Water and Sewerage Industry

HC Deb 19 April 1995 vol 258 cc129-49

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

10.4 am

Mrs. Helen Jackson (Sheffield, Hillsborough)

I am delighted to have the opportunity today to initiate this debate about regulation of the water industry because, of all public services, water is the one that is most central to human life and well-being. If it is managed well, people always pay up without question for their water and sewerage. They do not want to give it a second thought. They want to turn on the tap for a drink, watch the rain run down the gutters and roadside grates and flush the toilet. They do not feel the need to say thank you to the Government, the regulator or the water companies because they feel that water is a right that they earn by being a citizen of this country.

Yet if anything goes wrong—if the water is brown when it comes out of the tap, if it does not come out of the tap at all, if the drains are blocked, or if people are suddenly asked to pay a great deal more—there starts to be public outrage.

There is no question but that there is an immense amount of consumer dissatisfaction with the water industry at present. In a survey by the Consumers Association last year, the water industry came out bottom of all the regulated industries on every count of consumer satisfaction, including satisfaction with delivery and relationship with the consumer.

It is interesting that a study undertaken by Elaine Kempson into water debt and disconnection, published last month by the Policy Studies Institute, showed clearly that water debt had increased by nine times since privatisation. So people are no longer happy simply to pay their water bill and forget it. The document concluded that the reason was partly the resentment and dissatisfaction that people feel about the industry.

Hon. Members on both sides of the House will be aware that the Opposition have been interested in the past few months in the issue of public ownership and what it signifies. Water is what public ownership means. As the rain comes down and the children play in the rivers or streams this summer, they and their parents do not believe that the substance they are using is anything other than publicly owned. That explains the resentment about this privatisation of this utility. People have never believed that water belonged to anyone so that it could be sold off.

It is interesting that yesterday's debate about the environment agency and pollution control and regulation saw the House in a remarkably consensual mood. There was no vote. There was agreement among all hon. Members that the agency could be a good move forward if the correct powers were given to it.

However, there is no such consensus about the operation of the water industry. I should like to spend a few moments today to discover where the blame for that lies, to what extent it lies with the Government or with regulation, and to what extent the two are indivisible.

In the earlier clauses of the Water Act 1989, the two are balanced and almost indivisible, because the duties are placed on the Minister or, if he delegates them, on the Director general of the Office of Water Services. It is clear that the regulator's first duty was to look after the financial well-being and management of the water companies. His duty to act in the interests of customers and consumers secondary, which could be one element of what has gone wrong.

The regulatory system—I shall return to the subject of whether it is the regulator or the Government—has failed on five counts, however. It has failed on prices, interference in the industry's charging systems, the absence of interference where it is necessary, undertaking the necessary research into the industry, and the inability to devolve to local democratic committees some of the consumer-based interests that should be represented in the water industry's regulatory system. Colleagues might want to mention others.

The system has failed on prices, because the regulator's main duty is to be an economic regulator, and his main power to act on behalf of consumers is to limit charges. The regulator was to control the industry by suggesting a K factor, with which we are all now familiar, by which companies could raise prices over and above inflation in a particular year. Unfortunately, in 1989 there were no negative K factors, although no excuses were given. The companies had to comply with factors that were all positive numbers, well above the inflation rate.

By 1993, it was clear that the K factors were over-generous, profits were rising sharply, prices were on the increase, and these rapidly growing multinational enterprises had a general cushion of surplus. As time went on, it became clear that the cushion was being creamed off at the top for top executives and share options. In England and Wales, profits had risen from £710 million in 1989 to £1.5 billion in 1993–94, with a 67 per cent. increase in water charges. Top salaries had increased by 228 per cent. since privatisation.

Those three issues caused an immense public furore. The public have realised that privatisation has not been in their interests, but has simply been in those of the big companies and their shareholders and chief executives, and that the regulator appeared to be unable to do anything to stop that.

In 1993, Ian Byatt recognised that the initial K factors were probably too generous, and that the asset base and ease with which the water industry could cope with its economic future had probably been underestimated. At about that time, I became really interested in the water industry, and the cross-party group was established.

Time and again, we suggested that it might be appropriate to claw back some of the excess profit. The reaction was that nothing could be clawed back, because the surplus proved how creditable the regulatory system had been. The regulator even suggested that it showed how good the incentive that he had presented with the K factors had been when the industry was privatised in 1989.

Had the Government and the Director general of Water Services said that they had got it wrong in 1992–93—I know that the system was for a five-year price review, and that was only three years on—and that they would claw back some of the surplus and pull the price regime right down, much of the public anger and outrage would have dissipated, and the Government would be finding it easier to justify what is happening in the water industry.

In 1994, I believe that they got the K factor review wrong again, as do a number of experts in the City, as the "Panorama" programme showed. It is interesting that, less than a year after the review that was supposed to impose tight controls over the water companies, North West Water has been able to pay back £6.50 to each of its customers.

Mr. Peter L. Pike (Burnley)

It is somewhat strange that Sir Desmond Pitcher, the chairman of North West Water, should have written to all the consumers in the north-west to make them aware that the company is proposing a bonus of £6.50 per customer for the next five years because of the additional profit that it is making from the way in which the industry is regulated, as if it is giving us something, when in reality it is overcharging us in the first place.

Mrs. Jackson

That endorses my point. North West Water certainly has £6.50 per customer to spare following the K factor review last year. As I know that other hon. Members want to speak, I shall move on to the next issue.

The Government and the regulator have also got the charging systems fundamentally wrong. There is a contradiction between statements that charging systems were the responsibility of the water companies and that they were free to manage their businesses and choose how they wanted customers to pay for water and sewerage services, and, on the other hand, the claim that they can do so only if they place the main emphasis on a metering system of payment in the long term.

Ian Byatt's preference for metering is well known throughout the industry, and he is entitled to that opinion. He wrote about it in "Paying for Water" in 1991, and he still refers to that document, even though it is five years old, in reply to any queries about Ofwat's policy on the issue.

"Paying for Water" was written before the Government had finally abandoned the poll tax, and while the Conservative party was still claiming that it was fair to make each household pay for public services in proportion to the amount that they used them. That is the principle of metering that is set out in "Paying for Water", and it is the poll tax principle, which has been discredited and booted out by this Parliament. It is simply inappropriate for water and sewerage, which are the most essential public services.

The average water bill of an ordinary household breaks down roughly as follows: 40 per cent. relates to the drinking water supply, of which some 80 per cent. relates to the fixed cost of water treatment works—pipework and the infrastructure that delivers that drinking water—and 20 per cent. relates to the volume of water that goes through that infrastructure; 20 per cent. of the water bill relates to surface water drainage and the pipe work, guttering and infrastructure that takes water off the roads, gardens and land. It cannot be appropriate to measure that by metering domestic households. The remainder of the bill—a further 40 per cent.—relates to the sewerage side of the industry, waste water and sewage treatment. Surely we shall not try to measure the amount of sewage that each household produces.

If my arithmetic is correct, the argument about conserving water and metering relates to just 8 per cent. of the industry's costs for average domestic water purposes. Some 30 per cent. of the water used by an ordinary household is to flush the toilet, and only 10 per cent. is used for extra household activities such as washing the car and watering plants. The remainder is used for baths, showers, washing food and drinking. Hon. Members on both sides of the House do not feel that it is important that people should cut down on those.

The compulsory element in insisting that people pay for water and sewerage by a measured system is inappropriate. If the regulator says that he is neutral on that issue and that companies can choose their own charging systems, it cannot be appropriate for him to be so paranoid about insisting on metering, when water companies are trying to do the best for their customers.

In Yorkshire, there has been much public outrage about compulsory metering, especially on housing association estates in Bradford, Sheffield and other big towns, where people do not have large incomes. Yorkshire Water has been prepared to listen to public concern, and has met groups from the Lower Grange estate in Bradford and local authority associations.

It decided to move right away from the compulsory element of charging, even on new properties, and its decision was endorsed by both the local housing federation and the local Ofwat customer services committee. Yorkshire Water took that decision at board level and said that it would devise notional rateable values for every new house built since 1989, so that every customer in Yorkshire could have that choice. What could be wrong with that?

Unfortunately, the regulator's response was to write a letter to the managing director of every other water company in the country, saying: I am disappointed that the company has decided to allow this concession"— not choice, but a concession— to customers in new properties. However, before this scheme can come into operation Yorkshire Water will need to demonstrate to me that any notional rateable values avoid any bias". He therefore has an opportunity to sit on those notional rateable values before Yorkshire Water can put its policy into effect.

The regulator goes on to say: The ability to opt for a charge based on a notional rateable value will be strictly time-limited and subsequent owner-occupiers would not be allowed to opt for a charge based on notional rateable value. From someone who says that he will not interfere in charging methods, that is incredible. I do not know whether it applies just to Yorkshire Water, but it comes after Mr. Byatt's refusal to accept the renomination of the chairman of the Yorkshire customer services committee, who was well backed by Members of Parliament from both sides and consumer groups throughout the county.

That interference is another indication of the failure of the present system—Government plus regulator. Since becoming involved in this issue, I have been surprised at how many press releases, research papers and briefing documents are produced by the water regulator's office. Some of those comparative statistics are useful, while the press releases and comments are less useful. But I am also surprised at how little good information and research has been done on relevant issues.

For example, when Ofwat commissioned research into different charging methods through the Institute of Fiscal Studies about two years ago, the institute was specifically asked not to investigate the possibility of charging on the basis of council tax bands. It could investigate charging on any other property bands, even though of the options being considered by the water companies, council tax bands made the most sense. It was left to the Water Companies Association to do the best piece of research on charging systems, which they presented to the Minister last September, and to which the Minister responded two weeks ago.

Similarly, the Select Committee was surprised that, given all the controversy about disconnections and whether those happened because people would not or could not pay, no research had been done—none was even authorised or intended to be authorised—by Ofwat or Mr. Byatt on the reasons for disconnections. The first piece of evidence on that has now been produced by the Policy Studies Institute. It shows that, as we all knew, people are disconnected because they have not enough money to pay the ever rising bills. Those are just some of the issues on which the opportunity for good-quality research has been missed.

The same applies to conservation. If we are to debate whether the best means of conserving water is to make a major effort to reduce leakage or introduce domestic water metering, Ofwat should have authorised research to discover that. Instead, it has been left, once again, to someone else, in this case the National Rivers Authority to do the best piece of research about leakage. The water companies, too, are beginning to make progress in that area.

I have been disappointed—and, to an extent, shocked—by the lack of responsibility that the director general has taken over safety and security within sewage treatment works. The question was raised in Yorkshire whether it should be totally contracted out to private contractors. The director general had nothing to say on that, and gave private contractors no guidelines to ensure that sewage was treated safely and securely. Until recently, there were no guidelines on, for example, specifications on sewer pipework. That has been of great concern to clay pipe manufacturers, who have felt that, since privatisation, the water industry has not been acting responsibly in undertaking that sort of research and information. On all those issues, the regulator has left a great deal unsaid and uninvestigated.

Many Opposition Members, and possibly Conservative Members, have been unable to understand why the regulator had nothing to say on chief executives' pay and salaries, and why Mr. Byatt felt that he had nothing to say on charging systems to the major local authority conference on the subject on 13 March in Liverpool.

We do not understand why he had nothing to say to people who complained about compulsory metering to the Ofwat customer services committees. As it was an issue of charging, he was not prepared to include those complaints in his published schedule of complaints. A whole list exists of areas where the regulator or the regulator/Government have been unwilling or unable to listen and respond to the immense public concern that has developed about the industry.

I should like to feel that it is not too late even for this Government, but I think that we will have to wait for the next one. The root of the problem lies in the lack of understanding that we are talking not about a commodity which can be left to the free market and in the private sector, and which somehow will be all right with a bit of economic regulation drawing together the statistics, but about a public resource and utility—water, which is owned by the public.

Unless the Government and regulator absolutely understand that basic fact, it is never going to be right. The only answer is for the Government to accept that responsibility and the outrage that the public feel about what has happened to their crucial public industry, and to say that, for the moment, they will take over the regulation of the industry, and take responsibility for it.

Only yesterday, we agreed on a consensual basis that we have the makings in the environment agency of an excellent body that will control one side of the whole water cycle business. The other side is a mess. It will remain a mess until the Government get hold of it, take it out of the so-called independent regulator's hands, pull it together and deal with it in the interests of the public.

10.32

Mr. Peter Bottomley (Eltham)

I congratulate the hon. Member for Sheffield, Hillsborough (Mrs. Jackson) on procuring this debate, and on her consistent interest in the water industry. The House and country will be grateful for that. She has made some fair points. I declare a non-interest. I am the honorary president of the Water Companies Association. I am not paid, and it has not asked me to speak, but it is a matter of record.

I was at one stage a Minister with responsibility for the environment and the water industry in Northern Ireland. When I was a junior Minister at the Department of Employment, I noticed how the sewerage system in London had not kept up with demands. Bazalgette sewers seemed to back-fill during storms, and water reached the third floor of the Department of Employment offices in Tothill street. It was not very pleasant.

The hon. Lady has a couple of things wrong. If one lined up the water company chairmen, picked the one in the middle and asked what they were paid, the answer would be that they were paid 20 per cent. less than the leader of the Labour party's press agent. It is worth putting across the fact that, even when the Labour party was so proud that the water industry was nationalised, 20 per cent. of the country's water consumers received their supplies from companies that had not been nationalised. It is also worth noting that some people, including an uncle of mine in Shropshire, had their own water supply.

Therefore, the idea that the water industry was all in the hands of nationalised industries under chairmen appointed by Ministers is wrong. One of the reasons why the Labour party has been traditionally so in favour of state-controlled industries is that that allows it to appoint people to those jobs, rather than people being chosen on merit.

When the Labour party decides what it intends to renationalise, it would be interesting to know whether it intends to nationalise water supply companies that have never been nationalised. If it proposes to go further than it has gone before, it should be willing to say so openly. I am sure that the hon. Gentleman who may speak for the Opposition in the debate will say clearly whether they intend to renationalise any water company, and, if so, whether they intend to renationalise all of them.

The hon. Member for Hillsborough made an important point about whether ordinary domestic consumers in ordinary homes—small houses and flats—should have to pay the long-run marginal costs of their supply, or pay more of an average cost. No real debate exists about industrial consumers and large users. There is no point in discussing that further. The interesting question is whether people living in small household units, especially those who do not have the opportunity to run a garden hose all day and all night through the summer so that they can have a better-looking lawn than their neighbours, should have a meter, or some alternative system that would have the same sort of effect.

The information that the hon. Lady gave about the degree of discretionary cost that the ordinary consumer and the small household might have in relation to the water supply was interesting and important. I think in the same way in relation to dealing with the cost of disposal of waste water, and of treatment of isolated pockets of population and their sewage—a legitimate matter of debate, which will be raised by my hon. Friends representing the south-west.

The Government could easily have said that some of the cost should have been met on a pooling basis. Issues involving the coastline and the distribution of population are not fully appreciated by those of us who represent or live in areas like London, which does not have anything like the same level of treatment expenses as coastal areas.

I want to go a stage further. I put it to the hon. Lady and to the House that it is ludicrous to believe that, under predominantly public ownership, a golden age of water and sewerage existed. Every five years or so, a Minister, who may be called the Secretary of State for the Environment or some other title, will announce that we need £20,000 million of capital investment.

Year after year, five years after five years, a Minister would make that great announcement, and the investment would not happen, because capital investment in the water industry—both in relation to supply and disposal—had to compete with capital investment and current expenditure in education, the health service, defence, and the railways, and with subsidising other nationalised industries, which were losing a fortune. Investment for quality, equality of improvement and higher and more modern standards of sewage treatment just did not happen.

People should consider water companies' profits—here I go beyond the Water Companies Association companies, because they are involved only in water supply and not in treatment—and relate them to the degree of investment in the past few years. It would have been helpful to the House if the hon. Lady had given the figures on the investment level increase, and if she had information on how companies profit surpluses relate to their capital investment. If the hon. Lady wants me to give way, I shall happily do so.

Mrs. Helen Jackson

I accept that the investment level has gone up substantially, but what I and, I suspect, water customers do not accept is that they, in the past five years, through price increases of 67 per cent., have carried that degree of new investment cost, especially when the whole purpose of privatisation was said to have been to enable new companies in the private sector to have greater flexibility, to borrow in the longer term, and to finance their investment in that way.

Mr. Bottomley

The hon. Lady makes a better argument, and I acknowledge that.

There are arguments about what level of gearing the companies should have aimed at. They are pretty secure and stable. They are regulated, so they are unlikely to go bust. They can borrow money on pretty fine terms. They are of interest to major investors, who know that there is a long-term customer relationship; it is not similar to investing in motor car manufacture or some of the other things that may go through fashions. As the hon. Lady says, we shall continue to need water.

There is also the issue of fairness between different companies on the green dowry and other matters, but I do not wish to discuss those matters now. However, I want the hon. Member for Hillsborough to acknowledge that investment has increased mightily in the past few years, and that investment is dramatically greater than profits. I am willing to debate the other arguments.

Mr. David Nicholson (Taunton)

I am sure that my hon. Friend will be aware that hon. Members representing Devon and Cornwall constituencies very much welcome what he has said about the problem in the south-west. Does he agree that another advantage of privatisation is that it has enabled the privatised water companies to invest and lend their skill to water developments throughout the world, which is greatly to the benefit of this country's balance of payments and reputation throughout the world?

Mr.Bottomley

My hon. Friend has made a serious and important argument. Anyone who reads Water Bulletin will be aware of some of the spread of our expertise and talent. The privatised water companies are also bringing into this country other people who have an interest in showing that their techniques can be used here.

May I briefly say how much I welcome the number of people who contribute to Water Aid, whereby the water industry uses the voluntary giving of many of its customers to help extend the use of water throughout the world? The idea that water is a free good will come as a surprise to the people in KwaZulu/Natal, where people, mainly women, have to carry water large distances. I pay tribute to companies such as the Umgeni Water Company, which, through what is called reticulation—getting the pipes through—will bring water to 175,000 more people a year each year for the next five years.

We should pay some attention to the life cycle approach to water usage, which is why, in the case of larger houses, I do not think that it is necessarily right simply to use rateable value or some proxy for it; but that is a matter of detail. It is not my role, or that of anyone in the House, to defend the water regulator, but I think that it is right that he has encouraged open discussion, debate and argument. I pay tribute to the way in which he has done that. By taking a pretty firm economist's view to water, he is doing a service. I do not think that he got his K factors that far wrong. I am glad that they are smaller now than they were.

I wish to make two final arguments. I want to break an official secret—or rather, as I am not a civil servant, commit a ministerial indiscretion. I once sat with half the Cabinet and various other junior Ministers, trying to discuss the pension arrangements of the deputy chairman of Thames Water, and after about an hour and a quarter, we had not reached a decision. That is not a job for Ministers. Ministers should stay away from that type of decision. If the Labour party wants to go back to it, it only needs to read the diaries of former Labour Cabinet Ministers to discover how incompetent politicians are when they start becoming involved in that level of detail.

I hope that all the water companies will take it as their responsibility to continue reducing the number of disconnections. I hope that, in their statistics, they will distinguish between the people who are "won't-payers" rather than "can't-payers" and show that they do want to become involved with the "can't-payers" as soon as possible to reach agreements about debt management and continuation of water supply. That is important.

I challenge the legislative requirement that a water company must take someone who has not paid their account to court before being able to use the disconnection process. I have not read any analysis of the way in which the ordinary consumer who cannot pay gains by that process. If that process means an extra £30 or £60 on the bill because a court order has been obtained, how does that help? If analysis had shown that half the, poor customers were told by the court that they did not have to pay and they would not be disconnected, there might be a purpose in requiring the court application. However, at the moment it is one of those silly ideas, designed to help the poor, which in fact penalises them.

10.44 am

Mr. Matthew Taylor (Truro)

The privatisation process threw a sharp spotlight on the role of the regulator and of the Government; on the role of Government, because the Government, in disentangling themselves from the water industry, had to show that the new privatised industry and the regulatory system could deliver to consumers a fair and affordable deal; and on the role of the regulator, because it remained to be seen whether it would ensure that that process took place effectively and efficiently.

In my opinion, the record of what has happened since then has cast a pretty poor light on both. Regulation has failed on several counts. I shall highlight a few of those.

First, directors have had excessive pay increases, and there has been excessive shareholder profit. Notwithstanding that much of the paper profit goes into investment and cleaning up, the excessive profit to shareholders reflected in the share price and dividends appears inexplicable, in view of the role that the regulator is meant to take.

In a monopoly industry, in which there is effectively no real risk, in which there is no chance of losing customers—indeed, the customer base is increasing, if anything, as a result of greater industrial use, greater consumer use and greater numbers of households—there is no reason why the returns of directors of the privatised industry had to be so much greater than those that the same people, in most cases, received when it was a state industry. The fact that that happened places a major question mark over the way in which the regulatory system was set up, or the way in which the regulator operates it.

Above all, I believe that, in an industry in which there is no real risk for shareholders, the rates of return that shareholders have received have been unacceptable. That has been shown to be the case with the increases that have taken place in the value of those shares. If the industry had been priced and regulated correctly, that process would not have gone on.

On the K factor and decisions that the regulator has taken about that, we have to ask whether it has been tough enough, given that share prices have increased after the regulator's announcements about the K factor, in the first round across the board for the water companies, including those water companies that have been most heavily hit by new requirements to clean up the sewage problems.

After the K factor was announced, those people who were confronted with the highest costs nevertheless noticed increases in share prices in the local water company. That happened again in the latest round, with the one exception of South West Water Services Ltd., about which an appeal is under way; we do not know what the final settlement will be. That rate of increase in the share prices since privatisation casts a severe doubt on the effectiveness of the regulator.

One final aspect in which I believe there has been clear unacceptable practice is in the diversification of the water companies into sectors not connected with their core business and with very different risk levels. Indeed, I would question whether, in the rules affecting directors, some of those decisions were acceptable on a purely commercial basis, let alone in the regulatory structure and the intentions of Government.

The best example of that is the speculative investment in a bid for West Country Television by South West Water Services. It paid off, because it won the bid. Had it not won it, however, that would have been throwing money away. It would have been throwing water customers' money away. I do not believe that a water company has a legitimate role investing in a speculative bid for a television company.

One problem which the regulator has failed to tackle and which has a direct impact on customers' bills is the difficulty of obtaining the right mix between raising capital and relying on profit to fund the capital investment. Water prices could have been significantly lower had the regulator chosen the capital option rather than taxing the customer for that investment. I do not believe that the decision taken would have been made in any business other than one with a monopoly. Why did not the regulator take stronger action? Why have not Ministers had a greater involvement?

The other area where the regulator has failed is more significant. The regulator has failed in his duty to ensure that all customers receive a reasonable deal, even within the same water district. I shall come to the particular problems of some districts later. We are now seeing a process of so-called rebalancing between customers that benefits the large industrial users at the expense of the domestic users.

As a result, the promise to hold down price increases this year has not been matched in individual customers' bills. The so-called re-balancing has cut the cost to the major industrial user at the expense of the domestic user. That is not right within the terms originally laid out for the regulator to ensure fair treatment between customers.

The hon. Member for Eltham (Mr. Bottomley) said that he was taking an economist's approach. Perhaps he was, but I do not think that he was taking a proper approach in terms of what Parliament intended. Ian Byatt states:

Where, however, supplying water to a particular customer can be demonstrated to cost less, for example, where the customer provides their own on-site storage, then Ofwat would expect to see the introduction of different tariffs. We would want to see these tariffs published and made available to all customers in similar positions, rather than established by special agreements. We must recognise that such a policy opens the way for differentiation between different domestic customers within one water company area. It opens the way for major housing authorities such as Plymouth city council in my region to put forward the basis of a contract with South West Water and say, "We have a large number of households which are cheap to supply, and we want to take advantage of those lower costs to deliver water more cheaply to our tenants."

That is now a possibility, and it appears from everything that the regulator has said that he regards it as acceptable. Those who represent rural areas where the costs are high regard such a policy as a threat. The regulator has done nothing to rule out that possibility. The regulatory system, and the fact that the regulator gives the matter an economic emphasis rather than a customer-based emphasis, makes it possible for rural customers to be hit hard.

The biggest problem with the regulatory system is that it cannot deliver a solution to the biggest problem, which hits my constituents and may yet hit others. Where a water area has particularly high costs, the bills of people living within it rise to a rate that they cannot afford. In the south-west water area, many bills are more than £600. Such bills often affect elderly people in rural areas, who have notionally expensive properties, but little income, and who cannot afford the bills. I am not talking simply about holding down price increases: such people cannot afford their present bills.

The regulator is unable to tackle the problem, because he is unable to create a fair system of payment across the country to meet the cost of the national clean-up system. I have spoken about that problem before in this place, so I shall not do so now.

That problem can be tackled only by Ministers—it falls to them to do so. Perhaps the Under-Secretary of State for the Environment, the hon. Member for Croydon, Central (Sir P. Beresford), will say today whether it is true that the Department of the Environment made a bid to the Treasury for funding to meet the problem. Perhaps the Minister will tell us whether it is true that the Department of the Environment recognised the problem, but the Treasury said no. My constituents and those throughout the south-west want to know from where the money will come.

Those hon. Members who think that they have avoided the problem because they do not represent the south-west may find that, the next time that the regulations change, their areas will be hit. Those in East Anglia may be hit by regulations affecting water quality and the cost of tackling farm run-off. We do not know where the problem will strike and we cannot expect customers to carry the burden.

In the past few weeks, Ministers have been directly responsible—an announcement was made just before Easter—for writing off one potential solution. If they will not invest more money, I must ask them to reconsider the problem. By announcing that they will stick with the old, outdated water rate system and allow water companies to continue with it, Ministers have refused one potential solution that might have helped solve the problem.

The old water rate system is out of date; the valuations cannot possibly be justified any longer. That was the justification for the introduction of the poll tax a long time ago, so we can imagine what the position is in 1995. Those out-of-date valuations are, in themselves, unfair, but they bring with them a system that allows no relief for those on low incomes and for those living alone. If we cannot help those living on low incomes and those living alone in regions such as the south-west, which has been hit by high charges, some people will be unable to pay their bills.

If we are not going to equalise the costs of the clean-up across the country, if we are not going to do something about the green dowry and look again at those problems, we must try to help those on the lowest incomes who are hardest hit by high bills. That point is made by the South West Water customers committees, citizens advice bureaux and many organisations that have to deal with people on the receiving end of the problem. That argument is even backed by the water companies, which say that the problem must be tackled.

While the problem is not tackled, and while Ministers allow old systems to exist that are inappropriate to the present position, pensioners will continue to struggle to pay bills that they cannot afford—it is not a political matter: the pensioners literally cannot afford to pay the bills. They receive state pensions, but are ineligible for help towards paying bills of £600 or £700. The only solution to that problem would be the introduction of a new water Bill in this place. We cannot look to the regulator to meet the crisis.

10.57 am

Mr. David Harris (St. Ives)

The interesting feature of the debate has been the consensus across the Chamber. Much has been said by Opposition Members, particularly by the hon. Member for Truro (Mr. Taylor), with which I would not disagree, especially his concluding remarks. There is also, perhaps, a hidden consensus. That consensus may be shattered by the speech of the hon. Member for Cunninghame, North (Mr. Wilson), but as I understand it, whether or not they liked it when privatisation was introduced, all parties in the House now recognise that privatisation is here to stay.

I sincerely congratulate the hon. Member for Sheffield, Hillsborough (Mrs. Jackson) on securing the debate, on the interest that she has taken in the subject and on her speech today. She made a moderate speech, but although she hankered back to nationalisation, and half seemed to suggest renationalisation, I know that that will not happen. Were the Labour party to gain office, it would not advocate that policy. I do not think that the Liberal Democrats are advocating it—I am glad to see that the hon. Member for Truro is nodding in agreement.

The question is how to regulate the industry, and I am delighted that that is the focus of the debate. Regulation is essential, partly for the reasons given by the hon. Member for Truro. He was absolutely right to say that some of his constituents and some of the constituents of every south-west Member of Parliament cannot afford the increases that they have had to suffer—that is the right word—in recent years.

We can consider why those increases have occurred. Undoubtedly, the increases were partly due to the extra requirements placed on South West Water following privatisation.

We all agree that a very extensive capital programme should be put in place in the south-west. However, the extra requirements which have been applied, with good reason, to South West Water—partly by Europe and partly by the Government—have involved costs which were not taken into account when the green diary was fixed. The green dowry, which allocated some £260 million to South West Water, was simply not large enough, given the eventual scale and cost of its capital programme. That is the essence of the difficulty we face, and I am sorry that, even now, we do not have a proper solution to that problem.

Hon. Members from all parties who have constituencies in the south-west have badgered the Government, from the Prime Minister down, about the problem. We will continue to badger them until we see a satisfactory solution. Despite the harsh criticisms that have been expressed in the debate, I believe that a vital ally in the battle is the Director general of Water Services, Mr. Byatt. I do not know of a single Member of Parliament from the south-west who has not supported his action in setting the K limit for South West Water which will put a stop to the horrendous price increases, even though it will not tackle the differential that has built up already.

We all support him in his efforts, and many of us have made it known to the Monopolies and Mergers Commission that we support the regulator in the appeal by South West Water against his determination of the K factor limit and the limitation on factor price increases. I believe that the Monopolies and Mergers Commission must back the consumers of the south-west by rejecting South West Water's appeal.

The director general has shown that he has teeth, and he has used his powers properly in trying to limit price increases. South West Water should respond to the challenge of the new limits, as I do not believe that its case for future price increases stands up.

The South West Water top brass have done enormous damage—as have most privatised industries—by awarding themselves huge salary increases. Clearly, even if those increases had been halved or quartered, and even if the industry had set the kind of limits that we in the House have applied to our salaries, it would not have made a difference to the size of the water bills. However, the psychology involved is extremely important. Our constituents feel extremely angry when they weigh those salary increases against the percentage rise in their water bills.

I am pushed for time in the debate, and I know that Front-Bench Members wish to speak. In conclusion, I believe that the regulator has done a good job—I do not share the criticisms that other hon. Members have voiced in the debate. I think that the regulator deserves our thanks, and I hope that he succeeds in his efforts on behalf of the hard-pressed consumers of South West Water.

11.3 am

Mr. Richard Burden (Birmingham, Northfield)

Before the recess, my hon. Friend the Member for Sheffield, Hillsborough (Mrs. Jackson) and I raised some issues in an Adjournment debate which are extremely relevant to the debate this morning. Before Easter, we complained about the fact that a written parliamentary answer made a potentially fundamental statement about future charging mechanisms for water. That issue is a continuing cause of major public concern, and it is why regulation of the water industry is extremely important to many people up and down the country.

As my hon. Friend the Member for Hillsborough said, regardless of who may technically control the water industry, the resource is owned by the public. Despite the fact that the public are very concerned about water metering and that there are major doubts as to whether it makes sense environmentally, logically or in terms of cost and equity, one man—the water regulator, Mr. Ian Byatt—has committed himself to the expansion of metering as the norm for water charging.

The Government have concurred with his view, despite the growing public outcry and despite the industry's reservations. The clear message in the Government's written answer is that water metering will become the charging norm, even though rateable values will be allowed to be used beyond the year 2000.

That is why we must examine the whole system of water regulation. We must decide whether vesting power in a regulator is synonymous with effective regulation. I do not wish to knock Ofwat employees; a great many very good and committed people work for that organisation, and they have performed some very effective work since privatisation. However, there have been major problems with the way in which the regulator has operated with regard to the issue of water charging systems and pricing.

The hon. Member for Eltham (Mr. Bottomley) referred to the investment programme. Whenever I speak about water, it is my aim to conclude my remarks without referring to the financial system that was set up at the time of privatisation, but that matter must be addressed.

When water was transferred technically into the private sector, it was treated like no other private sector industry: it was guaranteed a monopoly market, it was awarded a gift of £1 billion, and its debts were written off at a stroke. However, when the industry was in the public sector, it was told that it had to pay off its inherited debts, which led to a lack of investment in the industry in the last few years before privatisation, and to subsequent price increases.

The rules suddenly changed when privatisation occurred. Recent statements about the K factor have made the situation a little clearer with regard to the financial featherbedding of the industry upon privatisation, but it has not been sorted out. That underlines the need for a more democratic element in our regulatory system.

Much concern has been expressed up and down the country about the balance between the core business and the enterprise companies within the water industry. I am not opposed to the water companies engaging in enterprise activities, but they should provide a service to the core business, not the other way around.

Time is short, so I shall conclude with some ideas about how to secure more effective regulation in the future. We need effective economic regulation of the industry in the areas of price and investment. Those issues must be treated much more democratically than has occurred in the past. The industry must be accountable, and it needs to link more successfully with other agencies.

The benefits system must mirror the real needs of people on low incomes. There must be effective environmental regulation of the industry, and hopefully the forthcoming Bill will make a start in that regard. There must be a much more effective consumer voice, and a separation of that voice from the official Ofwat structure.

In bringing the water industry to more democratic accountability, we do not intend to shackle management or to take away from professionals the tasks that they perform best. We are simply saying that, regardless of ownership, the water industry provides a public service, and it must be run in a way that is accountable to the public and in a way that recognises their economic, social and environmental needs.

11.8 am

Mr. Peter L. Pike (Burnley)

I congratulate my hon. Friend the Member for Sheffield, Hillsborough (Mrs. Jackson) on pushing for this debate on a subject which she has pursued vigorously and considerably. The role of the regulator in the water industry is probably more important than in any other privatised industry. Water is an absolute monopoly, and we do not have the choices in water supply which we have in electricity, gas and telephones. It is also an essential service, on which we all depend.

The hon. Member for Eltham (Mr. Bottomley) made a point about investment, and we must welcome the way in which he approached the matter. I hope that the Government and the regulator take a similar approach. It is wrong that so much long-term capital expenditure is funded from revenue. When hon. Members met the Water Services Association recently, we heard that 80 per cent of long-term capital investment is made from revenue. That is totally wrong, and I hope that the Minister will change that.

On the subject of water metering, it is surprising that it was not the regulator Mr. Byatt—who says he is neutral on the subject, although everyone knows that he is committed to metering—who issued a warning when the Secretary of State made his announcement earlier this month about relying on rateable values until metering could be introduced in the longer term.

It was the Water Services Association and the Water Companies Association jointly which warned against compulsory metering. They said: They hope this doesn't mean the thin end of the wedge towards universal compulsory metering for all domestic customers. We would certainly fight that on behalf of our customers very hard. It should be the regulator who is doing that, not the industry; I wlecome what the companies are doing.

A survey of Members of Parliament was carried out by Access Opinions on the role of the regulators and executive pay. In response to a question on the regulators of privatised utilities needing to strike a balance between the interests of shareholders, customers and staff', 90 per cent. of Members thought that customers were the most important. Even among Conservative Members, that figure was 82 per cent, while 98 per cent. of Labour Members said consumers. In response to a question asking whether Members believed that Ofwat was adequately protecting the needs of consumers, 36 per cent. thought Ofwat's response was inadequate, 19 per cent. thought it was very inadequate, and 6 per cent. had no opinion.

When the same question was asked about shareholders, the answers went the opposite way, with 58 per cent. answering that they thought Ofwat dealt with shareholders adequately, and 26 per cent. answering "very adequately".

I wish to refer the north-west customer services committee of Ofwat, which tends to do good job. It has limited resources, and I would like to see those resources increased. Mr. Anthony Goldstone, the committee chairman, refereed to disconnections, and said:

One disconnection is one too many". The regulator and the Government must address that matter. I would suggest time that Ministers ought to discuss the matter with the Department of Social Security to try to come to an arrangement.

Mrs. Helen Jackson

My hon. Friend and Front-Bench Members may like to know that members of the all-party group went to see the Minister for Social Security, and we are hopefully making some progress on that matter.

Mr. Pike

I thank my hon. Friend for that comment, and there may be an opportunity for liaison on deductions from income support. I believe that that would help that problem.

11.13 am

Mr. Brian Wilson (Cunninghame, North)

I add my congratulations to my hon. Friend the Member for Sheffield, Hillsborough (Mrs. Jackson), not only on securing this debate, but on her outstanding contribution during the past few years in ensuring that proper scrutiny is made of this subject through her activities in the all-party group.

The hon. Member for St. Ives (Mr. Harris) spoke of the "enormous consensus" in the House on the issue, but I am sure that he would expect me to take some exception to that. Some historic facts make it impossible for there to be consensus, a major one of which is that Conservative Members voted for privatisation and—by association—for the regime under which so many people are suffering. Opposition Members voted against it, which means that there can be no consensus.

We are in disagreement about what has been done to the industry, and the people we represent are on our side of the argument. We have the overwhelming support of the British people, which Conservative Members chose to ignore. Now—when they are facing the electoral consequences—it is a little late to bleat about the "enormous consensus".

I approach the subject from the regulatory side of the argument, and I also speak with slight trepidation, as a Member representing a Scottish constituency in what has clearly so far been an English and Welsh debate. That is because we in Scotland succeeded—where, I suggest, the hon. Member for St. Ives and others may now regret that they failed—in stopping the Scottish water industry being privatised.

Unfortunately, the industry will—for a brief period—be under the control of quangos. The hon. Member for Eltham (Mr. Bottomley) rather eccentrically described members of quangos as "people put there on the basis of merit". That is a new description. The Scottish industry will be in the control of quangos for a short term, until it returns to full local authority control.

Unfortunately, we have not had the same success in England and Wales, and we must now try to improve the regulatory system to make it work—as my hon. Friend the Member for Burnley (Mr. Pike) said—on behalf of the consumers.

My hon. Friend the Member for Hillsborough asked whether the Government or the regulator was responsible for what is going on, but I think that it is two sides of the same coin. The regulators are not mystical people dropped from heaven into their positions, but people appointed by the Government to do the work of the Government and to pursue the policies which are inherent in the privatisation programme. In general, that is what the regulators have done, and that is why we are determined that there must be a complete overhaul of the regulatory system, particularly with regard to accountability.

The regulator has allowed massive price increases for consumers in England and Wales, and he is not acting on their behalf. He is, instead, pursuing the policies and logic of the Government. The electorate make no distinction between the Government and the regulator in this area, and they hold the Government and the Tory party responsible for what has happened to water prices over the past few years.

The true scandal was neatly summarised in a recent article in the Financial Times, which gave a recent history of the water industry. The article said: The water companies were sold initially for £6.5 billion, with more than £5 billion of debt written off by the government. Yesterday. their market value was more than £12 billion, and shareholders have received more than £2 billion in dividends since privatisation. Customers, meanwhile, have faced large increases in their water bills, to pay for improvements in water quality, better sewage treatment and cleaning up beaches and rivers. On average, household bills have risen more than 5 per cent. above the rate of inflation for every year since privatisation. On the basis of that potted history, there can be no consensus. It is an absolute scandal which is increasingly being hung around the necks of the people who voted for privatisation in the first place.

The Times summed it up in these terms: While customers squealed, shareholders were laughing.

Mr. Peter Bottomley

Hear, hear.

Mr.Wilson

That may be the epitaph on the grave of the Tory Government, and the hon. Member for Eltham (Mr. Bottomley) says, "Hear, hear."

The article continued: By 1993, Northumbrian was making operating profits of £69.7 million on turnover of £239 million. One pound of profit in every four was being doled out to shareholders. The rest was rapidly inflating the value of their company. A similar pattern could be seen elsewhere. I can assure that hon. Member for St. Ives that there is no consensus on that, either.

Recently, there was a flurry of activity, with a more stringent pricing regime due to come in on 1 April. North West Water suddenly discovered that it had £180 million to distribute to customers and shareholders over the next five years. Immediately, the loyal Mr. Byatt came to the company's aid, and declared that companies which share the efficiencies made in their investment programmes will face less demanding price controls in future reviews. That was a quote from the Financial Times.

On that point, Kevin Lapwood of Smith NewCourt declared that Ian Byatt's declaration has unshackled the sector … Investors and the companies have been worried about how they could get the benefits of better financial performance out to shareholders after the electricity experience. They can now promise substantially better than expected dividend growth with the regulator's approval. The sinners among Conservative Members who have repented and who claim to be enormously worried, but say that the new pricing regime will see things all right and that Mr. Byatt is doing a tremendously good job, are being a little over-optimistic.

Disconnections are an evil, wicked and totally unnecessary act. To leave people without water in their homes is not something for which any civilised society should be responsible. Scotland is not the wealthiest part of the United Kingdom. People there living in poverty have difficulty meeting their water bills, yet it is legally impossible for anyone's water supply in Scotland to be disconnected. Somehow, the system has managed to survive a century and more. If that can happen in Scotland, it can happen in the rest of the UK. Disconnections should be made illegal.

If any Conservative Member seeking consensus or the Minister can stand up and make a moral case for disconnection, I would be interested to hear it. There is no need for disconnections. There are other means of recovery. The marginal loss sustained by non-recovery is one that the water industry can well bear.

The idea of companies for which Conservative Members are mouthpieces indiscriminately denying water to homes occupied by the elderly, small children or the sick strikes me as completely unacceptable in a civilised society. That does not happen in Scotland, and it should not legally be done in England. Why does not one Conservative Member have the guts to say that disconnections should not be legal in England and Wales?

Metering is only another form of disconnection, because if people do not have money to put in the meter, water companies do not even have to dirty their hands physically disconnecting water supplies. Metering is another assault on the poor, leading to further hardship and misery for people who cannot afford the excessive charges caused by privatisation and the lax regulatory regime, for which every Conservative Member voted. There is no consensus. The whole thing is a scandal and a scam, and one reason that the Tories will be finally judged next month, and then in a general election.

11.22 am

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

This has been an interesting and broad debate. My difficulty is to answer in seven minutes many of the points that were made.

I was intrigued by some made by my hon. Friend the Member for Eltham (Mr. Bottomley), and it was also interesting that my hon. Friend the Member for St. Ives (Mr. Harris) joined the hon. Member for Truro (Mr. Taylor) in leaning on South West Water. I am sure the company will note that with some concern.

The most interesting contribution was that of the hon. Member for Cunninghame, North (Mr. Wilson), which re-emphasised Labour's preoccupation with regulation to the point of strangulation—which is what we shall be in for if the electorate ever make the mistake of allowing Labour back in.

Privatisation has succeeded in its main objectives of allowing the water industry access to private finance and to enable a much higher level of investment than was possible—as hon. Members on both sides of the House accept—when the industry was in the public sector and subject to public expenditure restraints. Privatisation has removed the water industry's dependence on the Exchequer, and it has enabled a much increased investment programme of around £3 billion each year since 1989, dramatically to improve drinking water quality and the water environment, as well as allowing the renewal and necessary maintenance of infrastructure.

In England and Wales, in 1993, 99 per cent. of 3.5 million tests met drinking water quality standards, and between 1990 and 1993 there was a net upgrading in quality of nearly 16 per cent. of river length—the proportion of rivers in the highest-quality class increased and the proportion in the lower classes dramatically reduced. The percentage of the population at risk of water shortages, hosepipe bans and low pressure have all been dramatically reduced.

Since 1990–91—the first full year of privatisation—the water industry has invested about £15 billion. The new price limits set by the Director General of Water Services last summer allow for a further £24 billion capital expenditure programme over the next 10 years—£11 billion for quality improvements, £12 billion for maintenance of assets and £1 billion for additional water resources and measures to reduce the risk of flooding from sewers.

Mr. Rhodri Morgan (Cardiff, West)

Will the Minister give way?

Sir Paul Beresford

I hope that the hon. Gentleman will not mind if I decline, but I have only five and a half minutes left in which to reply.

That large-scale investment programme is necessary to make good the years of under-investment before privatisation—we heard the dramatic example from my hon. Friend the Member for Eltham of the sewage build-up in one Government office. The industry is now engaged on nothing less than a massive modernisation of the water and sewerage infrastructure, which will ensure that it complies with much higher European and national standards. The same level of investment would have been required had the industry remained in the public sector, but without the availability of private sector finance.

Much has been made of charges. Improvements in water and sewerage services and in the environment are not cost-free—somebody must pay. Charges have had to rise to help pay for investment, but the rate of increase in charges is much less than in previous years, and for the next five years will be significantly below the increase originally set at the time of privatisation. In his first periodic review of water price limits last summer, the director general set new, tighter limits to apply to charge increases from 1 April this year and for subsequent years.

The periodic review was the regulator's first opportunity to make a fundamental review of companies' costs and efficiency, and to address issues such as the cost of capital. He decided that companies would now be expected to make a lower rate of return on investment and to reduce their costs through greater efficiency. As a result, he was able to reduce price rises over the next five years from the average of 4 per cent. a year in real terms set in 1989 to an average of 1.5 per cent.

Mrs. Helen Jackson

Will the Minister give way?

Sir Paul Beresford

I have only three and a half minutes left.

In the full 10–year period from 1995 to 2005 covered by the director general's review, the average increase in charges is limited to less than 1 per cent. a year. Within those average figures, there are, of course, differential rates of price increase for different companies and for different groups of customers, to reflect the cost of the services provided. The price limit that the regulator sets each company applies to the average increase in tariffs.

Despite claims of a perceived growth in water debt and disconnections, they fell by 12 per cent. in 1992–93, by 33 per cent. in 1993–94 and by a further 7 per cent. in the first six months of the following year. Of the 2 million households identified by the Policy Studies Institute report as experiencing water debt last year, fewer than 0.6 per cent. experienced disconnection.

That can normally only take place after a length procedure, in which the water company has obtained a county court judgment that remains unpaid. The power to disconnect supply for non-payment of charges must remain as a last resort, particularly in respect of people who can pay but will not pay. We are not talking of the individuals who were so dramatically portrayed earlier.

Mr.Wilson

How does the Minister distinguish?

Sir Paul Beresford

It is for the courts to do that.

My right hon. Friend the Secretary of State recently made a policy statement about the basis of charging for water in England and Wales. The Government believe that, in the long term, metering is the best basis for paying for water in many circumstances. It is fair and equitable, in that it relates charges directly to the amount of water used and gives customers some control over their bills.

Payment by amount used encourages customers to use only the water they need which, particularly in dry areas, and it is important in developing patterns of water use that are sustainable in the longer term. With lower consumption, the need for costly capital schemes to develop new water resources may be deferred or avoided. Metering also helps in the detection and control of leakage from the distribution system, so it can play an important role in water conservation.

It is with regret that I recognise that I shall have to answer specific questions by writing to individual Members.

Contrary to the impression that Opposition Members have attempted to give, the privatisation of the water industry and the system of regulation that we have established have been both successful and effective. These developments have enabled a huge programme of capital investment to take place. They have brought improvements in water treatment, sewerage and sewage treatment.

As a result, we are achieving higher standards of drinking water quality, as well as higher standards in the water environment. The regulator has ensured that the rate of increase in charges will be much less than in previous years, while the levels of service provided by the water companies will continue, as over the past few years, dramatically to improve. The companies are becoming more efficient. Some of them are already announcing rebates and reductions in customers' bills. These are all developments to be welcomed and encouraged.