Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of witnesses (Questions 480-499)

TUESDAY 13 FEBRUARY 2001

THE RT HON MICHAEL MEACHER MP AND MR ALAN DAVIS

Mrs Ellman

  480. Why do you propose to weaken the voice of the consumer in the region in relation to regional issues?
  (Mr Meacher) I was not aware that we were. It was certainly not the intention. Why do you ask that?

  481. Because in the draft proposals you are replacing statutory regional committees—even though there were question marks against them, they were there—and there is no explicit requirement to set up regional committees. In the Bill, there is a possibility it can be done but there is no requirement.
  (Mr Meacher) We are strengthening the Consumer Council by making it more independent, by freeing it of allegations in the past that it was too much under the influence of the Regulator. It will be again for them, as an independent sovereign body, to decide how they seek regional representation. Because there are ten major water companies, it is very important that there should in my view be some regional representation, but it is a matter for them.

  482. Do you not consider there is a need for regional representation in its own right, not only as an adjunct of a national body?
  (Mr Meacher) My view is that there should be a regional representation. What you are asking me is whether we should lay it down in the Act that there shall be.

Mrs Dunwoody

  483. A little phrase here and there would not hurt, would it?
  (Mr Meacher) Let me consider that. I certainly believe that there should be regional representation. If there is some dubiety about this, it might well be better to write it into the legislation. Let me give further thought to that.

Mrs Ellman

  484. Would you also consider a role for the regional chambers and regional assemblies in relation to representation of regional water companies in the region itself?
  (Mr Meacher) I would expect that to be via the independent Consumer Councils. I do not think we can proliferate the number of bodies that have responsibility in respect of the water industry. I would expect that those interests be represented on the Consumer Council.

  485. Would you consider the importance of regional representation within the region as well as regional representation on a national body?
  (Mr Meacher) I am sorry; I have not followed.

  486. Would you consider the importance of having regional representation within the regions, not only regional representation on a national body? There are issues affecting consumers which are of relevance within the region in which they live.
  (Mr Meacher) You mean you are proposing a more localised form of representation within the region?

  487. Yes. I am asking that, within this change, you do not do away with the regional structure. There is a regional structure now and I am asking that within the new arrangements you ensure that the regional structure does not disappear.
  (Mr Meacher) That seems to me to be much the same question as you were asking a moment ago. There is not a requirement within the draft Bill that there should be a regional representation.

Mrs Dunwoody

  488. But you are going to go away and think about it?
  (Mr Meacher) Yes. I take the view that there should be. I do not think one can lower it to the level of localised representation within the region. If we have regional representation, those localised interests as well as stakeholder interests ought to be represented on those bodies. That is sufficient to represent the consumer interest in those regions.

Mr Brake

  489. Could we dwell briefly on some of the lacunae as identified by Dr Helm? Perhaps you would like to comment on his assertion that in his view the issue of proper utility regulation competition, sustainable development and climate change agenda and, very importantly, the new restructuring proposals within the industry are not adequately addressed in the Bill, none of those four.
  (Mr Meacher) First of all with regard to sustainable development, should the Director General of Ofwat have to have regard to sustainable development? This is arguable and I personally take the view that that would be desirable. It would bring Ofwat in line with the other utility regulators. It would ensure that Ofwat takes account of sustainable development with regard to long life asset maintenance. It would ensure that Ofwat and the Environment Agency shared a common objective, joined up regulation. It would balance the duty to promote the customer interest with sustainable development but with the downside that it could complicate or confuse the clarity of the regulatory role. On balance, my judgment is that he should be required to have regard to sustainable development.

  Mr Brake: That is your view. Is that the government's view?

Mrs Dunwoody

  490. You are still the Minister, are you not? You were when you came in.
  (Mr Meacher) No one told me otherwise and I intend to carry on with that presumption. This is an issue which is being discussed within government at the present time. I know the Director General, Philip Fletcher, has given his views on this which are probably fairly similar. When it comes to the Bill that is going to be introduced—and there are a number of omissions, I entirely agree—this is a matter which does have to be clarified. In my view, as Minister responsible for water, having to take account of Ofwat and of other relevant departments, DTI and Treasury in particular, he should take account of sustainable development.

Mr Brake

  491. Will you be able to swing it or not?
  (Mr Meacher) I believe that the government's overall commitment to sustainable development from the Prime Minister downwards, even if there were some resistance which I do not think there will be, would make it extremely difficult to suggest that the Regulator should not have to take account of sustainable development. We are requiring all government departments in all of their planning to take account of sustainable development. There seems no reason whatever to make an exception here, but we do need to make it explicit, I agree. Secondly, competition. Competition has been deliberately omitted because we are consulting. We issued a consultation paper earlier this year. Since the paper was published, we have had a number of proposals for restructuring. The Committee will know that following Kelda and the rejection of that by the previous regulator earlier last year there has been a proposal in respect of Welsh Water or Hyder, which has now been taken over by WPD, for there to be restructuring. We discussed this and examined it with great care. In the end, it is a matter for the director general of Ofwat. He has given his view on this, which I think is a very balanced view. There are issues about the separation of assets from operations. There are issues as to whether the debt financing model provides adequate incentive for management to promote efficiency compared to the equity model. There is also the question whether there is sufficient incentive to justify it from the point of view of the consumer, because the gains are something of the order of two or three per cent over three or five years and might benefit the consumer by something of the order of five or six pounds a year if the fund which is built up to deal with liabilities does not have to be used for major problems in the meantime. Against a reduction in the periodic review of average consumer charges of something like £30 a year, these are the issues which were considered. What is most important is that the Regulator made clear that, whilst he was prepared to agree in this case, there were special considerations. First of all, WPD, the owners, wished to diversify out of water. Secondly, the political authorities—in this case the National Assembly for Wales—were extremely keen on this. That would not necessarily be the case with political authorities elsewhere. Thirdly, there was the discount on the price as a regulated company of something of the order of six or seven per cent. Those considerations, he pointed out, would not necessarily apply elsewhere. We are taking account of this particular case and what proposals the industry may subsequently come forward with in finalising our competitions proposals. That is why they are not in the Bill at the present time.

  492. Is it possible that when eventually the Bill comes forward it will include no competition measures at all and those will be tackled separately at a later date?
  (Mr Meacher) It is always risky in Whitehall, I have learned, to make absolute predictions but I strongly believe that it will contain competition provisions.

Mrs Dunwoody

  493. It is a bit nonsensical to say, "We are doing this in relation to one water company but of course it is not a precedent", is it not?
  (Mr Meacher) I do not agree. I think it is reasonable to say that there were special conditions applying here which do not necessarily apply elsewhere. We should look at every application made on a case by case basis. If a very similar proposal came forward, it would not necessarily be treated in the same way by the Regulator for the fact that the three reasons he stated would not necessarily apply in other cases.

  494. My experience of government is that, when two apparently similar companies with very similar remits operating in the same industry are faced with what they regard as similar circumstances and the government divines differently between the two, that is not a recipe for happiness.
  (Mr Meacher) It may not be a recipe for happiness but it may be a justifiable position to take which would withstand legal challenge and I believe that the Regulator, who very carefully crafted his response, is in a position to justify that.

Mr Cummings

  495. Minister, section four I understand allows you to issue guidance to the director general on how to achieve social objectives but does not require you to do so. Could you give the Committee the reasons why?
  (Mr Meacher) We believe that part of the consideration which the Regulator should take into account at the time of the quinquennial periodic review should not only be the economic situation in the light of the previous quinquennial period and the upcoming one, but also take account of social and environmental factors. We believe that it should be in the form of advice and guidance rather than direction because it is for him ultimately to make the judgment that he has to make at the periodic review of what is the appropriate price level for the succeeding period, what is the pattern of prices over the next five years, taking account of social and environmental concerns. To dictate to him exactly how he should make that judgment would be to diminish the proper role he has to take account of all of these factors. I am doubtful about how far government should excessively prescribe how others who we set up with confidence and in whom we have faith should make their judgments.

  496. Is it not the case that we are not talking about the director general setting parameters but insisting that the water companies take on board certain responsibilities. For instance, since the consultation period early last year, the water companies have come up with their own suggestions on how to tackle particular problems which were plainly rejected by the director general and it just stands there. There has been no further movement.
  (Mr Meacher) I think you are referring to the rejection of the Kelda proposals by Yorkshire Water but, in the light of that rejection by the then

  director general, there have been further discussions in the industry and the latest proposals in respect of Welsh Water or Hyder have sought to meet the strictures that he laid down. It can be argued to a degree that they do.

  497. What would your reaction be if the director general, because he is not required to do this, just did not do it, towards meeting various social objectives?
  (Mr Meacher) This is guidance to the director general to take account of social and environmental concerns. What, you are saying, if the government believe that he had recklessly disregarded proper social and environmental concerns in the case of making his judgments and had exclusively looked at economic matters and efficiency? That is a matter that we would strongly raise with him. I do not believe for one moment that this is going to happen, not least because of my knowledge of the current director general whom I had some part in appointing. I believe that he would be more than willing to take account of social and environmental concerns but to dictate exactly how he should do that and how those factors should influence a judgment in a particular consideration is a degree of dirigisme, a degree of interventionism, which I think is probably uncalled for. I do not believe there will be a problem but if there were I would expect to discuss the matter with him vigorously.

  498. That might be all well and good when you have a damned good director general but this Bill is going to be with us for many years and directors general are going to come and go.
  (Mr Meacher) I understand that. It is a matter of judgment, how far we put people into very senior, key positions, to use their expertise and judgment to make decisions, and then tell them exactly how they should do it. I think that is going too far. We should tell them what they should take account of in reaching those decisions and we should expect them to do it. If they fail to do it, we would certainly take the matter up with them. If there continued to be a major lacuna in terms of social and environmental concerns, we might have to change the legislation, but I would be unwilling at this point to be that directly intervening.

Mrs Dunwoody

  499. I do not think you need worry, Minister. No one is going to think of this government as being dirigiste. I want to bring you on to abstraction. How do you respond to the criticism that the abstraction proposals of the Bill could risk the long term security of public water supply?
  (Mr Meacher) I do not think they will because current abstraction licences are unaffected. They continue as they are at the moment, unless they have to be curtailed in the interests of protecting SSSIs or alleviating low river flows. With regard to new abstraction licences, it is proposed that they should be time limited to 12 years. We think that is a proper balance between investment—


 
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