The Government’s Water Bill has cleared its final hurdle in the House of Commons this week, despite being described as "seriously flawed” by Labour’s Shadow water minister Angela Smith during the debate.

The MPs accepted a range of amendments made to the Bill by the House of Lords – including provisions for exits by incumbent companies when the non-household market opens for retail competition in 2017.

Much of the discussion was centred around the retail exit clause, alongside affordability, reform of the current abstraction licensing system and the Flod Re insurance scheme.

Commenting on the retail exit amendments water minister Dan Rogerson, the Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs said the Government had been “particularly careful” to ensure that customers were protected, both the non-household customers who will be transferred to a different retailer and the household customers who will remain with the incumbent.

 The water minister said the Lords amendments relating to retail exits contain three core principles: exits must involve non-household customers only, they must be undertaken voluntarily, and they must ensure the ongoing protection of customers.

The Lords amendments give the Secretary of State powers to establish, through regulations, a framework that permits incumbent water or sewerage companies—with the consent of the Secretary of State—to stop supplying any retail services to current or future non-household customers in their areas of appointment. The services will then be provided by one or more retail licensees. Any incumbent water company whose area is wholly or mainly in England will be able to apply to the Secretary of State to exit from the non-household retail market for that area.

Dan Rogerson stated:

“These amendments create broad, permissive powers in what will be a very complex area. Further work will be required to consider the practical implications of exits, and to develop the detailed policies that will underpin the use of the powers. We will therefore be consulting widely with all interested parties as we develop our approach and produce exit regulations.”

He went on to say that the Government did not want to take risks with a successful model –  “we cannot risk damaging investor confidence.”

The Government now plans to consult on the content of draft regulations by the end of the year and will work closely with incumbent water companies, Ofwat, the Competition and Markets Authority, the Consumer Council for Water and others as its develops its approach.

Angela Smith said the Opposition had remained broadly supportive of the Bill but that “there still remains even now a major hole at the heart of the Bill, and at the heart of the Government’s water policy: the absence of any serious attempt to tackle the impact of rising water bills on household budgets, which is adding to the cost of living crisis.”

She added that the Government had failed to back a new national affordability scheme that would have ended the current postcode lottery in which companies choose whether to offer a social tariff and set the criteria for eligibility, commenting:

“ Last year the industry made £1.9 billion in pre-tax profits, of which they returned £1.8 billion to shareholders, yet fewer than 25,000 people are eligible to benefit from social tariffs offered by just three water companies. In many ways, therefore, the Bill represents a missed opportunity and remains seriously flawed.”

Anne McIntosh, the Conservative MP who chairs the House of Commons Select Committee for Environment, Food and Rural Affairs said that without the retail amendment, economies of scale would work against new entrants, either preventing them from entering the market or, at the very least, reducing the benefits they could provide to new customers because of the higher costs of entry. It  was also not in the interest of the companies or customers to force companies to stay in a market when they have no or very few customers.

Dan Rogerson rejected the Opposition’s call to introduce a national affordability scheme, saying that the Government were not convinced of the approach and that one scheme mandated across the whole area would have different impacts on different customer groups across those water company areas and couldhave perverse impacts on the bills of some, given the different demographics and mix of bill payers.

Government cannot commit to a timetable for introducing legislation on abstraction reform

Other amendments will reinforce environmental protections under the bulk supply and private water storage regimes, improve the resilience duty and place a new duty on the Secretary of State to provide Parliament with a progress report on abstraction reform in England within five years of Royal Assent. Dan Rogerson said the latter signalled the Government’s determination to progress abstraction reform and meant that in practice, a written progress report would be laid before Parliament no later than early 2019.

However, the minister said the Government could not commit to a timetable for introducing legislation on abstraction reform, but its aim was to introduce the necessary legislation early in the next Parliament. When published, the report would also provide the opportunity to update Parliament on the preparations for implementation of both abstraction reform and upstream reform, and how the two are closely aligned, as well as setting out any other progress on moving towards a more sustainable abstraction regime.

Angela Smith commented:

“It is important to put on the record our deep disappointment that the Government have not gone further and recognised the need to make the Bill stronger and more effective by making sustainable development a primary duty for the regulator, as is the case with other regulators. We believe that resilience and the associated term that the Government use here—“the efficient use of water”—are not good enough. “

“My question to the Minister about the Government’s failure to grasp the opportunity presented by the Bill to strengthen regulation in this regard is this: why have they failed to respond to this vital issue in a robust manner and safeguard our environment?”

Labour: Environment Agency not adequately placed to deal with abstraction licences

On water abstraction, she said that together with leading environmental experts, the Opposition was concerned that without comprehensive abstraction reform, upstream competition could incentivise existing abstraction licence holders to sell their water to water companies, even when the catchment was already over-abstracted or over-licensed.

She added that they did not agree with the Government’s  assessment that the Environment Agency was adequately placed to review and/or change abstraction licences, commenting:

“Following budget cuts, the Environment Agency has cut 600 staff since 2010, so surely the Minister must concede that the Environment Agency will now have less capacity effectively to discharge its duties in that respect. What will be the priority for this smaller, rather emaciated, Environment Agency—flood defence schemes or attention to abstraction reform? Given its much reduced resource, is the Minister confident that the Environment Agency can manage all its duties effectively?”

“Under the new market conditions created by the upstream market reforms in the Bill, more water could be abstracted from water courses than is sustainable or suitable for local ecosystems. We support the amendment for upstream market reforms to allow new water undertakers into the market, but we still think it wise for the Government to deliver progress on abstraction reform, running concurrently.”

“We asked the Government to bring forward reformed abstraction licences on the same day as the upstream reform measures in the Water Bill come into effect, but they have unfortunately neglected to do so.”

Anne McIntosh agreed, saying:

“Personally, I would have made the case to include abstraction reform within the context of the Bill. I hope this does not come home to roost in the intervening five, six or seven-year period, but given the climatic changes and swings in weather patterns that we have seen, I hope we do not rue the day that we failed to include abstraction reform in the Bill.”

Flood Re - Government to end up as insurer of last resort?

On the Flood Reinsurance Scheme, the Water Minister said the first thing that would be taken forward is information that a policy has been ceded to Flood Re, commenting:

“It is important that people should know that, as the scheme has a life span and the whole direction of policy is to protect more homes and to move to a post Flood Re period in due course. ….

To plan for the future, households also need to understand the likely impact of the transitional nature of the Flood Re scheme which is subsidising their premiums. Members should note that it is expected that standardised information will be sent to the customer by the relevant insurer that is ceding the policy to Flood Re, as that maintains the relationship between insurers and their customers.”

The Shadow water minister responded that in many ways, this was yet another example of “a missed opportunity to produce effective and robust legislation.” The Opposition also felt that the Government had failed to grasp the importance of using reliable scientific evidence on the potential impact of climate change when making estimates of the current and projected number of properties eligible for inclusion in the Flood Re scheme. The threat of climate change was real and it was necessary to ensure that the scheme would operate effectively within its 25-year span and be adaptable to weather conditions resulting from climate change. It was crucial that households ould access information that identifies current and projected estimates of the number of people eligible for the scheme.

Anne McIntosh warned that the greatest concern remained that the Government may end up as an insurer of last resort because Flood Re will not cover a one-in-200-year or one-in-250-year event. The winter floods in 2013-14 were a one-in-200-year event, so it would be sooner rather than later that the Government will end up as the insurer of last resort. She added:

“The House will be interested to learn what provisions the Treasury has in place if that occurs earlier than might have been assumed, because there will not be money in the pot if the winter floods are repeated in the autumn of 2014 and 2015.”

Dan Rogerson responded that Flood Re would be an authorised insurer operating under the requirements of solvency II, whereby insurers must hold capital reserves that can be used to cover the cost of a catastrophic event. To assess the required capital reserves, insurers must keep their detailed catastrophe models up to date, including any changes in levels of insured risk such as from climate change. Flood Re would need to take account of climate change as part of its regulatory obligations in ensuring that it remains solvent over time. The minister added:

“I assure colleagues that the impacts of climate change will be considered during the entire lifetime of the scheme to ensure that Flood Re is resilient to changes to flood risk.”

However, if a one-in-200-year event did occur, the Government would have no direct liability. The Government would take primary responsibility for deciding how all available resources would be used, but the Government were not an insurer of last resort in that they do not have financial liability for Flood Re.

Now the Water Bill has completed all the parliamentary stages in both Houses, it is ready to receive royal assent, when the Queen will formally agree to make the bill into an Act of Parliament.

There is no set time period between the conclusion of consideration of amendments and royal assent. When assent has been given, an announcement will be made in both Houses – by the Lord Speaker in the Lords and the Speaker in the Commons.  The legislation within the Bill may then come into effect immediately, after a set period or only after a commencement order by a government minister.