of it is, but the detail ought to come from the regulator, because we do not want to get into a state of affairs where the Government are stepping in and regulating the market directly—that is something for a strong regulator to do. So we need to have the opportunity for those regulations to come forward in that way, with the Government as a backstop to ensure that there is nothing alarming that needs to be dealt with.
Similarly, with the provisions on Flood Re, this is an industry-centred solution, as we have heard, so we are not setting up a public body here, which would have been another option. What we have is an industry-based solution, and we are putting in place the mechanisms that we have to put in place through legislation to allow that to happen in a way that will deliver affordable cover for people.
Again, we need to proceed on the basis that the industry can come forward with what they think is the best way of allowing Flood Re to operate, and then ultimately the Secretary of State—and Parliament—can have the chance to say no if he or she thinks that that is the wrong way to go about it. We are not trying to put everything on the face of the Bill.
The other point to make is about flexibility, as we have heard. There will be some things particularly with Flood Re that will evolve as the situation becomes clearer and we get more information about who is being affected and how. We need to ensure that we do not have to come back and go through a second, third or fourth Bill to get that cover right.
Q 164 John Cryer: I am interested in the principle of leaving everything to statutory instruments. This is not a party political point, because the volume of statutory instruments has increased to an industrial scale over 30 or 40 years. When it comes to flood risk insurance, band H, for instance, is being exempted. I do not see why that should not be on the face of the Bill. Why would that change in the coming months?
Dan Rogerson: We have heard some examples from the National Flood Forum and the industry about how the picture will potentially change as we get more information and data, and as we react to climate change and all the factors that will be there.
In order to make the system a robust and working one, we must have some flexibility. I think you are always setting in any legislation the understandable willingness to get as much on the face of the Bill as we can, so that we can feel that Parliament as a whole has set it, against the ability to be flexible.
There is a cascade, if you like, from what is in the Bill—this is not a three-clause Bill and there is quite a bit of detail—to the potential for secondary legislation. Ultimately, we also have, within the two examples that I have given, the ability of appropriate bodies, whether it is Flood Re in the industry or the water industry and other consultees with Ofwat, to come up with a framework. Those are the three tiers of ways of getting it right. We must be careful about setting too much in stone in primary legislation, because we would end up with a system that cannot be flexible enough to work. That would cause us all sorts of problems in the future.
Q 165 Mrs Lewell-Buck: The first panel we had this afternoon expressed some reservations regarding the point that has just been made, but they said that if there was proper consultation and thorough scrutiny, those reservations would be limited. Can you assure people that there will be proper scrutiny and consultation?
Q 166 Mrs Lewell-Buck: This was from the first panel this afternoon in relation to insurance. I would go further and say this: in light of the amount of issues that are not on the face of the Bill, will there be proper scrutiny and consultation for all those?
Dan Rogerson: As we have heard from the Association of British Insurers, which was giving evidence earlier on, as well as getting it right, we have been trying to stick to a timetable, so that we can deliver this on time to ensure that the cover is there when it is needed. Perhaps in an ideal world, with Flood Re, we could have said, “Right, we will not legislate on this until next year. We will give more time for those negotiations to go on.” In order to deliver things on time, we have to stick to the deadlines that we have set out. We published draft clauses with regard to Flood Re, which people have had the opportunity to comment on, and now we have been able to give some more detail about how things are emerging.
The major issues were set out in the memorandum of understanding, but there are still some second-order issues—technical issues—around the finances and stuff that we have to get right to make sure that the industry is happy. The mechanism levies other people—it is effectively a tax—so we have to make sure from the public accounting point of view that we have got everything signed off and that the Treasury is happy as well. We are trying to get things out in public as quickly as we can and we now have clauses that the Committee will be able to consider over the next few weeks and in the subsequent stages as well.
The consultation will be absolutely crucial to getting this right. We want to get to the point where we are happy that we have a system that works for the people who need the cover and that delivers the original objectives that we had as constituency MPs for people out there
Dan Osgood: Just to add to that, we consulted on the policy and on the draft clauses over the summer. We published the Government response to the consultation last month. As part of that response, we committed to—before moving ahead with any regulations either for Flood Re or for the flood insurance obligation—further public consultation on the draft regulations, so there will be at least one more opportunity for public input into that.
Dan Rogerson: We heard a lot this morning, understandably, from the Scottish example, because they are ahead of what we have done here. However, the model goes only so far. It is not an exact parallel. For example, how residential bills are paid in Scotland is different from how they are paid in England and Wales. When we are looking at retail exits, which was obviously a topic of some discussion, we are looking at exit from the commercial, public sector and charity side of retail, because we still have the residential customer base there. They are left behind.
As we heard from the evidence of the Consumer Council for Water, aspirations include the economic savings that are there to be made. For all those market reasons, I understand why there is an argument for retail exit. We also want to see gains in terms of customer service, innovation and better relationships with customers, because there has been a feeling in the past that, although the water industry has come a long way in terms of engineering solutions, it has not been perhaps the most customer-focused business.
Feedback from business customers shows that one of the gains in Scotland is that business customers value a much better customer interface. I do not want to see residential customers not getting the benefit of that. If we have the companies that are still maintaining that residential customer base exiting the retail market in business terms, you are going to be left with the people who are not innovating quite so much dealing with the residential customers.
Dan Rogerson: Absolutely. If the question is, “Why not competition for residential customers now?” there are a number of things that we could do all in one go, but we are trying to proceed at a pace where we think we can take customers and the industry with us and get to a point where it functions. Then, if exit is seen to be something that is valuable and we can get round the issues I was talking about earlier and have safeguards in place, we can perhaps look at it in future.
Q 169 George Hollingbery: What would your reaction be if some clever player managed to hive off their retail activities through a bit of offshore manoeuvring, some of their own legal work, the sale of certain bonds—who knows what the mechanism might be? Let us assume that someone out there manages to effectively place that retail business in a third-party hand, even though they
Dan Rogerson: These are questions about how the regulation functions. We would hope that the robust regulator that we have in Ofwat and the financial regulators that we have out there for companies will take account of that. There is nothing to stop companies that retain that function bringing in someone else and finding a third party to provide it for them. That is perfectly proper and it happens. There is nothing wrong with that, but the ultimate responsibility for making sure that their customers are looked after remains with the company, and that strikes a balance.
Gabrielle Edwards: If the company has put arrangements in place by which it could not deliver basic conditions of customer service, or customers were not getting the basic standards of customer service that would be a licence condition, Ofwat would be able to take action against them. They would ultimately be responsible. We are also looking, through this process, at setting minimum service standards. These will be something that any customer would expect to get and there will be Ofwat powers to deal with it if they do not.
Q 171 John Penrose (Weston-super-Mare) (Con): I have a supplementary on that point. You said that you can effectively subcontract to someone else to organise your retail customers for you rather than exiting. Does that mean that you could subcontract to another water company? If I am Thames, can I subcontract to Scottish Water? Is that what you mean?
Q 173 Thomas Docherty: The parent water company is still required to do all the bureaucracy and meet all the regulation, so it is not actually getting out of the business. There will still be, as Mr Sutherland said, 40-plus water companies chasing 1.1 million customers, but is not the reality that, apart from a small minority of water companies and your officials, there is nobody in this water community who does not think that there needs to be an exit clause there to be used at the express permission of the Secretary of State? The regulator for Scotland, the regulator for England and Wales, the Office of Fair Trading, Policy Exchange, many of the water companies and the Select Committee of which you were a Member, all said that there should be an exit clause. Is it not the reality that what this is really about is that it was just a bit difficult and officials did not want to do it? You signed the Select Committee report, so when did you change your mind on this issue? Was it 30 seconds before or after you became the Minister?
Dan Rogerson: I did not sign a Select Committee report—you know that that is not how it works. There is a process by which you try to reach a consensus across the Committee and you make recommendations. You are commenting to Government, which is a very different position from legislating, to be honest. In a Select Committee report you are challenging Government, quite rightly, and the level of confidence you need as a Select Committee reporting back is very different from saying you are going to put something through in legislation.
As Minister, I have heard voices—you mentioned some of the water companies as an example. Some are more relaxed about it than others, I accept that. I have also heard from the Consumer Council for Water about their concerns on behalf of customers, residential customers in particular. If there is any doubt there, I want to make sure that we are protecting people in that instance. That is not to say that the case may not be made in the future, and that can be dealt with, but we want to be very clear at the point of legislation here that we are at the point where it is appropriate to do that.
Dan Rogerson: This industry is not the same at the moment, nor will it be after this, as many other industries. I have given you an example of the situation for residential customers. Where they sit is not changing under this.
Q 175 Thomas Docherty: But you cannot enter the domestic market. My point is that this is a market where you can enter, you can choose, you can shop around. It is a fundamental principle. I suspect we will return to this at some length on Thursday afternoon. I genuinely struggle to understand what new arguments your civil servants have managed to come up with that they did not have six, 12 or 18 months ago. At every stage of the Bill the consensus from everybody, apart from a handful of water companies—and I take your point about the Consumer Council for Water’s concerns—has not changed. What is the new argument?
Dan Rogerson: I do not necessarily think there is one. For those who are concerned they remain the same. Those who are keen to press ahead with these changes to the market do not think it is necessary, as we have heard from people with whom you will be familiar, coming from the Scottish context, such as Business Stream, who want to press on with the open market. They think those safeguards do not need to exist and that exit clause could be in from the start.
As Minister I want to be convinced that we are moving at a pace with which everybody is happy. There will be economic benefits; that is the point of doing this. In terms of customer service, there will be economic benefits for business, charity and public sector customers. There will also be benefits in terms of the competitiveness of the industry. However, we have to remember that there are other people involved in this sector such as residential customers in particular, and we balance the needs of all of them.
This is something that we are considering. No Government would say that this should never be revisited. What we are saying is that there are some questions about whether now is the right time to do it.
Q 176 Hywel Williams: I wonder whether you are in a position to clear up a point that I do not quite understand. It is a broad point about the situation in Wales. As I said on Second Reading, it is different in Wales. Welsh Water is being exempted from parts of the Bill. The Government of Wales Act 2006 reserves powers for the Government here over water in Wales. Even if you are allowing Wales to go its own way, do you still retain a veto as it were?
Dan Rogerson: Just to be clear, we are putting a framework in place that Welsh Ministers could opt to take up if they want to. At the moment there is no appetite to do that. However, we heard from Scottish witnesses about the way that savings for customers and efficiencies are being delivered in Scotland. If that happened in England, especially given the nature of the border, where there are customers of English water companies on one side of the border and customers of Welsh Water on the English side, there may be an increasing debate and discussion in Wales about the benefits. Ultimately, that is a matter for Welsh Ministers to decide.
Gabrielle Edwards: There is the separate water resource issue, where a power of intervention is retained in the case of adverse impact on customers in England. That is different from the licensing issues in the Bill.
Q 177 Hywel Williams: Can I just ask you, Minister, to clear up a point that has come up frequently in Wales but nowhere else? Did you give any consideration to having some territorial integrity, in that Severn Trent actually serves much of Powys and Dwr Cymru serves much of Herefordshire? Did you ever consider a straight swap, so that the borders would follow the political border rather than the course of the rivers?
Dan Rogerson: There is a whole set of issues around how the networks are configured and the history that predates the devolution settlement that is difficult to unpick. It would be quite a complicated process. We are discussing with the Welsh Government about how we have proceeded and they have been consulted. It is perhaps something we could look at in future. At the moment the companies serve the customers that they do and their networks face in that direction. It is quite difficult to put a knife through that and realign it without some very complicated work.
Gabrielle Edwards: It is one of the issues the Silk commission is looking at. As the Minister said, it would be extremely difficult to unpick some of those arrangements, because they are based on historical networks and catchments where the rivers flow. They do not follow the political boundary. At the moment we have a situation in which companies on both sides of the border operate under different regimes. For some aspects they operate in a regime that is essentially an England and Wales regime, but in other aspects they operate under a regime that is driven by the political boundary. So it is complex.
Q 178 Hywel Williams: So you concede that companies are sometimes at slight disadvantage—the ones on the border, such as Dee Valley Water, Severn Trent and Dwr Cymru—because they operate under two different regimes, as compared with other companies that they are competing with?
Dan Rogerson: What may emerge is a position in which business customers feel that they would much rather have access to the market that is developing in
Q 179 Mr Spencer: You are saying that any exemptions to the FR scheme will be set out in secondary legislation, but I am wondering what options are available to people who are clearly in a flood area in a band H property, but who are restricted from building their own mitigation because they are under the protection of English Heritage. What options are available to individuals who find themselves in such circumstances?
Dan Rogerson: It is obviously a difficult issue, which we have consulted on. We have to recognise that what is building up the pot for Flood Re is a levy on insurance generally, so we have to have a discussion about who we are levying on and who that money is potentially paid out to, should there be a claim, or about keeping premiums low for those customers. The position of the Government has been that, given the value of those properties and therefore the resources available to the owners—though that does not always follow—they are in a slightly different situation from someone in a band D property in an area of a more standard nature. As I have always said, I am willing to listen to the debate as we go forward, but at the moment that balance has been struck. We will also consult the industry, because it is crucial that we take the negotiations forward based on the memorandum of understanding. If we are looking to unpick that for any of those reasons, we have to have a good reason and a good argument to do so.
Q 180 Mr Spencer: I am worried that we will end up in a lawyers’ mess. Clearly, there are lots of properties out there that are joint residential and business properties, and we are exempting business properties. How will we avoid that lawyers’ muddle over the areas between what is a business and what a residential property, which become very blurred?
Dan Rogerson: Essentially, if something is covered under your council tax—what you pay your council tax on is the residential element of the property—that is where you would have the insurance policy to cover that. So in a farming context, the farmhouse would be covered, but the barns would be a more commercial proposition and a different outcome. As we look at the system that is proposed—we were hearing from the ABI earlier—they would not be covered under it. The message that we have had from the industry is that there is a market for business solutions, and all the evidence base is very much on the incredibly difficult position that families are in with regard to residential property. That is what this solution is designed to cover.
Q 181 Anne Marie Morris: There are two problems, one of which is this exclusion of small businesses, which were included in the statement of principle. I hear what you say, in terms of the focus on domestic, but it seems to me that that is a real issue. I do not really accept the argument that there is no way of determining what a
My other concern applies to the domestic consumer. It is clear to me that owners of houses built after 2009 are going to be in a difficult position. It seems that if houses are pre-2009, or if they are somewhere that is uninsurable, they are all right, but if they are post-2009 they are not. The argument, “Well you can do something about it, can’t you?” is a little difficult if the person cannot get on the internet to look at the flood risk warning. I would be grateful for your thoughts on both those points.
Dan Rogerson: With regard to the issue of commercial compared with residential properties and their not being covered by Flood Re, it is not just about the neatness of being able to categorise them by council tax bands. It is also about what Flood Re is there to do and what problem it is there to solve. The argument I am trying to make is that the problem for commercial properties is not the same as for residential properties, in terms of the insurance market. Therefore, we have to proceed on an evidence base. The evidence at the moment does not show that they have the same problem—commercial properties do not have the huge cost in the market that residential properties have. I accept that some were covered under the statement of principles, but we are moving on the basis of the memorandum of understanding we have with the industry, and we are trying to come up with a robust solution that will work. I would have to be convinced that there is a huge crisis in order to move away from that line and to bring in categories of property other than residential. I come back to the point about how the whole thing is funded and where the money comes in. The settlement with insurance payers generally through the industry is based on the fact that it is there to deal with the residential situation. We will have difficulties if we start adding to that.
The 2009 date was chosen based on the previous statement of principles. Wherever you draw the line, it is difficult. However, as many hon. Members have said to me in private and on the Floor of the House, we do not want to send out the message, “It’s okay; you build there and someone else will pick up the tab later on.” We have to be very careful about how we do this. The discussion and agreement with the industry was based on that. Given where we need to get to in order to make the scheme deliverable, we are trying to get all these issues settled in a way that is agreed and is deliverable in time to meet our timetable. I am cautious about moving away from what has already been agreed. I said on Second Reading on the Floor of the House that if there are issues that we think will be impossible to resolve, and if the evidence base grows, the date is something we can revisit. However, at the moment I am not convinced of the need to move away from the current proposal.
Dan Rogerson: Can I finish the point? There will be a route to insurance for those properties. We will look at things such as property level protection and other schemes. The Government are putting money into maintaining the existing flood defences and increasing their coverage so that over the course of Flood Re’s life we manage and deal with the flood risk for everybody. We have to be cautious about sending out the message, “It’s okay; next time when we revisit it we will budget a bit further down in history and we will pick up another bunch of people, so it is okay to build there.” It is about getting the balance right.
Q 184 Thomas Docherty: Following on from that exchange, I understand the need to draw a line somewhere, Minister, but what is your thinking about why the retrospective date of 2009 was chosen, rather than a current or a future date—say, the day you announce Flood Re or 1 May 2015?
Dan Rogerson: Our estimates would be based on discussions that we have had with the industry, because they are the experts on what is do-able. I am sure that we could share something with the Committee on that.
The reason why it is that date and we have moved on, is that it is based on the last agreement. When the agreement was moved forward in 2008, the 2009 date was in place. I return to the point that I made to Anne Marie Morris: if we moved on each time we looked at this, we would be moving the date each time. Instead, we have stuck to the date that was agreed, which was not a surprise to people. Anyone building in some of these areas or increasing the number of properties beyond that date knew that they were going beyond the statement of principles that existed at the time. They were perhaps being optimistic that something would happen. At that stage, we did not know what the model would be or that Flood Re would be the proposed model.
We want to ensure that there is affordable insurance for everyone, and if we see that a huge number of properties are affected, we can look at the evidence base as it comes forward. At the moment, having the date as 2009 sticks to what was agreed under the last statement of principle.
Q 185 Sheryll Murray: I want to ask about the confusion between commercial and private residences. I want to present a scenario to you of someone who is paying domestic rates on his own property. He also has, in a curtilage, three or four holiday lets that he pays business rates on, because it is a business. I know from experience
Dan Rogerson: If it is separate properties within the curtilage, as you rightly said, the business rate would be levied on the holiday let element of that, which is the number of properties. Those would not be covered, but the residential element, if he resides on site in a property on which he pays council tax, would be under the aegis of the scheme. That is a clear divide. Returning to the earlier discussion, we have a clear message that we can send out on what is covered and what is not. Once we start to blur those lines, it becomes complicated to know who is in and who is not. What I have described is what the situation would be under Flood Re.
Andrew Percy (Brigg and Goole) (Con): I want to go back to this 2009 cut-off, which is a real problem for me. In East Yorkshire, houses were built after 2009 in good faith, with properly planning permissions in place, and people bought them in good faith. The Government are promoting the sale of those houses through Help to Buy. We are flogging homes and supporting them with Government-backed money, but we are telling them that they will not be able to access this flood insurance scheme. I know that the date is arbitrary—that is what you have confirmed today—but would it not be better to set a date some time in the future, rather than just sticking to 2009? People have bought homes expecting something to replace the scheme and the Government are helping people to buy these homes in flood risk areas.
Dan Rogerson: Certainly at no point did this Government or the previous Government say, “It is okay, we will extend this statement of principles”, at the point at which those homes were on the market and for sale. That statement of principles is now being extended. The cut-off date was clear and was something that people ought to have kept in mind.
One of the key questions is how information has been passed on to people. Looking back at the planning process, there is an issue on how planning permission was granted. I accept that there are areas such as yours—we heard from the hon. Member for Kingston upon Hull North (Diana Johnson) on Second Reading about the situation in East Yorkshire—where there are whole districts for which we will have to come up with solutions through flood protection schemes and other measures and we are investing in that as a Government.
Ultimately, Flood Re is not a for ever solution. We need to get to the point where, first, we have dealt with the market issues that we need to address in the flood insurance industry, but we must also continue to invest money, as the Government are doing, in flood protection schemes to protect properties. The case stacks up for such investment because there are so many properties that need to be covered. We look at both of those issues. I would not say that 2009 is an arbitrary date, as it sticks to the date set at the time of the last statement of principles.
Dan Rogerson: You are right. We need to look at all the solutions that the Government are putting in place to deal with flooding. On the bigger scale, we are investing money in flood protection schemes and increasing the maintenance budget to protect communities. There are also the property-level protection solutions, because there are properties in the country that people accept will flood when they move in. If they are buying an old watermill to convert, or whatever, they accept that flooding will happen, but they can put in some design solutions to address those issues, to make the property more resilient and to make it easier to cope when flooding happens. There is a range of solutions that will be right in some cases, but in other cases we will need to consider other solutions. I am not saying that 2009 is something we could never move from, but, at the moment, I am wary of sending out a signal that we will move every few years to update the scheme and that people will be okay because they will be taken into it. We need to be careful about departing from that.
Q 188 Thomas Docherty: On affordability for household customers, we have heard today that only three water companies have their own social tariff schemes—things like WaterSure—and another 12 have made what we might generously call advanced progress on introducing such schemes. There is a big gap, and I do not have figures to hand on how many households, but I am sure we both agree that the number is large. Are the Government considering mandating that every water company should develop its own scheme? If not, why not?
Dan Rogerson: The biggest thing that we have done as a Government is to send out a signal that we expect Ofwat to take account of the cost burden on bill payers and to be careful to keep down bills in the price review period that we are entering. The response so far, and we have had some submissions from companies, seems to be reflecting that, and Ofwat has sent out a clear message, too.
We have to keep bills down for everyone, whether they would qualify for a social tariff or are just above the threshold but, equally, would feel that their bills are going in the wrong direction. That is the first thing on which the Government are being very clear, and all the early signs indicate that we are making some progress.
With regard to tariffs, it is very much to be welcomed that companies are now responding and coming forward with schemes, but we have made all the provisions in such a way that they have to convince their own customer base that the approach they are taking is the right one and that they are coming up with the right model to do it. As we heard earlier, some companies have consulted on this and found that the willingness was not there from customers. We are talking not just about the most well-off customers saying, “No, I’m not going to help anyone,” but about people’s understanding of what the social tariff will deliver. In areas where companies have had a much better response, they are now moving to bring those social tariffs in.
What we want are models that work in the circumstances of each area. For example, in the area I represent in the south-west there has been a particular issue with this. The water company there has come up with solutions, as well as the Government doing what they have done to help out. In other places the solutions will be slightly different. What I want to see is the companies taking up the options that are there. They seem to be doing that, which is to be welcomed, so I am not convinced of the need to go further and press them to bring in particular types of scheme at the moment.
Q 189 Thomas Docherty: I am sorry that my water glass is half empty rather than half full, but while we can all welcome some of the water companies belatedly coming forward, it is quite clear that a number of them are still not bringing forward schemes sufficiently rapidly, if at all. Do you not accept that it is not working everywhere and that for those regional water companies’ customers where there is no sign of a social tariff, the Government have a duty to say, “Enough is enough. We are not going to tell you what the tariff needs to look like, but we are going to make you bring one forward for our review and approval by a certain date”? Do you understand that nuance?
Dan Rogerson: I understand that approach, but I guess the answer is that it is not one that I am proposing to take at the moment. It is not something we are looking to do in this Bill. You will be aware that water bills in different parts of the country have been different for historical infrastructure and investment reasons and so on, so the costs faced by people on low incomes in some areas are higher than in others, and I expect that the willingness to move from the customer base has been much higher in those areas than others. The pressures will be different. Taking that approach is now moving to deliver the social tariffs that we want to see.
You mentioned WaterSure and the other things in place. In previous debates, we have discussed at length what we want to see in terms of dealing with bad debt, so that companies will work to support those people who are struggling to pay in all sorts of ways, such as meeting them part way on writing off historic debt and so on. There is a number of techniques that companies can use to help people who are struggling. Social tariffs are one of those and I am pleased to see companies now
Q 190 Sheryll Murray: Obviously, I was going to ask that question, in exactly the same words as Mr Docherty. It was mentioned that nine companies apart from the three had already made moves to introduce an affordability scheme and work was under way. Could you update us on that? Obviously, it is a big improvement.
Dan Rogerson: It is, and we are seeing more information now coming out from the companies about their initial discussions with Ofwat about the pricing structure that they want. Ofwat will then obviously play a role in that and in what the shape of social tariffs will be, just to ensure that they are right for the customers in that area where they are delivering. That it is something I welcome and we are seeing some movement from companies, which I hope will continue to gather pace. The signs are that it is, but it is something we will have to keep an eye on.
Q 191 George Hollingbery: Before—and indeed after—the Bill was published, a lot of people said that upstream reform without abstraction reform was a recipe for disaster. The Government have made a lot of changes and have suggested quite a few new clauses. Are you confident that your naysayers are wrong?
Dan Rogerson: Getting abstraction reform right is something that we all want—well, I am putting words in the mouth of everyone on the Committee, but I am assuming that everyone wants to get there—which is why we must ensure that we get the consultation, which the Department will hopefully publish relatively shortly, and get the reform right. The upstream reform provisions will not happen overnight, both in terms of people’s confidence that this is something in which they want to engage as the market opens up, and in terms of how the regulation will deliver that and at what point the regulatory framework comes in.
The alarming disconnect between abstraction reform and upstream reform that some have described is not as stark as that: in fact, the two processes can move alongside each other. Equally, it would have been wrong to rush doing something on abstraction reform and get it wrong, because we want to be fair to the current abstraction licence holders. It is absolutely pressing that we deal with the environmental issues that we heard about from previous witnesses. We must also ensure that we have the capacity for future water users by delivering the growth that we want in the economy.
We want to balance all those pressures. It would not be right to have rushed it and got it wrong. We need to ensure that we get it right. That is what our consultation will seek to do to ensure that we take everybody with us and come up with a solution that works. It will be quite exciting to deliver what we want to achieve.
Gabrielle Edwards: There was never any suggestion that upstream reform was going to come into force against a background where there was no regulation to deal with any impacts, because there is a process for regulating abstractions and for dealing with unsustainable abstraction. Earlier, Trevor Bishop was talking about how that operated.
In response to the questions about whether there were any gaps in the system, we looked quite hard at that and how the system would work and we talked to Ofwat and to the Environment Agency. As a result, we have suggested some relatively small amendments that will make the system a bit more bomb-proof and will also ensure that the consultations between Ofwat and the Environment Agency really do take place in order to minimise the risk of damage. Of particular importance is the fact that Ofwat will now have to consult the Environment Agency before it issues a licence, and the Environment Agency will obviously have to check whether there would be any impact on abstraction from that catchment.
Dan Rogerson: What we heard through you, Mrs Riordan, about the compensation and the changes in the Bill is an example of how the Government have listened to some of the concerns out there, which is something that we can do now as we proceed with the major consultation on how we reform the whole system of abstraction for the future.
Q 195 Dr Offord: There was a divergence of opinion between the CEO of Ofwat and one of the other witnesses on clause 22. How does the Minister see it working, particularly in terms of the sustainability and resilience duties on Ofwat?
Dan Rogerson: We have heard from the witnesses and I do not want to put words in their mouths, but I think Ofwat is focused on affordability and ensuring that the market functions effectively and delivers the investment that we want to see. We have seen huge investment in infrastructure and want that to continue. We also want the price to be affordable and fair for customers. Understandably, it has some concerns about duties being placed upon it over and above that. We think, however, that the resilience duty is crucial for the reasons we heard from other witnesses about the need to prepare for changes. Whether those be demographic, climatic or industrial demand, in whatever we do we need to be ready. We need to ensure that we get that resilience duty right.
We can take into account that a lot of the concerns are about sustainability—abstraction reform is one example—and how we manage our finite water resource so that we deliver things effectively and efficiently. In short, it is about having adequate resource there to meet all societal needs while protecting the environment, too. What I take away from today’s evidence sessions is how we can get that resilience duty to the point where we are delivering all of those goods. That is something that would be very beneficial.
We will put more people’s minds at rest if we plan for the long term. One criticism has been about price review period to price review period. We want to get away from that and ensure that we are looking at long-term investments.
The Chair: Four Members still wish to ask questions and I want to call them all. If the Committee is content, I will use my power under Standing Order No. 83C to allow the sitting to continue for a further 15 minutes beyond the time specified in the programme order.
Q 196 Neil Parish: When do the Government intend to table the insurance clauses? Will an updated impact assessment be published at the same time? Will they provide the flood insurance clauses in sufficient time to allow us to scrutinise them?
Mr Docherty has quite rightly been pressing me on this on the Floor of the House, and it is absolutely right that the Committee has them as early as possible. For the reasons we heard about earlier regarding discussions with the industry, we have to ensure that we get through all the questions, and one or two issues still remain. There will be opportunities for the Government, with the permission of the House and the Committee, to come back and ensure that we get all the points right as we move through the process.
Dan Rogerson: The impact assessments are there. I had a request from Mr Docherty for explanatory notes setting out what each new clause and amendment will do, which is understandable. That is something that the Government have undertaken to do with everything from January. We do not have to do that, but we are keen to provide it, and we will get it to the Committee as soon as we can to help Members. Fortunately, Mrs Riordan, with your and Mr Gray’s permission, we will probably reach the flooding clauses later on in the process, but that is not to say that we will not get to them as soon as possible.
Thomas Docherty: On a point of order, Mrs Riordan. I am sure the Minister did not mean to mislead the Committee, but I have just checked the documents and the impact assessment is not there. I am sure that the Minister will want his officials to provide it.
Dan Rogerson: Absolutely. The material provided here on the day is a matter for the Scrutiny Unit that supports these Committee sittings, rather than us. We published the impact assessment and we can certainly circulate printed copies, as we have done with the other information that we sent out.
Dan Rogerson: Yes. We have published draft clauses before. Some of them changed, but some are substantially the same, so there has been an opportunity to discuss those. The nature of the negotiations and the timetable to which we are operating to deliver the scheme successfully
Q 200 Roger Williams: Going back to the issue of sustainability, it appears to me that Ofwat’s argument against having a first-order priority of sustainability is that it would mean environmental issues trumping everything else. However, as far as I am concerned, sustainability is about getting a balance between economic, social and environmental issues. That lies at the heart of what Ofwat is about, so I am very unsure why people are resisting what seems to be a very common-sense approach.
Dan Rogerson: I think Mr Williams is quite right that people’s understanding of sustainable development can be all-encompassing; sometimes it is more narrowly focused. I would say the same about the resilience duty. The message of resilience that we are sending out is important, because it suggests that we need to be ready for something coming down the track—perhaps with a sense of urgency. That is why I think that the resilience duty achieves a lot of the things that we want to do.
I was interested when the witness from the chartered institution said that he was happy that resilience could cover it and he only wanted to be reassured that we were saying that environmental resilience is also included. I do not think that we need to hang everything on the fact that we are imposing a sustainable development duty on Ofwat and then think that will solve all the problems. Again, as we heard from the NGOs through Blueprint, we need systematically to work through the issues on the ground and deal with them. We need a willingness to do that.
That is very much what we are doing with abstraction reform and so on. We are not just tacking on a duty, and we must be careful about saying that that is the ultimate solution. I am not completely opposed to exploring these issues, but resilience is an important part of where we want to go. I am concerned that if we go for sustainable development as a new duty, we will undermine what we are trying to do on resilience, including environmental resilience.
Q 201 John Cryer: As the Minister is probably aware, the water industry is getting something of a reputation for clever financial engineering. Again, that is not a party political point, because in the debate that took place two or three weeks ago, the financial shenanigans got a lot of stick from Members on both sides of the House. I am looking at a report saying that Thames Water announced last week that it does not intend to pay any corporation tax for the next decade. Do you think that that might be addressed in some way in the Bill, or that it could have been addressed in the Bill?
Dan Rogerson: The issue of corporation tax is very much without the role of DEFRA, as well as outside what this Bill seeks to cover. We are trespassing on the territory of the Treasury and HMRC. The key point is that the ability to defer corporation tax—not never to pay it, but to defer it as a recognition that money is reinvested into infrastructure or whatever—is common in other industries. However, I accept that there have been arrangements that have given cause for concern. Various organisations have written reports on this, and a number of hon. Members have raised the issue, as have Members of another place.
That is why I am very pleased that the message being sent out by Jonson Cox, the chair of Ofwat, and others is that they want companies to be very transparent. It is not just about price; it is also about what they are doing to report back. I am pleased that we see the regulator taking that side of it much more seriously than was the case in the past. Customers want to know that their bills are for the provision of a service and to cover investment. They do not want to see money disappearing into complicated arrangements elsewhere, so I am pleased that the regulator is taking a robust role on that.
Dan Rogerson: All I can do in that case is to apologise to you, Mr Docherty, and the Committee. I will ensure that we furnish members of the Committee with that information, as well as interested observers. It should be there and I apologise if it is not.
Q 203 Thomas Docherty: May I follow up Mr Cryer’s point very briefly? It was fascinating to hear some people saying that the ideal would be for water companies simply to go along below the radar—I am sure that is what they want to do. There is a shared agenda that that is not how they should operate. Do you accept the argument about greater transparency and that too many water companies appear to use vehicles, if I can call them that, in the Cayman Islands and elsewhere to manage their financial affairs? Do the Government accept that, to the public, that is simply unacceptable—
Dan Rogerson: My preferred approach is to support the regulator in setting a robust challenge to companies to ensure that their reporting of information and the way in which they operate are effective and in accordance with good practice. Ofwat is now sending out a much stronger message than what we heard in the past, which I welcome. It is the role of Government to say that we want an industry that is transparent and that delivers investment, environmental quality and affordability. I am confident that Ofwat is pursuing that agenda, too. This is not just about how the market functions, which it might have focused on a bit more in the past, but increasingly about issues such as customer service, and about seeing good water companies. That is the sign to me of a good regulator that is offering a strong challenge to the industry.