The Water Bill, which was debated at its second reading in the House of Commons yesterday, has cleared its first parliamentary hurdle with Labour's support.
Opening the debate, Owen Paterson, Secretary of State for Environment, Food and Rural Affairs, raised a number of important issues for the water sector.nIn response to John Redwood MP's call for the introduction of competition for everybody, Mr Paterson said that as an aspiration universal competition was worthwhile.
However, while the Government wanted to take the first step and take the wholesale route, which would bring immediate benefits and real efficiencies to major businesses, it was hard to move down to a household level, where the gains are much smaller because of the narrow margins, until universal metering was in place.
The Government was not at this point offering choice to household customers and was “taking a step-by-step approach, gaining experience from a competitive business retail market first and reducing any risk to investment in the sector.”
The Minister said that although household customers would not be able to choose their supplier, they would benefit from a framework that encourages water companies to put customers at the centre of decision making or risk losing market share. Ofwat would also “ ensure that household customers do not subsidise the costs of increased competition.”
Bill will “exert sustained downward pressure” on water bills
Owen Paterson told MPs that the Government was tackling affordability for the long term and that the package of reforms in the Bill was designed “to exert a sustained downward pressure” on water bills and ensure affordable flood insurance for households in areas at high risk of flooding.
He drew attention to his recent letter to the water companies asking them to consider whether to apply the full price increases next year that were planned for in the 2009 price review which asked them to share the benefits of historically low financing costs with their customers. However, he reiterated that the stable regulatory system which gives confidence to investors must not be undermined in any way.
Bill will release “a floodtide of new investment, potentially in new reservoirs, use of aquifers and transfer of water between water companies'
On the issue of new water resources, Mr Paterson said he hoped that the measures in the Bill would release “a floodtide of new investment, potentially in new reservoirs, use of aquifers and transfer of water between water companies” to maximise use of the water that lands on the UK.
The Bill would make it much easier for new businesses to enter the water market to provide new sources of water or sewage treatment services, known as upstream services. New sources of water could mean opening up old boreholes, or farmers building new reservoirs, or water companies building new reservoirs. Mr. Patterson explained:
“The reforms will increase water supplies by making it more attractive for landowners to develop new sources of water, or for innovative businesses to treat and dispose of waste water. Let me take a hypothetical example. If a brewery with its own borehole has spare capacity, it might be able to supply its pubs in the area more cheaply than they could be supplied by the local water company. The brewery could put its spare water into the water company’s supply system or work with a retailer providing broader services to those businesses.”
“We also want to make it easier for our farmers and land managers to develop new sources of water, such as on-farm reservoirs, and to hold water back. For example, a farmer with an on-site reservoir that more than meets the farm’s water needs could make an arrangement with either a licensee or the incumbent water company to enable it to put water into the supply system. The water could be supplied regularly or only at times of high demand. Either way, the farmer would have a new product that he could sell.”
Mr Paterson said that where there is demand, people will invest and the Government hoping to create a new market for the product, commenting:
“I am absolutely confident, given the freedoms we are releasing in this Bill, that there will be significant investment. “
“For the first time, we are opening a market for businesses to recycle and reuse waste water as a new water resource. They will also be able to purchase sewage sludge that might otherwise have been sent to landfill—for example, for use in anaerobic digestion plants.”
However, the Minister rejected calls for water companies to have the option of exiting the retail market, explaining that household customers could lose out because they would not have the ability to move to a new supplier. If the incumbent water company kept its household customers but disposed of its business customers, the householder would be stranded with a company that had “little incentive to provide a decent service’ which the Government was not prepared to risk.
Opposition - "Government’s disjointed and, frankly, botched plans to introduce upstream competition"
Despite criticism from some MPs on delays to take action on unsustainable abstraction, the Minister said the Government would not take any risks with the introduction of upstream reform. He was satisfied that there were robust regulatory safeguards in place to prevent upstream competition from leading to environmental damage. The new upstream markets would not open before 2019 and the Government expected to implement abstraction reform in the early 2020s to ensure sure that the reforms were carefully co-ordinated.
Maria Eagle MP, on behalf of the Opposition, commented:
“We have serious concerns about the Government’s disjointed and, frankly, botched plans to introduce upstream competition. We support the principle of upstream competition and acknowledge the benefits that it could bring, but even a slimmed-down version of the Government’s plans would not adequately address the potential consequences of not taking forward abstraction reform in parallel.”
“The Government’s White Paper, “Water for Life” set out a strong case for abstraction reform, yet the target date for a new regime is now 2022. The fact is that, historically, we have seen the over-allocation of water resources. Competition in advance of abstraction reform risks increasing the total amount of water taken from the environment—not least as those with unused or part-used abstraction licences seek new ways to realise their value.”
Regretfully, I have say that, unless he is able to offer some very convincing remedies on this issue, our instinct will be to seek to remove this entire part of the legislation.”
Owen Paterson also rejected calls for Ofwat’s existing sustainable development duty to become a primary duty, saying that the Government had strengthened Ofwat’s role in safeguarding long-term resilience. The Bill included a new primary duty to take account of environmental pressures, population growth and demand on essential services.
Government to seek reserve powers on affordable flood insurance
Commenting on negotiations with the insurance industry on affordable flood insurance, which are currently ongoing, Mr. Paterson said:
“We are still in intensive and constructive discussion with the insurance industry on some of the finer points of detail, but we plan to table new clauses in time for consideration in Committee. The powers in the Bill will help to ensure that affordable flood insurance is available for households in high-risk areas.”
However, while Flood Re remained the Government’s preferred approach, it was also seeking reserve powers to provide affordable cover if it should prove unworkable or prices in a free market proved unacceptable. The Minister said that “having a fall-back means that customers can have confidence that the issue is being addressed. “
In reply to a question from Andrew Percy MP about houses in his constituency, which is at massive risk of flooding because it is below sea level in many places, Mr Paterson confirmed that the Government did not propose to include houses built after 2009 if they were built on areas that are subject to flood risk in Flood Re.
On flooding issues, Anne McIntosh, the Conservative MP who chairs the Environment, Food and Rural Affairs Committee, said the 2014 price review provided an opportunity to invite Ofwat to reward innovation, which it was not doing at the moment, commenting:
“Ofwat should invite water companies to show that they can bring positive benefits to consumers by creating innovative flood defence and water supply schemes like the Pickering project, and to include such proposals in their business plans. “
Opposition – Bill is a “wasted opportunity” to tackle household bills
Responding on behalf of the Opposition in the debate, the Shadow Secretary of State for Environment, Food and Rural Affairs, Maria Eagle MP, described the Bill as “a wasted opportunity to tackle the impact that rising water bills are having on stretched household budgets” and pointed out that water bills had increased by almost 50% in real terms since privatisation.
Ms. Eagle told MPs:
“The Bill fails to provide Ofwat with tougher powers to bring down prices and it fails to require water companies to help those who are struggling to pay their bills. Despite the promises from the Prime Minister that we would see action, the Secretary of State has not brought forward a single new measure. All that we have seen is one weakly worded letter to water bosses, begging them not to hike bills next year. There was not even a threat of action if they take no notice—no threat of a tougher regulatory regime and no threat to impose an affordability scheme.”
The Opposition is also calling for a wider review of whether the right balance between Ofwat’s regulatory role and the need for a powerful champion for consumers was in place. The review should consider the future relationship between, and roles of, Ofwat and the Consumer Council for Water. A proper ombudsman role was needed because adequate powers of redress for customers did not currently exist.
Maria Eagle said the Government should also consider accepting the Consumer Council for Water proposal for it to be given enhanced rights to be consulted on each water company’s charging scheme and any changes to it, and a continual scrutiny role to “find and fix issues” as they arise.
The second major change the Opposition want during the passage of the Bill is the introduction of a clear legal requirement on water companies to sign up to a new national affordability scheme.
Joan Walley Labour MP said a national affordability scheme was needed to help those struggling to pay their bills, and it should be funded by the water companies themselves.
The Shadow Minister also criticised the Government for failing to propose any new powers in the Bill to widen Ofwat’s scope to reopen pricing settlements between price reviews, saying:
“Last year, regional water companies made £1.9 billion in pre-tax profits, but paid out a staggering £1.8 billion to shareholders. We know they do that and that it is achieved through financial engineering designed to maximise their debt and minimise tax liabilities. “
Maria Eagle said the Opposition would seek to amend the Government’s legislation and address its central weakness - the lack of measures to tackle the contribution that rising water bills are having on household budgets. It would seek to grant Ofwat more wide-ranging powers to reopen price reviews between the current five-year periods.
Bill should challenge traditional kinds of capital investment
Joan Walley MP raised a number of issues on investment, commenting:
“The Bill will promote greater competition, but what will it do to challenge traditional kinds of capital investment We should be looking into different kinds of investment. Expensive engineering solutions are not always the way forward, even though the water companies depend on capital value for the returns that they make. If the Government can be persuaded to introduce an obligation for sustainability into Ofwat’s powers, Ofwat could look at a return on revenue expenditure, too. We need to look at the kind of investments involved. The Bill could enable Ofwat to take a much more proactive role in vetting companies’ proposals for investment.”
“I would also like to see the dividends paid out to water company shareholders managed differently. Yes, money is needed for investment in water management, but it would be so much better if the profits could stay in the business and be reinvested, rather than global private equity companies that do not necessarily have a long-term commitment to our river basins paying out massive returns—well above what we can earn in interest from our bank account—to shareholders.”
The Water Bill, which was introduced to the House of Commons on 27 June 2013, will now go to a Public Bill Committee for consideration.