The importance of expanding citizenship education is an issue on which the noble Lords, Lord Norton, my noble friend Lord Phillips and others touched. Yes, it is vital. No, we have failed to do that, as have successive Governments over the past 20 to 30 years, and more. It is something that other institutions, such as the churches and local politics before local government was cut so badly, used to provide. We have to find a way of doing that and I thoroughly support the work of the Citizenship Foundation and my noble friend Lord Phillips in promoting it.

We all feel that good men and women are needed to hold political life and democracy together. We also recognise that to some extent the professionalisation of politics has undermined that. We have a problem with political recruitment and getting people into politics who will want to serve. In many ways it is sad that David Cameron’s efforts to bring a number of people from outside politics into the Commons through his A list has not been more successful. He was trying to find people from outside political life who would contribute to politics. We need a broad common effort by all political elites to rebuild public trust. That has to come from parties, Parliament the media and others—heaven knows, business and bankers. Until bankers begin to make their own proper efforts to reconstruct the trust of the common public in the financial system, there is a limit to what we can do to rebuild public trust as well. Most of all, we need to explain to and educate our public about what is possible and what is not, and to accept that we are not just politicians but, as the noble Lord, Lord Bew, said, we have to be public educators.

8.33 pm

Sitting suspended.

Water Bill

Committee (1st Day) (Continued)

8.37 pm

Amendment 98

Moved by Lord Whitty

98: After Clause 15, insert the following new Clause—

“Retail exit

(1) The Secretary of State may by regulations make provision about the transfer of an undertaker’s assets and liabilities associated with its non-household retail business into a separate company.

(2) Regulations under this section are to be made by statutory instrument.

(3) Regulations under subsection (1) may, in particular, make provision for any such transfer to be subject to—

(a) approval by the Secretary of State;

4 Feb 2014 : Column 180

(b) any such safeguards as may be specified in the regulations;

(c) the transferee company holding a licence containing a retail authorisation pursuant to section 17A of the Water Industry Act 1991;

(d) the provision of any information or other such assistance from the relevant undertaker as may be required by the Secretary of State for the purposes of approving the transfer.”

Lord Whitty (Lab): My Lords, at Second Reading there was bemusement on all sides of the House as to why the Government were being resistant to the concept of exit in the new retail market. I am not sure that the Minister’s words, either on that occasion or in any briefing since, have convinced me as to why, uniquely in this market—or almost uniquely—we should not allow exit.

It is a funny market in which we are trying to encourage new entrants by designating the area in which they should operate, and designating the terms and regulations under which they should operate. We envisage benefits to business and other non-domestic consumers within that market as a result of that competition, and we are assuming that it will bring benefits to a wider part of the whole water structure and water consumers. However, to maximise the effect of a market, there have to be winners and losers; and we are talking about competition and different companies with different forms of experience.

There is not only bemusement around the House about why the Government were resistant to the concept of exit. Out there, many bodies—including Ofwat itself, which I would have thought is fairly significant—are saying that we should allow exit. Although some of the incumbent companies are opposed to it—Water UK has said that, on balance, it is not really convinced by it—some of the major companies are in favour. I have not declared many interests so far, but my current interests are that I am a consumer of two water companies, Thames and Wessex, both of which have written to me and said that they are in favour of providing an exit clause.

Why would you allow a situation to continue in which somebody is supplying part of the non-household retail market but not doing well at it? Remember that there is an obligation on the regulator to ensure that everybody who wishes to be connected to the water supply will be connected to the water supply, so nobody is going to be stranded despite some of the things that have been said. Why should a supplier who is losing customers and presumably losing money, or certainly not making as much money as they had hoped, be prevented from leaving when Ofwat can arrange for somebody else to take over those assets and that market? I do not know of a serious precedent in any other field. We are trying to encourage a degree of churn, with new entrants, new competition and new drive for reducing costs, yet failing companies, or relatively failing companies, are not allowed to pull out.

This is odd, but even odder is what seems to be the Government’s main objection. The Government were kind enough to send us a further explanation, and although there are some other points in it that we do

4 Feb 2014 : Column 181

need to take seriously, the main point was that providing for exit would create uncertainty and put off investors. I tried to downplay investor panic when speaking to the last but one amendment, but there are arguments about that. Investors are getting a good return, but why would they want to persevere in an area in which they were not getting a good return, where they were failing, and where on their own internal economic analysis they were being advised to get out? Investors see the UK water market as a pretty good return, a steady return and one that will last a long time. However, there may be a part of that market they are supplying and where they are failing. Customers may be pulling away from them and going to rivals or they may be getting a high level of complaints—one way or another they are failing, and that will show up in their balance sheet eventually. Why would international investors say we absolutely will not invest in England unless we are forced to remain in an unprofitable market?

There seems a fair degree of absurdity in the explanation. That argument for the Government falls. Maybe some strange investor has told somebody in the department or a government adviser that that is the case, but logically, that cannot possibly be the reason. The problem is that the department has got stuck on this. The reality is that it was a bit untidy to allow for exit. New rules and procedures would have to be invented and safeguards built in, and that was not the priority. The priority was to get new people in, not to get people out.

Fair enough, but we have moved on, because a range of people have, as I have said, raised this issue. The Government now have to think again. There are some objections to providing for exit and some concerns about it, but those concerns are covered by the safeguards that are built into the amendment. The Government may want to elaborate on it, but it provides that for exit, Ofwat has to approve it, ensure that there is a substitute supply and make sure that there is no disruption as far the business consumer is concerned, and Secretary of State approval is also needed. That might appear a bit draconian to some investor who desperately wanted to get out. However, it provides a safeguard to counter for example the objection that comes—rather quietly, but nevertheless it does come—from the Consumer Council for Water, which is a bit worried that they would have people left literally high and dry. That could not happen under this system: Ofwat must supply. In a strange situation, the Secretary of State could block it if there was a real reason for thinking consumers might be in danger, whether they are consumers in a competitive market or other consumers affected by the knock-on effect.

8.45 pm

I still do not understand why the Government say that this is not appropriate. There has been a subtle change in the latest leaflet they have sent round. They do not say that they are against it but that it is premature, which is always a good way for the Civil Service to say, “We cannot be bothered with it just now”. However, if it is premature to do it, why do the Government not provide for some contingency and say that they will put it into the Bill that after two years they will allow for exit? In that way, any immediate

4 Feb 2014 : Column 182

disruption, uncertainty or whatever could be overcome and people would know what the rules were. They could build that in. I do not think that we even need that, but if we do, the Government could table an amendment to that effect on Report. It is yet another safeguard which can be built into the Bill.

As it stands, it is bizarre and does not gel with any concept of a market that most of us understand. I believe that if the safeguards are there, the Government will eventually come round to doing this. I hope that they come round to it during the course of the Bill, rather than finding themselves in a situation in a year or two where it becomes obvious that some of the players in the market ought to get out and that the consumer experience would be better if they did so. The Government should think again. I hope that the Minister will have better news for us on this. I beg to move.

Lord Moynihan (Con): My Lords, I shall speak to Amendments 107 and 132 in my name. I also support Amendment 98 in the name of the noble Lord, Lord Whitty. I have listened to him over the past 10 minutes and there is now no doubt in my mind that his amendment—and, indeed, this group of amendments—is the jewel in the crown of all the amendments that have been tabled so far to the Bill, and that is for a very good reason.

The Bill provides for the opening up of water retail services to competition. That is welcomed by some of the leading water companies and by the regulator, and the concept of exit is welcomed by both. Exit is welcomed north of the border and it has been welcomed by the Defra Select Committee. That is a rare alliance indeed. However, as the noble Lord, Lord Whitty, has stated, it is also welcomed by the investor community. Brought together, they are powerful voices in support of exit in the retail services market.

I shall concentrate my remarks on a number of the points raised by the noble Lord, Lord Whitty, and then summarise, as I see them, the key areas of opposition to date that the Government have put forward and offer some reflections on them.

The first and most fundamental point is that for an effective market there needs to be an ability for new entrants to enter and for existing market players to exit. Customers benefit from more effective and efficient suppliers replacing poorer performing businesses. Allowing incumbent water and sewerage companies to exit from retail services would help ensure successful development of the new retail services market and thus benefit customers. Successful entrants could more quickly acquire critical mass by buying the customers of the less successful or committed incumbent retailers. There appears to be plenty of scope for customer benefit if high-performing companies were to take on the customers of other companies.

Ofwat data have suggested that one water and sewerage company can spend up to twice as much as another providing retail services to each domestic customer. Ofwat reports significant variations between companies’ customer service standards. Simon Less, the senior visiting fellow on regulatory policy, has done some outstanding work. He has clearly made the case at the Policy Exchange that where a company

4 Feb 2014 : Column 183

considers its strength is in wholesale water activities, allowing it to sell its retail business would enable its management to focus on wholesale. Water wholesaling and retailing have quite different sets of risks. Exiting retail services would reduce a wholesaling company’s risks from, for example, bad debt. The sector would, overall, be able to access investors with a wider range of risk appetites. Allowing exit from retail services would enable mergers between retail businesses, with benefits from increasing scale and scope.

Not only is the group that I have outlined in favour of exit; let us also reflect for a moment on the Bill. This Bill principally came from Martin Cave’s review—80% to 90% of the Bill was based on this review. He, too, is supportive of this principle. It does not go as far as separation, which does concern many noble Lords. It allows, as the noble Lord, Lord Whitty, has stated, no compulsion, simply an option to exit the retail market. I mentioned that the market itself is supportive of this proposal. It is interesting that Moody’s has come out in support of the proposal. Not only Moody’s, but Macquarie Equities Research has recently published a telling and impressive review of retail exit, in which it states:

“We … see a consolidation of retail functions as positive for both consumers and shareholders. Companies will be under no obligation to exit, but will hold the option to do so … Consumers benefit as ultimately all cost synergies are passed to consumers”.

In placing a value on this, Macquarie concluded that synergies through exit could be worth up to £40 million to just two companies alone. Let me quote its overall conclusion on this:

“Under retail competition, given the size of their bills and the services they require, non-households are the area where”,

you would,

“expect to see greatest activity in providing new, tailored services for customers. Figures from Scotland, where there has been non-household retail competition since 2008, show that customers have saved £35 million.

We estimate that NPV savings for customers in England and Wales could be c. 10x that in Scotland, or £350mn.

This estimate tallies with a cross reference estimate. Total annual costs in household retail is c.£800mn and that non-household is roughly 1/2 that of household: i.e. £400mn. With a 15-20% cost reduction through consolidation we would expect to see total annual savings of c.£60-80mn per annum. If we assume that half of this is shared between consumers and companies, then the benefits of consolidation could be c.£30-40mn per annum, or c.£400mn value. …

Under current proposals, water suppliers will need to hold a ‘licence of last resort’, meaning that if they exit their retail division, they are still potentially liable to provide retail services if the new owner of the retail customers goes into administration.

This means … that water companies are unlikely to exit their retail divisions if they need to maintain the capability of running the infrastructure systems needed in case their customers need to return.

This causes two problems … : firstly in the non-household retail division, the water companies that lose market share, will end up with rising costs relative to their revenues and could potentially see losses increase and continue, and secondly in the household retail area, there can be no cost synergies between the existing 18 water and water and sewerage companies”.

4 Feb 2014 : Column 184

Macquarie’s is a powerful voice in this debate, but I would argue that Ofwat is an even stronger voice. Cathryn Ross, at the Water Bill Committee on 3 December, said:

“Our view is that retail exit for incumbents is a critically important element of a functioning, effective retail market. Particularly important is the fact that if we do not allow incumbents to exit, essentially we are mandating inefficient retailers’ remaining in the market. That will basically be baking in cost that customers will have to pay for, which we can easily avoid”.—[Official Report, Commons, Water Bill Committee, 3/12/13; col. 7.]

What would my amendments do? They would enable incumbent water and sewerage companies to transfer their retail businesses to third parties. They would also secure the benefits of such transfers by ensuring a level playing field and consequently maximising the benefits that could flow to non-household customers. It is important to repeat that this approach does not require or compel incumbents to transfer any or all of their non-household customers. It is an option and, as the noble Lord, Lord Whitty, said, it would be subject to the approval of the Secretary of State and a restriction on its use by the competition authorities, and nothing more.

I said that in closing I would try to answer the issues which, as I understand it, underpin the Government’s position at present. The first was referred to by the noble Lord, Lord Whitty: allowing retail exit could unsettle the investment climate. I hope that the noble Lord, Lord Whitty, and I have demonstrated from both sides of the Committee that that is not a strong argument when investors and companies are actively seeking this change, suggesting that they are far from unsettled by it. As I mentioned, the rating agency Moody’s had previously suggested that this would be a positive change, and the Australian bank Macquarie, as I have quoted, also supports the change. Similarly, a recent research study report entitled “Ready for Retail?” published in Utility Week, which I have gone back to—it was quite wrongly maligned by my noble friend the Minister in his summing up at Second Reading—is a good assessment and is worth looking at closely. It highlights that of those companies that were approached, 76% supported amending the Bill to allow retail exit, so I am not convinced that allowing retail exit is going to unsettle the investment climate.

The second point put forward by the Government is that allowing only non-households to exit the retail market would create a two-tier market where householders could be left stranded with a water company that has signalled a lack of interest in providing customer service. To the extent that there is a concern here, it would be addressed entirely by allowing retail exit for all customers rather than just the non-household element. However, even if only non-household retail exit was facilitated, again this appears to be a weak argument when companies have been forced to provide these services in any event since privatisation. Since companies have no choice but to provide retail services because the licence they signed up to at privatisation requires them to provide an end-to-end, source-to-tap service, we really have no idea about whether they are interested, or not, in providing them now—absent retail exit. Indeed, there is a wide variation in the quality of customer service provided by companies, with some of them improving but still some significant gaps at

4 Feb 2014 : Column 185

the moment. This argument is really an argument against the status quo. If we have been comfortable with the current arrangements for the past 20-plus years, it seems odd to start criticising it now.

The third point is that if the Government were to go further and allow retail exit for all customers, households could be passed to a new retailer about which they knew nothing and, unlike business customers, they would have no option to switch if they were unhappy with the quality of the service they received. This point, which has been made by the Government, is true on the face of it, but it is rather a xenophobic one. First, customers have never had any choice over who provides these services because they have simply inherited their local monopoly provider. Again, why is this a concern now? Secondly, while the local branding of companies—Thames Water, Severn Trent Water and so on—gives us a warm sense of local provision by local companies, of course they are not local at all. Most of the companies are owned by Canadian or Australian pension funds, and that ownership changes hands regularly with customers none the wiser about the process. Generally the process is very positive for customers because competition in capital markets brings new investment into the sector, and investors put pressure on the management of these companies to keep costs, and therefore bills, down for customers. Surely the key point is that customers want the lowest prices and the best service, and allowing retail exit provides that most effectively. Poor performers are moved out of the market and good performers can grow their market share, even if they are not the “local incumbent”.

The fourth point mentioned by the Government is that introducing retail exit would require a change or create problems with Ofwat’s price controls. I hesitate to say it, but I think that is a redundant argument. The current price control arrangements apply to regionally specific companies and licences. Ofwat is setting both household retail and non-household retail price control. Allowing this change would be easily accommodated within Ofwat’s price control arrangements; in fact they have been designed for that purpose.

9 pm

Finally, the argument is that we should wait to see how the market develops and make the change later, as the noble Lord, Lord Whitty, said. The reality is that the water supply licensing regime was introduced as long ago as 2005 to give business customers choice. That regime has, by any standards, been a failure. Fewer than 10 customers have switched suppliers since the market opened because the legislation was inadequate and inadequately set out and, in many eyes, overprescriptive. For example, setting out the excess pricing arrangements in the law—the costs principle—was not a good idea, another point recognised by Professor Martin Cave and much prayed in aid by the Minister this evening.

Business customers are sceptical about the new legislation because many were disappointed in 2005. After the false start of 2005, we have an obligation to get the legislation right and to ensure that the market works well for business customers. We should not take any risks to create a second false start. Coming back

4 Feb 2014 : Column 186

again in 2020-plus to have a third go at making this work should not be an option. I strongly support the case for exit.

The Earl of Selborne (Con): My Lords, after those two speeches, there is not much more to be said. For 24 minutes, we have had a very powerful exposé of the astonishing contradictions of a Bill which is here to promote competition and which is trying to implement Professor Martin Cave’s recommendations. The OFT said of orderly exits in the report that successful markets require a right of exit.

In this specific market everyone, including the EFRA Select Committee, has taken a very firm view, which has been forcefully put by the noble Lord, Lord Whitty, and my noble friend Lord Moynihan. The only argument that I have read that puts the contrary view has been the Government’s response to the EFRA Select Committee. That response has been so efficiently demolished that I do not think I need to repeat the argument.

I drew a crumb of comfort from the Minister’s response at Second Reading. He slightly opened the door when he said that it was just possible that the Government might wish to think further on this. We need the ability in the Bill to allow exit at a future date, sooner rather than later. It needs to be in the Bill, because there will not be another water Bill for some time. I hope the Minister will look with approval on these amendments. I do not mind which of the two is accepted; it is the principle which needs to be accepted.

Lord Crickhowell (Con): My Lords, this has been a remarkable brief debate. I thought that the noble Lord, Lord Whitty, introduced the amendment in a very low key, charitably commenting on the Government’s position. That powerful speech was followed by what I was going to say was a lecture, but certainly a speech, that ought to be read by every civil servant in the department, because it was one of the most impressive speeches—lectures—about market economics and their realities that I have heard for a very long time.

I know my noble friend on the Front Bench knows something about business and will have listened with care. I beg him on this occasion to listen to the realities of the market rather than the detached views of civil servants, who, by their training and nature, may not be as equipped to deal with market realities as my noble friend Lord Moynihan clearly is.

It was only really when I heard the speech of the noble Lord, Lord Whitty, and even more so when I heard my noble friend Lord Moynihan’s speech, that it seemed we were going to deal with this point about uncertainty. I simply cannot believe that people advance that as a serious argument. All the evidence suggests that if you want to have market confidence—the confidence of investors and of the people who advise them—you need to have a clause of this kind. Far from an uncertainty, it is an absolutely essential requirement in order to give the market confidence. On that ground alone, I believe that this amendment simply has to be taken seriously by the Government. I hope that, rather than advancing any arguments that have been put in his papers before the debate, my

4 Feb 2014 : Column 187

noble friend makes a very cautious response, takes away my noble friend Lord Moynihan’s speech and demands that his department consider it adequately and fully before we come back again on Report.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con): My Lords, I am very grateful to the noble Lord, Lord Whitty, for moving his amendment and to my noble friends for speaking to theirs, as well as for the debate as a whole on retail exits and for an understanding of the concerns of noble Lords.

Amendment 98, tabled by the noble Lord, Lord Whitty, and Amendments 107 and 132, tabled by my noble friends Lord Selborne and Lord Moynihan, take two different approaches to enabling incumbent water companies to exit the non-household water and sewerage retail markets. Amendment 98 would provide for such exits through regulations produced by the Secretary of State, and Amendments 107 and 132 through transfer schemes produced by incumbent water companies and approved by the Secretary of State.

For completeness, I should be clear from the outset that new entrant licensees may enter and exit both the retail and upstream markets whenever and however they wish. It could be as simple as surrendering their licences to Ofwat, and their customers could then be distributed to other licensees through the supplier of last resort regime introduced by Clauses 31 and 32. Alternatively, they could sell their customers or their infrastructure to other licensees ahead of surrendering their licences. These companies operate only in the competitive part of the market, serving non-household customers who will be able to switch to another retailer if they are unhappy with the service they receive.

However, these amendments deal with the thorny issue of retail exits by incumbent water companies, the quasi-monopolies appointed in each area of England and Wales. We have heard a range of arguments for retail exits at Second Reading, during the passage of the Bill in another place and now this evening. This is a complex issue with far-reaching ramifications for both customers and investors. It is clear that the intention, at least of Amendment 98, is to allow exit only from the non-household market, leaving household customers with the incumbent companies. However, this partial form of exit would leave many questions unanswered about the future relationship between the incumbent water companies and their customers in both the household and non-household sectors. We want our market reforms to lead to real improvements in services for all customers, including of course household customers, and we do not consider that making such a change at this time would be in the overall interest of customers. Before making potentially far-reaching changes to the relationship between all customers and their water companies, we would need to ensure that they were effectively engaged. The Consumer Council for Water, the independent organisation responsible for making sure that the customer voice is heard, supports the Government’s approach to retail exits.

We want to see a successful non-household retail market. The Bill sets a framework for new-entrant retailers to enter the market on an equal footing with

4 Feb 2014 : Column 188

the retailers of the incumbent water companies. We expect Ofwat to use its regulatory powers to make sure new entrants can be confident they are competing on a level playing field. Clause 23 introduces a shared obligation between the Secretary of State, Welsh Ministers and Ofwat to take steps to reduce the likelihood of incumbents discriminating in favour of their own retail businesses or associate licensees. However, retail exits are not about delivering a level playing field. They are about some incumbents wanting to exit because they do not want to participate in a competitive retail market and would prefer to stop offering services to any non-household customers in their area. While we might expect there to be a more active market in England from 2017, a scenario in which incumbent companies lose most or all of their customers is highly improbable. Incumbents sitting around while customers disappear is, in our view, an unlikely scenario.

The point we are making is that this is evolution not revolution. Many non-household customers may choose to stick with the incumbent supplier because the incumbent supplier improves its services as a result of these reforms. Where customers choose to switch, we anticipate a growth market where innovation and competition lead to benefits, both environmentally and in customers’ bills.

Incumbent water and sewerage companies are given clear responsibilities for a reason. Their unique status as virtual monopolies requires some commitments from them in return. This means that following a retail exit, the incumbent might still be required to provide retail services to any non-household customers that move into the area, or when new non-household developments are completed, or if the market failed. Incumbents are the default supplier of first and last resort regardless of whether they are able to hive off their existing non-household customers to a licensee. Allowing partial retail exits would also open the door to forced separation. We have already discussed the risks relating to separation.

It was incumbent water companies themselves and their investors that persuaded us of the risks to future investment should separation be forced onto the sector. They told us that forced separation would increase risk to investment and push up costs to customers if they had to renegotiate their finance packages as a result of restructuring their businesses. Neither companies nor their investors have told us that they have reversed their view on this.

Amendment 132 would prevent the new Competition and Markets Authority—but not Ofwat—using these provisions to force separation as a remedy to address issues to do with discrimination. We doubt that such a mechanism would be appropriate. More importantly, for the reasons I have explained, we believe integrated companies that are able to provide services to customers within their area of appointment are the right approach for the time being.

Let us be clear: any decision on separation should be made by Ministers and Parliament. We are not prepared to take the risk of any restructuring, or even the potential for it, destabilising investment or increasing costs or even supply risks to customers. While all these amendments envisage the Secretary of State permitting

4 Feb 2014 : Column 189

exits, this will also be open to challenge. I have already said that there are very good reasons for not allowing exits yet.

I hope that noble Lords will appreciate that there is more to this matter than simply allowing some incumbents to exit the market. We are not ruling this out for the future but we have a responsibility to consider all the impacts on household customers and on choice in the competitive markets before putting provisions into law.

The noble Lord, Lord Whitty, and my noble friend Lord Moynihan, suggested that we should allow failing companies to exit. The focus of many comments has been the exit of failing companies. Advocates for exit assume that the large players will swallow up the small. These are the companies, however, that customers value for the quality of their service and are often the most efficient suppliers of retail services. Do we really want to see consolidation that loses these efficient and valued companies?

My noble friend Lord Moynihan referred to Macquarie. I simply say to him that its figures need to be looked at with some care. It assumes complete exit, including from the household market, and that there would be no risk of separation. That is not the model proposed by these amendments and it raises some significant issues about the protection of household customers.

It has been suggested that an OFT report—Orderly Exit, published in December 2012—supported the case for allowing retail exits. That report is about designing continuity regimes to allow orderly exits from the provision of public-facing services without interrupting the delivery of services to customers when a business becomes insolvent or otherwise fails. It is not about allowing a company to decide whether it wants to continue with some of its statutory obligations and to get out of others because it no longer feels it wants to compete. The regulatory regime for incumbent water companies already provides for orderly exit in cases of insolvency and for enforcement purposes.

The deadline for the retail market opening in April 2017 is challenging but achievable under the conditions set out in the Bill at present. That would be put at risk if we were to legislate for further structural changes to the industry at this time. Given what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.

9.15 pm

Lord Whitty: My Lords, I am slightly baffled by the Minister’s reply, which seemed to repeat the main arguments that noble Lords all around the Committee have knocked down. I am very grateful for their interventions, particularly the forensic analysis by the noble Lord, Lord Moynihan, of why this is a misunderstanding of markets.

I tried to do a relatively simple thing. We are creating a market in the non-household retail sector and my amendment addresses only that. We are encouraging entry and improvements, and we surely have to recognise that that will drive some people out in normal circumstances. I cannot see what the creation of a market means if you cannot have that churn. The Government seem fairly stuck on this. Some of the things

4 Feb 2014 : Column 190

the Minister said really relate to wider considerations and there is nothing in these amendments—certainly not in my amendment—that means forced separation. This is voluntary withdrawal by incumbents from a relatively small part of the market. Their new rivals coming in already have that right so it is not a level playing field. Really, what does this market mean? I know it is small and that we are making changes that are quite new within the water sector, but surely we ought just to be bold enough to allow this. I hope the Minister will recognise that there is a lot of experience in this Committee and in the industry with a consensus for allowing this, subject to the kind of safeguards written into my amendment, which give Ofwat and the Secretary of State huge powers to prevent any catastrophic effect on consumers of any sort.

Just before I stood up, I tried to find the quote from Cathryn Ross of Ofwat that the noble Lord, Lord Moynihan, used. I will just end on that point. If we took the Government’s line—I have lost the quote again now—we would effectively provide for failing companies and bake in cost. The Government do not really want to do that, do they? I hope they will think again. Meanwhile, I will withdraw the amendment.

Amendment 98 withdrawn.

Clause 16: Charges schemes

Amendments 99 to 100 not moved.

Amendment 101

Moved by Lord Grantchester

101: Clause 16, page 53, line 16, at end insert—

“( ) The rules under this section will require water and sewerage undertakers to consult with the Council on their draft charges scheme.”

Lord Grantchester (Lab): My Lords, this amendment would ensure that the Consumer Council for Water would have to be consulted by the water and sewerage undertakers when they drew up their draft charging schemes. The importance of this is that it would allow the CCW to play a role from an early stage and provide the ability for it to flag problems then, before the relevant bills start arriving on customers’ doorsteps and further problems occur.

One example where the Consumer Council for Water had previously challenged a charging plan concerned some companies’ plans to restrict half-yearly payment options for those on direct debit payments. Some customers prefer to pay in that way, as it better enables them to manage their money. The elderly, in particular, may want to retain that option, so it is important that attempts by those companies to stop it were successfully challenged by CCWater. That is just the kind of circumstance that the amendment is designed to pre-empt.

That gives rise to a whole series of problems surrounding direct debits and whether there should be any extra charge for non-direct debit payments, which can be disguised as a discount for direct debits. That may become part of the Consumer Rights Bill, shortly to come before your Lordships’ House. Another example

4 Feb 2014 : Column 191

of the benefit that the amendment would create was provided when CCWater negotiated with companies not to backdate charges if a company was at fault for initial error that resulted in substantial backdated charges. That can be as simple as misreading of a water meter by the water company’s employees. It is clear that in such an environment it is always useful, and sometimes essential, for CCWater to have such a say before charging schemes are finalised. It ties in with other steps that we hope to take to protect consumers during the passage of the Bill, such as providing for collective redress where a number of consumers have been subject to detriment.

The amendment is short and simple. I therefore hope that the Minister will find that it makes sense to include it in the Bill. I beg to move.

Baroness Northover (LD): My Lords, the noble Lord, Lord Grantchester, has already highlighted the important work being done by the Consumer Council for Water, a view with which we very much concur. As he laid out, the purpose of his amendment is to require water and sewerage undertakers to consult the Consumer Council for Water on their draft charges schemes. That is clearly a reasonable objective. I therefore confirm that the Consumer Council for Water is in fact already routinely consulted by water companies on their charging schemes. That is in addition to the important work that CCWater undertakes to ensure that the consumer voice is heard during the price review process.

The noble Lord is right to say that the protection of consumers is essential, and never more so than in a sector with monopoly characteristics, such as water and the sewerage sector. CCWater plays a vital role in working with the water companies to ensure that their charges schemes do not have unintended consequences for hard-pressed customers, and we want that to continue.

I am therefore very happy to be able to reiterate the assurances already given in another place that the charging guidance produced by the Government will ensure that consumer groups such as CCWater continue to be properly consulted on company charges schemes in future. CCWater has identified its three top priorities in relation to the Bill. The third of those is that the charging guidance,

“should reflect that CCWater should be consulted by each company on its charges scheme and any changes to it before they are implemented”.

Once more, I confirm that the charging guidance produced by the Government will ensure that CCWater continues to be consulted on charges schemes. With that reassurance, I hope that the noble Lord will be content to withdraw his amendment.

Lord Grantchester: My Lords, I am very grateful to the Minister for that assurance. The provision should indeed, as a minimum, be included as statutory guidance. That is very well accepted by the Consumer Council for Water. However, we have received briefing from it that it is particularly keen that that should be written into the Bill. We will consult further and reflect on the Minister’s words but, in the mean time, I beg leave to withdraw the amendment.

Amendment 101 withdrawn.

4 Feb 2014 : Column 192

Amendments 102 and 103 not moved.

Clause 16 agreed.

Clauses 17 to 20 agreed.

Amendments 104 to 106 not moved.

Clause 21 agreed.

Amendment 107 not moved.

Amendment 108

Moved by The Earl of Selborne

108: After Clause 21, insert the following new Clause—

“Right to discharge water

(1) A sewerage undertaker may discharge water from a relevant pipe or from a drainage system constructed pursuant to section 114A of the Water Industry Act 1991 into any inland waters, whether natural or artificial, or any tidal waters.

(2) In this section “relevant pipe” has the same meaning as in section 158 below.

(3) A sewerage undertaker shall pay compensation to the owner or occupier of any land who suffers damage by reason of the exercise by the authority of any right under subsection (1) above.

(4) This section is without prejudice to any enactment the purpose of which is to protect water against pollution.”

The Earl of Selborne: My Lords, Amendment 108 refers to the rights to discharge and its purpose is to support the installation of sustainable urban drainage systems, or SUDS. It is generally recognised that SUDS are part of the long-term solution towards the sustainable use and drainage of water. They improve surface water management and reduced the risk of flooding, and they may include rain gardens, permeable paving, swales and the like. They are designed to collect water and release it slowly back into the environment.

Clause 21, which we have just agreed, clarifies the function of a sewerage undertaker under the Water Industry Act 1991 to include the building and maintenance of SUDS features, so we are here to promote SUDS and the Bill does that. However, there is a problem. To install a SUDS scheme an undertaker, a water company or a drainage company has at present to negotiate the right of discharge. Without such a right or with the prospect of costly negotiations and litigation—there has been plenty of that—there is little incentive to deliver SUDS schemes as opposed to surface water sewers.

The amendment would remove this uncertainty, which has led to litigation and to a lack of incentive for the installation of SUDS. It helps sewerage undertakers to deliver SUDS schemes. We are of course awaiting secondary legislation, which is a separate issue, on the maintenance and the issues with local government on SUDS. That apart, this deals with a much more fundamental issue. It would resolve the legal uncertainty that has arisen since 1989, when a previous water Bill removed the right of sewerage undertakers to discharge. The amendment would therefore restore the legal position to where it was before 1989, when sewerage undertakers had a statutory right, as highway authorities still have,

4 Feb 2014 : Column 193

to discharge pure water into any watercourse. I emphasise that it has to be pure; no one is suggesting that there should be a licence to pollute in any shape or form.

At the moment traditional pipe discharges, which are inferior in many respects to SUDS, as I have explained, can be acquired by compulsory purchase powers. However, again, under the Bill we are not extending compulsory purchase powers to SUDS. I am not suggesting that they should be but that once you have the right to discharge, these powers will give an incentive for SUDS to be installed. That incentive is greatly needed, and I beg to move.

Lord De Mauley: My Lords, I am grateful to my noble friend for raising the importance of sustainable drainage systems and I agree with him on this. I can confirm—my noble friend referred briefly to this—that we plan to bring forward the secondary legislation needed to implement Schedule 3 of the Flood and Water Management Act 2010 by April this year, and to commence it at the earliest possible opportunity.

I appreciate, also, that the issue of the right to discharge water is important for sewerage undertakers. However, this is not, by any means, a straightforward issue and there are more interests which would need to be taken into consideration, including the impact on landowners and bill payers. The amendment would allow the discharge of water without express consent. It suggests that compensation should be paid if there is any damage but that no permission needs to be sought. Interference with third parties’ land rights would need careful and detailed consideration.

Current case law suggests that there is no general right to discharge without compensation under the Water Industry Act 1991, for sewerage undertakers or others. Private parties who wish to discharge water on

4 Feb 2014 : Column 194

to other parties’ land or into other parties’ assets such as lakes, canals or rivers have to negotiate an agreement to discharge water with the owners.

As my noble friend knows, a challenge to the existing case law on whether there is a right to discharge has been made and will go before the Supreme Court in May. I am sure noble Lords understand that it would not be appropriate to comment on that case. In the circumstances, I ask my noble friend to withdraw his amendment.

The Earl of Selborne: I am grateful to my noble friend. The fact that this has led to such protracted, expensive and time-consuming litigation demonstrates that the law was left in an ambiguous situation—to put it at its kindest—after 1989. The issue clearly has to be resolved but whether the Supreme Court is the right organisation to do so is another matter. I think it would be more appropriate for it to be done by an appropriate Act of Parliament. This is not asking for something particularly unusual. As I said, highways authorities have the right to discharge at the moment. Before 1989, sewerage undertakers had the right to discharge. If landowners found themselves inconvenienced, it would only be in the sense that they were reverting to a situation to which they had been quite accustomed.

I have heard what the Minister says and accept that, with a case in the Supreme Court, he is constrained from discussing the detail. I therefore beg leave to withdraw the amendment.

Amendment 108 withdrawn.

House resumed.

House adjourned at 9.32 pm.