My Lords, my noble friend Lord Selborne has tabled Amendments 30 and 37, which would amend provisions in Schedules 2 and 4 allowing Ofwat to produce the charging rules that enable licensees to apply for discounts, where the licensee, its customer or anyone else, takes action to reduce pressure on water or sewerage networks. These amendments would restrict such discounts to situations where the incumbent water company’s costs are also reduced.
I agree with the sentiment behind the two amendments, but let me explain why they are not necessary. Ofwat’s powers to make rules on discounts are wide-ranging and can take into account impacts on an incumbent’s costs. They must also be consistent with ministerial guidance. It goes without saying that a discount should not result in an increase in costs for the incumbent or its customers. The sorts of things that we are looking for are agreements where customers commit to take positive actions, such as investing in water recycling facilities or agreeing not to take water during peak periods or during a drought. It might also involve a discount in wholesale charges, where a customer or licensee agrees to invest in an upgrade of a network where the incumbent is also making an investment. But my strong concern is that making a reduction in an incumbent’s costs a condition of such discounts protects the competitive position of the incumbent and risks stifling innovation in the sector if a proposal
results in a one-off increase in an incumbent’s costs or if a small investment is needed by the incumbent to help the licensee.
I note that the amendment is similar to a provision in Scottish legislation, which also allows licensees to apply for discounts against charges made by Scottish Water. As far as I can determine, no details have been published of any discounts being applied in Scotland, and I do not wish to place such constraints on the system in England. I am confident that ministerial charging guidance and Ofwat’s charging rules can address issues relating to an increase in incumbent’s costs and what may or may not be passed on to other customers not benefiting from a discount.
Amendments 59 and 60 would prevent an incumbent making any charges within its area based on a location of premises. I know that my noble friend seeks to address issues relating to de-averaging, which we have just debated, but these two amendments could result in a significant impact on charges for all customers across England and Wales. It is sometimes necessary for an incumbent to set different charges within its area of appointment, particularly when it is merged with another incumbent. It may be necessary to maintain separate charges for different parts of a merged incumbent’s areas, even after the merger is complete. For example, Affinity Water provides services in three different parts of the country. The charges are different in each of those three areas to reflect the local costs of supplying water.
We are hoping to stimulate more merger activity through Clause 14—for example, to take advantage of economies of scale for the benefit of customers, who could lose out if the merged incumbent had to average its charges across a merged area. There will be winners and losers, but it will mean that the true costs of providing water and sewerage services may no longer be reflected in customers’ charges. Ofwat and the Secretary of State share a statutory duty to protect the interests of customers. The Water Industry Act 1991 provides that this duty should be discharged when appropriate by promoting effective competition. The Government are clear that the purpose of introducing competition into this sector must be to benefit consumers.
I know that noble Lords will be concerned about the potential for impact on rural and vulnerable customers. The noble Lord, Lord Cameron, referred to that. I share those concerns, and I know that noble Lords will be concerned about household customers who cannot switch suppliers. The Secretary of State, Ofwat and the Consumer Council for Water all have specific duties to have regard to the interests of rural customers and those who are unable to switch their suppliers, such as household customers. These duties are already clearly reflected in the charging principles which we have produced to inform these debates and will flow through directly into our charging guidance and Ofwat’s charging rules.
My noble friend referred to discounts for direct debits. To be clear, the discounts covered by the Bill are not discounts offered by incumbents, such as direct debit discounts for charging payment methods, but discounts for novel or innovative proposals which help all customers.
My noble friend was also concerned that charging rules could be different for different localities. This will allow Ofwat to provide extra protection—for example, for rural customers—as supported by its duty to have particular regard to certain classes of customers, such as, indeed, rural customers. Given these comments, I hope that my noble friend will be prepared to withdraw the amendment.
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