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Lord Whitty: In allowing access to their networks and providing supplies of wholesale water, undertakers incur additional costs. They will need to recover those costs from the licensed water suppliers. This clause sets out the principles on which the charges that licensed water suppliers pay to undertakers will be based. Those charges will enable undertakers to recover the costs that the undertakers incur as a result of the licensee introducing water, including an amount for expenses they have incurred in relation to customers who switch to licensed suppliers.

However, it is necessary to deduct from those costs any savings that they may be able to make and any financial benefits that may accrue as a result of the licensee's involvement. The amendment seeks to remove the offset of those financial benefits, so they are not deducted from the costs. Financial benefits may, for example, include financial savings resulting from being able to defer or cancel future capital plans as a result of not directly supplying the customer who has switched to licensed suppliers.

The effect of the amendment would be to ensure that any such financial benefits were retained by the undertaker. Effectively, the undertaker would be over-charging the suppliers to the disadvantage of the customers. Of course, in not all circumstances will any financial benefits arise. This simply provides for the situation in which such financial benefits or savings arise and need to be taken into account and offset against the charges which the undertaker is making.

Lord Dixon-Smith: I shall need to study that with some care. I understand direct financial benefits, if there are any, and perhaps they should be taken off the charges. But the idea that charges should be taken off, to the benefit of being able to defer or even avoid future capital expenditure, is stretching the point. This is expenditure which has not yet happened and therefore could not be charged anyway.

Baroness Byford: I thank my noble friend for giving way. We are doing a duet here. Perhaps I may raise one point. The Minister said that the proposal would be to the disadvantage of consumers or customers. Equally, it would be to the disadvantage of customers of water undertakers, so it depends on which customer will be losing out. Unless I misunderstood what the Minister said, there will be a loss to somebody.

Lord Whitty: The total cost will be met one way or the other. There will not be any additional cost to the

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consumers as a whole. If it is right that the undertaker should be able to recover the costs of setting up a licensed supplier and charge that, it will eventually be charged to the customer. But if the undertaker is left just to charge the gross costs but does not deduct any benefit from those gross costs, the final expenditure is shifted to the wrong customer.

For example, when the competitive activity allows the incumbent water undertaker to defer or avoid investment as a result of the additional capacity created by eligible customers switching to a new supplier, such investment would otherwise have to be financed through higher prices to his direct customers. If that is not so, there is no reason why allowance for that should continue to be built into the charge to the licensed supplier; that is, it is an attempt to ensure that the net costs are passed through the system to the ultimate customer in the right place.

Lord Borrie: Perhaps I might intervene and I hope that my comments will be helpful rather than unhelpful. Whereas I understood the example given by the Minister about the water undertaker being able, in certain circumstances, to defer capital expenditure that it might otherwise have had to incur—customers are now being supplied by the other company—I am unsure that that is covered by these words. I do not see that the undertaker receives financial benefit simply because he has been able to defer or permanently bring to an end his plans for future capital expenditure. Is that really a financial benefit received?

Lord Dixon-Smith: I am grateful to the noble Lord, Lord Borrie, for explaining rather more clearly than I what is causing us concern. I understand that it might be of benefit if one supposes that the capital expenditure programme was so advanced that it had been taken into account in the pricing structure for the authority's water to its customers in the most recent assessment by what is now Ofwat and what will be the new body.

Because the price structure is reviewed regularly, I cannot believe that that situation would ever arise. On a number of occasions, we have discussed the length of lead-in time for major capital expenditure of any sort by a water undertaker. The authorities responsible for the pricing structure would not allow any accrual of income to the water undertaker until the expenditure had commenced. Therefore, to a certain extent, we are talking about a situation that will never arise.

12.30 p.m.

Lord Whitty: I think that the noble Lord and my noble friend Lord Borrie have both accepted the principle that financial benefit should be offset against cost. My noble friend Lord Borrie asks whether the wording of the Act actually covers the saving as well as a financial benefit received. It is intended to cover savings gained as well as positive financial benefit gained. Our advice is that the wording does cover that, although we shall look at that matter again.

As to whether it can be identified or not, clearly that will be a matter that Ofwat will need to look at and its guidance will need to cover. Clearly, there will be some

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situations where there will be some argument about whether it can be identified or not. But, surely, the principle is right.

Lord Dixon-Smith: I am grateful for that reply. If we are dealing with a principle—we may well be able to accept a principle—I think that the examples which we have been discussing are a little fictitious, if I may put it that way. We shall study what has been said. It has been an interesting discussion on another of the technical points. For now, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Duke of Montrose moved Amendment No. 168ZF:

    Page 161, line 16, leave out from beginning to end of line 29 on page 162.

The noble Duke said: On page 159, the Bill states that the authority may determine a case referred to it by a licensed water supplier. What is the point, two pages later, in making it mandatory for the authority to consult the Secretary of State before it makes that determination? Not only does this indicate considerable doubt about the ability of the authority to carry out its duty, but it also deprives the licensed water supplier of an appeal route. Furthermore, it lengthens the time necessary for a decision to be reached. In our view, it is unnecessary and bureaucratic. I beg to move.

Lord Whitty: This may be an issue about the way in which legislation is drafted. The reference to consulting the Secretary of State is required in order to obtain the opinion of the Drinking Water Inspectorate. The Secretary of State is directly responsible for the DWI and for drinking water quality. Therefore, in practice, this consultation would be with the DWI. That is an important safeguard in respect of the quality of water in the public supply system.

Where a dispute concerns a supply of wholesale water given by one undertaker for introduction into another undertaker's supply system, the authority is also required to consult the Environment Agency. That is to enable the agency to give its views on the advisability of transferring water between different systems. There is an existing requirement to consult the agency in case of a dispute.

The reference to the Secretary of State therefore is not pre-empting the appeals process but it provides a means whereby the Drinking Water Inspectorate could give a view.

The Duke of Montrose: I thank the Minister for his reply. I am not well enough up on the structure of legislation to know why that cannot be stated a little more clearly in the Bill. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Whitty moved Amendment No. 168A:

    Page 162, line 36, leave out first "supply" and insert "introduction"

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The noble Lord said: This is a formidable-looking group of amendments. I have communicated to those on the Opposition Front Benches the need for the amendments, which I hope will be acceptable. They are related to the competition provisions and are technical and consequential. I would like to draw three points to the attention of Members of the Committee. If there are any other queries, no doubt they will be raised.

Amendment No. 168F and the associated Amendments Nos. 168G to 168J augment the provisions in proposed new Section 66G by making provision for the authority to designate two or more introductions of water from a single supplier as a strategic supply. That better caters for situations where, for example, licensees develop several sources. Amendment No. 168M allows customers to sue an undertaker for consequential loss or damage, should the undertaker not comply with its duty to maintain a supply. Amendment No. 168N and the associated consequential amendments substitute the undertaker for the licensed water supplier as the body which detects incidents of damage to water fittings, contamination of water and waste. That better reflects the present position, which will continue under the competition arrangements, where undertakers detect incidents through their routine audits.

The remaining amendments are technical or consequential. I beg to move.

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