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Lord Dixon-Smith: My Lords, in supporting my noble friend on the amendments, I again refer to the debates on them in Grand Committee. The Minister was very clear that it would be explicit that water licensees would share the expenses. His response specifically was:

He went on to point out that:

    "In one sense, Clause 36 provides a transitional power to allow undertakers' existing conditions of employment to be modified".—[Official Report, 3/4/03; col. GC 197.]

Our point is that it should be mandatory for the licensed water suppliers to pay their fair share of the costs of regulating the water industry.

Lord Whitty: My Lords, Amendments Nos. 46 and 48, which are in the name of the noble Baroness, Lady O'Cathain, are intended to tie the fees paid by each undertaker to each year's price limit in the periodic review. I understand that she wishes to be assured that regulatory bodies should not become a financial burden on the companies that they regulate, but the safeguards to prevent that are already in place. Undertakers' conditions of appointment already contain a cap on the level of fees payable, and Ofwat currently levies less than it is entitled to.

As regards the consumer council, paragraph 10 of Schedule 2 gives the Secretary of State the power to decide how much money the council needs to run its operations. The Secretary of State therefore has the power to prevent the consumer council from going mad, as the noble Baroness said and then withdrew the remark. We therefore rely on—it is certainly in the interests of the Government to ensure it—the consumer council to be a cost-effective body and not one that runs away with the industry's money.

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5.15 p.m.

Baroness O'Cathain: My Lords, would that mean that the water companies could liaise with the Secretary of State and have discussions about the costs of the council? If they felt that the council's plans were going into the stratosphere and were far too expensive, and that the costs of running the council were far too expensive and bearing down on them, could they have an appeal to the Secretary of State?

Lord Whitty: My Lords, the noble Baroness mentions a formal appeal. I am not sure that that is provided in legislation. It certainly must be the case that the water companies would have the right to say to the Secretary of State, "Look, this consumer council is behaving extremely irresponsibly with money that it raises from us. Can you do something about it?", and the Secretary of State would have the power to do something about it. The problem with the amendment is that it limits the inflation of the costs to the fees in any given year, whereas the Secretary of State would take a view over a number of years and over the general strategy of the consumer council, rather than linking it to the regulated price.

The amendment has the potential to have a perverse effect, as in one sense it would give Ofwat an incentive to allow a higher price rise if it felt that that was the only way to escalate its own costs. That is probably a remote possibility. Nevertheless, one has to bear it in mind if too mechanistic a relationship is made between the price rise and the cost of the council.

Amendments Nos. 47 and 49 are designed to ensure that water licensees share the expenses of the consumer council. We would certainly expect them to do so. Schedule 4, to which the noble Lord referred, would allow a licence to require that such payments shall be made. He wishes to make that mandatory, which relates to that schedule rather than to Clause 36. The clause is a transitional power. Its purpose is to enable the regulator to change undertakers' conditions of appointment so that they would continue to pay for the consumer council, which will be set up in April 2005.

We would not expect the regulator to grant licences to new suppliers until after April 2005 anyway, so the transitional power will not be needed for licensees. Instead, the power beyond that point in Schedule 4 would be the appropriate one. Although I would resist the amendments to that schedule, it is probably where any discussion of mandatory provisions rather than those on power for a licence to require should appropriately be discussed.

Baroness O'Cathain: My Lords, I cannot say that I am ecstatic about the Minister's response, but he does not expect me to be. Would it be feasible for him to have another look at the matter? There is some merit in making a cap related to the price increase.

My experience of a lot of industries—not water companies, I hasten to add—is that if one gives a marketing body or department a free rein, the money goes so rapidly that one cannot understand where it has gone to. The consumer councils are a little like

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marketing bodies. They are full of people who want to do research and ensure that they get the best possible information. In some cases, they overdo it. I fear a situation in which the water companies will be placed under severe financial constraints if there is no cap related to the price. I beg leave to withdraw the amendment, but in doing so I ask the Minister to reconsider it.

Amendment, by leave, withdrawn.

[Amendments Nos. 47 to 49 not moved.]

Clause 38 [Objectives and duties under WIA]:

Baroness Byford moved Amendment No. 50:

    Page 43, line 8, at end insert—

"( ) any interests of consumers in relation to the possible effects of effective competition over an extended period of up to twelve years,"

The noble Baroness said: My Lords, in moving this amendment, I shall speak also to my Amendment No. 51 and to Amendment No. 53. The Government have tabled two amendments on this matter, Amendments Nos. 52 and 55. I am grateful to the Minister for coming back with amendments which I believe have to some extent met some of our concerns.

I shall speak to Amendment No. 50 first. In the run-up to the Bill, we received information and opinions from a variety of sources. It has been extremely difficult to determine what a licensed water supplier will be, how big, how competitive and how effective. Nevertheless, it seems fairly obvious that, by taking away the 2,000 largest customers from the water undertakers, there is a strong possibility that the latter will be less profitable. If that is so, there is also a possibility that it may be necessary for prices to the remaining customers to rise in order to protect water supplies. The regulator would have little room for manoeuvre and the 2,000 industrial and commercial customers would benefit at the expense of everyone else—a point about which I believe all noble Lords would be concerned.

A further aspect concerns us. The figures for rainfall, county by county, used in an article in the Daily Telegraph gardening supplement at the end of May make it clear that sizeable areas of England are short of water. In several cases those areas are also under huge development pressure. As matters stand, new water supplies, whether piped or delivered by some other means, will be charged for across all users.

If the largest customers are supplied even more cheaply than now, from another source than of now, they will not be available to pay a share of the new supply charges from the water undertakers. This must surely result in higher charges than would otherwise be the case for the rest.

Amendment No. 51 was debated in Committee. The noble Baroness, Lady Farrington, replied for the Government and explained that if it were to be accepted the effect would be to remove the ban on licensed water suppliers operating in the same area as an associated water undertaker. Apparently, this would be anti-competitive in that the water undertaker might,

    "find ways of encouraging customers to transfer to its associates in order to remove them from their regulated activities and the price control mechanism".

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On reflection, we find this an astounding statement and one which needs to be explored more thoroughly. Water undertakers will, apparently, be allowed to form subsidiaries which may apply for and be granted a licence to supply water, but only in another water undertaker's area.

Only the largest of 2,000 or so customers will qualify for transfer to a licensed water supplier. They are, however, apparently so naive that the effect of allowing an associated water supplier to operate in the same area as its parent water undertaker will be to encourage the undertaker to use means to persuade them to transfer. It would seem that the Government are acting more out of animus against the water undertakers than out of a true desire to open up the water industry to competition. At this point, the noble Baroness, Lady Farrington, said:

    "This could be done only at the expense of the customers remaining with the regulated business".—[Official Report, 8/4/03; col. 13.]

From this short exchange it would appear that the introduction of licensed water suppliers will indeed be bad news for those customers, including domestic consumers, who will not be eligible to move from a water undertaker to a licensed water supplier. I am sure that this is not what is intended and I should be glad if the Minister would clarify the position and explain in different terms why a licensed water supplier may not operate in the same area as its parent or associated water undertaker.

I turn to Amendment No. 53, which I moved in Grand Committee. Subsequently, the Government have kindly come up with Amendment No. 52 which, on reflection, I believe deals with the concerns expressed in our amendment. Therefore, I shall not set out in detail the reasons why we promoted Amendment No. 53.

In moving Amendment No. 50, I have spoken to Amendment No. 51 and I commend our Amendment No. 53, which I believe we shall withdraw in the light of Amendment No. 52 tabled by the noble Lord, Lord Whitty. I beg to move.

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