HC Deb 01 December 1994 vol 250 cc1431-6

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Andrew Mitchell.]

10 pm

Mr. Richard Ottaway (Croydon, South)

Before the House adjourns, I wish to discuss the differentials in water charges in the ward of Selsdon in my constituency.

Anyone who has taken an active interest in politics in the past 10 years will remember the famous Conservative party political broadcast from Hazelbourne road. On one side, the residents lived in Wandsworth and on the other the residents lived in Lambeth. The broadcast emphasised the difference in rates between the two sides of the street.

That information sought to give the electorate financial information to help them to decide how best to cast their vote—for a high-cost, low-service Labour-run authority or a low-cost, efficient, well-run Conservative-controlled authority: a clear choice.

Farley road in the ward of Selsdon has a similar problem, not with council tax levels but with water charges. A constituent of mine, Mrs. Kendall, has her water supplied by East Surrey water company. She was astonished to find that her neighbour in a similar property paid more than £100 less for his water than she did. The reason for that was, as in the rates example, that the services came from different suppliers. In this case, Mrs. Kendall's neighbour received cheaper water from Thames Water.

Mrs. Kendall and her neighbours on her side of the road had the geographical misfortune of having their water supplied by East Surrey water company. East Surrey is listed as being the third most expensive supplier of water in the country—the average bill, according to the Office of Water Services, being £151.

I am pleased to place on record the fact that I have no complaint against the quality of supply or the service of East Surrey, both of which are well up to standard. Indeed, East Surrey recently won a prize for the quality of its water. My complaint is that its charges are out of line, and that is what I wish to draw to the attention of the House.

The neighbours supplied by Thames Water, whose charges, when sewerage and water services are combined, are among the lowest of all water companies, face an average bill of £79 per annum, almost half that of East Surrey.

The problem is not restricted to Farley road—far from it. East Surrey supplies some 25,000 households in my constituency, representing 65,000 residents. They have been paying almost twice as much as their neighbours in the north of the borough for a similar supply. The area affected covers all the houses in the Coulsdon, East, Kenley, Sanderstead and Selsdon wards and most houses in Croham and Purley, together with a small area of Woodcote and the Coulsdon, West ward.

The borough of Croydon had a hard look at the matter, prompted by Dudley Mead, the excellent Conservative councillor for Selsdon. It proposed that all customers of East Surrey within the borough of Croydon should have their source of supply transferred en masse to Thames Water.

In the spirit of competition fostered by the Conservative Government over the past decade, telephone customers have a choice, as do gas users, and we will soon be able to choose our electricity supplier. The relevant legislation, the Water Industry Act 1991, as amended by the Competition and Service (Utilities Act) 1992, encourages the same.

At the council's request, Thames Water undertook a feasibility study, which confirmed that Thames would be interested in taking on the area in question. The company found that it would have to provide a water main connection in at least one location in the borough, and it proposed using existing pipework to households. The majority of residents who made their views known supported the change.

I received many letters from constituents requesting that Thames Water be encouraged to take over their supply. Mr. Ray Rowsell, chairman of Selsdon residents association said: We are very hopeful of obtaining a transfer because East Surrey's water charge levels cannot be justified. This autumn, Croydon council and Thames Water put their proposals to the Director General of Ofwat, Mr. Ian Byatt. He did not make a ruling but gave his interpretation of current legislation: that Thames Water would be permitted to serve customers in the East Surrey supply area only if it constructed its own separate supply network or—and this is important—if Thames Water was appointed the supplier under the inset provisions of the 1991 Act. That Act would permit Thames Water to supply East Surrey if it were a green-field site, which it is not, if the host water company were to agree, and it does not, or if the individual customers concerned used more than a threshold of 250 megalitres of water a year: average family use is 0.15 megalitres.

The combined households of the area in question could transfer en masse. They consume a combined total of 3,000 megalitres—well above the legislative guideline figure. However, in Ofwat's view, each house is a separate entity and together the properties do not constitute a block that could transfer en masse. That is the nub of the argument.

Fortunately, my right hon. Friend the Secretary of Slate for the Environment can help, without new primary legislation being necessary, by amending the competition threshold in the spirit of competition policy that the Government are always keen to encourage.

Mr. Peter Ainsworth (Surrey, East)

My hon. Friend understands that the matter is by no means simple. Were such a transfer to occur, my constituents served by East Surrey would see their water charges rise substantially. Although East Surrey is an efficient water company, it is largely rural—and that is why the cost is higher.

Mr. Ottaway

My hon. Friend makes his point well, and I will refer to it shortly.

It is required of my right hon. Friend the Secretary of State to make an order, so that groups of individual customers can be considered as one large individual customer for the purposes of the 1991 Act, and possibly to lower the threshold of 250 megalitres a year to one that encompasses a street of customers. That would allow a suitably located street to transfer across a boundary to a more advantageously priced area.

Not surprisingly, East Surrey is not in favour of those proposals. Mr. Phil Holder, managing director of the company—for whom I have the highest regard—says: Whilst understanding the position of Croydon Council and sympathising with customers who pay more than their neighbours … we must emphasise that transfers of this type are not in the best interests of all our customers. A spokesman added: We do not want to lose our customers. That was a surprise.

East Surrey makes two key arguments. The first is that the pipework belongs to the company and is not available to Thames Water. If my right hon. Friend the Secretary of State ordered a boundary change for areas of responsibility, Thames could take over the existing East Surrey pipes, but would be obliged to reimburse East Surrey for its loss; Ofwat would set the compensation.

The second argument is that allowing transfer of the affected area, which represents a substantial part of East Surrey's business, could mean prices rising for other consumers outside the borough boundaries, as my hon. Friend said.

My response is that, for decades, urban areas have been subsidising rural areas. It is about time that rural areas paid a more realistic contribution to their water charges. That is not a penalty, but a removal of the subsidy. My hon. Friend the Member for Surrey, East (Mr. Ainsworth) perhaps winced a little at that, and I suspect that his constituents would do the same, but I have an answer.

If that is unacceptable to the residents of east Surrey, the alternative would be for Thames Water to take over the entire East Surrey water area, and it has assured me today that that would result in significantly lower water charges for everybody in east Surrey. I am sure that that would be very popular. If my hon. Friend were to assist me in that, I am sure that he would be very popular.

One could have some sympathy with the users in the rural areas if it were not for the fact that East Surrey Water reported a profit increase last year of more than 45 per cent.—some £8.2 million on a turnover of only £25.5 million—and as such should be prepared to submit to competition. The case is not helped by the fact that, in 1991, two directors, who held almost half the shares, were paid a dividend of £1.17 million at a time when consumers faced an increase of 24 per cent. That prompted Ofwat, in a letter dated 12 July 1991, to express concern about the levels of prices, profits and dividends. Regrettably, it took no further action.

I am afraid that East Surrey Water merely wishing to restrict its customers from obtaining services elsewhere is simply not a good enough reason for preventing access to those households by Thames Water.

In summary, the people of Croydon, supported by their borough council, want a low-cost service and Thames Water is in a position and is willing to provide it. The only objection comes from another company, which, understandably, does not want to lose business, but which is, after all, competing in a market economy. The main argument is that the high cost is due to supplying those who live in rural areas. But Selsdon and the rest of my constituency is not a rural area. It is not even in Surrey. It is a London suburb and, as such, should be supplied by Thames Water.

I therefore ask my hon. Friend to consider whether the Government should consider loosening the regulator's guidelines, keeping within the Government's desire to increase competition in that industry, and whether the regulator's preliminary observation is within the spirit of the Water Act 1991, as amended.

10.12 pm
The Parliamentary Under-Secretary of State for the Environment (Sir Paul Beresford)

I must thank my hon. Friend the Member for Croydon, South (Mr. Ottaway), who is also my neighbour, for bringing this issue to the attention of the House. It is a serious matter and it raises a number of interesting issues.

As my hon. Friend outlined, we have here two water companies with very different characteristics. Thames is a very large concern with responsibilities not only for water supply but for sewerage, although it is its water supply responsibilities with which we are concerned tonight. East Surrey is a much smaller company, which supplies only water.

The contrast could hardly be greater. Thames supplies water over an area of more than 8,000 sq km; East Surrey, 700. Thames supplies 7.3 million people with water; East Surrey just over 300,000. As we have heard, the average Thames Water charge is £83 while East Surrey's is £141. In respect of those charges, my hon. Friend may be interested to know that the charges of the other 10 water companies having a similar boundary to Thames range from £81 for Severn Trent to £152 for South East Water.

The limits on water charges that individual companies can make and which feed through to customers' bills are rigorously controlled under statute, which provides that they are set by the Director General of Ofwat. In setting those limits, the director general has a duty to protect the interests of customers, but he also has a duty to ensure that the companies can finance the improvements in services which the customers themselves expect to be undertaken, and meet their obligations regarding water quality.

In his recent periodical review of price limits, the director general has taken the view that water companies should be able to operate more efficiently and finance their functions at a lower cost of capital. In the light of that, he has imposed limits which are considerably more stringent than before.

That will still mean that charges will vary from company to company. But differences in charges cannot be used as an indicator that one company is more efficient than another. Indeed, taking the companies in question, Ofwat, as part of its periodical review, identified East Surrey as one of 10 companies "being more efficient". Thames, with 13 other companies, was identified as being of "average efficiency" in the way in which it handled its operating costs.

Inevitably, the level of charges imposed by a water company will depend on its particular circumstances. The larger customer base of Thames Water, for instance, and the proportion of its customers who are in relatively densely populated areas and can therefore be supplied less expensively, are factors in its lower charges. The company, however, also supplies more sparsely populated areas such as the Cotswolds. I am sure that my hon. Friend will know of the large amount of capital construction that it undertakes each year, the new London ring main being an outstanding example.

East Surrey, in contrast, supplies a number of small towns and rural areas, which—as has been pointed out—tends to put up costs. But two of the main factors that increase charges are the company's greater need for capital expenditure on its network—its current system has an implied life of 100 years, compared with 800 years for Thames—and the fact that East Surrey is one of only two companies that soften the water before it goes into supply.

Mr. Andrew Mackinlay (Thurrock)

What about the profits—the large profits—the excessive profits?

Sir Paul Beresford

I have a funny feeling that the hon. Member for Thurrock (Mr. Mackinlay) wants to buy into the company because of the profits.

The characteristics of the raw water will also affect costs and treatment. For example, the relative hardness of the water will vary according to its source, and the services on offer from each company will vary. Softer water may save both domestic and industrial consumers considerable money, as it will—for example—have a less detrimental affect on heating systems. East Surrey has softened the water for many years. I understand that the issue of whether the practice should continue was taken up with customers and local authorities about 10 years ago, when the company was renewing two major treatment works. The consensus was that it should, and Croydon council was one of the local authorities that requested that it should continue.

I understand that, if water softening were abandoned and water of similar hardness to that supplied by Thames was put into the system, the cost of the water would be reduced significantly—perhaps to within 15 per cent. of the Thames price.

My hon. Friend asked whether the current legislation could be used to enable Thames to take over the supply of 20,000 homes currently supplied by East Surrey. The Competition and Service (Utilities) Act 1992 extended the circumstances in which the director general can, through what is known as an inset appointment, make another company the water and sewerage company for an undeveloped or greentield site—that clearly does not apply in this instance—or a site where an existing large company is already receiving water. My hon. Friend suggested that, rather than take the number of individual customers as 20,000, we should divide them into streets. The same point still applies, however: the individuals still exist.

I understand the problem. However, the opportunities arise only when there are differences in charges between companies, which do not necessarily indicate differences in efficiency. Any change—if we went along the lines suggested—would still be highlighted at the new boundaries between the companies. The likely effect of allowing customers to change supplier in the way suggested would be a further rise in the charges of customers remaining with the original company. We have already heard a legitimate protest from my hon. Friend the Member for Surrey, East (Mr. Ainsworth).

The next obvious suggestion—which has already been made—is that it would make economic sense for one company to take over another. That is a sensible suggestion, but a quite different matter which would be for the commercial judgment of the companies concerned and their shareholders. They would have to take into account the advantages that they perceived, bearing in mind the fact that such takeovers would automatically be referred to the Monopolies and Mergers Commission, as Thames Water's assets exceed the £30 million limit set in the legislation.

That, however, would be a very different matter from what is currently proposed, which is in effect "cherry picking"—to the advantage of one company and the detriment of the other and its remaining customers. That point in particular needs careful consideration.

I am grateful to my hon. Friend for raising this issue. It gives me the opportunity to explore it with him. I am sure that our discussion will concentrate the minds of both water companies on ways in which the problem could be tackled. It is a matter for them, but East Surrey may, in addition, want to look at the continuation of its water softening policy and Thames may wish to consider the commercial position.

The Government are continuing to look at ways of providing opportunities for direct competition where we can and we will take every opportunity to open up the industry to fair competition and to offer customers the choice which that allows. This debate has been an added spur to that.

Question put and agreed to.

Adjourned accordingly at nineteen minutes past Ten o 'clock.