Lords amendment: No. 1, in page 3, line 47, at end insert—
(4A) Subsection (6) of section 12 of the 1973 Act (right of statutory water company to reasonable return) shall apply in relation to the giving by the Secretary of State of a direction under subsection (4) above to a statutory water company as it applies to the settlement or variation of arrangements under that section.
I beg to move, That this House doth agree with the Lords in the said amendment.
The amendment is designed to make it clear that the Secretary of State's power of direction under clause 3(4) does not prejudice the ability of statutory water companies to provide a reasonable return on capital, so long as they remain under their present financial framework. Clause 3(4), as drafted, requires water undertakers to comply with directions from the Secretary of State about the matters by reference to which their charges are fixed and the methods and principles to be adopted in calculating and imposing the charge.
During their discussions with my Department about the need for this reserve provision, the Water Companies Association pointed out that similar protection is already available to statutory water companies in section 12(6) of the Water Act 1973. That provision was inserted in the 1973 Act at the WCA's request, because of similar fears that the Secretary of State might settle or vary arrangements between water authorities and water companies which would affect their ability to provide a reasonable return on capital to their stock holders. Section 12(6) was in turn derived from the proviso to section 40(1) of the Water Act 1945. It also pointed out that, because investors have got used to seeing references to section 12(6) in the prospectuses of water companies, they will be looking for similar protection, and to have similar wording in this case.
I commend this technical but important amendment to the House.
We agree with the amendment. It is a technical matter, but, as the Minister said, it is eminently sensible that the water companies should have the protection they are seeking. The Lords amendment clarified the position exactly.
I should like to ask the Minister one question so that his answer is on the record. It is the only thing about which we are concerned. Will he define for us what is meant by a "reasonable" return on capital? I understand that discussions on that matter have been taking place between the Government and the Water Companies Association. I have a copy of a letter from the association, signed by the director, Michael Swallow, saying that the association requested this amendment. We are happy that discussions have taken place, but would like to know what a reasonable return on capital means.
There have been lengthy debates on the Floor of the House and in Committee about the precise definition of "reasonable". There is a statutory restriction on the dividends of water companies. So anything below a statutory restriction—if it is imposed—would be deemed reasonable. That point was debated extensively in Committee and in the context of the 1973 Act, which gave no definition of "reasonable" It was left to common sense. The advantage here is the statutory restriction on the dividends of water companies, and a reasonable return on capital would be anything beneath that ceiling.