Water and Sewerage Undertakers (Exit from Non-household Retail Market) (Consequential Provision) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Water and Sewerage Undertakers (Exit from Non-household Retail Market) (Consequential Provision) Regulations 2021.

My Lords, the technical amendments in this instrument, which was laid before the House on 21 July, amend the Water Industry Act 1991 to reapply developer service duties to water and sewerage undertakers —generally known as water companies—operating in retail exit areas wholly or mainly in England.

As part of competition introduced into the water sector, a “retail exit area” is where a water company, such as Thames Water, has transferred its “retail”—business or non-household—customers, such as supermarkets, to a separate company or “retailer”. The retailer liaises with Thames Water for the water and sewerage services to be provided to the business customer and the retailer bills the business customer for the services and offers it advice on how to improve its use of water.

This market allows business customers to have all their water and sewerage services looked after by one retailer, saving them time and money in dealing with billing for these services. This was not possible when water companies dealt with business customers directly. The market also enables retailers to work directly with housing developers for their water and sewerage services, which they need when building new homes, as housing developers are of course also businesses.

To set up the developer services for retailers, we disapplied some water company duties through the Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016. These disapplications have had unintended consequences for developer services, which is why we are now seeking to reapply the duties and to set up developer services for retailers in a slightly different way. I should make it clear that all the amendments introduced by this instrument are therefore technical operability amendments and do not introduce any policy changes.

The Water Industry Act 1991 is the principal piece of legislation setting out the duties and functions of water companies in England and Wales. The retail market is a devolved matter and the 2016 regulations applied to English water companies only. The market opened in April 2017, but water companies did not all transfer business customers to retailers when the market opened. The last water company to transfer its business customers to a retailer was in 2019. The effects of the way in which the developer services market was set up were therefore not fully realised for a few years after market opening.

When setting up the market for developer services, Defra recognised that some developers might still wish to work with the water company for the housing developer services, for example. We envisaged that housing developers choosing this route would make their own contractual arrangements with the company. However, in subsequent discussions with Ofwat, the economic regulator of the water industry, and with the water industry itself, it emerged that contractual arrangements are not straightforward. They do not sufficiently replicate the water company duties within the 1991 Act that were disapplied and the unintended consequences include Ofwat no longer being able to determine complaints from a housing developer about the developer services provided, as well as water companies having restricted access to water and sewerage pipes to maintain them.

This statutory instrument is therefore needed to resolve those issues. It makes no changes to the water retail policy for developer services; it just enables us to refine our legislative approach for how we are delivering it. It reapplies developer services duties to water companies but with modifications to those original duties. That will enable water companies to provide developer services to housing developers without the need for separate contractual arrangements.

The SI addresses the unintended consequences, such as Ofwat being unable to determine complaints, but still enables retailers to continue to provide developer services if they wish to do so. We have also modified those duties, so that if a developer first approaches the retailer for the service and they choose to undertake it, the developer cannot then change its mind and ask the water company to provide the services directly to it instead.

My department is presently reviewing progress in the whole retail market through a post-implementation review of the 2016 retail exit regulations. Our post-implementation review will look at progress since the 2017 market opening in the round, and it will be completed in the new year.

Both the JCSI and the SLSC have formally considered this instrument and approved it. In line with published guidance, there is no need to conduct an impact assessment for the instrument; this is because no—or no significant—impact on the private or voluntary sector is foreseen, as the instrument relates to the maintenance of existing regulation. The territorial extent of the instrument is England and Wales. The territorial application of the instrument is England. I commend the draft regulations to the House.

My Lords, I thank my noble friend for talking us through the regulations today. I remember that, when the original legislation went through—rather than the regulations themselves—concern was expressed about what would happen if a retail company were to fail. I do not know whether that has been resolved in the existing regulations; as my noble friend has explained, it seems that these regulations apply to that very narrow area of a retailer providing services to housebuilders.

I want to take this opportunity to ask a question in that regard. My noble friend is aware of my passion for SUDS—sustainable drains. Where housing developers build major new developments, is it envisaged within the original regulations that SUDS could be applied as a condition of planning permission for the work being agreed?

The Explanatory Memorandum says that the instrument—I believe it is the second regulation—will

“reinstate the … duty on undertakers to provide connection services, on request, in retail exit areas”.

Is that deemed to be an automatic right to connect? Is there any leeway to ensure that we can actually insert a condition that SUDS must at that stage be envisaged? That could save any contribution to flooding down the line.

The Explanatory Memorandum says at paragraph 7.3:

“The main retail services provided to non-household customers through the retail market”,

as my noble friend said,

“are billing and administration services. However, with the opening of the market, it was designed so that retailers could also provide new water and sewerage connections services to business customers.”

My noble friend said that this was limited. Has it been so limited as to have never actually happened, or has it happened in literally only one or two cases? Paragraph 7.3 goes on to say:

My Lords, I thank the Minister for introducing this SI and for his comments. On the face of it, it seems like a straightforward change in the legislation to bring the retail sector into line with domestic housing arrangements following the changes made in the Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016. I note that this instrument relates only to England, but the extent of it is England and Wales where there are cross-border issues.

The water and sewerage industries were privatised in England and Wales in 1989. In 2014, reform of the Water Act enabled competition in the market. In 2016, the transfer of non-household retail business prevented the provision of retail service to new non-household customers that arose in its area. Given what we now know about the effects of supply and demand on water and sewerage systems, this would seem a sensible step.

Paragraph 7.4 of the Explanatory Memorandum enables

“developers to make new connection requests to their retailer.”

There is no mention in the Explanatory Memorandum, nor in the instrument itself, of whether there would be capacity for new development to be safely connected under the automatic right to connect, which the noble Baroness, Lady McIntosh of Pickering, has already mentioned.

The Minister will know that during the passage of the Environment Bill there were many debates about the effect of effluent being discharged into rivers, lakes and other watercourses and the extremely detrimental effect this has on both water quality and the wildlife that previously inhabited those areas. I ask the Minister whether the local relevant sewerage and water capacity will be part of the consideration when developers apply for connection for retail. The automatic right of developers to connect for housing developments has caused considerable problems, not only in effluent discharge, but has contributed to localised flooding during prolonged periods of rainfall.

My Lords, I thank the Minister for his introduction to this SI. I am sure he will be relieved to hear that we accept that it is broadly technical in nature and, as such, will not be opposing it. It deals with relatively small consequences of the reform of the water industry and the right of water companies to exit the non-household retail market in their sector. As the Minister has said, several unintended consequences have arisen from the new provisions and this SI deals with one such anomaly relating to new housing developments.

I have to say I was amused to read the Commons Minister Rebecca Pow stating when introducing this measure that it was underpinned by the Government’s commitment to

“strong, independent regulation that protects customers and the environment”—[Official Report, Commons, Delegated Legislation Committee, 22/9/21; col. 4.]

because, arguably, that is exactly what we do not have. This is why water companies such as Southern Water get away with regularly pouring sewage into our rivers and sea with no comeback from their customers or for their customers. But I accept that that is a slightly wider issue than the SI before us today.

The Minister in the Commons also argued that while water companies did not have to provide the water connection service for new development under the existing regime, they

“have stepped in to carry out the role even though, legally, it was not actually in their power. They did not have to do it, but out of the generosity of their hearts they have carried on doing it.”—[Official Report, Commons, 22/9/21; col. 6.]

This generosity is a whole new side of the water companies that many of us will be rather unfamiliar with, but I am interested in the consequences of changing the regulations in the way that is being proposed. As the noble Baronesses, Lady McIntosh and Lady Bakewell, have said, many of us have been concerned for some time with the expectation that water companies are obliged to connect new developments to existing water and sewerage systems, even when they know that the infrastructure does not have the capacity to carry this extra load.

Will water companies be able to operate with more discretion about which housing developments they provide connection services for under these new provisions? Would they be able to insist that the system must be underpinned by sustainable drainage systems before they connect them? In other words, what new flexibility and powers will the water companies have under these changes? Can the Minister also clarify whether there will be any additional costs when they are no longer acting out of the generosity of their hearts, and will those costs be passed on to the customer?