My Lords, in moving the amendment, I shall speak also to 33 amendments grouped with it. We return to the potential risk of de-averaging of charges, on which I moved a plethora of amendments in Committee. I think that there was some mystification around the Chamber as to the purport of the amendments. I hope that the amendments this time round will not come as such a mystery, because we rehearsed in Committee the potential risk of de-averaging of charges. There was general agreement that de-averaging was to be avoided, but I think that we still need to test whether the Bill gives the sort of protection that my noble friend the Minister assured us it did in Committee.
The reason why I think that the Bill currently presents a real possibility of non-household customers paying different prices for the same services within the same appointed area is because of the nature of the link between upstream and downstream. The customers who would be most adversely affected by de-averaging of charges would most probably be smaller businesses and non-household customers in more remote rural areas—at this moment, I should declare my interest as a farmer and therefore, by definition, living in a rural area. As I said, the problem arises from the direct link in the Bill between the retailer and the provider of resources. Such a link was allowed in the Water Act 2003 for water in a different form and reappears, modified, in the Bill. The link is introduced for the first time for sewerage services.
The danger is that, if a new entrant retailer can access a new source of water more cheaply than the incumbent and offer it to selected customers with the focus on price, and price alone, there will be no incentive to improve on or even match the incumbent in providing, for example, water efficiency services that might be
beneficial to the customer but which might involve an upfront cost for either the retailer or the customer. In other words, if you can offer a simple “buy it cheap” service for specific customers, you have immediately blown a hole in the averaging regime.
The Bill creates perverse incentives which direct the focus of retailers away from helping customers to play their part in reducing levels of water abstraction and, more generally, in building water industry resilience. The Minister told me in Committee, and I am sure that he will repeat, that the amendments would allow incumbents to dictate the future direction of upstream markets. I disagree. As noble Lords will see, the amendments mention participation and allow—indeed, encourage—incumbents to look for innovative solutions, but not at the price of cherry-picking or allowing people to purchase water or sewerage services on price alone.
The Government agree and say in their guidance on draft charging principles that de-averaging must be prevented. I cite their advice:
“No category of customer should be unfairly disadvantaged by the way reform impacts on water charges. A fair and non discriminatory approach to sharing network costs”—
I repeat, sharing network costs—
“will be critical. For example, rural customers must … be protected”.
That we can all agree on. De-averaging is not desirable and must be prevented. The issue is whether the Bill as drafted will lead inexorably to two-tier charging, whatever guidance the Government might be giving on charging at the moment. The guidance goes on to say:
“Averaging of charges is common practice in sectors that have much greater scope for contestability than the water sector does. Ofwat has a number of tools to limit the effect of de-averaging on customer charges. They will use these to ensure that any marginal changes are introduced in a measured fashion and, above all, that they are in the overall interests of consumers”.
My problem is that I am simply not persuaded that Ofwat will indeed have the tools to limit the effect of de-averaging on customer charges. Given the proposed link between retailers and potential upstream service providers, I cannot understand how Ofwat will be able to manage the impact of de-averaging to prevent any unfairness between customers, especially rural customers. The problem is, of course, that once you have allowed that direct link between upstream and the retailers, you have to justify in law any interpretation of the rules in court.
I mentioned in Committee what is perhaps an obscure case, but nevertheless a legal precedent, the Shotton case in Wales, where the precedent was set that local costs were required to be used in a ruling in setting prices under bilateral deals. My noble friend the Minister assured me that this precedent could be ignored, but I remain convinced as I have the feeling that legal precedents are legal precedents. An even more serious threat would be if this were determined under a European law and the United Kingdom Government might not be able to prevent the de-averaging of charges if a link is allowed, as the Bill allows, between the wholesale and retail markets. There is a threat and it is incumbent on us to be absolutely certain that we are not widening the scope for de-averaging by the way in which the Bill is drawn up.
3.30 pm
The Bill has the laudable purpose, in part, of promoting the cause of reducing water consumption and reducing the harmfulness and quantity of wastewater returned to the sewage system. What is needed to achieve this is a focused retail market, which forces retailers to differentiate themselves principally by the quality of their service rather than by price. This would ensure that customers can make real contributions to reducing abstraction and discharges and would contribute to establishing a more resilient and environmentally secure water industry. All this is highly important but we are not going to get it by selling on price and price alone.
These amendments therefore seek to break the link between an upstream service provider and a retailer. Those with wholesale authorisations would be required to interact with incumbent water companies rather than retailers. This would then allow Ofwat to require incumbent water companies operating networks to procure water and sewerage treatment services in the most economic way possible. My amendments therefore amend Schedules 1, 2, 3 and 4 so that the holders of authorisations participate,
“in arrangements made by the undertaker for the introduction of water”,
or,
“the removal of matter from the undertaker’s sewerage system”,
into the supply system, so that they cannot bypass the undertaker. I beg to move.