Clause 42 - Objectives and duties under WIA

Water Bill [Lords] – in a Public Bill Committee at 7:15 pm on 14 October 2003.

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Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs) 7:15, 14 October 2003

I beg to move amendment No. 76, in

clause 42, page 45, line 17, after 'capital', insert

'in line with market expectations'.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

With this it will be convenient to discuss amendment No. 93, in

clause 42, page 46, line 10, at end insert—

'(2F) In performing the duty under subsection (2A)(c) above, the Secretary of State or, as the case may be, the Authority shall—

(a) have regard to the arrangements entered into under section 55 of the Water Act 2000;

(b) have regard to the longterm interests of consumers;

(c) ensure that appointed companies are able to fund on reasonable terms all required investment programmes and the longterm maintenance of their assets;

(d) apply to all appointed companies all determinations and conclusions of the Competition Commission (including all methodologies adopted by the Commission) which relate to any such company.'.

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

Amendment No. 76 is extremely important and I am sorry that we have to debate it at such a late hour. It would ensure that what the Government regarded as a reasonable return on capital was in line with reality, because I have tied that in with the term ''market expectations''. That is a fairly general term. It may not be the most precise one, but it would ensure that the Secretary of State did not choose an arbitrary figure to suit budgetary pressure, but considered a figure in line with what companies might reasonably expect to raise on their capital if they had invested it in other markets. It is vital that the legislation takes into account proper returns on capital.

Amendment No. 93 would take things further. It would take performance into consideration and perhaps change the emphasis of the Bill slightly.

Hon. Members will recall from earlier debates that the time scale envisaged by Government is different from that on which water companies, and indeed quarrying and bottling companies normally base their capital projections. Both amendments would be extremely helpful in providing stability and a realistic business basis for anyone investing in water companies.

Photo of David Drew David Drew Labour/Co-operative, Stroud

I rise on a point of clarification, because I am not sure whether what the Opposition spokesman intends is possible with the amendment, inasmuch as his wording is predictive. I understand how we can measure the rates of return according to the capital that a company has accumulated, but if we are considering market expectations, who judges what those expectations are? The company may be performing as well as it can.

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to the hon. Gentleman for the point that he is making. He is right: who can tell? The Bill contains phrases such as ''securing reasonable returns'', but reasonable to whom? That is the nub of the problem and I would be interested to hear how he would address it.

Photo of David Drew David Drew Labour/Co-operative, Stroud 7:30, 14 October 2003

I am certainly not going to answer for the Government—I am sure that the Minister will do that. I am merely saying that I am not sure whether the amendment would help. If anything, it would further muddy the water. We should be considering how we expect water companies to make sufficient returns. There have been allegations in the past that they have failed to do that. If the Government tidy up the wording I may further question it on Report, but the amendment might make the situation worse rather than better.

Photo of Elliot Morley Elliot Morley Minister of State (Environment and Agri-Environment), Department for Environment, Food and Rural Affairs

I concur with my hon. Friend that amendment No. 76 is not helpful, because there is a big problem with it. It is not unreasonable to take into account the return on capital for the companies. The regulator, not the Secretary of State, takes the lead in considering what a reasonable return is. It is done in a thorough and sophisticated way in a periodic review. The regulator has the knowledge and experience to do that, which is the whole point of that role.

Although the hon. Member for Leominster is worried about the definition of ''reasonable returns'', I am just as worried about the meaning of

''in line with market expectations.''

How would that be interpreted by shareholders and investors?

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

I can help the Minister with his worry. Market expectations are a common phenomenon. The Chancellor has a team of analysts, and whenever he does his Budget—I am sure that the Minister has heard more than I have—there is an estimate of where the market expects various indicators to be. A return on capital is well known and publicised, and many analysts predict all sorts of returns on capital, according to types of business. I am sure that the Treasury will be more than willing to provide him with that information.

Photo of Elliot Morley Elliot Morley Minister of State (Environment and Agri-Environment), Department for Environment, Food and Rural Affairs

Well, I guess that the Polly Peck shareholders had aspirations due to market expectations, and we all know what happened in that case. We have to be careful on the issue. My worry is that, if it is written into the Bill, there is enormous potential leverage to companies. We have to take consumers into account. The idea of the Bill is to have a balance between the needs of companies and of consumers. The amendment does not take into account the needs of consumers, because it alters the balance in favour of the companies because of the difficulty of interpretation, the demands that the companies might make, and what could be a blank cheque.

Photo of Hugo Swire Hugo Swire Opposition Whip (Commons)

I understand the Minister's reservations. However, if companies are obliged to perform in line with market expectation, which my hon. Friend the Member for Leominster pointed out is easy to follow for any analyst in the sector, it ensures good governance and optimum performance. That is surely the incentive that they need. Otherwise they will get away with under-performing because there is no requirement for them to perform to market expectations. It is another discipline that would, in the long term, benefit companies, investors and the public, for whom we are trying to provide a level playing field.

Photo of Elliot Morley Elliot Morley Minister of State (Environment and Agri-Environment), Department for Environment, Food and Rural Affairs

With respect, I do not think that the amendment would give equal consideration to consumers and companies. Market expectation is not a precise science, and there are different forces and influences to those in projections. It is the regulator's role to determine the rate of return. The danger of the amendment is that it would remove the regulator's opportunity to analyse and would not allow his opinion of a reasonable return, which can be different from market expectations, to be taken into account.

Photo of Hugo Swire Hugo Swire Opposition Whip (Commons)

Yes it is, and no it isn't. The projection will surely be based on an element of market expectation.

Photo of Elliot Morley Elliot Morley Minister of State (Environment and Agri-Environment), Department for Environment, Food and Rural Affairs

We are into hair-splitting. There is a fundamental difference with the reasonable retainer. The regulator is charged to take market expectation into account. I much prefer the reasonable retainer because the balance is right.

Amendment No. 93 is concerned with the long-term issues, which are quite important. There may be short and medium-term issues that must be taken into account, and we should not tie the regulator's hands. I assure the hon. Gentleman that the guidance issued by the Secretary of State to Ofwat about the periodic review is a good example of that. It states:

''The Government would expect regulators and companies to take a long view, not confined to the limits of the periodic review cycle, in devising or recommending solutions''.

We understand that there is a long view that may go beyond the five-year period in what is a very long-term business. There are problems with how the amendments might be interpreted. I invite the hon. Gentleman to withdraw the amendment.

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

I am always grateful to get an invitation from the Minister. Looking around me, I

see there is a certain humanitarian streak in him, but that urges me to carry on talking so that Labour Members recognise the importance of the Bill.

There is a problem with the phrase

''in line with market expectations.''

I would have liked to use a more precise term, but, as the Minister said, it was helpful to avoid tying the hands of the regulator, the Secretary of State or, as the case may be, the authority. It is important that the regulator or the Secretary of State does not think that there is a difference between investment in water companies and investment in anything else. If businesses decide that it is not worth investing in the water sector, there is a risk of long-term problems.

The amendment, and those grouped with it, sought to clarify that. I concede that perhaps the wording is inadequate and—I am humble about this—I am more than happy to withdraw it. The concept behind it is of great importance. When we have regulators choosing rates of return, provided they get it right, there will be no problem.

Photo of Hugo Swire Hugo Swire Opposition Whip (Commons)

My hon. Friend touches on a very proper point. When investors are considering companies in which to invest, they must base those decisions on market forces and market expectation. That is the only way in which they will do it, and the Government are living in a fool's paradise if they think that it can be done in any other way. Although my hon. Friend is willing to alter his wording, I urge him not to concede his very valuable point.

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to my hon. Friend, and he is right. I will not concede the point but I will withdraw the amendment.

Photo of Ms Sue Doughty Ms Sue Doughty Liberal Democrat, Guildford

I have listened with great fascination, because the whole point of a regulated business and, in particular, a business in the water industry, is that part of that business is regulated. A company that has a regulated element, such as the supply of water with set prices and investment, is run on a far more tangible basis than most businesses because it has a fixed market base.

I do not sympathise with the view advanced, because such companies also have the non-regulated side where they are free to make such profits as they wish, and they do so very successfully in this country and overseas.

If the hon. Gentleman has information about financial expectations and they are as reliable as he implies, will he let members of the Committee have a copy? If we have any spare cash to invest, we would like to know where the good information comes from.

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

The hon. Lady sought to make the important point that there is an element of security in that type of investment. She is right, but it would be included in any market expectation. Therefore, there is no panacea for her pension plan or any other investment she seeks to make, and I do not have a sheet of market expectations for her. However, should she want to obtain market expectation, it is widely available.

Photo of Ms Sue Doughty Ms Sue Doughty Liberal Democrat, Guildford

The hon. Gentleman referred to our pension plans and investments. My pension plan is, as I have declared to the Committee, partly with a water company from the time when I worked for the regulated side of that business, although I worked for the non-regulated side as well. Investors in the water business understand the balance between the regulated and the non-regulated side. There is not much more that can be said about that.

Photo of Bill Wiggin Bill Wiggin Shadow Minister (Environment, Food and Rural Affairs)

I am delighted to hear that, and I believe that I speak for the whole Committee. My hon. Friend the Member for East Devon made the important point that, no matter which way we cut it, investors will have to take into consideration more than just their own reasonable estimate of returns. Without further ado, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Further consideration adjourned.—[Mr. Ainger.]

Adjourned accordingly at twenty minutes to Eight o'clock till Thursday 16 October at five minutes to Nine o'clock.