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Lord Livsey of Talgarth: My Lords, in general, we agree with the principle of the amendment. However, I should be grateful if in summing up the noble Baroness could explain subsection (9), which states:

Does that place the larger companies at an unfair advantage? If so, why does the mover of the amendment wish to create inequality of this kind? Is

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not there a case for treating all companies in an equal way, or is there some agenda here that has put subsection (9) into this? I merely seek information and an explanation which perhaps the noble Baroness will address when she has had a look at it.

Lord Whitty: My Lords, I still cannot accept the amendment. Clearly, the company should have an early opportunity to make representations to the regulator, and Ofwat should—and does—provide constructive occasions for such dialogue on the methodology for the periodic review. However, this amendment says that the authority must issue a statement of policy at an early stage in the periodic review, that that could be challenged, and that the Competition Commission could be brought in at that stage to determine whether that policy should be pursued. That could slow down the process, but it could also give additional powers to the company to upset the intentions of the regulator before any final determination is reached, and therefore before the company would suffer any detriment—at which point they can call in the Competition Commission.

The time restrictions implied by this measure would help make the process more static and inflexible, reducing the ability of the regulator to respond to changing circumstances. That is completely contrary to what the industy usually says about the regulator; namely, that it should operate much more flexibly.

I know that the noble Baroness denies this, but the amendment would enable undertakers to drop or at least delay the statement of policy, and shift the balance of power and influence between companies and consumers, because consumers have no equivalent rights to make an outside appeal at this point in the process. It would also, as the noble Lord, Lord Livsey, says, shift power from the smaller companies to the larger companies, in that the effectiveness of any such appeal-blocking mechanism with reference to the commission would be dependent on the market share. That does not seem to be an equitable treatment, even within the company.

This amendment therefore implies two shifts of power with which I am not prepared to go along. I regret that I continue to oppose the amendment.

Baroness O'Cathain: My Lords, I thank the noble Lord, Lord Livsey, and the Minister for his comments.

The process of doing the periodic review is extraordinarily, excruciatingly long and detailed. It takes an enormous amount of management time. The idea of this amendment is to halve the process; to do the methodology and have it fixed in stone. In the past, the methodology has been found to be faulty, and the next stage, at which prices are set, is then faulty as a result.

If the methodology is signed off, such a problem will not occur in future. The water companies want some certainty. They look back over their shoulders at what happened at the last periodic review. I thought that by putting a time-limited clause into the amendment it

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would help in that direction. They could not allow negotiations on the methodology to go on and on; there would have to be a cut-off point. We might review that to see whether the period specified is too much or too little.

There is no hidden agenda as regards subsection (9), but I will certainly consider the point about the balance of power between larger and smaller companies. I was convinced of the validity of this one. I am a member of a very small water company, and I saw that in the interests of the company that I knew, the amendment would remove much uncertainty and cut down on the puzzlement of those who, after Ofwat's price findings were given, scratched their heads and wondered whether they could question the methodology and what result another might have yielded. It would put a stop to all that questioning if they knew once and for all that the methodology was correct and had been agreed.

The amendment was in the interests of making the periodic review as efficient and effective as possible; to ensure that once the determination was given, there might be quibbles about price but there could be none about the methodology; to remove uncertainty; and above all, to recoup the management time that has been involved in all of this. It is difficult for people who are supposed to produce lots of clean, potable water and ensure consumer supply to spend so much management time on looking through the methodology ad nauseam. The amendment would have been a good counter to that.

I am disappointed by what the Minister said. I will probably come back to it at Third Reading, but in the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.16 p.m.

Baroness O'Cathain moved Amendment No. 61:

After Clause 39, insert the following new clause—

"LICENCE MODIFICATIONS In section 14 of the WIA, after subsection (1) there is inserted—

    "(1A) Where a company has requested the Authority to modify the conditions of its appointment and the Authority has not consented to making the modifications, the Authority shall make to the Competition Commission a reference which is so framed as to require the Competition Commission to investigate and report on the questions in subsection (1).

    (1B) Before making a reference under subsection (1) or (1A), the Authority shall give notice of the matters specified in the reference to the company to whose conditions of appointment the modification relates and shall take into account any representations or objections which are duly made and not withdrawn.

    (1C) Notice under subsection (1B) shall be in writing and shall specify a period of not less than 28 days from the date of receipt of the notice within which representations or objections with respect to the matters proposed to be specified in the reference may be made.""

The noble Baroness said: My Lords, this is a new clause on licence modifications. Its purpose is to enable a water company to appeal to the Competition Commission against a refusal by Ofwat to modify the terms of its instrument of appointment, namely its licence. At the moment, only Ofwat has the right to

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initiate alterations to licences. The amendment lends a more even-handed approach to the issue. I beg to move.

Lord Whitty: My Lords, the amendment would create an automatic appeal to the Competition Commission against any refusal to amend conditions of appointment if requested to do so by the undertaker holding an appointment.

The amendment would take no account of the issues in each case and would mean that relevant precedents would have to be ignored. It would not even allow the company concerned to withdraw its request, even if it agreed with the authority's decision. The amendment contains several rigidities and technical problems, in any case.

The amendment would require the authority to consult and take into account the views of the company concerned on the terms of reference of the referral. It does not give the same rights to any other stakeholders or consumer groups.

The amendment would also introduce a potentially bureaucratic appeal system which would unsettle the balance between the company and the regulator, and clearly disadvantage consumers. Therefore, I cannot accept the amendment.

Baroness Byford: My Lords, before the noble Lord sits down, could he explain to the House a little more about this amendment? Is he completely happy with the situation raised by my noble friend Lady O'Cathain as regards the Bill? Does he not feel that there should be a right of appeal?

Does the Minister purely find fault with the words of this amendment, or is there a closed door; namely, that he feels that undertakers or water suppliers have no right to appeal directly themselves?

Lord Whitty: My Lords, the amendment relates to an appeal when an authority has refused a request from a company to modify its conditions of appointment. In those circumstances I would not look for any system of appeal. This particular system has additional problems in terms of its rigidity. Nevertheless I am not persuaded that we would need an appeals system in those circumstances.

Baroness O'Cathain: My Lords, I thank my noble friend for asking for clarification, which we now have. I also thank the Minister. He more or less suggested that the amendment is fatally flawed. I was interested in what he had to say. Not being a shorthand writer I was not able to take down what he said, so I shall read what he said in Hansard tomorrow. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 40 [Standards of performance in relation to water supply]:

Baroness O'Cathain moved Amendment No. 62:

    Page 46, line 30, after "research" insert "and regulatory impact assessment"

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The noble Baroness said: My Lords, in moving Amendment No. 62 I shall speak also to Amendments Nos. 63, 64, 65, 66 and 67. They all relate to standards of performance and to Clauses 40 and 41.

The amendment places on the face of the Bill requirements to conduct a regulatory impact assessment in order to provide cost benefit analysis when standards of performance are set. Clauses 40 and 41 enable the Secretary of State to initiate regulations setting new or amended standards of performance in relation to water supply and sewerage services. The regulator can do so in order to pursue policy objectives relating to public health and the environment or otherwise, where the regulator considers such regulations to be in the public interest. The clauses also set out the process for making such regulations.

At the moment the Secretary of State can make regulations setting standards of performance only if the regulator receives an application from the Director General of Water Services. That is in the Water Industry Act 1991, Sections 38, 39 and 95.

Standards of performance are usually set by Ofwat. The main means are setting water quality programmes under the quinquennial periodic review process, the overall performance assessment and setting targets for water leakage. But the considerations that it must take into account are defined in statute. And the process, the financial (cost) calculations and timetable for the price reviews and its policies on security of supply, water quality and the environment that are available to the public are often subject to consultation. Otherwise standards of performance are set through European Union and UK legislation; for example, the EU Drinking Water Directive.

Ministers want a reserve power to regulate the industry if they consider it politically necessary and/or if the water regulator is too slow to develop solutions to particular issues that arise. So companies need to be protected from the risk of responding to short-term political pressures without proper consideration of the costs to customers. One such safeguard is to have some kind of assessment in financial terms about whether benefits to the customer or the environment outweigh the costs. A balance needs to be struck. I beg to move.

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