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Lord Moynihan: My Lords, in moving the amendment, I shall speak also to Amendments 40, 42, 56, 57 and 59, as well as indicating my support for Amendment 105 from the noble Lord, Lord Whitty, in this group.

The balance between regulation and negotiation in the water industry is crucial to this set of amendments. At the heart of the Bill is the intention to create a market where access is regulated—in other words, the rules of entry are set out very clearly, and must be adhered to by all market participants. I am concerned that in some places the Bill leaves too much too open; it appears to be based on the premise that the parties within the retail market should negotiate between themselves on service and price. In my view, that negotiation could substantially limit the effectiveness of the retail market. Allowing individual parties to negotiate in this way opens the door to current incumbents to discriminate against new retailers by offering them higher prices, less preferable terms or poorer service levels. Alternatively, and perhaps more worryingly, current incumbents could simply be slow in responding to requests for information or services from new entrants; this would be difficult to police.

As the noble Lord, Lord Whitty, suggested, in speaking to Amendment 1, some companies may change their allocations of retail costs to ensure that as little revenue as possible is at risk under the new market arrangements. The result of those changes is to reduce the amount of revenue that is open to competition and, potentially, to reduce the margin available to any new entrant. If allowed to stand, that move by the companies may reduce the level of entry into the new retail market. That would be a very serious issue indeed and, I hope, will not result from this legislation. This is an example of how companies might be expected to react when there is insufficient clarity in how the market will operate.

It is interesting to note the experience and views of the Water Industry Commission for Scotland, which opines that it could be difficult for Ofwat to put a framework in place that will allow the regulator to ensure that there is an effective level playing field for all market participants. It is likely to require relatively draconian rules to be drafted and policed. Notwithstanding those rules, some companies may choose to seek to frustrate the operation of the market or seek to get round the rules or even break them to maximise profit, which could be to the substantial detriment of all customers and, indeed, the environment. Having to negotiate on too many issues could also increase the upfront costs for new entrants, which may deter them from entering the market—or, if the new entrant does enter the market, will increase the costs that have to be passed on to customers. To be effective, a retail market, rather than relying on negotiation, needs all participants to have access to clear and accessible prices and to standard terms and conditions. In regulatory economics, I would describe this kind of access to the market as being regulated rather than negotiated.

In Scotland, the retail market is specifically designed to ensure that there is a level playing field. Scottish Water was required to separate its retail arm on a functional basis but chose to create an arm’s-length subsidiary. This has meant that the required governance

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code, the document that gives new entrants the confidence that they can compete on their merits with the incumbent retailer, could be less onerous than it would otherwise have been. However, the governance code still requires Business Stream to operate profitably as a standalone entity; the code also requires it to limit the access of Scottish Water’s management to its financial and operational information. Scottish Water is not allowed to know about Business Stream’s strategy for the competitive market in Scotland. Finally, under the terms of a licence condition, Business Stream is required to publish within 40 business days of offering a new tariff to any customer.

The market and operational codes are common to all market participants. The market operator, the Central Market Agency, handles all switches and aggregates supply information to determine amounts owing from retailers to Scottish Water, which is also required to seek the commission’s approval on its wholesale tariffs. All entrants have equal access to all tariffs, even those that are a result of legacy arrangements between Scottish Water or its predecessor organisations and larger businesses. The commission has taken further steps related to the reallocation of supply points from companies that exit the market to ensure that all market participants have the opportunity to compete on a level playing field.

To ensure that new entrants do not face increased barriers and costs when trying to access the retail market, I hope that the Bill can be amended so that it focuses on regulated access rather than negotiation. As such, it would require each wholesale company to publish a wholesale charging scheme; rules that support the level playing field between all market participants to be put in place; and the use of operational and market codes that are available to all participants in each area.

The Government’s response to the Defra Committee’s pre-legislative scrutiny states:

“Preventing discriminatory behaviour is critical to providing a level playing field in which new entrants can be confident that they will be treated fairly by incumbent water companies. However, the Government does not accept that a blanket requirement for incumbent companies to functionally separate their retail functions is the best solution to this”.

In the light of that, Clause 23 would impose a new general duty on Ofwat to exercise its powers and perform its duties in a way that helps to ensure that no undue preference or discrimination is shown by water and sewerage companies, including against water and sewerage supply licensees. As is usual in industry reform legislation, Clause 43 would also give Ofwat a time-limited power to drive changes to existing licences, including to companies’ conditions of appointment, when it considers that those changes are necessary or expedient in consequence of the new statutory provisions. Ofwat has published discussion papers that recognise the important role that such licence conditions play in ensuring a level playing field between existing and new entrant retailers. However, many believe that there is a deficiency in Clause 43 as currently drafted which could be exploited by companies seeking to resist any efforts by Ofwat to make changes to their conditions of appointment—for example, in order to introduce new governance codes.

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There are also real risks in leaving such a vital part of a successful market to be developed and possibly challenged through secondary regulation. The burden on Ofwat could be lifted by imposing the non-preference, non-discrimination duty directly on to companies. While general competition law arguably already prohibits such discrimination, enforcing such competition law duties has been shown to be a costly and prolonged process. I am therefore suggesting amendments that, while not requiring functional separation, would make companies’ non-discrimination duties directly enforceable by Ofwat, using its existing powers under Section 18 of the Water Industry Act 1991. This would help reduce the cost of implementing the market reform and policing and of enforcing effective competition in the future.

The aim is competition; the aim is choice. The question is how we engage with a process that is clear and straightforward, while protecting consumers. The hurdle is incumbent companies. Many of them can use complex contracts with significant legal fees attached and delaying mechanisms. It is therefore very important that the aim moves towards regulated access with clarity and less emphasis on bilateral negotiations, and that that regulated access is for everybody. At that point, anyone entering the market can plug in and play. There should be no prohibitions put in place as a result of bilateral negotiation. It is for those reasons that I have tabled the amendments in my name. I beg to move.

Lord Grantchester (Lab): I shall speak to Amendment 105 in this grouping and agree with many of the comments in its other amendments, in that they resonate with Amendment 105.

The proposed new clause in Amendment 105 is another technical amendment about how this market is to be made to work. We support the introduction of a market to non-household customers, but remain concerned that the market as currently drafted in this Bill is not up to the function as well as it could be. It is essential in a market to have a fair playing field, where each competitor has the same rules applying to it. I quote the Water Industry Commission for Scotland:

“To be effective a retail market needs all participants to have access to clear and accessible prices, clearly defined and common levels of service, and standard terms and conditions. Allowing parties to negotiate could open the door for a current incumbent to discriminate against new retailers by offering them less preferable terms, poorer service levels or simply by being slow to respond to requests. This would limit the effectiveness of the market and increase costs for new entrants (and customers)”.

Incumbent water companies have a very large advantage, having been in place for many years, and can offer more favourable terms to their own in-house companies than to new entrants. There are many barriers to entry that may become apparent and it is important that the new entrant has the protection with the ability to challenge any that may materialise, and not merely on pricing. This would not in any way cut across the Government’s view that a blanket requirement for incumbent companies to separate their operations by function is unnecessary.

The Minister may point out that Clause 23 may do what we are seeking. However, this clause requires Ofwat to secure merely that no undue preference, including for itself, is shown. There does not appear to

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be a definition of “undue preference” and it is important to show from the outset that all competitive pressures must be fair, and appear to be fair, to the new entrants. The Minister will no doubt point to the market codes that will be issued with the Bill, but evidence that has been provided to us during its passage, such as that from Business Stream, the Scottish water company, suggests that this is not enough.

I hope that the Minister is able to recognise the significance of this amendment that will ensure that the terms offered to existing licences are also offered to new licences and that the regulator is able to pay close attention to such deals. The new market situation in Scotland has highlighted this issue. Without correction, there are grounds to fear that when the market opens in 2017 it will not function as the Minister would hope. As a result fair competition may be impeded, and business will not get the kind of benefits and savings that we would like to see.

5.45 pm

The Earl of Selborne: My Lords, I support my noble friend Lord Moynihan and welcome the tenor of the remarks of the noble Lord, Lord Grantchester.

I think that we are agreeing that common industry codes are critical. No one dissents from that. We come back to the question of the extent to which the existing codes, as written in the Bill, deliver these common codes and standards. New entrants simply cannot be allowed to be discriminated against by incumbents. Without a doubt, we have seen this in other utilities—in the rollout of broadband, for example. It is no coincidence that BT seems always to be on the inside track, so we should not be naive enough to think that the incumbent undertakers are not always going to try to ensure that they see off any competition. Later we will talk about discounts and special charges. These do happen. They need to be regulated and, in so far as these amendments help establish the principle that there should be common industry codes, I welcome them.

Lord De Mauley: My Lords, as noble Lords have explained, the purpose of these amendments is to ensure that access to the retail market is regulated to minimise burdens and make access to the market simpler. I agree that requiring all licensees to negotiate with each of the 21 incumbent water companies to enter the market would represent a considerable burden on the market participants and undermine what we are trying to achieve with our reforms.

Schedule 4 of the Water Act 2003 inserted current new Sections 66A(2) and 66D(2) into the Water Industry Act. These placed the incumbent water company under a duty to make a water supply agreement on certain terms agreed with the licensee or determined by Ofwat. This duty has been interpreted to mean that each individual agreement between an incumbent water company and licensee must be negotiated, or imposed by Ofwat where the parties are unable to agree. Ofwat has produced guidance to facilitate negotiations, but the parties to these agreements could ignore the guidance and come to their own agreement. This is clearly a considerable barrier to entry into the retail market in particular and one that provides unco-operative

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incumbents with an opportunity to delay the making of agreements, about which the noble Lord, Lord Grantchester, and my noble friend Lord Selborne have rightly expressed concerns.

New Sections 66A and 66D will be repealed by this Bill, and replaced with a requirement that agreements between incumbent water companies and licensees must be in accordance with new, enforceable charging rules and codes produced by Ofwat. This will reduce burdens and costs on all parties, and speed up customer switching when the market expands to include 1.2 million potential customers. Schedule 4 creates the same requirements for sewerage arrangements.

There has been some confusion as to the wording of some parts of Schedules 2 and 4 that might lead some to assume that a licensee will be able to enter the retail market only through a complex series of negotiations with every incumbent water company in England. For example, new Section 66DA states that codes may include provisions about procedures in connection with making a Section 66D agreement. This is not the case. We need some flexibility about allowing a certain level of negotiation in some cases, particularly for the upstream markets; negotiations might address water quality and environmental conditions specific to a locality in a water company’s area. We also want licensees to have some flexibility to negotiate innovative new ways of doing things. Market codes will be able to set out the circumstances when such negotiations would be appropriate or inappropriate. I draw noble Lords’ attention to new Section 66DA(2)(c) and (d) and new Section 117F(2)(c) and (d).

My noble friend Lord Moynihan referred to functional separation and we will discuss specific amendments on that matter in a little while, and perhaps I can address that at that point. He also referred to the regime in Scotland and the fact that it provides only for regulated access. Scottish legislation is silent on the need for WICS to produce codes to make the market work. WICS took the decision to regulate access to the retail market and Ofwat and the Open Water programme are taking the same approach. It is worth noting that there is no competition in Scotland for wholesale supplies of water. The two markets are therefore clearly not directly comparable.

I am happy to tell my noble friend that paragraph 5 of Schedule 2, which inserts new Section 66E into the Water Industry Act 1991, and new Section 117L, inserted by Schedule 4, already provide Ofwat with powers to regulate these charges between incumbents and licensees, and that Ofwat may make rules about their publication.

The Bill regulates licensees’ access to the supply and sewerage systems of the quasi-monopolistic incumbents only. We see no need to regulate arrangements between licensees themselves, as they all start on the same footing. That is competition and it will be left to market forces. I hope that my noble friend will therefore feel able to withdraw the amendment.

Lord Moynihan: My Lords, I am grateful to noble Lords for participating in this exchange of views. I particularly thank my noble friend Lord Selborne for his apposite comments. As he is aware, the Bill anticipates

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a relatively large number of codes. The experience of other industries, such as the electricity industry, shows the importance of keeping codes as simple as possible. For example, a single market code could help ensure that any central market system works by applying the same rules to all companies and retailers. Similarly, to help create a level playing field, I very much hope that retailers have a single point of contact with each water or sewerage company. Each company should have a code which every retailer must follow. To me that is an essential prerequisite for operating a successful market.

It is an appropriate moment to echo the comments that have been made on all sides of the House about how constructive, supportive and helpful my noble friend the Minister has been throughout the process since the publication of the Bill, through its early consideration and in the many meetings that he has hosted to provide clarity on this complex measure. I am grateful to him for his comments. I noted that he recognised that there was at least scope for misunderstanding on some aspects of the clauses that are relevant to the amendments that I have proposed. I agree with what he said about the codes which Ofwat may issue under the new Sections 66DA and 117F. They could be used but I am concerned that the current drafting does not adequately recognise the necessary scope that he has outlined. There will be merit in considering in detail what he has said this evening and reflecting on it before determining whether we revisit this subject at a later stage in our proceedings.

I very much appreciate the support of the noble Lord, Lord Grantchester. His comments echoed very clearly the concerns that I have tried to lay before your Lordships’ House. This is an important issue. If the Bill is to be enacted and then operate effectively in the market, this is a subject which needs to be absolutely clear. If we can help to improve the position by amending the legislation in order to achieve that clarity and efficiency of operation, we will add value to the Bill. I hope that we will be able to take this away and review whether or not we will come back with an improved amendment at a later stage of our proceedings. In the mean time, I beg leave to withdraw the amendment.

Amendment 39 withdrawn.

Amendment 40 not moved.

Amendment 41

Moved by The Earl of Selborne

41: Schedule 2, page 136, line 36, at end insert—

“(e) principles for determining the provisions that should or should not be incorporated into arrangements of the sort contemplated in paragraphs 5 and 8 of Schedule 2A together with a procedure for making and modifying such arrangements”

The Earl of Selborne: My Lords, in moving Amendment 41, I wish to speak also to Amendments 46, 58, 63 and 114.

We now come to Ofwat’s duties. Amendments 41, 46, 58 and 63 all seek to ensure that Ofwat does, indeed, have the powers and the authority under the Bill

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to deal with some of the issues we have already addressed. Amendment 114, which I will come to, seeks to ensure that no detriment is caused.

Amendment 41 seeks to amend Schedule 2 to the Bill by adding to the four subjects on which Ofwat may issue codes in regard to Section 66D agreements. I remind the Committee that the four provisions in the Bill allow a code to make provision about,

“procedures in connection with making a section 66D agreement … procedures in connection with varying or terminating a section 66D agreement … the terms and conditions of a section 66D agreement, including terms as to the duration of such an agreement … principles for determining the terms and conditions that should or should not be incorporated into a section 66D agreement”.

Thus the Bill sets out Ofwat’s responsibilities vis-à-vis these Section 66D agreements. Amendment 41 proposes a fifth subject for which a code should make provision and refers to the,

“principles for determining the provisions that should or should not be”,

in the Section 66D agreements.

Amendment 46 relates to the rules under new Section 66E on the reduction of charges payable under a Section 66D agreement. The amendment seeks to add the proviso that the case for reduced charges must be based on reduced costs—therefore, discounts would be allowed only where overall costs are reduced. In other words, the amendment seeks to keep the level playing field we have discussed on earlier amendments. Amendments 58 and 63 seek to introduce the same provisions for sewerage undertakers.

The thrust of these amendments is to ensure that Ofwat is under a clear obligation to set charging rules in a way that helps to incentivise water efficiency and the efficiency of other services of environmental, social and economic benefit. It is essential that Ofwat has sufficient powers to prevent discrimination against new entrants by incumbents offering them less profitable terms, poorer service levels or simply being slow to respond to their requests. There are many and insidious ways in which you can see off competition and Ofwat must have the powers to enable it to regulate and monitor these special agreements very carefully. I am confident that the Minister will say that this is already adequately covered in the Bill. However, in so far as these amendments would further strengthen the legislation and Ofwat’s hand—we have all agreed throughout our deliberations this afternoon that Ofwat is the key to this—surely they would be helpful in preventing any such discrimination.

Amendment 114 is the so-called no-detriment amendment. It seeks to put on Ofwat a specific duty to ensure that no detriment is caused to wholesale business as a result of retail activities. The amendment ensures that the wholesaler, for example, has no incentive to discriminate unfairly in favour of retailers who are less active in providing environmentally desirable services. I referred to that in an earlier amendment. We can see that if a retailer is actually managing to reduce the demand for water it might no longer necessarily be to the wholesaler’s advantage to give that particular retailer the same sort of service as somebody who was less assiduous in selling such services.

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The no-detriment provision ensures that the wholesaler is indifferent to the efforts of retailers to improve water efficiency or provide other value-adding environmental services. The operation codes will go some way to setting out the rules of engagement between wholesalers and all retailers. The no-detriment provision will give added protection as it will remove all incentive to discriminate. Extending the duty of non-discrimination to Ofwat, which I accept is already there under the terms of the Bill, will ensure that no undue preference or discrimination takes place. It should help to establish that Ofwat indeed has all the duties that we would require to facilitate competition directly. I beg to move.

6 pm

Lord Whitty: My Lords, my name is also on the amendment to which the noble Earl, Lord Selborne, has just referred. My reason for putting my name to it was very much the point he was underlining. Only by some form of no-detriment clause—some of the amendments go slightly wider—can we protect what is intended to be an outcome of retail competition, which is more focus on energy and environmental improvements at the retail-user end and final delivery. Historically, Ofwat has not been particularly good at being prepared to finance—if that is the word—through the price review, or to give priority in the price review to water efficiency schemes. I think that Ofwat improved a little in the previous price review and it shows intention to do so again in the next one, but the reality is that we have not done very well on that front. The introduction of upstream and, to some extent, retail competition could, if it is not contained, have an effect on improvements in water efficiency at the retail end, and the positive move by Ofwat in recent years to focus on water efficiency could be reversed. I strongly support what the noble Earl, Lord Selborne, has said on the amendment.

Lord De Mauley: My Lords, perhaps I may start by saying that our approach to retail competition is being developed jointly with the industry, along with the England and Scottish regulators, and others. This group is well placed to identify the conditions that will work best in England, capturing any lessons learnt and building on the Scottish experience.

I am not sure how a no-detriment duty would sit alongside the general duty for the Secretary of State and Ofwat to secure that licensees meet their statutory obligations and the conditions of their licences, given that these are set by the existing duties on Ofwat and Ministers. Ofwat is under a general duty to ensure that incumbents are able to finance their statutory functions. This duty enables Ofwat to create the right incentives to ensure that incumbents can benefit from investments that deliver improved water efficiency in their respective areas. It is suggested that incumbents may show preference to licensees that do not concentrate on water efficiency activities. This is addressed through Clause 23, which requires Ofwat to ensure that incumbent water companies do not discriminate in the provision of services. Ofwat is also able to address such issues through its Competition Act power, which incidentally is a power that WICS does not have in Scotland.

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In England and Wales, both incumbents and licensees are subject to a duty under the Water Industry Act 1991 to help their respective customers conserve water. I would not want to undermine the market for water efficiency services. I am sure that that was not an intended impact of the amendment.

Curbing the licensees’ water efficiency activities could also put them at a competitive disadvantage if a similar duty was not placed on the retail side of the incumbent’s business. Why should licensees be kept under a duty which potentially curbs their water efficiency activities, while an incumbent’s retail business is allowed to operate without this barrier? Amendments 46 and 53, in particular, may be a barrier to licensees working with customers to become more water-efficient because they impose a condition that any new arrangements designed to reduce pressure on networks must not impose any more costs on incumbent water companies. This same requirement is not being placed on the incumbents’ retail businesses through these amendments. A no-detriment clause works in Scotland due to its circumstances, having just one incumbent retailer and wholesaler. It simply will not work in the same way in England and Wales. For that reason, I ask my noble friend to withdraw his amendment.

The Earl of Selborne: My Lords, I shall come to the no-detriment clause in a moment. The earlier four amendments deal with strengthening the codes for Ofwat, and I am fairly confident that the more robust the powers that Ofwat has to prevent discrimination the better.

I simply do not understand why, if the no-detriment clause works in Scotland, where there is one undertaker—one company—it would not work if there is more than one. I think that the case becomes stronger, not weaker. However, I will read with some care what the Minister said because I suspect that the whole area of a no-detriment clause is something that we will want to come back to at a later stage. I beg leave to withdraw the amendment.

Amendment 41 withdrawn.

Amendments 42 and 43 not moved.

Amendment 44

Moved by The Earl of Selborne

44: Schedule 2, page 139, leave out lines 31 to 38

The Earl of Selborne: My Lords, we now come to special charges, which I have to admit were a bit of a mystery to me. I did not even realise that they existed. Clause 33(2) on page 81 of the Bill amends Section 142 of the Water Industry Act 1999 so that there is a duty on incumbents to notify Ofwat if they make an individual charging agreement with a customer that is not covered by a charging scheme. In other words, they are special agreements. Ofwat already requires information provided by incumbents about those special charging agreements.

Special charging agreements have the potential to undermine just about everything we have been talking about. Once there is a special agreement, which by its

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nature is not a common agreement, it flies in the face of the excellent provisions in the Bill, not least to ensure that there is a level playing field and transparency. We need to establish just how many such special agreements are in place at the moment. Amendment 106 does that. It would amend Schedule 2 to require Ofwat to review existing special agreements and assess the charges payable under these agreements. The purpose of the amendment is to ensure that such agreements that depart from the charging schemes are appropriately regulated in future. I would have thought that that was pretty uncontroversial, and I hope that the Minister agrees.

Amendment 103 requires any future special agreement to be allowed only if a customer has done, or has agreed to do, something that reduces or increases the costs incurred by an undertaker. Such agreement would have to receive the consent of Ofwat. In other words, there cannot be a deal that is specific to that particular customer. We would lose the averaging principle that we hold so dear. New Section 66E(3) is the basis on which Ofwat establishes these special charges. I am keen to ensure that Ofwat first makes it absolutely clear how many special charges exist at the moment and, above all, does not allow any future special charges, unless there is a reason that is transparent, obvious and does not undermine the averaging principle. I beg to move.

Lord De Mauley: My Lords, my noble friend would introduce changes to the way in which incumbent water companies’ special charging arrangements for customers operate in the reformed market. Special charging arrangements come about when incumbent water companies depart from published charges schemes to allow discounts on the wholesale element of a water charge where a customer, for example, agrees to do something to reduce pressure on a network or has made a contribution to a capital project carried out by an incumbent.

Amendment 103 would require Ofwat to approve special charging arrangements for licensees before they are put in place. Amendments 44 and 48 remove powers for Ofwat to introduce charging rules under Schedules 2 and 4 that would allow customers who receive discounts to switch to a licensee without losing those discounts. Amendments 106, 131, 166 and 169 will initially require incumbents, within one month of Royal Assent, to notify Ofwat of all existing special charging arrangements that are in place. However, Ofwat already collects and publishes information on special charging arrangements on an annual basis, which means that it is not necessary for the Bill to be changed for Ofwat to obtain details of historical agreements. The amendments would also require Ofwat to make and publish a determination about the appropriateness of these historical charges, publish details of its determination, and control the charges between the incumbent and the licensee as well as the price that the licensee can charge the customer from then on.

As part of the review of price limits for 2015 to 2020, Ofwat requires incumbent water companies to separate out the retail and wholesale components of the charges. Ofwat will be able to assess the appropriateness

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of such charges during this process and introduce charging rules under Schedules 2 and 4 to ensure that licensees will be able to access wholesale charges at a competitive rate and compete with incumbents on the retail element of the special charges. For example, rules can ensure that costs are properly allocated between the retail and wholesale elements of the special charge. Ministers will also be able to give their views on the content of charging rules.

Importantly, the change introduced by Clause 33 will place incumbents under an enforceable duty to report new special charging arrangements to Ofwat as soon as they are made. Clause 33 comes into force two months after Royal Assent. This provision also requires Ofwat to publish details of these arrangements in its register, which is available on its website. Taken together, Clause 33 and Schedules 2 and 4 deliver most of what my noble friend wants to achieve through his amendments. Like my noble friend, we want to increase transparency around the setting of new special charges to enable the beneficiaries to be able to switch to a licensee and still retain their discounts on wholesale charges, if appropriate. As part of the price review process for April 2015, when new price limits are introduced, Ofwat will be able to assess the appropriateness of existing special charges ahead of the retail market opening. With these assurances, I hope that my noble friend will feel able to withdraw his amendment.

The Earl of Selborne: My Lords, I draw some comfort from my noble friend’s response. I think we all agree that special charges represent a potential Trojan horse and are not to be encouraged. In so far as they can be transparent, reduced or even eliminated, that would surely be helpful. I should like to think that Ofwat would trenchantly make it clear that it is not in favour of special agreements, and that any special agreements would be published in a transparent and open way annually, as I understand the Minister says Ofwat does and will do. Above all, Ofwat should make it clear to the industry that it does not expect special agreements to be common practice, and should be countenanced only under exceptional circumstances. With that assurance from the Minister, I am happy to beg leave to withdraw the amendment.

Amendment 44 withdrawn.

Amendments 45 and 46 not moved.

Amendment 47

Moved by Lord De Mauley

47: Schedule 2, page 144, line 1, leave out from “with” to end of line 5 and insert “—

(a) a retail authorisation (whether that retail authorisation is an authorisation of the licensee requesting the introduction of water or another water supply licensee’s authorisation), or

(b) a restricted retail authorisation of the licensee requesting the introduction of water.””

Amendment 47 agreed.

Schedule 2, as amended, agreed.

Clause 2 agreed

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Clause 3: The threshold requirement

Amendment 48 not moved.

Clause 3 agreed.

6.15 pm

Amendment 49

Moved by Lord Whitty

49: After Clause 3, insert the following new Clause—

“Separation of retail and wholesale activities

Any company granted a water supply licence under section 17A of the Water Industry Act 1991, prior to the passing of this Act, must establish separate legal identities for its—

(a) retail activities, and

(b) wholesale activities,

within one year of the passing of this Act.”

Lord Whitty: My Lords, I shall speak also to Amendment 97. I am asking the Committee to consider a rather more radical approach to the structure of this industry. In earlier debates today, there was reference to unravelling some of the accounting structures of companies. Indeed, the Minister referred to the requirement on separate indication of charging by the retail and wholesale ends. We have to remember what was said by several of us at Second Reading. This is a very odd industry. In England, it consists, effectively, of eight regional monopolies, all of which are totally vertically integrated, with high profitability over the years since privatisation. There has also been high investment but there has nevertheless been high profitability for their owners and high dividends have been paid out. There has also been a high level of gearing in order to meet those investments by going to the money markets. Most of them are now owned by international investment funds although in many cases they have had a sequence of owners. However, they retain a close resemblance to the pre-privatisation water authorities.

Over the years, there has been some degree of breaking up of monopolies in other industries, including vertical splits, to encourage a more effective form of competition. The recent report by Martin Cave and Ofwat’s own assessment of the situation give rise to suggestions that Ofwat, too, ought to be able to require separation of the wholesale and retail ends of the currently vertically integrated water companies. When we move to retail competition, its major feature is likely to be that the retail arms of other incumbent companies will begin to compete in the areas that are dominated by the historic incumbent companies. To some extent, that has happened in Scotland, where English-based companies provide some of the competition in the non-domestic retail sector.

We would expect those companies to continue, one way or another, to dominate the scene, even if they are in more direct competition with each other. As other noble Lords have said, that means that we have to separate out how those companies operate on the retail side and consider what the relationship between the wholesale water undertaker operation and the retail operation will be. One can do some of that by ring-fencing, separate accounting, Chinese walling or

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whatever, but we need to consider separation as legal entities or even disinvestment from one company to another. That option is not available to Ofwat or, indeed, the CMA, whatever the performance of companies, the competitive flaws of the market or the outcome for consumers may be. This argument about where to separate quasi-monopolies has applied. We have had many debates over recent years about banking, we have had the situation of the railways and the issue arose at some length during the debates on the Energy Bill. It is horses for courses, but the fact that there is no power to require this, even in a situation which is still pretty well dominated by regional monopolies, seems to be an omission.

There are reasons why Ofwat and successive Governments have not gone down this road, one of the main ones being that it might well frighten off investment. This is a pretty good investment. It has provided a very substantial return to those people who have invested in the English water industry over the past 20 or so years. They have had a pretty good and reliable return. Over the past two price review periods some would say that, particularly because of the over-allowance by Ofwat for the costs of capital, they have had an exceptionally good return on prices which have been designated by the regulator. That is not to say that a change in the circumstances would not cause some hesitation on the part of investors, but the reality is that on whatever basis we operate it will continue to provide a good, safe, consistent return to international investors. For that reason we should discount some of the scare stories that surround the issue of enforced separation.

These two proposals give the Government an option. Amendment 49 would give Ofwat, and by extension the CMA in certain circumstances, the power to mandate separation either for one company, or, following a market review, for all companies operating in that sector. That is a pretty substantial increase in their powers, although it is not very different from what the CMA can do in most markets if it finds that there is a breach of general competition law. The rather softer alternative which I think the Government might well consider more is Amendment 97. That would allow for voluntary separation in certain circumstances or negotiated separation if Ofwat were to intervene in order to enforce better competition and better performance.

Amendment 97 therefore is a minimalist form of separation. Amendment 49 is more draconian. The Minister can probably guess which I should prefer, but in this context I would be happy to see the Government take up either. At some point down the line, the current structure of the water sector is going to have to be challenged more fundamentally than is done by the Bill. If we were to give the contingency power to Ofwat now, or make it easier for the companies themselves or for Ofwat to negotiate and suggest to companies that they should split, that would give us the ability to reshape the industry following the introduction of retail competition even to the degree provided for in the Bill.

I suspect that the Government are going to be deeply resistant to either option, but they are wrong. The structure of the industry is not one which can be

4 Feb 2014 : Column 145

sustained for very much longer. It is one that requires significant investment and we do not want to frighten the investors. On the other hand, we have to face up to the reality that proper competition, meeting both business and household consumer needs plus the very substantial environmental demands on the industry, may well require a more radical solution to the structure of the industry than is envisaged in this reform.

I hope that the Government will at least take this matter seriously. Giving Ofwat some powers in this area would be a significant move forward. I beg to move.

Lord De Mauley: My Lords, I am grateful to the noble Lord, Lord Whitty, for tabling Amendments 49 and 97, which are about an important subject, that of separation, whether legal or functional. Legal separation is what Amendment 49 deals with. The amendment would require the eight licensed water suppliers currently operating under the existing water supply licensing regime—so not the incumbent water companies—to set up legally separated entities for the retail and wholesale parts of their business. It is unnecessary to require these licensees to undergo legal separation. In the current market, such licensees can already choose to offer retail services only. In fact all of them do. In the new market, licensees will be able to offer both retail and upstream services separately.

As drafted, this amendment would not require the legal separation of incumbent water companies, but I understand that that is the intention behind it. Legal separation of the incumbent water companies is usually perceived as a way of preventing them from discriminating against new licensees entering the market in favour of their own retail businesses. This discrimination could be either through the prices they charge or by other non-price forms of anti-competitive behaviour. However, legal separation would not eliminate the risk of discrimination in competitive markets, nor is it the only way to deal with discrimination. Ofwat has a range of tools it could use, for example by making licence changes to govern the relationship between the retail and wholesale parts of the companies. These could go as far as requiring effective functional separation. The Bill also gives Ofwat stronger powers to ensure that it can take action to tackle discrimination and ensure a level playing field for all market participants.

The water White Paper made it clear that we would not drive fundamental structural change to the industry, such as forcing the legal separation of incumbent water companies. We were persuaded by the arguments of water companies and investors in the sector that doing so would reduce the regulatory stability of the sector and put future investment at risk, something to which the noble Lord, Lord Whitty, referred. We must not take risks with a successful model given the challenges we face in building the resilience of the sector and the importance of keeping customer bills affordable.

The Government expect Ofwat and other competition authorities to take firm action to prevent discriminatory pricing or behaviour. This could include requiring undertakings from market participants to address anti-competitive behaviour, for example by introducing functional separation. Furthermore, under Clause 23, the Government have also introduced a duty on the

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Secretary of State, Welsh Ministers and Ofwat to ensure that incumbent water companies do not exercise undue preference to their own retail businesses, associated licensees or other incumbent water companies on non-price matters. Ofwat therefore has sufficient powers to reduce discriminatory behaviour without there being legal separation of incumbent water companies.

As the noble Lord, Lord Whitty, explained, Amendment 97 would enable licensed water suppliers to choose to specialise in either retail or wholesale services. Clause 1 and Schedule 1 to the Bill already enable this by removing the requirements in existing legislation for suppliers of upstream services also to provide retail services. This amendment is therefore unnecessary to achieve the objective the noble Lord seeks.

Forcing separation would not simply be about costs to investors, it would impact on costs to customers. If the sector becomes less attractive, the cost of capital increases, and increases of as little as 1% can lead to £20 on a bill. We must remember the need to ensure that bills remain affordable. I therefore ask the noble Lord to withdraw his amendment.

6.30 pm

Lord Whitty: My Lords, clearly I am going to withdraw my amendment because the noble Lord indicated in his opening paragraphs that it is in the wrong place to achieve what I thought it might achieve. However, the subject is worthy of further consideration. It is true that Ofwat has a power of functional separation in Schedule 1 but it is only one way round. The amendment would provide for it to be both ways round. It would give some flexibility to Ofwat, but only on functional separation.

On ownership separation, this is such an odd market that at some point some Government will have to consider this. The proposed clause, as drafted and as intended, did not say that we would do it, but it would give Ofwat reserve powers to do it in relation to either one company which was engaged in anti-competitive behaviour—which is wider than simply the relationship between its own wholesale and retail internal pricing system—or across the board.

The power exists and is used by both the European and British competition authorities in almost every other sector—we have required breweries to give up their pubs and banks to give up their retail branches—but water is more protected because it has a sector-specific structure of regulation which has built up, for understandable reasons, from the old nationalised structure into a regionally based oligopoly. It has attracted a serious amount of investment, but at a cost. Part of the cost is inflexible and the Bill seeks to introduce a greater degree of flexibility. I accept that, but, ultimately, you would not necessarily want the structure for all time.

Therefore, although I do not advocate wholesale intervention at this point, Ofwat, as the sector-specific competition authority, needs stronger powers than it currently has. My proposed new clause clearly would not give it those powers, and even if it did the Minister would not accept it. We have a problem with the nature of the industry. It has had some fairly bad

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publicity recently in terms of its levels of profitability, its method of gearing and the way that it treats its customers. There is considerable room for improvement. One potential stick for that would be to give Ofwat wider powers. Indeed, a future White Paper may well address this issue more radically than we are doing today. In the mean time, I shall withdraw my amendment.

Amendment 49 withdrawn.

Clause 4 agreed.

Schedule 3: Sewerage licences: authorisations

Amendments 50 and 51 not moved.

Schedule 3 agreed.

Schedule 4: Sewerage undertakers' duties as regards sewerage licensees

Amendment 52 not moved.

Amendment 53

Moved by Lord De Mauley

53: Schedule 4, page 146, line 43, at end insert—

“(4A) For the purposes of this section and sections 117B and 117C—

(a) premises which are outside a sewerage undertaker’s area are to be treated as being within that area if they are provided with sewerage services using the undertaker’s sewerage system, and

(b) any sewers or drains of the sewerage undertaker which are used for the purpose of serving premises as mentioned in paragraph (a) are to be treated as being part of the undertaker’s sewerage system (if they would not otherwise be part of it).”

Amendment 53 agreed.

Amendments 54 to 59 not moved.

Amendment 60

Moved by Lord De Mauley

60: Schedule 4, page 151, line 23, leave out “the code prepared by the Authority” and insert “a code in relation to which a direction may be given”

Amendment 60 agreed.

Amendments 61 to 63 not moved.

Amendment 64

Moved by Lord De Mauley

64: Schedule 4, page 155, line 25, leave out “fit” and insert “appropriate”

Amendment 64 agreed.

Schedule 4, as amended, agreed.

Clause 5 agreed.

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Schedule 5: Extension of licensing provisions in relation to Wales

Amendments 65 to 72

Moved by Lord De Mauley

65: Schedule 5, page 162, line 9, at end insert—

“2A In section 2B (strategic priorities and objectives: Wales) (as inserted by section 24 and amended by Schedule 7), in subsection (4)(d), after “water supply licensees” there is inserted “and sewerage licensees”.”

66: Schedule 5, page 163, line 7, leave out “Subsection (1)(a)” and insert “Paragraph (a)”

67: Schedule 5, page 163, line 8, leave out sub-paragraph (3)

68: Schedule 5, page 163, line 23, at end insert—

“(1A) Subsection (1A) is repealed.”

69: Schedule 5, page 165, line 15, leave out paragraph 26 and insert—

“26 In section 52 (the domestic supply duty) (as amended by Schedule 7), in subsection (4A)—

(a) after paragraph (a) there is inserted “and”;

(b) paragraph (c) and the “and” preceding it are repealed.”

70: Schedule 5, page 165, line 17, after “purposes)” insert “(as amended by Schedule 7)”

71: Schedule 5, page 168, line 23, leave out sub-paragraph (4)

72: Schedule 5, page 170, line 23, after “195(3AA)” insert “(the Authority’s register: consultation as regards water supply licensees) (as amended by Schedule 7)”

Amendments 65 to 72 agreed.

Schedule 5, as amended, agreed.

Clauses 6 and 7 agreed.

Clause 8: Bulk supply of water by water undertakers

Amendment 73

Moved by Lord De Mauley

73: Clause 8, page 10, line 32, at end insert—

“( ) In this section and sections 40A to 40I “bulk supply agreement” means an agreement with one or more water undertakers for the supply of water in bulk and includes—

(a) an order under subsection (3) which is deemed to be an agreement by virtue of subsection (5), and

(b) any agreement which has been varied by order under section 40A(1).”

Amendment 73 agreed.

Amendment 74

Moved by Baroness Parminter

74: Clause 8, page 10, line 32, at end insert—

“( ) In relation to any agreement for the supply of water in bulk between a water undertaker and a qualifying person—

(a) the Authority and any party to an agreement shall at any time if so requested provide such information as the Environment Agency or NRBW may require in relation to the volume and source of any water to be abstracted or supplied and the timing of such abstraction or supply under the agreement;

4 Feb 2014 : Column 149

(b) the Environment Agency or NRBW may at any time certify to the Authority that it is necessary or expedient for the purpose of—to vary or terminate an agreement, the Authority must seek a variation or termination of that agreement;

(i) conserving, redistributing or otherwise augmenting water resources in England and Wales;

(ii) securing the proper use of water resources in England and Wales; and

(iii) securing the conservation of flora and fauna which are dependent on an aquatic environment;

to vary or terminate an agreement, the Authority must seek a variation or termination of that agreement;

(c) if the Authority is satisfied that the variation or termination cannot be achieved by agreement between the parties within a reasonable time it must by order vary or terminate that agreement accordingly.”

Baroness Parminter: My Lords, I shall speak also to Amendment 76. The amendments seek to give the strongest safeguards to the bulk transfer of water in advance of—and, indeed, in the absence of—reform proposals for the water abstraction regime, which we will discuss in subsequent amendments.

The Bill incentivises existing licence holders to sell their water to water companies even when the catchment is over-abstracted. It is welcome that the Commons amended the Bill to require applicants for new water supply licences to consult with the Environment Agency as well as with Ofwat. It is on the existing licences being traded as a result of the reforms making it easier for bulk transfers that I wish to focus with these amendments.

Clearly water companies have responsibilities about deterioration outlined in the water framework directive but, as the head of water resources at the Environment Agency said in evidence to the House of Commons, Clause 12 could even force bulk transfers of water between existing participants that could affect the use of abstraction licences.

To protect the scarce resources, the Environment Agency and NRBW need the strongest role at the beginning of the trading process. At present the Environment Agency can only intervene once damage has occurred. That is too late, and especially so for the controls that we are proposing for a new market. In the Commons, the Government gave statutory consultee roles to both the Environment Agency and NRBW when Ofwat makes an order for bulk supplies. My amendment would give those bodies the right to compel Ofwat to intervene in or terminate a bulk supply agreement which it deems would cause unsustainable abstraction.

The issue is whether the statutory consultee role for the Environment Agency and NRBW when Ofwat makes an order regarding a bulk supply agreement means that Ofwat has to act on what these bodies say, or whether it is just advice or input on whether the supply is necessary or expedient which Ofwat can choose to ignore. Surely we need the Environment Agency and NRBW to be able to require Ofwat to intervene to vary or terminate a bulk supply agreement before unsustainable abstraction takes place. That is what both these amendments seek to achieve. I beg to move.

4 Feb 2014 : Column 150

Lord Crickhowell: My Lords, we come now to one of those probing amendments which, as I said earlier, I have refrained from tabling partly because I found the Bill so complex that I was not sure I was going to get it in the right place. I am not sure that the noble Baroness has got it in the right place, because here we are debating, I thought, Clause 8, and she has referred specifically and entirely to Clause 12. I can understand why the amendment she tabled was appropriate for Clause 12; I am not entirely sure it is right for Clause 8. However, it enables me to address some of the points about which I expressed concern at Second Reading.

Once again, I thank my noble friend Lord De Mauley for the extraordinarily thorough way in which he has dealt with anxieties expressed during the preparation and passage of the Bill. He wrote me a long letter even before Second Reading because I had raised the issues during one of his briefing meetings. He wrote me another letter after I had raised the issues again at Second Reading. This is the only part of the Bill that I had serious anxieties about. I think that these anxieties are almost certainly unfounded. My noble friend’s letter prompted me to pull down from the shelves of the Library the Water Resources Act 1991, which I suppose I should have known by heart from the days when I was chairman of the National Rivers Authority. That Act gives the authority the powers that are needed in this respect.

My noble friend also drew my attention to the debates in the Public Bill Committee in the other place, to which I think the noble Baroness referred. During those sessions, Trevor Bishop, head of water resources at the Environment Agency, was questioned on this issue. He was asked about the powers that the Environment Agency has and its relationship with Ofwat. Ofwat is required under the Bill as it is drafted to consult with the Environment Agency. Mr Bishop said:

“We operate a series of tests regarding an application for a 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”.

Then he was asked whether the Environment Agency would have the right to veto any current extraction licences. He said:

“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”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 57.]

What I think the Environment Agency is saying is that, yes, it has to be consulted. It is not Ofwat which issues the extraction licences, it is the Environment Agency. Ofwat is obliged to consult the Environment

4 Feb 2014 : Column 151

Agency. I suspect the Minister may also refer to the role of the Secretary of State in giving guidance on the Bill. If there are any doubts about what the respective duties are, I suspect they could be covered in that way.

Partly as a result of the diligence of my noble friend on the Front Bench in trying to foresee all the difficulties I might raise in Committee, I have got to the point where I am almost entirely satisfied that the safeguards are there. However, I will listen carefully to what is said further in this debate. It may be that on later amendments I will have to keep my ears open, but, broadly speaking, I am satisfied. The only additional point on which I should keep my powder dry is the introduction later of the new abstraction licensing regime, and whether that will raise any issues that are not adequately covered here. We will come to that in later amendments anyway. For the time being, I am largely satisfied.

6.45 pm

Lord Whitty: My Lords, I can accept quite a bit of what the noble Lord, Lord Crickhowell, has just said, but it does not deal with the totality of the noble Baroness’s amendment, which I broadly support. Amendment 74 deals with bulk transfers which may well be within the context of an existing abstraction licence—it is only change of use if it is used for some other purpose. The Environment Agency does not have a licence control except in terms of change of use. It is an Ofwat responsibility, in increasing upstream competition, to arrange for these bulk transfers. It is complicated but it seems to me that if there is a serious environmental problem, the Environment Agency and its Welsh counterpart need some powers over and above consultation—which already exists—to stop those transfers taking place. I think that is really where the noble Baroness’s amendment is aimed.

The consultation rights already exist and the noble Lord, Lord Crickhowell, has spelt this out. In most cases, under the previous regime, Ofwat and the Environment Agency have certainly in recent years reached an amicable agreement. However, there is the possibility of a clash under the new regime, and in those circumstances the noble Baroness’s Amendment 74 would be appropriate.

Lord Crickhowell: I am grateful to the noble Lord. I do not have the papers immediately to hand but I have it in mind that if there is a change of use, that prompts Ofwat to have to consult the Environment Agency. I may be wrong on that and no doubt my noble friend will be able to deal with it.

Lord Whitty: If there is a change of use—for example, if you are a landowner with an extraction licence who now, under the new regime, wants to put it into the water system—then the Environment Agency has to give a change of use certificate, and will judge that in the same way as if it was a new extraction licence. So that control is there. However, if it is simply a bulk transfer within existing use and with existing abstractors, then that break is not there. I think I am right in saying that.

4 Feb 2014 : Column 152

Baroness Northover: My Lords, I thank my noble friend Lady Parminter for tabling these amendments. Clause 8 plays an important role in achieving a more resilient water industry by encouraging the bulk transfers of water, or bulk supply agreements, between incumbent water companies and between incumbent water companies and inset appointees. We recognise my noble friend’s concern that an increase in bulk supply agreements might lead to unsustainable abstraction, particularly in advance of broader reform of the abstraction regime. We are therefore grateful for the opportunity to explore these issues in further detail today.

We would like to assure the Committee that we are serious about reforming the current abstraction system so that it is fit to face future challenges, and noble Lords are quite right to focus on this point. We are committed to putting in place an effective system that better reflects available water resources and we published our proposals for consultation in December. My noble friend Lord De Mauley will talk about our approach to abstraction reform in more detail shortly, as my noble friend Lady Parminter noted; as my noble friend Lord Crickhowell noted, Clause 12 may also appear to be relevant here.

I shall focus on Clause 8, which introduces new provisions to regulate more effectively bulk water supply agreements by introducing codes and charging rules that will govern these agreements. By enabling incumbent water companies to use water resources more flexibly and efficiently, increased water trading can both build resilience and increase the sustainable use of water resources. It can be particularly useful for water stressed areas and in times of drought. My noble friend Lady Parminter is right that we need to avoid any damage from unsustainable abstraction happening in the first place. Tackling damage after it has occurred can be a slow, difficult and expensive process. We therefore want to ensure that adequate safeguards are in place in introducing this reform to the bulk supply regime. We believe that these safeguards are already in place.

The Environment Agency and Natural Resources Wales are the regulators responsible for protecting and improving the environment and they will continue to control the impacts of abstraction through abstraction licensing. As my noble friend Lady Parminter noted, it has been agreed that Ofwat must consult the appropriate environmental body before ordering, varying or terminating a bulk supply agreement. However, I note her current disquiet at this. My noble friend Lord Crickhowell was more encouraged by the arrangement and is, as he put it, almost entirely satisfied by the correspondence from my noble friend Lord De Mauley, and I trust that my noble friend Lady Parminter has also seen this correspondence. If she has not, we will make sure that she receives it. I note also that the noble Lord, Lord Whitty, is less reassured, and I am sure that this issue will be considered further in the later group, as I have indicated. We all share the concern to ensure that we have a resilient system which does not cause damage.

I remind noble Lords that water companies have statutory environmental duties as well, including a duty under Regulation 17 of the Water Environment (Water Framework Directive) (England and Wales) Regulations 2003 to have regard to river basin

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management plans when deciding whether to enter into bulk supply arrangements. River basin management plans set out the environmental objectives for the water bodies within a river basin district and how they will be achieved. Each water company also has a duty under Section 37A of the Water Industry Act 1991 to produce a water resource management plan every five years that sets out how it aims to balance demand and supply over the next 25 years.

As I say, my noble friend Lord De Mauley will be addressing abstraction in greater detail in the next group, and in the mean time, I hope that my noble friend will be content to withdraw her amendment.

Baroness Parminter: I thank the Minister for her comments and I thank my noble friend Lord Crickhowell and the noble Lord, Lord Whitty, for their contributions in exploring this debate. It has become clear that the focus is not the new licences, which are covered by effective safeguards, but the issue of bulk trading where the licences have already been issued. It is about whether the new safeguards that have been put in, which give statutory consultee status to the environmental bodies, are sufficient. Ofwat has to consult those bodies, but it is not obliged to act in accordance with what they say. In the absence of the aligned timetables for the abstraction reform proposals and the proposals for the upstream composition, I remain concerned that we need the strongest safeguards. If we are not given satisfactory responses to the issue that we will be discussing imminently, I reserve my right to come back to it. On that basis, I beg leave to withdraw the amendment.

Amendment 74 withdrawn.

Amendment 75

Moved by Lord De Mauley

75: Clause 8, page 11, leave out lines 32 to 38

Amendment 75 agreed.

Amendment 76 not moved.

Clause 8, as amended, agreed.

Clause 9: Main connections into sewerage systems

Amendments 77 and 78

Moved by Lord De Mauley

77: Clause 9, page 19, line 47, at end insert—

““main connection agreement” means an agreement with one or more sewerage undertakers for that undertaker or each of them to permit a main connection into its sewerage system and includes—

(a) an order under subsection (3) which is deemed to be an agreement by virtue of subsection (5), and

(b) any agreement which has been varied by order under section 110B(1).”

78: Clause 9, page 21, leave out lines 1 to 8

Amendments 77 and 78 agreed.

Clause 9, as amended, agreed.

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Clause 10: Agreements by water undertakers to adopt infrastructure

Amendments 79 to 86

Moved by Lord De Mauley

79: Clause 10, page 29, line 5, leave out “in relation to” and insert “as regards the consent of”

80: Clause 10, page 29, line 7, leave out “in relation to” and insert “as regards the consent of”

81: Clause 10, page 30, line 46, leave out “may issue one or more codes” and insert “must issue a code”

82: Clause 10, page 30, line 48, leave out “A” and insert “The”

83: Clause 10, page 31, line 13, leave out “a code” and insert “the code”

84: Clause 10, page 31, line 34, leave out “a code” and insert “the code”

85: Clause 10, page 31, line 41, leave out “A” and insert “The”

86: Clause 10, page 31, line 43, leave out from “Authority” to “issue” in line 44 and insert “must from time to time review the code and, if appropriate,”

Amendments 79 to 86 agreed.

Clause 10, as amended, agreed.

Clause 11: Agreements by sewerage undertakers to adopt infrastructure

Amendments 87 to 94

Moved by Lord De Mauley

87: Clause 11, page 37, line 35, leave out “in relation to” and insert “as regards the consent of”

88: Clause 11, page 37, line 37, leave out “in relation to” and insert “as regards the consent of”

89: Clause 11, page 39, line 32, leave out “may issue one or more codes” and insert “must issue a code”

90: Clause 11, page 39, line 34, leave out “A” and insert “The”

91: Clause 11, page 39, line 47, leave out “a code” and insert “the code”

92: Clause 11, page 40, line 9, leave out “a code” and insert “the code-”

93: Clause 11, page 40, line 16, leave out “A” and insert “The”

94: Clause 11, page 40, line 18, leave out from “Authority” to “issue” in line 19 and insert “must from time to time review the code and, if appropriate,”

Amendments 87 to 94 agreed.

Clause 11, as amended, agreed.

Clause 12: Arrangements for water undertakers to take water from other persons

Amendment 95 not moved.

Amendment 96

Moved by Baroness Parminter

96: Clause 12, page 47, line 40, at end insert—

“( ) Before laying a draft of an instrument in accordance with subsection (1), the Minister must publish and present to Parliament draft legislation for reforming the law in respect of water abstraction.”

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Baroness Parminter: My Lords, we now touch on the issue of the absence in the Bill of any abstraction reform proposals. Amendment 96 seeks to address the issue of the non-alignment of the proposals for upstream competition, which are within the Bill, and those for abstraction reform, which are not. Without the proposals for abstraction reform running in parallel with those that create a market for trading water, there is a significant risk to our scarce water resources. I will not repeat what I said at Second Reading, but suffice it to say that the House of Lords EU Sub-Committee on Agriculture, Fisheries, Environment and Energy and the Environment Agency both concur with the Government’s own view that at present,

“significant volumes of water are licensed but unused”.

If this water is used as the result, for example, of increased trading in a reformed system, that could cause environmental deterioration.

The upstream competition briefing paper which the Government have helpfully provided for us states that they are aiming to legislate for abstraction reform early in the next Parliament. My amendment would merely give statutory backing to that commitment by this Government and would tie future Governments to abide by it. Requiring the Minister to draft public legislation to reform water abstraction will give clarity to parliamentarians about the shape of the abstraction reform proposals prior to their scrutiny of the regulations that will govern the new market in upstream competition, which the Government say could come into force by 2019. I hope that the Minister will agree that this amendment is one way—I accept that it is only one way—of reflecting the Government’s stated commitment to delivering reform in a timely and coherent way. That can be secured only by aligning the proposals for upstream reform, which are in the Bill, with those for reform of the abstraction regime, which are not. I beg to move.

7 pm

Lord Cameron of Dillington: My Lords, it seems strange to be talking about possible water shortages and abstraction reform in one of the wettest Januarys since records began. I remind noble Lords that January is named after the Roman double-headed god, Janus. If one head is pointing to the climate change extreme of floods, the other is undoubtedly pointing to drought.

I am not certain that either this group of amendments or the previous group totally grip the issue of likely water shortages and the much needed reform of the abstraction regime, which should be put in place as soon as possible. One of the lessons of the disaster of the Somerset Levels is that we should not wait until disaster strikes before taking action and rushing through reforms. At one of the side meetings last week, which many noble Lords attended, we heard that improvements in water supply and demand take a long time. We heard, for instance, how the mere extension of a reservoir in Essex took 20 years to arrange—10 years to prove the case and 10 years to get the planning through. Equally, universal metering, on the demand side—which of course is worth several reservoirs and is not dependent on rain—would also take a very long time to achieve, particularly if we are to bring consumers along with us, which is very important.

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To avoid the likely dire situation that we will have in the future, we should use the Water Bill to ensure that disaster does not strike some time in the future. The dire situations relate to population increases, more demand for energy—energy is a huge user of water, as I am sure many noble Lords know—and more droughts, which are very likely. All these factors require greater flexibility in the management of our abstraction regime.

There are parallels with the energy industry. Some of us were dealing with the Energy Bill at the end of last year and tried to ensure that in the next 10 or 20 years’ time there would be a sufficient balance of supply to demand within the energy industry. All the time, we were aware that 10 years ago no one had looked carefully at this balance of supply and demand. We are quite likely to face power cuts in the next couple of years—as many noble Lords are aware—because of this lack of forethought in the past decade.

During the passage of the Energy Bill, my noble friend Lord Oxburgh, who I am sorry to see has left his place, tabled an amendment to establish a council of wise men who would look at the energy industry in the long term, see what was needed and ensure that the right precautions were in place. If the water industry had a group of wise men now, they would be telling us to put a road map in the Bill to take us as speedily as possible towards overall abstraction reform in universal metering and not to wait until the next decade, which seems to be the form, to put this in place.

I agree that abstraction reform is a serious issue. There will undoubtedly be winners and losers in the process whose interests must be given voice in the democratic process. However, I am fearful that Amendment 104, which I am sure the noble Lord, Lord Whitty, will come to in a minute, might put an even greater brake on the introduction of reforms than the long drawn-out process seemingly currently envisaged by Defra. If I have misunderstood Amendment 104, I look forward to being corrected. In the mean time, I strongly support Amendment 96 in the name of the noble Baroness, Lady Parminter.

Lord Crickhowell: My Lords, the noble Lord, Lord Cameron, asked if it was right to discuss the possibility of drought in the middle of floods. I can assure him that it is absolutely right. My experience in the NRA was that, whenever we had a flood it was almost immediately followed by a drought, and whenever we had a drought it was almost immediately followed by a flood. It was an almost invariable rule, so I am sure that he is right that we should be addressing these issues.

When speaking to my noble friend’s previous amendment, I said that the one area to which I might want to return was reform of the abstraction licensing regime. I spoke about it in some detail at Second Reading and I do not want to repeat what I said then. It was one of the central problems that we had to deal with in my time in the NRA.

I disagree with the noble Lord who has just spoken when he says that the Government should get this issue into the Bill and that it is very urgent. My understanding is that the Government are getting on with the kind of review and detailed discussions with

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just the sort of people that he suggested they should be meeting. However, they have pointed out that the issue is extremely complicated and cannot be rushed. While I, perhaps on the basis of experience, have always been one of the first to criticise the timescale on which some government departments operate, I have a good deal of sympathy with the need to take adequate time on this. This view was reinforced by the fact that at one of the briefing meetings, the representative of—I think—Anglia Water told us that it was undertaking fairly basic research into the resources available in the region. It was suddenly brought home to me that we do not know a great deal about the availability of ground water resources in many of our regions. We know how much water is going down the rivers, but we still need quite a lot of information before we have the kind of policy that we all want to see.

While we must get on with it, I am not sure it is right to think that we can put into this Bill the requirements that will follow the result of this important inquiry and examination. However, my noble friend Lady Parminter is right in thinking that there should be safeguards in the Bill so that when the results of the review come through, we can be certain that the necessary steps and measures are taken. I am not sure how that should be drafted or whether the noble Baroness has got the drafting quite right, but I sympathise with her desire to write safeguards into the Bill so that we are not left with a great gaping hole when we get the results of the very important review that is under way. I will therefore listen with great care and interest to what the Minister says in reply to this debate.

Earl Cathcart (Con): My Lords, I declare that I farm in Norfolk, I live in a band H property, I have a bore hole for domestic use and I have spent about 30 years working and underwriting in the London insurance market.

I want to talk about two aspects. One is bringing all abstraction licences in line with today’s rules, conditions and requirements, and the other is abstraction charges.

At Second Reading I said that,

“it is cackhanded to be bringing in upstream competition in water trading before the existing water abstraction system has been reformed, given that the Environment Agency says that many rivers are already overabstracted and overlicensed”.—[

Official Report

, 27/1/2014; col. 1025.]

Just about everybody agrees that reform is sorely needed. The question is when it should take place. Many are impatient for reform, and I include myself, but the Government, in their handout, Upstream Competition and Abstraction Reform, say:

“We should not rush this: if we get it wrong, there will be real consequences for a range of business and industry, including farmers, food manufacturers and the power sector, as well as the environment”.

Quite so—they do not want to throw the baby out with the bathwater. The handout goes on to say that any abstraction reform will take place “in the early 2020s”. That could be 10 years away, which, to say the least, is disappointing.

Is there anything that we can put into this Bill that will help improve the current system? I believe that there is. My noble friend Lord Crickhowell mentioned

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Trevor Bishop, who is head of water resources at the Environment Agency. When he gave evidence to the Commons Committee, he said:

“Most of the damage due to over-abstraction is because the licences were passed a long time ago”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 63.]

The older licences are still allowed to abstract, regardless of whether water is abundant or scarce, but there are restrictions on newer licences. The hands-off flow condition allows the Environment Agency to reduce or stop abstraction altogether if river and ground water levels fall, but this does not apply to the older licence holders—the vast majority of total abstractions. This puts newer licence holders and, indeed, the environment at a disadvantage. Surely, the first step should be to bring all licences up to date with modern requirements, especially the hands-off flow condition and, indeed, any other condition deemed necessary. I would like to see a provision in the Bill similar to the proposed new paragraph (c) in Amendment 74 in the previous group, which says that if the variation,

“cannot be achieved by agreement”,

the authority can vary the licence by order or terminate it. This would bring all licences in line, protect the environment and give flexibility to vary all licences as and when necessary. It would also bring this in now rather than waiting for 10 years

The next thing is abstraction charges. I looked at the Environment Agency website, which lists eight charging regions in England and one in Wales. There are two charges: the standard charge and the environmental improvement charge. The environmental improvement charge is different for water companies and for non-water companies, which I presume includes energy companies. The standard charges are not standard at all—they vary region to region. Of the eight regions in England, the Anglian and Northumbrian regions are charged the most, at about £28 per 1,000 cubic metres of water, while the north-west region is only charged about £12.50 per 1,000 cubic metres of water—less than half. Why is there this variation when it is called a standard charge? The Minister might say that the Anglian region, being in an environmentally sensitive area, attracts the highest charge in the country to cover the costs of managing the resources available. However, here I got muddled, because that is surely an environmental issue, and any extra charge ought to be levied under the environmental improvement charge, not the standard charge. Can the Minister explain?

I move on to the environmental improvement charge for non-water companies. Again, the Anglian region pays the most, at £13.71 per cubic metre of water, which is what one might expect, given that it is an environmentally sensitive area. The lowest environmental charge is 62p, for the Yorkshire region, while two regions—the Midlands and Northumbrian regions—pay no environmental improvement charge at all. Why? I do not understand the logic behind the charging and would like the Minister to explain.

7.15 pm

When it comes to the environmental improvement charge for water companies, of the eight regions, only two—the north-west and Thames—pay any charge at

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all. Again, why? As water companies account for more than 50% of all water abstracted, should they not be contributing at least their fair whack of any charges?

I apologise to my noble friend for asking all these questions. I am not expecting an answer today—that would be too much—but perhaps he could write to me on this. While doing so, perhaps he should consider whether the entire charging system needs reviewing: not so much the standard charge—although it would be nice if it was standard—but the environmental improvement charge in particular.

I think we are missing a trick here. If the Bill is about better management of our water resources and the protection of the environment, why does the environmental charge not reflect this? For instance, when there is an abundance of water, the charge could be relatively low, but as water in each catchment area becomes scarcer, the charge could be ratcheted up, thus making it more financially prohibitive to abstract when it might harm the environment.

Lord Whitty: My Lords, I have Amendment 104 in this group, which touches on exactly the issue that the noble Earl referred to right at the beginning of his remarks. The essential problem here is that we have two issues: the introduction of upstream competition and the deficiencies in the present abstraction regime. Logically, it would be sensible to have accomplished, or at least set in train, the abstraction reform before we introduce upstream competition. In fact, the Bill gets it entirely the other way round.

The inadequacy of the abstraction regime has been fairly long-standing. I can remember having arguments within Defra when we brought in the 2003 Bill that we ought to have been more radical at that point. Indeed, ever since, the situation in several catchment areas has seriously deteriorated. Although the noble Lord, Lord Cameron, is right that it sounds odd for us to be talking about it in light of the recent inclement weather in most of the country, the reality in the long term is that a lot of our catchments are not in very good condition, either in terms of water resources or of their environmental flow. Abstraction levels and potential abstraction levels have had a serious effect on that.

The Government know this and have undertaken a review of the abstraction regime. It has been rather a long time coming, but they have nevertheless got to the point where they issued a very good consultation paper only last month, which gives two options as to how we could conduct the framework of reform. They could have gone a little further—issues such as charging, which the noble Earl also referred to, ought to be part of this. However, if we are unable to introduce that reform until into the 2020s, and meanwhile we have triggered upstream competition, we are aggravating the position. Once there are new suppliers, they will be looking at new sources. They will be looking at trading licences. In reality, it is not only the abstraction that is taking place that is damaging to a lot of our catchments, but the potential abstraction under existing licences. Many of these existing licences, which we talk about being introduced in the 1960s, are grandfathered rights, which probably existed centuries

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previously when the demand for water was less and the precipitation was probably even more than we recently experienced.

We have catchment areas that are subject to increased demand at the far end, to increased environmental deterioration and to climate change, and present potential problems for water quality as well as water supply. That problem needs addressing. If existing licences provide for twice the level that is actually abstracted—in other words, less than 50% of the potential abstraction actually occurs—and more people are trying to get their hands, figuratively speaking, on the water to put it back into the system and to enhance competition, then we have got a perfect storm. What, however, if we do it the other way around—if we speed up the introduction of abstraction reform and get the legislation we need? Some of it can be done without legislation, but probably not all of it. For example, the issue of compensation was a major inhibitor on the Environment Agency, as it comes out of the Environment Agency’s budget and the Treasury makes absolutely certain that it comes out of your budget. This inhibits the degree to which you can introduce modifications of termination of abstraction agreements. Probably, because it is a property right, that needs primary legislation. We need to move to primary legislation fast. We need to introduce it and you cannot introduce it all at once. It will take a bit of time to introduce it, but we need to start as rapidly as possible.

Once we have an abstraction regime that puts a cap, catchment by catchment, on the amount of water in aggregate that people can extract, and defines that in terms of the flow of the river, the demand on that river, and the potential environmental damage or benefit to which that river contributes, then we can relatively easily within that framework introduce competition, trading, sophisticated agreements of swapping water between one entrepreneur and another and indeed across boundaries of the water company areas. If you do it the other way around, however, you will affect the environment and the supply of water. You will make it much more difficult later to introduce rules in relation to the competition which affect the abstraction licences which exist, let alone new ones.

The Environment Agency is not without some powers in this respect. As we said in relation to the previous group of amendments, at the point of change of use, the Environment Agency can effectively introduce new provisions. However, not all of these will be change of use and if you have an abstraction licence currently, which would allow you to take out twice as much water as you actually need, then only part of that licence would be used for the public water supply system and the rest would remain. In effect, instead of taking 40% of the abstraction you would be taking 100% and only half of that would go into the public supply to provide for additional competition.

Although there are powers for the Environment Agency, they need to be strengthened. The sequence of events needs to be a rapid conclusion of the current consultation on abstraction, and introduction of the primary legislation and other regulations that we need as rapidly as possible over the next few years If we sped it up we could probably do that by 2020, which the department says is probably the earliest date that

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we could introduce upstream reform in any case. If we do not have that legislative sequence, we will get to 2020 without abstraction reform being properly implemented, and have all the problems of suddenly introducing upstream competition.

All we are asking in these amendments is to put the order right, put both elements in the Bill, and recognise that we will still need another Bill to do the abstraction reform in detail. I am suggesting that the division between the primary legislation for abstraction reform and the introduction triggering the provisions on upstream competition should be five years. The noble Lord, Lord Cameron, queries whether that actually made matters worse, but that is more or less the timescale the Government are working on for upstream competition in any case, so it does fit. If necessary we can alter that five years, but we need some clear sequence. At the moment the Government are dealing with only half of it in this Bill. The department have started the other half but we need to do them the other way around. I hope that the Government at least accept that principle, even if they are not prepared to accept the noble Baroness’s or my amendment tonight.

Lord De Mauley: My Lords, I thank my noble friend Lady Parminter for moving her amendment and other noble Lords for their contributions to this debate. This is, we all agree, a vital area. Amendment 96 would delay regulations under Clause 12 and the market for private water sales to water companies from coming into force until draft legislation is presented to Parliament on abstraction reform. Amendment 104 would introduce a new clause to prevent Clause 1 from coming into force until five years after the Royal Assent of future primary legislation on abstraction reform.

These amendments would delay both the upstream reforms and the retail market reforms in the Bill. We do not think they are necessary. I will explain why. We are fully committed to delivering abstraction reform and we share the views of noble Lords that just because we have had the wettest January on record does not mean that we will not imminently go into drought. We have seen that in recent years. We do not share the view, however, that there are risks in introducing upstream reform ahead of abstraction reform.

The Government and the Open Water programme—a partnership between the industry and regulators—are working towards retail market opening in 2017. Our retail reforms are widely supported by customers, who will benefit from improved customer service as a result of these changes. Non-household customers will be free to negotiate the best package to suit their needs. Customers with multiple sites will benefit hugely from being able to negotiate for a single bill from a single supplier. Improved customer services will have knock-on effects for household customers too.

Upstream reform will be introduced at a slower pace, as the noble Lord, Lord Whitty, acknowledged beyond the 2019 price review. This is because we recognise— and I thank my noble friend Lord Crickhowell, for his expert views which supported this—that upstream reforms will require careful planning and close working between the water industry, regulators and customer representatives. However, it is important to progress

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upstream reform because the current regulatory model is not delivering the kind of efficient resource use and innovation that we need. This reform will help to keep bills affordable and, vitally, to benefit the environment.

I assure noble Lords that there are sufficient safeguards in the existing regimes to prevent an unsustainable increase in abstraction being caused by the Bill. In order to sell water into public supply, abstractors will need to apply to the Environment Agency or Natural Resources Wales for a “change of use” for their abstraction licence. The Environment Agency can refuse such a request if it will lead to unsustainable abstraction. It can also refuse if it would cause deterioration in the catchment, or apply conditions to ensure that this does not happen.

In addition, Ofwat must ensure that anyone wishing to input to the public water supply system holds the appropriate abstraction licence, and informs the Environment Agency about any trades with other abstractors.

Through this Bill, in Clause 1, the Government will also require Ofwat to consult the Environment Agency or Natural Resources Wales before issuing a water supply licence. As my noble friend Lady Northover explained in the context of an earlier group of amendments, there are also safeguards in the existing regimes to prevent an unsustainable increase in abstraction by water companies for the purposes of water trading or “bulk supply” agreements. I also assure noble Lords that we are completely committed to abstraction reform and the introduction of a new system fit to face future challenges including changing climate and population growth.

7.30 pm

The noble Lord, Lord Cameron, asked about a road map to reform. We issued our consultation on reform proposals on 17 December, as the noble Lord, Lord Whitty, said; he spoke kindly of it. We are working with abstractors and everyone else involved with abstraction to understand their concerns and finalise our proposals. We aim to legislate for abstraction reform early in the next Parliament. During Second Reading, I highlighted just how complex those reforms would be. We must make sure that our final reform package delivers a robust, flexible and future-proofed system. We must also make sure that abstractors across the country can continue to access the water they need to run their businesses.

We have committed—I do so again—to ensuring that the implementation of our upstream and abstraction reforms is carefully co-ordinated. The expansion of upstream water resource markets and the transition to a new abstraction regime will take place on broadly similar timescales. This will enable abstractors to take decisions about managing their water use with good information about how future regulation will operate and the role markets might play in enabling them to meet their water needs. My noble friend Lord Cathcart asked about time-limiting licences. The changes proposed for old-style abstraction licences would be part of the abstraction reform. Significant changes to licences like this would usually involve payment of compensation. The Bill helps with that but there is no shortcut to fundamental reform.

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My noble friend Lord Cathcart and the noble Lord, Lord Whitty, asked what we are doing now about unsustainable abstraction. Indeed, that was behind what a number of other noble Lords said. We have a twin-track approach. In parallel to developing reform proposals, we are ramping up our efforts to reduce damaging abstraction now by making better use of our existing tools. We continue to work with licence holders to reduce abstractions through the Environment Agency’s Restoring Sustainable Abstraction programme. It takes time to do that. We might know that a particular extraction damages the environment but if, for example, that water supplies a major conurbation we cannot just switch it off overnight. Ways of reducing that damage must be considered and alternative sources of water investigated. The Environment Agency will soon use its powers to revoke or vary abstraction licences without compensation where they are causing serious damage to the environment. That follows our recent consultation on how to assess serious damage.

My noble friend also raised an important point about abstraction charges reflecting the value of water. As he suggested, I will write to him explaining the charging system in more detail. However, in brief, the standard charge is the mechanism through which the Environment Agency recovers its costs for managing and regulating water abstractions. The environmental improvement unit charge is used to cover the costs of compensating abstractors where the Environment Agency compulsorily varies or revokes abstraction licences to reduce the risk of environmental damage. The charges differ across regions for a range of historical reasons, including the location of sites in the Environment Agency’s Restoring Sustainable Abstraction programme. The Government seek to send better signals about the value of water through the Bill. Our proposals for abstraction reform develop these signals further and aim to introduce a reformed abstraction system that is more flexible and resilient to future pressures. Our proposals also cover abstraction charges and the future use of the environmental improvement unit charge. I thank noble Lords for their patience. I hope that my noble friend will agree to withdraw her amendment.

Baroness Parminter: I thank my noble friend the Minister for his detailed comments and the numerous colleagues around the House who joined in this debate. We face an inadequate abstraction regime that will be reformed at some point in the future and a Bill here and now that will introduce upstream competition proposals that could exacerbate the problems of abstraction. While I thank the Minister for his comments, I do not feel he adequately answered why the Government are not prepared to put wording in the Bill reflecting our concern that there is insufficient clarity at the moment about the timetabling of this issue. My noble friend Lord Crickhowell was kind enough to say he had great sympathy with that point.

I accept that the wording I proposed might not be right. We certainly do not wish to put any barriers on the proposal for reforming the retail market. I am sure everyone in this House agrees that we want to press ahead with that now. However, in the relationship between the abstraction reform proposals and the

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upstream competition there needs to be clearer timetabling within the Bill. I say to the Minister that we will return to this issue on Report, and in the absence of a sequencing being put in the Bill we will look again at further safeguards that will be required to prevent more deterioration to the environment. Those safeguards will be along the lines mentioned in my previous proposed amendments, which my noble friend Lord Cathcart was kind enough to say that we should look at more seriously, particularly paragraph (c) in Amendment 74. As I said, we will come back to this matter but on that basis I beg leave to withdraw the amendment.

Amendment 96 withdrawn.

Clause 12 agreed.

Clauses 13 to 15 agreed.

Amendment 97 not moved.

House resumed. Committee to begin again not before 8.36 pm.

Standards in Public Life

Question for Short Debate

7.37 pm

Asked by Lord Bew

To ask Her Majesty’s Government what assessment they have made of the report of the Committee on Standards in Public Life, Survey of public attitudes towards conduct in public life 2012, published in September 2013.

Earl Attlee (Con): My Lords, I understand that my noble friend Lord Phillips of Sudbury would like to speak in the gap. If all noble Lords adhered to three minutes we could accommodate my noble friend. When the Clock indicates “3”, a noble Lord’s time is up.

Lord Bew (CB): My Lords, the Committee on Standards in Public Life is an independent committee that provides advice to the Prime Minister. Its remit is to promote high ethical standards across the public sphere, not just Parliament. Its first ever report, in 1994, recommended seven principles to guide the behaviour of those who serve the public in any way: selflessness, integrity, objectivity, accountability, openness, honesty and leadership. Those principles are popularly known, after the first chairman, as the Nolan principles.

The committee published its fifth general survey of public attitudes last autumn. The committee has conducted the survey every two years since 2004. It is a unique long-term, independent study and source of information about what the public think about standards in public life. The issue here is general probity. It is important to check our perception of the standards that the public expect of public servants and organisations, and the extent to which those are being met, against reality. We cannot afford to assume that we know what the public really think about these issues.

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The survey was published at a time when a variety of research showed an increasing disengagement from the political system and some national institutions seemed to be engulfed in a series of scandals. The apparently—and I stress apparently—engulfing nature of scandals is a particular problem of the modern era. At least in some media discussion the impression exists not just of a few bad apples but that entire institutions lack probity: the BBC, Parliament, the police, et cetera.

The survey draws on all four previous surveys to chart changes in attitudes over the past 10 years. All surveys have consistently demonstrated what members of the public expect from people in public office. It is: to be committed to public rather than private ends; selflessness and integrity, as in the Nolan principles; to be honest and open in decision-making; to make decisions in the light of the best evidence; objectivity; to be held accountable; and for some senior public figures to lead in some respect exemplary lives—the principle of leadership.

Over the lifetime of the survey, there has been a continuous and substantial decline in the number of respondents rating standards as quite high or very high. In the latest survey, 28% of respondents rated conduct as either quite low or very low. There was also an increase in the proportion of people thinking that standards had got a lot worse. In relationship to Westminster MPs, the public broadly share a set of expectations that are in line with the seven principles of public life. However, they have consistently lower levels of confidence that MPs meet those standards. In the latest survey, pessimism was less marked than in 2010, when attitudes were sharply affected by the then recent events of the expenses scandal, but levels of confidence have not returned to their 2008 levels.

Although absolute levels of confidence are low in particular types of national public officeholders and professions—for example, Ministers, MPs and tabloid journalists—that should be contrasted with higher and rising confidence in institutions, processes and those administering the process. For example, as in most countries that have low and falling levels of confidence in politicians, there is, paradoxically, higher confidence in national institutions such as Parliament itself and much higher confidence in the legal system. For Parliament, it might be argued that there was something that looked like the possible beginnings of a crisis of legitimacy in the 1970s, but there is no sign of such a crisis today

Questions of trust are valuable tracking devices for changes, but there are dangers that we should be alert to in generalising about the public perception of probity. For example, we are sometimes a bit disappointed that only the broad, negative perceptions of MPs are reported in the media. There is a great deal of complex, sometimes counterintuitive material in the research which has messages for those working in public life. For instance, our survey showed a widespread belief that respondents would receive fair treatment from a wide range of front-line public services. Less than 15% of those surveyed expressed concern that they would be treated worse than others, and there are clear messages that the public expressed more confidence in the probity of those working in the public sector as against those working in private services.

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The data also give us a picture of those groups who are most likely to feel sceptical and, to some degree, alienated. That is particularly the case for those lower social grades from white British or white Irish backgrounds, middle-aged or older, and who have little engagement with the political system. The growth in the size of that group presents a challenge to all of us involved in public life.

The Committee on Standards in Public Life recognises that it is important to place those findings in a wider context, and it is now doing further research and assessing the results from our British survey compared with those in other countries, to see if results are potentially affected by domestic factors or reflect citizens’ attitudes across western democracies in general. We also appreciate that perceptions of trust and public confidence can include a range of issues which have nothing to do with integrity and genuine trustworthiness and are much more to do with the policy process and the process of delivery.

It is important that the public have confidence in the integrity of public institutions and that those who work in them are alert to a certain level of public malaise and, where necessary, willing to challenge the status quo. At a recent committee meeting with academics, there was a wide-ranging discussion about some issues which might address some of those perceptions: whether or not a less adversarial style of politics might help; or whether or not a better level of political reporting would help. An interesting point was made that MPs in the Netherlands considered that they have a role as a public educator. It is not quite as clear that MPs in United Kingdom consider that to be an important part of their role. There were a number of other interesting ideas for discussion and debate.

The broad context is clear enough. Modern politics became less ideological when the era opened up by the Russian revolutions closed in 1989. Politics became, it is often said, more about values and individuals and ideologies, but we still have a gladiatorial style, seen most spectacularly at PMQs, inherited from a more ideological age. The result is a displacement of inevitable popular resentment, which used to have a more ideological form of expression, to individuals in a more modern version of Brecht’s socialism of fools.

My committee believes that there is scope to improve and maintain levels of public confidence and trust by public officeholders and institutions by improving their own trustworthiness; by consistently and reliably exemplifying high standards of ethical behaviour, openness and accountability, as our recent report, Strengthening Transparency Around Lobbying, discussed; being more attentive to and active in addressing emerging ethical standards issues as they arise, rather than waiting for pressure for reform; establishing and promulgating robust mechanisms to detect and deal with wrongdoing; and creating a culture where high standards are built into everything the organisation does and genuinely seen as everyone’s personal responsibility.

Following a recommendation of the committee’s recent triennial review and understandable budget cuts across the public sector, that was the last such survey produced by the committee. I must say that since my arrival in the chair in September, the importance of

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the survey has been borne in on me in a way that was not the case before, and I began to appreciate its value in a way that I had not before. To have that steady survey over a period of changes and transitions in public mood is, I think, of great value. We regret losing in-depth analysis of the public view, especially when there are signs of disconnect between the public and the political process.

The focus of my committee’s immediate work programme will be on working collaboratively with public sector officeholders and organisations to promote and reinforce ethics and practice. We need to increase our understanding of the factors at play in building and maintaining public confidence. I believe that the committee and its research has a role to play in trying to move the debate on from the position so often heard—“They don’t get it”—to a different and better position, which is, “What can we do about it?”.

7.46 pm

Lord Patten (Con): My Lords, I have long admired the noble Lord, Lord Bew, for his ability to tease out of sometimes very dense language extremely important points, and he has just done so in his speech. Indeed, it was he who inspired me to read the whole of the report, which is dense and curious, sometimes, in its language. The noble Lord referred to the phrase, “the lower social grades”—a slightly grating phrase. I think that Aldous Huxley would have recognised that phrase, with his standard gammas, unvarying deltas and the rest.

That said, as I ploughed through the report, which the noble Lord, Lord Bew, inspired me to read, I became surprised—so I searched the harder—to find no specific mentions of your Lordships’ House in a longitudinal study, which strikes me as a major lacuna. There are mentions of all sorts of people—police, judges, and those in the front line giving out advice—but no mention of your Lordships’ House. I think that that needs to be addressed in future reports of this sort if we are to have the full value that we should get from them.

I can only make assertions, because there is nothing in this report which will stand up what I am about to say, but does the Minister share the concern expressed by some people in my hearing that there are things wrong with this place which need to be addressed? For example, some people feel that it has got terribly large and therefore is not very effective in what it does. I think that, had questions been asked in the longitudinal survey, we would have got some very interesting answers.

Most importantly, I am convinced—anecdotally; perhaps I listen to the wrong kind of taxi drivers—that the impression of your Lordships’ House has gone down sharply in recent years. If there is one thing that has affected that perception it is that a revolving door is still possible between someone becoming a lawmaker, then becoming a lawbreaker and leaving the service of your Lordships’ House, and then, having served whatever sentence was given, coming back into your Lordships’ House, having been a lawbreaker, to be a lawmaker. You do not have to be a taxi driver to think that there is something a bit rum about that.

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I end on the note that something should be done and be done quickly. It always used to be said that nothing could be done quickly about changing the laws of succession so that men and women could be in the right order of birth to become head of state in this country. The blessed Norman St John-Stevas used to stand up and say that it was quite impossible to do. Suddenly, the Zeitgeist changed and it was done. We need to make sure that as the Zeitgeist changes over this issue, the revolving door that goes between lawmaker, lawbreaker and lawmaker no longer exists.

7.50 pm

Baroness Donaghy (Lab): My Lords, I am grateful to the noble Lord, Lord Bew, for initiating this short debate. I was acting chair of the Committee on Standards in Public Life during most of 2007 and a member of the committee when Sir Nigel Wicks was in the chair and the public attitudes survey was inaugurated. I remember clearly how excited we were about the significance of the survey, particularly its long-term tracking of standards in public life.

The main thrust of my contribution is to ask the Government to think again about the withdrawal of funding for the public attitudes survey. I have been in contact with Sir Nigel Wicks and he has permitted me to communicate his “great disappointment” that the Government are withdrawing funding for future surveys. They provide an authoritative and transparently impartial method for tracking public perceptions and expectations of standards in public life. They give all concerned with standards in public life feedback on how the British people view a fundamental element in the working of our democracy. Sir Nigel is firm in the belief that the value of the public attitudes survey could not be replaced by a series of ad hoc surveys, conducted by bodies other than the committee. Such surveys would lack the authority derived from the committee’s own authority and knowledge, as well as the continuity provided by the regularity and consistency of the committee’s surveys. This would make it virtually impossible to identify trends and changing attitudes.

I can only echo Sir Nigel’s words and ask the Minister to consider the long-term implications of the Government’s decision to cease funding. The work of the Committee on Standards in Public Life is admired by the rest of the world for its independence and robust defence of standards. It will appear very strange for politicians, who admittedly are not too high on the popularity poll, to take the decision to weaken fundamentally the authority of these surveys.

7.52 pm

Lord Martin of Springburn (CB): My Lords, I, too, am grateful to the noble Lord, Lord Bew, for securing this debate. Our national poet, Robert Burns, often spoke about seeing the good in people. Perhaps we can see the good in people in public life because there are so many who are all too ready to highlight those who do the wrong thing.

However, my thoughts go to the fact that we have thousands of men and women up and down the United Kingdom, including in Northern Ireland, who have chosen to serve in local government for very little

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reward. Those men and women hold down their jobs and go to meetings of the council. At night, they attend the public meetings that we have with the housing associations or the tenants’ associations. They also deal with what some people would consider to be the little things, such as repairs to the sinks or drainpipes, or cleaning up the play area. A Speaker in the United States, Tip O’Neill, once said that all politics is local. We might call what these men and women in local government do “the little things” but it is important to remember that those things are important to the elderly, the mothers who want a play area to be cleaned up and all the other people who are worried about their community. As those men and women are not here at Westminster, sometimes constituents come to their door and disturb them even when they are having a family meal.

Your Lordships should remember that we often tut-tut when we are in conversation about non-traditional housing: the corridor houses and multi-storey flats in our cities. Not all of those places are bad to live in but because of the climate we have in this country the local authority gets the blame. In the 1960s and 1970s, when those men and women who were in local government wanted to clear the slums away and give people decent homes, it was central government who said to them, “You will not get government funding unless you build non-traditional houses”. When the problems arose, the blame lay with local government and the Government distanced themselves from the difficulties.

What I can say about the other place is that there are those who have brought the Commons to shame. We should remember that there are 650 Members of Parliament and that they are excellent at working on an all-party basis. Although I do not have the time, I advise noble Lords to read the adjournment debate which Mr Chris Skidmore raised on dangerous driving, in which dozens of Members from all parties took part.

7.56 pm

Lord Tyler (LD): My Lords, in view of the time constraints I want to focus on just one part of this excellent report. Figure 4.1 on page 22 shows that 26% of the respondents to the survey feel that MPs can legitimately take into account what big donors to their parties want when they cast a vote in the Commons. The committee found in another of its surveys, in 2010, that 81% of the public thought that the most common reason for donating to a political party was either in the hope of receiving some special favours in return—perhaps appointment to your Lordships’ House—or gaining access to those taking decisions. This perception that influence and access may be auctioned to the highest bidder is corrosive of our politics and corrosive of public perceptions of standards in public life.

The CSPL rightly concluded in its November 2011 report on party political finance that,

“this situation is unsustainable, damaging to confidence in democracy and in serious need of reform”.

The then chairman of the committee, Sir Christopher Kelly, argued that the cost to the public purse of capping big donations to parties would be the equivalent of just one first-class stamp each year for each elector. There is the choice: between each person paying 50 pence

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for an equal, democratic share of influence over the political system or a few people paying £50,000 a year for a necessarily quite unequal share of that influence. Yes, the public are sceptical about politics and parties but we have a responsibility to make the arguments, rather than shy away from them.

Just a fortnight ago in your Lordships’ House, the noble Lord, Lord Campbell-Savours, invited us to show that leadership by proposing the minimum possible reform of the party funding system: the introduction of a very small amount of tax relief for individual donations to parties. He said that,

“the very credibility of this institution is at stake. We have had far too many scandals over the years; political scandals relating to money and politics”.—[

Official Report

, 15/1/14; col. 320.]

He was backed up across the House. I particularly want to draw attention to the words of my noble friend Lord Hamilton of Epsom, who said that,

“political parties in this country are financed by the trade unions and, to a very large extent on all sides of the House, by extremely rich men who are seen to exert influence … This does us no good at all and we should grasp this nettle and do something about it”.—[

Official Report

, 15/1/14; col. 321.]

I supported him, as did my noble friend Lord Hodgson, who said:

“Someone, sometime, somewhere has to be brave, and we need to give them a nod tonight to get on and be brave as soon as possible”.—[Official Report, 15/1/14; col. 325.]

I welcome the report of the committee of the noble Lord, Lord Bew, but I worry about the deepening public distrust in politics that is held by our fellow citizens. I endorse strongly what was so many noble Lords have said and I very much hope that we will soon make progress and that our leaders will be brave on party funding because without that, there will be further corrosion of trust in party politics.

7.59 pm

Lord Hennessy of Nympsfield (CB): My Lords, the committee chaired with distinction by my noble friend Lord Bew is the guardian of the seven principles of public life first promulgated by the standards committee in the mid-1990s, under its founding chairman Lord Nolan, as my noble friend reminded us. The most cheering finding in the committee’s 2012 survey, which we are debating today, is that the public continue to support those principles to an overwhelming degree.

Should the British people become so jaundiced with those in public and political life that, when asked about the behavioural lapses on the part of their Ministers, officials and legislators, they shrug disdainfully and reply, “Well that’s the way they are; what can you expect?”, then we would be in deep trouble as a country and a polity. Mercifully, we are still shockable.

However, the standards committee report makes for truly depressing reading on the low levels of trust in politicians. But, in my judgment, it is the findings on political engagement which leap most dramatically out of its pages. It is the level of alienation from all parties, big and small, across the spectrum that is searing. Place this finding alongside the Hansard Society’s 2013 Audit of Political Engagement and the picture is truly grim. The Hansard Society found that, in terms of general elections:

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“The number of young people (18-24 year olds) certain to vote has declined 10 percentage points in a year (22% to 12%)”.

The reasons for such indifference and alienation are multiple and have accumulated over a decade of historically low general election turnouts.

I will finish by mentioning but one aspect that has long worried me: the language in which we conduct our national political conversation. George Orwell argued, in his classic 1946 essay, Politics and the English Language, that if the main instrument of political exchange and argument—language—became stale, clichéd and debased, we would be seriously impoverished. Nearly 70 years on, in our deeply sound-bitten political culture, we have much more to worry about than did Orwell. Between now and the general election of May 2015, can our political class raise its game? Can our politicians find the tone, the pitch and the vocabulary to break through the indifference, especially of those 18 to 24-year-olds? I live in hope.

I have one final thought for the noble Lord, Lord Bew, and his committee, the work of which I have always admired. How about a review of the quality and clarity of language used in government White Papers? That is a question of standards, too. Doing an Orwell on White Papers would be a service to us all.

8.02 pm

Lord Harries of Pentregarth (CB): My Lords, before turning to the survey in more detail, I would like to make some brief points of a more general nature about the seven principles of public life. First, these principles are absolutely fundamental to the healthy functioning of any society. Without them, a society can only be regarded as sick and it certainly would not function as it ought. Secondly they exist in their own right, valid in themselves, with a claim upon us. They cannot simply be read off or derived from any scientific or economic description of society. That is why, if I am honest, I think the word principle is a somewhat weak term. We could, for example, say things such as, “I am going to run the organisation along the following principles”, as though these were guidelines I had chosen, when I could have chosen others. However, the qualities that we need for public life are not items in a bag that we decide to choose. They are a sine qua non of any ordered society. For example, if a Minister lies in his private life, he will have to sort it out with his family as best he can but if he lies to Parliament, he rightly has to resign. Truthfulness, trustworthiness, integrity and a concern for the wider good are not principles that we just happen to choose. They are the fundamental values which make possible any ordered life together.

So it is very good to know, as the noble Lord, Lord Hennessy, emphasised, from the introduction of the report, that the public have consistently prioritised these principles across the five surveys. It is clear that the public have continuing high expectations of those in public office and that is very healthy. As the survey indicates, there is an overall decline in standards since the survey in 2008 and this stands in marked contrast to an overall continuous rise from 2004 to 2008. The report was correct to point out that the decline since 2008 had much to do with the financial sector, particularly

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the banks in bringing about the economic crisis, and the newspaper hacking scandal. So, as is pointed out, if trust can be lost, it can also be regained, as it rose in some areas in the years from 2004 to 2008. That is an important point and we must respond to it.

Nevertheless we cannot get away from the fact that the overall rating of standards has declined very sharply. In 2004, 46% rated them quite high or very high but by 2012 this has fallen to 35%. The noble Lord, Lord Bew, emphasised the importance of educating public office-holders. I suggest that the Government have a responsibility, both through the Department for Education—in citizenship education in schools in particular—and the Department for Communities and Local Government, through its cohesion programme, to try to educate religious communities and, not least, their leaders. Religious communities now have a key role in thickening the moral fabric of our society. Communities of all faiths have a particular opportunity to feed into and strengthen the moral bonds that hold us together and which enable public life to truly serve the common good.

8.05 pm

Lord Norton of Louth (Con): My Lords, I too congratulate the noble Lord, Lord Bew, on initiating this important debate. I wish to make three short points. The first is that maintaining standards, as embodied in the Code of Conduct, is necessary, but it is not sufficient to establish high levels of trust in our political system. As is clear from the survey, we have some way to go to meet the necessary standards. However, ensuring compliance with the code should be seen as only part of the solution. What flows from the survey, and the Hansard Society’s annual Audits of Political Engagement, is that we should be pursuing both a bottom-up and a top-down approach to restoring trust.

The bottom-up approach is captured by one of the final sentences of the survey, on page 51:

“It also seems likely that perceptions of standards would respond to better public information about how different institutions try to ensure that they live up to the principles in public life”.

One of the problems is lack of understanding of the political process. Like the noble and right reverend Lord, Lord Harries, I believe it is necessary to bolster citizenship education. It is in the national curriculum, but there are no incentives for head teachers to take it seriously. We need to be ensuring that there are incentives, and resources, for schools to deliver it effectively. It is essential to the health of our political system.

However, ensuring that people are more informed about the system is no guarantee that it will enhance support for it. That will come when people recognise that politicians are acting in good faith to deliver on their promises. There is thus a major challenge for politicians in terms of behaviour. We need political parties to move away from empty partisanship and to get out of the Downsian cycle of outbidding one another. We need politicians to show leadership—the top-down approach—to lead from the front and not follow focus groups or the latest passing bandwagon. Margaret Thatcher pursued policies that were contentious, but her leadership style resonated. We need to be addressing these issues. It is easy to advocate constitutional

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reform, but that is a form of displacement activity. It is to suggest that the structure, rather than those who occupy it, is the problem. The problem is the people who occupy it. Once we accept that we are part of the problem— indeed, a central part—we can then start to tackle it.

My question to the Minister is straightforward: do you agree?

8.08 pm

The Earl of Lytton (CB): My Lords, I too congratulate the noble Lord, Lord Bew, on securing this very timely debate. The attempt to yoke standards in public life with public engagement is commendable but it is no easy task. The noble Lord, Lord Norton of Louth, covered a point which I was going to make and I would like to reinforce it. There is a lack of knowledge about the systems on which interviewees are being asked to comment. It is not just about the political scene, it is about all manner of things. Things such as crime statistics, in which I am interested, or medical incompetence may be important to a few but are not often a wider consumer experience. This report shows there is no room to be complacent but it also show there is an endless need to try to dig a little deeper.

Since 2012, we have had several high-profile instances of things going wrong in both the public and semi-public sectors. The fact that the semi-public bit is not truly a public body does not mean that it does not have a public profile or impact on the public interest. Professor Barry Loveday of the University of Portsmouth wrote an excellent paper some years ago about performance management. He identified the target culture; at senior level, it is a culture for its own sake. Then there is collectivisation of risk and responsibility, so that there is no individual to blame and, with it, no real focused leadership. There is protection of the status quo—the system for its own sake. With the rank and file, not to be too segregationist here, there is a silo mentality. People say, “It’s not my job, not my responsibility”. There is a demarcation with other people’s roles and a philosophy of “Don’t grass on your mates”.

Within all this, some commonalities arise. There is the lack of ethical framework, referred to by the noble and right reverend Lord, Lord Harries. The rights and entitlements are not matched with the duties and responsibilities, a point made yesterday in “Thought for the Day” by Clifford Longley. There are no real consequences—everyone is doing it, so do not break ranks or make yourself conspicuous. These are the matters of concern.

We have heard about leadership and politicians. I am afraid to say that both rank exceedingly low on the OECD statistics, but there are obviously sociological aspects and there is this awful thing to do with victimless crimes—as if ever such a term could be invented. We should not have that; because the Home Office counting rules do not count them does not mean that there are no victims. So there has been a failure to exert rigorous investigations. I have in the past suggested that there should be senior criminal judge investigations in certain areas of our public life; there are victims who need to be recognised as there are malefactors to be brought to book.

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I could go on, but my time is up. I wish the committee chaired by the noble Lord, Lord Bew, very well. Never was a role more worthy or necessary of further funding.

8.11 pm

Viscount Colville of Culross (CB): My Lords, I, too, thank my noble friend Lord Bew for putting together this report. I declare an interest as a producer at the BBC. As a journalist, I want to concentrate on what the report tells us about the public trust in the media and their ability to hold those in public office to account. In Chapter 5, the noble Lord, Lord Bew, reports on the decline in public confidence in the media to do this. It seems a small fall from 80% 10 years ago to 70% in 2012, but the decline reflects a public awareness of the ability of the media to investigate and check public figures.

Local media in particular have been devastated by the move of advertisers to alternative providers on the internet. My noble friend Lord Martin mentioned local authorities; across the country, the work of local authorities is being ignored by journalists and receives little public attention, as local newspapers close down or become freesheets. We see the same process in our national newspapers, as newsrooms are pared to the bone. Of course, there are still investigations, like the exposure by the Telegraph of the MPs’ expenses scandal, but increasingly news is filled with PR, as product placement and unchecked political spin become more prominent. The internet is an extraordinary source of news stories, as the new tools of social media make us all citizen journalists. But when there are so many voices out there and so many with hidden positions and private axes to grind, it is hard to know which voices to trust.

That brings me to the findings of Chapter 2 of the report, showing a surprising increase in trust in journalists across the board; I wonder whether that would still hold up, after the last year of phone-hacking revelations. As my noble friend Lady O’Neill of Bengarve pointed out in her TED talk, the generic question of whether we trust a particular group is flawed. We do not ask whether we trust fishmongers; we trust some fishmongers and not others. Likewise, we trust some politicians and not others, and some journalists and not others. There are some journalists and some media outlets, such as the BBC and ITN, which we do trust.

It has never been more important for us to have professional journalists whom we trust to sift through evidence, painstakingly check its reliability and present us with a report that we can believe. They need to be supported by editors, prepared to take on an investigation even when it might fail. I cite the sterling work of my former colleague, Michael Crick, on “Channel 4 News”, in getting to the bottom of the “Plebgate” scandal, as he tenaciously investigated the two competing versions of the truth offered by competing holders of public office. Eventually, he discovered the lies in the police story and the flaws in the Cabinet Office’s investigation of that story. Television, the internet and newspapers need to foster those journalists, so that audiences continue to have faith in their ability to hold those in public life to account. It is important to support the

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work of investigative journalists that is exercised with integrity, so that authorities can be held to account as part of a healthy democratic process.

8.15 pm

Lord Phillips of Sudbury (LD): My Lords, I, too, thank the noble Lord, Lord Bew, and want to concentrate on the issue of the ignorance of our young citizens of this place and its workings and the impact of that. The report says:

“One particular cause for concern from the research is the number of people, especially young people, who feel disconnected from the political system and political parties”.

It says that the growth in the size of that group represents a challenge to us all. The noble Lord, Lord Hennessy, the noble and right reverend Lord, Lord Harries, and the noble Lord, Lord Norton, all referred to that.

Yesterday, the EU produced its first anti-corruption report. If noble Lords want to feel really miserable, they should look at that, because it shows that 64% of the people of this country consider that there is widespread corruption, from the private sector to the public sector and back. If noble Lords want to feel more miserable still, they should concentrate on the statistic in the Bew report to the effect that 41% of those polled in the youngest group—and a great number of people were polled—have no connection or sense of belonging to any political entity or party and are certain not to vote.

It is not good enough for us just to say that it is down to the Government. We are the legislature and we produce more legislation every year than any country in the free world: roughly 10,000 pages of new statute law a year. Much of that is beyond our comprehension, let alone the public’s. I am not making a trite point. If we go on as we are, the chances of the British public catching up with us are frankly nil. It becomes an exercise in cynicism. If you do not understand the basics of your democratic society—and, my word, they grow in complication year by year—let alone the law, how can you expect young people to identify with the system, feel ownership of it and want to contribute to it as active citizens?

I must declare an interest as the founder and president of the Citizenship Foundation. It is the biggest civic educator in the country. The situation is critical. Half our secondary schools do not even have to teach citizenship education. The rest have scarcely been Ofsted-ed. The numbers taking citizenship GCSEs are falling. The number of those teaching citizenship is falling. This is a crisis and we must start at root with our young people and give them the chance to be citizens.

8.18 pm

Lord Kennedy of Southwark (Lab): My Lords, like other noble Lords I start by thanking the noble Lord, Lord Bew, for initiating this debate. I agree with many if not all of the points made. In three minutes, however, it is difficult to get across all the points that you want to make. I thank the Committee on Standards in Public Life for commissioning the preparation and publication of this report, which is one of a series that

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it has produced since 2004. Like my noble friend Lady Donaghy and the noble Lord, Lord Bew, I very much regret the withdrawal of funding for this survey in future years.

The report confirmed for me a number of things that I had suspected about public attitudes to standards in public life. While some of these perceptions might not always be fair, as politicians and people in public life we often do not do ourselves any favours. I noted that in 2012 MPs and Ministers were evaluated less favourably than all other categories, with the exception of tabloid journalists. The expenses scandal in 2010 certainly affected in a negative way public attitudes towards politicians, and levels of trust and confidence have not returned to the levels seen before then.

I am of the opinion that people who go into public life and who seek elected office, at whatever level, do so with the best intentions, and that in this House, in the other place, in other parliaments and assemblies, and, as my noble friend Lord Martin of Springburn said, in council chambers, good men and women are seeking to make things better. We can and should debate, discuss and even argue what that should be. That is what a healthy democracy does.

The report also highlighted how we need a strong media to hold people to account and showed that 70% of people believe that the media will generally uncover wrongdoing. It was pleasing to read that people generally felt they would be treated fairly by people providing public services. There are high standards in the public sector and we are well served by people who work there. We also have remedies to deal with issues when things go wrong. Being able to correct things and provide redress is part of the confidence in how you know that you will be treated.

Will the Minister tell the House what action the Government intend to take following the publication of this report? In particular, will he tell the House, as the noble Lord, Lord Hennessy, highlighted, what the Government intend to do to deal with people’s feeling of disconnection from the political system and political parties? This is one of the most worrying findings of the report and it is incumbent on the Government to ensure that we have conditions in place to allow healthy parties to thrive.

I again thank the noble Lord, Lord Bew, for enabling us to debate this important issue tonight.

8.20 pm

Lord Wallace of Saltaire (LD): My Lords, this has been an excellent debate and we could have spent a great deal longer on it.

I am struck by the level of public alienation from conventional politics, which we find most of all among the young. I find it deeply frustrating that we are in this situation, partly because I spent some time as a member of the Government’s World War One advisory board, reading political literature on the first 15 years of the previous century. I reflect that we have a much less corrupt political system than we had then. Standards of personal morality among our politicians are far higher than they were then, but respect and deference have gone down.

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There are many reasons for that. We are in the middle of a media war with politicians. The Leveson inquiry has not settled things down into a new relationship yet. A major trial is under way that will impact on our perceptions of the media, as well as the relationship between the media and politicians. We have some real problems to face. When I read in the report where politicians stood, I was cheerfully reminded of a conversation at a party in Saltaire the winter before last. A friend of one of my wife’s cousins asked me what I did. I said that I didn’t think that she wanted to know. She said, “You’re not a banker, are you?”. I thought: good, there are people who rank below politicians in public respect.

However, we know that there is a crisis in our institutions and in confidence in our elites—not just our political elite. The standing of the police will no doubt be much lower in the next survey than it was in the latest one. This is a general problem for all of us; it is a problem of trust. The question of how we re-establish trust in our institutions is enormous. There is also a sense that people have lost local community. They have lost the church as part of local community and that gives them a sense of loss of control. They have lost local democracy. I am struck in our big cities, such as Bradford, Leeds and Birmingham, that there are wards of 12,000 to 15,000 people where you cannot have a sense of contact between elected politician and the community that he or she serves.

Globalisation—the extent to which multinational companies come and go, and a sense that international organisations, be they the European Union for us or the United Nations for Americans, are somehow interfering in our lives—gives a sense of popular alienation. The question of how we deal with this ought to be one of our major shared concerns. It cannot be dealt with by the Government or political parties alone; it has to be dealt with by all of us, including the media, judges, the police and others.

I liked the suggestion of the noble Lord, Lord Bew, that Dutch MPs see public education as part of their role. That is something we all ought to think about in more detail. I also liked his remark about the gladiatorial style of our party politics being a major part of the public’s switch-off. Lots of other politicians watch Prime Minister’s Questions because they think it is fun but not very constructive. The way that we approach political and constitutional reform is pretty awful. We ought to bear in mind that, unless we see the process of political and constitutional reform as a way of regaining the trust of the public, we are wasting our time.

The noble Lord, Lord Patten, asked about the House of Lords and how that fits in. I am not sure how people see the House of Lords—I think through a glass darkly on the whole. Yes, we are too large; so is the House of Commons, but that is partly because the Government are too large. We are the largest collection of government appointees of any advanced industrial democracy, and perhaps that is something else that we need to contemplate. However, I say to the noble Lord, Lord Patten, that the Private Member’s Bill—the Steel Bill mark 5, or whatever it now is—which is now called the Byles Bill, will begin to correct the problem of lawbreakers subsequently returning to the Lords.

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The noble Baroness, Lady Donaghy, asked the Government to review the decision to end this survey and I will take that comment back. I, too, read the Hansard Society survey on attitudes to those in public life. Part of the reason for deciding to end the survey of the Committee on Standards in Public Life was that a number of other similar surveys reach the same worrying conclusions, and the Hansard Society survey is clearly very much part of that.

The noble Lord, Lord Martin, talked of the importance of politicians being seen as serving their communities. One of the things that we have to combat is the sense that everyone, whatever they do, is doing it for their own benefit. That is part of the attitude that has grown up in the past 20 years. Economists bear a certain amount of responsibility for that with the growth of public choice economics, which argues that everyone is self-interested and no one has any altruistic feelings, as do the spread of libertarianism across the Atlantic and the disciples of Ayn Rand, who forget that the concept of public service—contributing to the life of the community—does motivate people. We need to reward those who are motivated by that. That is very much part of what we need to reintroduce in our public life because the cynicism of those who say, “You’re all in it for what you can get out of it”, is part of what has eroded popular respect for all our elite institutions.

My noble friend Lord Tyler talked about the power of money in politics as being part of that erosion. The power of money has always been there; it was just that previously it was disguised by deference. The extent to which we had mass political parties meant that they could claim to be funded by a very large number of people. I was rather shaken when I discovered, about two years ago, that in the previous year there had been more individual donors to the Liberal Democrats than there had been individual small donors to the Labour Party. The Labour Party had retreated to a position where it depended very heavily on union donations. That is a problem for all of us, and is one we all share. Why has our membership shrunk? Why have political parties ceased to be able to persuade people to share in contributing to political life at all levels, which is what we attempt to do?

The noble Lord, Lord Hennessy, talked about the need to reconsider the language of politics. That is very much a problem for all our public educators, journalists and others. The war between the BBC and the written media is part of the problem that we currently face, as the noble Lord well knows. There is the sense that the BBC is trying to address public service broadcasting and is being attacked; that it is an inherently left-wing concept for the Daily Mail and the Telegraph is part of what has gone wrong. How we gain that sense of a shared discussion about limited issues is very much a part of what we have to do.

I suggest that part of it is that politicians have to explain to people the limits of what is possible. I come from a party that, much against my efforts within the party’s policy committee, attempted to persuade people that we could somehow abolish tuition fees. We could not; we needed to spend the money on early years and education. It was a mistake. Politicians in some parties

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are now trying to persuade people that we can tell the world that we want to get off and go back to national sovereignty. We cannot. There are things that people want that politicians cannot provide. We cannot put up pensions, provide everything free on the National Health Service and cut taxes at the same time. Anyone who suggests that that is possible is misleading the public dreadfully.