Dan Rogerson, Dan Osgood and Gabrielle Edwards gave evidence.

We shall now hear oral evidence from the Department for Environment, Food and Rural Affairs. Please would the new witnesses identify themselves for the Committee?

Dan Rogerson: I am Dan Rogerson, Parliamentary Under-Secretary of State at DEFRA.

Gabrielle Edwards: I am Gabrielle Edwards, deputy director for water reform at DEFRA.

Dan Osgood: I am Dan Osgood, deputy director for flood risk management at DEFRA.

Q 163

The Bill seems to establish a broad framework and many of the details are going to be filled in. In fact, a lot of your intentions will be in the form of statutory instruments, secondary legislation and guidance. Can you explain the reason for that?

Dan Rogerson: We have discussed in evidence sessions —which looked a little different when sitting over there— the key elements of the Bill, for example, around market reform, where what we want to do is to set in place a framework for the regulator to regulate and make sure that they get it right. I think there has to be a clear statement of intent from the Government about where we go and what the shape of it is, but the detail ought to come from the regulator, because we do not want to get into a state of affairs where the Government are stepping in and regulating the market directly—that is something for a strong regulator to do. So we need to have the opportunity for those regulations to come forward in that way, with the Government as a backstop to ensure that there is nothing alarming that needs to be dealt with.

Similarly, with the provisions on Flood Re, this is an industry-centred solution, as we have heard, so we are not setting up a public body here, which would have been another option. What we have is an industry-based solution, and we are putting in place the mechanisms that we have to put in place through legislation to allow that to happen in a way that will deliver affordable cover for people.

Again, we need to proceed on the basis that the industry can come forward with what they think is the best way of allowing Flood Re to operate, and then ultimately the Secretary of State—and Parliament—can have the chance to say no if he or she thinks that that is the wrong way to go about it. We are not trying to put everything on the face of the Bill.

The other point to make is about flexibility, as we have heard. There will be some things particularly with Flood Re that will evolve as the situation becomes clearer and we get more information about who is being affected and how. We need to ensure that we do not have to come back and go through a second, third or fourth Bill to get that cover right.

Q 164

I am interested in the principle of leaving everything to statutory instruments. This is not a party political point, because the volume of statutory instruments has increased to an industrial scale over 30 or 40 years. When it comes to flood risk insurance, band H, for instance, is being exempted. I do not see why that should not be on the face of the Bill. Why would that change in the coming months?

Dan Rogerson: We have heard some examples from the National Flood Forum and the industry about how the picture will potentially change as we get more information and data, and as we react to climate change and all the factors that will be there.

In order to make the system a robust and working one, we must have some flexibility. I think you are always setting in any legislation the understandable willingness to get as much on the face of the Bill as we can, so that we can feel that Parliament as a whole has set it, against the ability to be flexible.

There is a cascade, if you like, from what is in the Bill—this is not a three-clause Bill and there is quite a bit of detail—to the potential for secondary legislation. Ultimately, we also have, within the two examples that I have given, the ability of appropriate bodies, whether it is Flood Re in the industry or the water industry and other consultees with Ofwat, to come up with a framework. Those are the three tiers of ways of getting it right. We must be careful about setting too much in stone in primary legislation, because we would end up with a system that cannot be flexible enough to work. That would cause us all sorts of problems in the future.

Q 165

The first panel we had this afternoon expressed some reservations regarding the point that has just been made, but they said that if there was proper consultation and thorough scrutiny, those reservations would be limited. Can you assure people that there will be proper scrutiny and consultation?

Dan Rogerson: Which particular aspects of the Bill are we talking about?

Q 166

This was from the first panel this afternoon in relation to insurance. I would go further and say this: in light of the amount of issues that are not on the face of the Bill, will there be proper scrutiny and consultation for all those?

Dan Rogerson: As we have heard from the Association of British Insurers, which was giving evidence earlier on, as well as getting it right, we have been trying to stick to a timetable, so that we can deliver this on time to ensure that the cover is there when it is needed. Perhaps in an ideal world, with Flood Re, we could have said, “Right, we will not legislate on this until next year. We will give more time for those negotiations to go on.” In order to deliver things on time, we have to stick to the deadlines that we have set out. We published draft clauses with regard to Flood Re, which people have had the opportunity to comment on, and now we have been able to give some more detail about how things are emerging.

The major issues were set out in the memorandum of understanding, but there are still some second-order issues—technical issues—around the finances and stuff that we have to get right to make sure that the industry is happy. The mechanism levies other people—it is effectively a tax—so we have to make sure from the public accounting point of view that we have got everything signed off and that the Treasury is happy as well. We are trying to get things out in public as quickly as we can and we now have clauses that the Committee will be able to consider over the next few weeks and in the subsequent stages as well.

The consultation will be absolutely crucial to getting this right. We want to get to the point where we are happy that we have a system that works for the people who need the cover and that delivers the original objectives that we had as constituency MPs for people out there  without cover. We have mechanisms in place. As long as the Treasury is happy, the industry can work on that, too.

Dan Osgood: Just to add to that, we consulted on the policy and on the draft clauses over the summer. We published the Government response to the consultation last month. As part of that response, we committed to—before moving ahead with any regulations either for Flood Re or for the flood insurance obligation—further public consultation on the draft regulations, so there will be at least one more opportunity for public input into that.

Q 167

What do we mean by exiting the retail environment and why do we not like it?

Dan Rogerson: We heard a lot this morning, understandably, from the Scottish example, because they are ahead of what we have done here. However, the model goes only so far. It is not an exact parallel. For example, how residential bills are paid in Scotland is different from how they are paid in England and Wales. When we are looking at retail exits, which was obviously a topic of some discussion, we are looking at exit from the commercial, public sector and charity side of retail, because we still have the residential customer base there. They are left behind.

As we heard from the evidence of the Consumer Council for Water, aspirations include the economic savings that are there to be made. For all those market reasons, I understand why there is an argument for retail exit. We also want to see gains in terms of customer service, innovation and better relationships with customers, because there has been a feeling in the past that, although the water industry has come a long way in terms of engineering solutions, it has not been perhaps the most customer-focused business.

Feedback from business customers shows that one of the gains in Scotland is that business customers value a much better customer interface. I do not want to see residential customers not getting the benefit of that. If we have the companies that are still maintaining that residential customer base exiting the retail market in business terms, you are going to be left with the people who are not innovating quite so much dealing with the residential customers.

Q 168

So what you are basically saying is that you do not want it at the moment.

Dan Rogerson: Absolutely. If the question is, “Why not competition for residential customers now?” there are a number of things that we could do all in one go, but we are trying to proceed at a pace where we think we can take customers and the industry with us and get to a point where it functions. Then, if exit is seen to be something that is valuable and we can get round the issues I was talking about earlier and have safeguards in place, we can perhaps look at it in future.

Q 169

What would your reaction be if some clever player managed to hive off their retail activities through a bit of offshore manoeuvring, some of their own legal work, the sale of certain bonds—who knows what the mechanism might be? Let us assume that someone out there manages to effectively place that retail business in a third-party hand, even though they  retain the statutory duty to supply it. If that happens—I think Mr Sutherland suggested earlier today that that might happen—how do you then effectively regulate that third party?

Dan Rogerson: These are questions about how the regulation functions. We would hope that the robust regulator that we have in Ofwat and the financial regulators that we have out there for companies will take account of that. There is nothing to stop companies that retain that function bringing in someone else and finding a third party to provide it for them. That is perfectly proper and it happens. There is nothing wrong with that, but the ultimate responsibility for making sure that their customers are looked after remains with the company, and that strikes a balance.

Q 170

What sanctions are applicable to the retail company owned by the water company, that it can then somehow deal to its third party with? How does that work?

Gabrielle Edwards: If the company has put arrangements in place by which it could not deliver basic conditions of customer service, or customers were not getting the basic standards of customer service that would be a licence condition, Ofwat would be able to take action against them. They would ultimately be responsible. We are also looking, through this process, at setting minimum service standards. These will be something that any customer would expect to get and there will be Ofwat powers to deal with it if they do not.

Q 171

I have a supplementary on that point. You said that you can effectively subcontract to someone else to organise your retail customers for you rather than exiting. Does that mean that you could subcontract to another water company? If I am Thames, can I subcontract to Scottish Water? Is that what you mean?

Dan Rogerson: You can form joint ventures to do that at the moment.

Q 172

Effectively, you could have quite a lot of consolidation through subcontracting without exit?

Gabrielle Edwards: Bristol Water and Wessex Water have already got a joint venture to do retail.

Q 173

The parent water company is still required to do all the bureaucracy and meet all the regulation, so it is not actually getting out of the business. There will still be, as Mr Sutherland said, 40-plus water companies chasing 1.1 million customers, but is not the reality that, apart from a small minority of water companies and your officials, there is nobody in this water community who does not think that there needs to be an exit clause there to be used at the express permission of the Secretary of State? The regulator for Scotland, the regulator for England and Wales, the Office of Fair Trading, Policy Exchange, many of the water companies and the Select Committee of which you were a Member, all said that there should be an exit clause. Is it not the reality that what this is really about is that it was just a bit difficult and officials did not want to do it? You signed the Select Committee report, so when did you change your mind on this issue? Was it 30 seconds before or after you became the Minister?

Dan Rogerson: I did not sign a Select Committee report—you know that that is not how it works. There is a process by which you try to reach a consensus across the Committee and you make recommendations. You are commenting to Government, which is a very different position from legislating, to be honest. In a Select Committee report you are challenging Government, quite rightly, and the level of confidence you need as a Select Committee reporting back is very different from saying you are going to put something through in legislation.

As Minister, I have heard voices—you mentioned some of the water companies as an example. Some are more relaxed about it than others, I accept that. I have also heard from the Consumer Council for Water about their concerns on behalf of customers, residential customers in particular. If there is any doubt there, I want to make sure that we are protecting people in that instance. That is not to say that the case may not be made in the future, and that can be dealt with, but we want to be very clear at the point of legislation here that we are at the point where it is appropriate to do that.

Q 174

Tell me another industry that functions effectively where you have a market where you can have entrance but not exit.

Dan Rogerson: This industry is not the same at the moment, nor will it be after this, as many other industries. I have given you an example of the situation for residential customers. Where they sit is not changing under this.

Q 175

But you cannot enter the domestic market. My point is that this is a market where you can enter, you can choose, you can shop around. It is a fundamental principle. I suspect we will return to this at some length on Thursday afternoon. I genuinely struggle to understand what new arguments your civil servants have managed to come up with that they did not have six, 12 or 18 months ago. At every stage of the Bill the consensus from everybody, apart from a handful of water companies—and I take your point about the Consumer Council for Water’s concerns—has not changed. What is the new argument?

Dan Rogerson: I do not necessarily think there is one. For those who are concerned they remain the same. Those who are keen to press ahead with these changes to the market do not think it is necessary, as we have heard from people with whom you will be familiar, coming from the Scottish context, such as Business Stream, who want to press on with the open market. They think those safeguards do not need to exist and that exit clause could be in from the start.

As Minister I want to be convinced that we are moving at a pace with which everybody is happy. There will be economic benefits; that is the point of doing this. In terms of customer service, there will be economic benefits for business, charity and public sector customers. There will also be benefits in terms of the competitiveness of the industry. However, we have to remember that there are other people involved in this sector such as residential customers in particular, and we balance the needs of all of them.

This is something that we are considering. No Government would say that this should never be revisited. What we are saying is that there are some questions about whether now is the right time to do it.

Q 176

I wonder whether you are in a position to clear up a point that I do not quite understand. It is a broad point about the situation in Wales. As I said on Second Reading, it is different in Wales. Welsh Water is being exempted from parts of the Bill. The Government of Wales Act 2006 reserves powers for the Government here over water in Wales. Even if you are allowing Wales to go its own way, do you still retain a veto as it were?

Dan Rogerson: Just to be clear, we are putting a framework in place that Welsh Ministers could opt to take up if they want to. At the moment there is no appetite to do that. However, we heard from Scottish witnesses about the way that savings for customers and efficiencies are being delivered in Scotland. If that happened in England, especially given the nature of the border, where there are customers of English water companies on one side of the border and customers of Welsh Water on the English side, there may be an increasing debate and discussion in Wales about the benefits. Ultimately, that is a matter for Welsh Ministers to decide.

Gabrielle Edwards: There is the separate water resource issue, where a power of intervention is retained in the case of adverse impact on customers in England. That is different from the licensing issues in the Bill.

Q 177

Can I just ask you, Minister, to clear up a point that has come up frequently in Wales but nowhere else? Did you give any consideration to having some territorial integrity, in that Severn Trent actually serves much of Powys and Dwr Cymru serves much of Herefordshire? Did you ever consider a straight swap, so that the borders would follow the political border rather than the course of the rivers?

Dan Rogerson: There is a whole set of issues around how the networks are configured and the history that predates the devolution settlement that is difficult to unpick. It would be quite a complicated process. We are discussing with the Welsh Government about how we have proceeded and they have been consulted. It is perhaps something we could look at in future. At the moment the companies serve the customers that they do and their networks face in that direction. It is quite difficult to put a knife through that and realign it without some very complicated work.

Gabrielle Edwards: It is one of the issues the Silk commission is looking at. As the Minister said, it would be extremely difficult to unpick some of those arrangements, because they are based on historical networks and catchments where the rivers flow. They do not follow the political boundary. At the moment we have a situation in which companies on both sides of the border operate under different regimes. For some aspects they operate in a regime that is essentially an England and Wales regime, but in other aspects they operate under a regime that is driven by the political boundary. So it is complex.

Q 178

So you concede that companies are sometimes at slight disadvantage—the ones on the border, such as Dee Valley Water, Severn Trent and Dwr Cymru—because they operate under two different regimes, as compared with other companies that they are competing with?

Dan Rogerson: What may emerge is a position in which business customers feel that they would much rather have access to the market that is developing in  England, so those who are customers of the Welsh company just over the border in England might feel that they are disadvantaged by that. Of course there might more generally in Wales develop a mood in the business community, as well as in the charity and public sectors, that they would like to see what happens over here in England come forward in Wales. That is something that there is the potential to deal with down the line, if the debate in Wales moves to that.

Q 179

You are saying that any exemptions to the FR scheme will be set out in secondary legislation, but I am wondering what options are available to people who are clearly in a flood area in a band H property, but who are restricted from building their own mitigation because they are under the protection of English Heritage. What options are available to individuals who find themselves in such circumstances?

Dan Rogerson: It is obviously a difficult issue, which we have consulted on. We have to recognise that what is building up the pot for Flood Re is a levy on insurance generally, so we have to have a discussion about who we are levying on and who that money is potentially paid out to, should there be a claim, or about keeping premiums low for those customers. The position of the Government has been that, given the value of those properties and therefore the resources available to the owners—though that does not always follow—they are in a slightly different situation from someone in a band D property in an area of a more standard nature. As I have always said, I am willing to listen to the debate as we go forward, but at the moment that balance has been struck. We will also consult the industry, because it is crucial that we take the negotiations forward based on the memorandum of understanding. If we are looking to unpick that for any of those reasons, we have to have a good reason and a good argument to do so.

Q 180

I am worried that we will end up in a lawyers’ mess. Clearly, there are lots of properties out there that are joint residential and business properties, and we are exempting business properties. How will we avoid that lawyers’ muddle over the areas between what is a business and what a residential property, which become very blurred?

Dan Rogerson: Essentially, if something is covered under your council tax—what you pay your council tax on is the residential element of the property—that is where you would have the insurance policy to cover that. So in a farming context, the farmhouse would be covered, but the barns would be a more commercial proposition and a different outcome. As we look at the system that is proposed—we were hearing from the ABI earlier—they would not be covered under it. The message that we have had from the industry is that there is a market for business solutions, and all the evidence base is very much on the incredibly difficult position that families are in with regard to residential property. That is what this solution is designed to cover.

Q 181

There are two problems, one of which is this exclusion of small businesses, which were included in the statement of principle. I hear what you say, in terms of the focus on domestic, but it seems to me that that is a real issue. I do not really accept the argument that there is no way of determining what a  business is. You have got the business rate band—you could say, “Let us exempt those who have a small business rate exemption”—and there are ways and means of doing it. You are taking away something that they had before, which seems to me not entirely fair and reasonable. We have seen, when we dealt with South West Water—for which I am grateful for the subsidy—the challenge of trying to divide business from the domestic.

My other concern applies to the domestic consumer. It is clear to me that owners of houses built after 2009 are going to be in a difficult position. It seems that if houses are pre-2009, or if they are somewhere that is uninsurable, they are all right, but if they are post-2009 they are not. The argument, “Well you can do something about it, can’t you?” is a little difficult if the person cannot get on the internet to look at the flood risk warning. I would be grateful for your thoughts on both those points.

Dan Rogerson: With regard to the issue of commercial compared with residential properties and their not being covered by Flood Re, it is not just about the neatness of being able to categorise them by council tax bands. It is also about what Flood Re is there to do and what problem it is there to solve. The argument I am trying to make is that the problem for commercial properties is not the same as for residential properties, in terms of the insurance market. Therefore, we have to proceed on an evidence base. The evidence at the moment does not show that they have the same problem—commercial properties do not have the huge cost in the market that residential properties have. I accept that some were covered under the statement of principles, but we are moving on the basis of the memorandum of understanding we have with the industry, and we are trying to come up with a robust solution that will work. I would have to be convinced that there is a huge crisis in order to move away from that line and to bring in categories of property other than residential. I come back to the point about how the whole thing is funded and where the money comes in. The settlement with insurance payers generally through the industry is based on the fact that it is there to deal with the residential situation. We will have difficulties if we start adding to that.

The 2009 date was chosen based on the previous statement of principles. Wherever you draw the line, it is difficult. However, as many hon. Members have said to me in private and on the Floor of the House, we do not want to send out the message, “It’s okay; you build there and someone else will pick up the tab later on.” We have to be very careful about how we do this. The discussion and agreement with the industry was based on that. Given where we need to get to in order to make the scheme deliverable, we are trying to get all these issues settled in a way that is agreed and is deliverable in time to meet our timetable. I am cautious about moving away from what has already been agreed. I said on Second Reading on the Floor of the House that if there are issues that we think will be impossible to resolve, and if the evidence base grows, the date is something we can revisit. However, at the moment I am not convinced of the need to move away from the current proposal.

Q 182

What message are you going to give to the 14,000 individuals—that was the number that was given to us earlier this afternoon—who cannot get insurance?

Dan Rogerson: That have been built since 2009?

Q 183

Yes.

Dan Rogerson: Insurance brokers will say that there are markets out there for a number of other people.

The 14,000?

Order. Several Members have caught my eye. I would like to call them all, so will Members keep their questions brief?

Dan Rogerson: Can I finish the point? There will be a route to insurance for those properties. We will look at things such as property level protection and other schemes. The Government are putting money into maintaining the existing flood defences and increasing their coverage so that over the course of Flood Re’s life we manage and deal with the flood risk for everybody. We have to be cautious about sending out the message, “It’s okay; next time when we revisit it we will budget a bit further down in history and we will pick up another bunch of people, so it is okay to build there.” It is about getting the balance right.

Q 184

Following on from that exchange, I understand the need to draw a line somewhere, Minister, but what is your thinking about why the retrospective date of 2009 was chosen, rather than a current or a future date—say, the day you announce Flood Re or 1 May 2015?

I make the same request that I made to the ABI. It would be helpful to get your estimate of the cost of both extending it to band H properties and moving the 2009 date to, say, today.

Dan Rogerson: Our estimates would be based on discussions that we have had with the industry, because they are the experts on what is do-able. I am sure that we could share something with the Committee on that.

The reason why it is that date and we have moved on, is that it is based on the last agreement. When the agreement was moved forward in 2008, the 2009 date was in place. I return to the point that I made to Anne Marie Morris: if we moved on each time we looked at this, we would be moving the date each time. Instead, we have stuck to the date that was agreed, which was not a surprise to people. Anyone building in some of these areas or increasing the number of properties beyond that date knew that they were going beyond the statement of principles that existed at the time. They were perhaps being optimistic that something would happen. At that stage, we did not know what the model would be or that Flood Re would be the proposed model.

We want to ensure that there is affordable insurance for everyone, and if we see that a huge number of properties are affected, we can look at the evidence base as it comes forward. At the moment, having the date as 2009 sticks to what was agreed under the last statement of principle.

Q 185

I want to ask about the confusion between commercial and private residences. I want to present a scenario to you of someone who is paying domestic rates on his own property. He also has, in a curtilage, three or four holiday lets that he pays business rates on, because it is a business. I know from experience  that that gentleman was not entitled to the £50 rebate that people were given by South West Water. Where would he stand with Flood Re?

Dan Rogerson: If it is separate properties within the curtilage, as you rightly said, the business rate would be levied on the holiday let element of that, which is the number of properties. Those would not be covered, but the residential element, if he resides on site in a property on which he pays council tax, would be under the aegis of the scheme. That is a clear divide. Returning to the earlier discussion, we have a clear message that we can send out on what is covered and what is not. Once we start to blur those lines, it becomes complicated to know who is in and who is not. What I have described is what the situation would be under Flood Re.

I want to go back to this 2009 cut-off, which is a real problem for me. In East Yorkshire, houses were built after 2009 in good faith, with properly planning permissions in place, and people bought them in good faith. The Government are promoting the sale of those houses through Help to Buy. We are flogging homes and supporting them with Government-backed money, but we are telling them that they will not be able to access this flood insurance scheme. I know that the date is arbitrary—that is what you have confirmed today—but would it not be better to set a date some time in the future, rather than just sticking to 2009? People have bought homes expecting something to replace the scheme and the Government are helping people to buy these homes in flood risk areas.

Dan Rogerson: Certainly at no point did this Government or the previous Government say, “It is okay, we will extend this statement of principles”, at the point at which those homes were on the market and for sale. That statement of principles is now being extended. The cut-off date was clear and was something that people ought to have kept in mind.

One of the key questions is how information has been passed on to people. Looking back at the planning process, there is an issue on how planning permission was granted. I accept that there are areas such as yours—we heard from the hon. Member for Kingston upon Hull North (Diana Johnson) on Second Reading about the situation in East Yorkshire—where there are whole districts for which we will have to come up with solutions through flood protection schemes and other measures and we are investing in that as a Government.

Ultimately, Flood Re is not a for ever solution. We need to get to the point where, first, we have dealt with the market issues that we need to address in the flood insurance industry, but we must also continue to invest money, as the Government are doing, in flood protection schemes to protect properties. The case stacks up for such investment because there are so many properties that need to be covered. We look at both of those issues. I would not say that 2009 is an arbitrary date, as it sticks to the date set at the time of the last statement of principles.

Q 186

As you mentioned, the geography of my area is relatively unusual. The name of my constituency, Goole, means “open drain” in old Norse:  three major estuarial rivers meet in Goole and the area has to be pumped 24/7, as it is marshland drained by Vermuyden in the 1600s. The area will never not be at risk of flooding, but our local development framework supports development and has land allocated for housing. The framework has gone through all the proper channels and the homes will probably come at some point, but they will all be in uninsurable areas. It is fine saying, “Caveat emptor—buyer beware,” but when the local authority and Government Departments are promoting development in such areas, the natural conclusion of the home buyer is that it is okay to buy a property; they buy the property and then find that it is uninsurable. I would like to hear more in Committee on the solution for such people. In my area there is no alternative to building on such land.

Dan Rogerson: I think that is a comment more than a question.

Q 187

I am seeking an assurance that it is at the forefront of your mind as the Bill progresses, because we need to hear more for residents in my area.

Dan Rogerson: You are right. We need to look at all the solutions that the Government are putting in place to deal with flooding. On the bigger scale, we are investing money in flood protection schemes and increasing the maintenance budget to protect communities. There are also the property-level protection solutions, because there are properties in the country that people accept will flood when they move in. If they are buying an old watermill to convert, or whatever, they accept that flooding will happen, but they can put in some design solutions to address those issues, to make the property more resilient and to make it easier to cope when flooding happens. There is a range of solutions that will be right in some cases, but in other cases we will need to consider other solutions. I am not saying that 2009 is something we could never move from, but, at the moment, I am wary of sending out a signal that we will move every few years to update the scheme and that people will be okay because they will be taken into it. We need to be careful about departing from that.

Order. Given the time left, I am going to move on to another area of questioning. If we have time, we will return to those who wish to speak.

Q 188

On affordability for household customers, we have heard today that only three water companies have their own social tariff schemes—things like WaterSure—and another 12 have made what we might generously call advanced progress on introducing such schemes. There is a big gap, and I do not have figures to hand on how many households, but I am sure we both agree that the number is large. Are the Government considering mandating that every water company should develop its own scheme? If not, why not?

Dan Rogerson: The biggest thing that we have done as a Government is to send out a signal that we expect Ofwat to take account of the cost burden on bill payers and to be careful to keep down bills in the price review period that we are entering. The response so far, and we have had some submissions from companies, seems to be reflecting that, and Ofwat has sent out a clear message, too.

We have to keep bills down for everyone, whether they would qualify for a social tariff or are just above the threshold but, equally, would feel that their bills are going in the wrong direction. That is the first thing on which the Government are being very clear, and all the early signs indicate that we are making some progress.

With regard to tariffs, it is very much to be welcomed that companies are now responding and coming forward with schemes, but we have made all the provisions in such a way that they have to convince their own customer base that the approach they are taking is the right one and that they are coming up with the right model to do it. As we heard earlier, some companies have consulted on this and found that the willingness was not there from customers. We are talking not just about the most well-off customers saying, “No, I’m not going to help anyone,” but about people’s understanding of what the social tariff will deliver. In areas where companies have had a much better response, they are now moving to bring those social tariffs in.

What we want are models that work in the circumstances of each area. For example, in the area I represent in the south-west there has been a particular issue with this. The water company there has come up with solutions, as well as the Government doing what they have done to help out. In other places the solutions will be slightly different. What I want to see is the companies taking up the options that are there. They seem to be doing that, which is to be welcomed, so I am not convinced of the need to go further and press them to bring in particular types of scheme at the moment.

Q 189

I am sorry that my water glass is half empty rather than half full, but while we can all welcome some of the water companies belatedly coming forward, it is quite clear that a number of them are still not bringing forward schemes sufficiently rapidly, if at all. Do you not accept that it is not working everywhere and that for those regional water companies’ customers where there is no sign of a social tariff, the Government have a duty to say, “Enough is enough. We are not going to tell you what the tariff needs to look like, but we are going to make you bring one forward for our review and approval by a certain date”? Do you understand that nuance?

Dan Rogerson: I understand that approach, but I guess the answer is that it is not one that I am proposing to take at the moment. It is not something we are looking to do in this Bill. You will be aware that water bills in different parts of the country have been different for historical infrastructure and investment reasons and so on, so the costs faced by people on low incomes in some areas are higher than in others, and I expect that the willingness to move from the customer base has been much higher in those areas than others. The pressures will be different. Taking that approach is now moving to deliver the social tariffs that we want to see.

You mentioned WaterSure and the other things in place. In previous debates, we have discussed at length what we want to see in terms of dealing with bad debt, so that companies will work to support those people who are struggling to pay in all sorts of ways, such as meeting them part way on writing off historic debt and so on. There is a number of techniques that companies can use to help people who are struggling. Social tariffs are one of those and I am pleased to see companies now  coming forward. In answer to your question, the approach that you suggest is not one that I propose to take as part of the Bill.

Q 190

Obviously, I was going to ask that question, in exactly the same words as Mr Docherty. It was mentioned that nine companies apart from the three had already made moves to introduce an affordability scheme and work was under way. Could you update us on that? Obviously, it is a big improvement.

Dan Rogerson: It is, and we are seeing more information now coming out from the companies about their initial discussions with Ofwat about the pricing structure that they want. Ofwat will then obviously play a role in that and in what the shape of social tariffs will be, just to ensure that they are right for the customers in that area where they are delivering. That it is something I welcome and we are seeing some movement from companies, which I hope will continue to gather pace. The signs are that it is, but it is something we will have to keep an eye on.

Q 191

Before—and indeed after—the Bill was published, a lot of people said that upstream reform without abstraction reform was a recipe for disaster. The Government have made a lot of changes and have suggested quite a few new clauses. Are you confident that your naysayers are wrong?

Dan Rogerson: Getting abstraction reform right is something that we all want—well, I am putting words in the mouth of everyone on the Committee, but I am assuming that everyone wants to get there—which is why we must ensure that we get the consultation, which the Department will hopefully publish relatively shortly, and get the reform right. The upstream reform provisions will not happen overnight, both in terms of people’s confidence that this is something in which they want to engage as the market opens up, and in terms of how the regulation will deliver that and at what point the regulatory framework comes in.

The alarming disconnect between abstraction reform and upstream reform that some have described is not as stark as that: in fact, the two processes can move alongside each other. Equally, it would have been wrong to rush doing something on abstraction reform and get it wrong, because we want to be fair to the current abstraction licence holders. It is absolutely pressing that we deal with the environmental issues that we heard about from previous witnesses. We must also ensure that we have the capacity for future water users by delivering the growth that we want in the economy.

We want to balance all those pressures. It would not be right to have rushed it and got it wrong. We need to ensure that we get it right. That is what our consultation will seek to do to ensure that we take everybody with us and come up with a solution that works. It will be quite exciting to deliver what we want to achieve.

Q 192

May I ask the same question of the officials?

Gabrielle Edwards: There was never any suggestion that upstream reform was going to come into force against a background where there was no regulation to deal with any impacts, because there is a process for regulating abstractions and for dealing with unsustainable abstraction. Earlier, Trevor Bishop was talking about how that operated.

In response to the questions about whether there were any gaps in the system, we looked quite hard at that and how the system would work and we talked to Ofwat and to the Environment Agency. As a result, we have suggested some relatively small amendments that will make the system a bit more bomb-proof and will also ensure that the consultations between Ofwat and the Environment Agency really do take place in order to minimise the risk of damage. Of particular importance is the fact that Ofwat will now have to consult the Environment Agency before it issues a licence, and the Environment Agency will obviously have to check whether there would be any impact on abstraction from that catchment.

Q 193

Will it consult and listen?

Gabrielle Edwards: I think that, by definition, consulting assumes listening.

Q 194

So that is a no.

Gabrielle Edwards: Of course, if they consult, they have to take account of what has been said.

Dan Rogerson: What we heard through you, Mrs Riordan, about the compensation and the changes in the Bill is an example of how the Government have listened to some of the concerns out there, which is something that we can do now as we proceed with the major consultation on how we reform the whole system of abstraction for the future.

Q 195

There was a divergence of opinion between the CEO of Ofwat and one of the other witnesses on clause 22. How does the Minister see it working, particularly in terms of the sustainability and resilience duties on Ofwat?

Dan Rogerson: We have heard from the witnesses and I do not want to put words in their mouths, but I think Ofwat is focused on affordability and ensuring that the market functions effectively and delivers the investment that we want to see. We have seen huge investment in infrastructure and want that to continue. We also want the price to be affordable and fair for customers. Understandably, it has some concerns about duties being placed upon it over and above that. We think, however, that the resilience duty is crucial for the reasons we heard from other witnesses about the need to prepare for changes. Whether those be demographic, climatic or industrial demand, in whatever we do we need to be ready. We need to ensure that we get that resilience duty right.

We can take into account that a lot of the concerns are about sustainability—abstraction reform is one example—and how we manage our finite water resource so that we deliver things effectively and efficiently. In short, it is about having adequate resource there to meet all societal needs while protecting the environment, too. What I take away from today’s evidence sessions is how we can get that resilience duty to the point where we are delivering all of those goods. That is something that would be very beneficial.

We will put more people’s minds at rest if we plan for the long term. One criticism has been about price review period to price review period. We want to get away from that and ensure that we are looking at long-term investments.

Four Members still wish to ask questions and I want to call them all. If the Committee is content, I will use my power under Standing Order No. 83C to allow the sitting to continue for a further 15 minutes beyond the time specified in the programme order.

Q 196

When do the Government intend to table the insurance clauses? Will an updated impact assessment be published at the same time? Will they provide the flood insurance clauses in sufficient time to allow us to scrutinise them?

Dan Rogerson: They are out now. Mr Parish, the astute reader that he is, can rush to get copies of them.

Q 197

Are they hot off the press?

Dan Rogerson: No, they have been published for a while.

Mr Docherty has quite rightly been pressing me on this on the Floor of the House, and it is absolutely right that the Committee has them as early as possible. For the reasons we heard about earlier regarding discussions with the industry, we have to ensure that we get through all the questions, and one or two issues still remain. There will be opportunities for the Government, with the permission of the House and the Committee, to come back and ensure that we get all the points right as we move through the process.

Q 198

What about the impact assessments—are they all there?

Dan Rogerson: The impact assessments are there. I had a request from Mr Docherty for explanatory notes setting out what each new clause and amendment will do, which is understandable. That is something that the Government have undertaken to do with everything from January. We do not have to do that, but we are keen to provide it, and we will get it to the Committee as soon as we can to help Members. Fortunately, Mrs Riordan, with your and Mr Gray’s permission, we will probably reach the flooding clauses later on in the process, but that is not to say that we will not get to them as soon as possible.

On a point of order, Mrs Riordan. I am sure the Minister did not mean to mislead the Committee, but I have just checked the documents and the impact assessment is not there. I am sure that the Minister will want his officials to provide it.

Dan Rogerson: I will seek some clarification on Mr Docherty’s helpful point.

Dan Osgood: I believe that the impact assessment is on the DEFRA website.

Printed copies would be a courtesy.

Dan Rogerson: Absolutely. The material provided here on the day is a matter for the Scrutiny Unit that supports these Committee sittings, rather than us. We published the impact assessment and we can certainly circulate printed copies, as we have done with the other information that we sent out.

Q 199

Finally, do you believe that we will have time for scrutiny?

Dan Rogerson: Yes. We have published draft clauses before. Some of them changed, but some are substantially the same, so there has been an opportunity to discuss those. The nature of the negotiations and the timetable to which we are operating to deliver the scheme successfully  mean that we have to do things as we are able to, rather than perhaps as early as we would like, but that is the situation we are in.

Q 200

Going back to the issue of sustainability, it appears to me that Ofwat’s argument against having a first-order priority of sustainability is that it would mean environmental issues trumping everything else. However, as far as I am concerned, sustainability is about getting a balance between economic, social and environmental issues. That lies at the heart of what Ofwat is about, so I am very unsure why people are resisting what seems to be a very common-sense approach.

Dan Rogerson: I think Mr Williams is quite right that people’s understanding of sustainable development can be all-encompassing; sometimes it is more narrowly focused. I would say the same about the resilience duty. The message of resilience that we are sending out is important, because it suggests that we need to be ready for something coming down the track—perhaps with a sense of urgency. That is why I think that the resilience duty achieves a lot of the things that we want to do.

I was interested when the witness from the chartered institution said that he was happy that resilience could cover it and he only wanted to be reassured that we were saying that environmental resilience is also included. I do not think that we need to hang everything on the fact that we are imposing a sustainable development duty on Ofwat and then think that will solve all the problems. Again, as we heard from the NGOs through Blueprint, we need systematically to work through the issues on the ground and deal with them. We need a willingness to do that.

That is very much what we are doing with abstraction reform and so on. We are not just tacking on a duty, and we must be careful about saying that that is the ultimate solution. I am not completely opposed to exploring these issues, but resilience is an important part of where we want to go. I am concerned that if we go for sustainable development as a new duty, we will undermine what we are trying to do on resilience, including environmental resilience.

Q 201

As the Minister is probably aware, the water industry is getting something of a reputation for clever financial engineering. Again, that is not a party political point, because in the debate that took place two or three weeks ago, the financial shenanigans got a lot of stick from Members on both sides of the House. I am looking at a report saying that Thames Water announced last week that it does not intend to pay any corporation tax for the next decade. Do you think that that might be addressed in some way in the Bill, or that it could have been addressed in the Bill?

Dan Rogerson: The issue of corporation tax is very much without the role of DEFRA, as well as outside what this Bill seeks to cover. We are trespassing on the territory of the Treasury and HMRC. The key point is that the ability to defer corporation tax—not never to pay it, but to defer it as a recognition that money is reinvested into infrastructure or whatever—is common in other industries. However, I accept that there have been arrangements that have given cause for concern. Various organisations have written reports on this, and a number of hon. Members have raised the issue, as have Members of another place.

That is why I am very pleased that the message being sent out by Jonson Cox, the chair of Ofwat, and others is that they want companies to be very transparent. It is not just about price; it is also about what they are doing to report back. I am pleased that we see the regulator taking that side of it much more seriously than was the case in the past. Customers want to know that their bills are for the provision of a service and to cover investment. They do not want to see money disappearing into complicated arrangements elsewhere, so I am pleased that the regulator is taking a robust role on that.

Q 202

In the brief time I have had since my last exchange with the Minister, I have visited the DEFRA website. Guess what?

Dan Rogerson: You are having difficulty finding it.

All it does is refer us to the parliamentary website. Having clicked on the link to the parliamentary website, guess what?

Dan Rogerson: All I can do in that case is to apologise to you, Mr Docherty, and the Committee. I will ensure that we furnish members of the Committee with that information, as well as interested observers. It should be there and I apologise if it is not.

Q 203

May I follow up Mr Cryer’s point very briefly? It was fascinating to hear some people saying that the ideal would be for water companies simply to go along below the radar—I am sure that is what they want to do. There is a shared agenda that that is not how they should operate. Do you accept the argument about greater transparency and that too many water companies appear to use vehicles, if I can call them that, in the Cayman Islands and elsewhere to manage their financial affairs? Do the Government accept that, to the public, that is simply unacceptable—

Order. Will Members address their questions to the correct Minister?

Does the Minister welcome the amendment that would require DEFRA to publish reports about the transparency arrangements of water companies?

Dan Rogerson: My preferred approach is to support the regulator in setting a robust challenge to companies to ensure that their reporting of information and the way in which they operate are effective and in accordance with good practice. Ofwat is now sending out a much stronger message than what we heard in the past, which I welcome. It is the role of Government to say that we want an industry that is transparent and that delivers investment, environmental quality and affordability. I am confident that Ofwat is pursuing that agenda, too. This is not just about how the market functions, which it might have focused on a bit more in the past, but increasingly about issues such as customer service, and about seeing good water companies. That is the sign to me of a good regulator that is offering a strong challenge to the industry.

If there are no further questions to witnesses, that brings us to the end of our business in this sitting.

Ordered, That further consideration be now adjourned—(John Penrose.)

Adjourned till Thursday 5 December at One o’clock.

 Written evidence reported to the House

WB 01 National Flood Forum

WB 02 British Insurance Brokers' Association

WB 03 RSPB

WB 04 The Chartered Institution of Water and Environmental Management

WB 05 Association of British Insurers (ABI)

WB 06 Sustainability First