HL Deb 26 February 1988 vol 493 cc1423-53

11.24 a.m.

The Lord Privy Seal (Lord Belstead)

My Lords, I beg to move that this Bill be now read a second time.

This is a Bill of only eight clauses and three schedules, but it makes provision for two of the most important industries in this country. Over the coming months, the water and electricity industries will be preparing themselves for major changes which lie ahead. The privatisation of both industries is a fundamental election commitment of this Government.

Our experience hitherto with privatisations is that they transform the attitudes of those within the industry. Privatisation not only makes an industry more responsive to commercial pressures, but also allows it to take advantage of commercial opportunities. It also fosters a greater awareness of the needs and wishes of customers. Taking industries out of the public sector means not only a welcome source of income to the Exchequer but also that they need no longer compete for public funding with our other major spending priorities. But perhaps most important of all, privatisation encourages the wider spread of share ownership so that individuals and in particular employees can take a genuine part in the running of that industry.

Those are the main reasons the Government are determined to press ahead with privatisation of water and electricity at the earliest opportunity. Clause 1 of this Bill will enable the water authorities and the electricity supply industry to co-operate with government as we take our proposals forward. It will also, in the case of water, enable us to make progress with the establishment of the National Rivers Authority, which we believe is an important policy initiative in its own right. Clauses 2 to 7 and the schedules are about charges made by water undertakers, and more particularly about metering. They will enable compulsory trials of metering, and will facilitate the introduction of metering more generally.

Clause 1 gives an express power to the relevant public utilities to act in relation to government proposals for the transfer of any of their property or functions to another body corporate. I should like to describe the significance of this power in relation to the water authorities.

In April 1985, a Question from my noble friend Lord Nugent was the occasion for a debate in this House on the discussion paper on the privatisation of the water authorities which the Government had produced at the start of that month. It was in February 1986, after responses to that discussion paper had been considered, that we published a White Paper setting out our intention to transfer the water authorities into private ownership. In May 1986, the noble Baroness, Lady Nicol, initiated a debate on the water industry and on the privatisation proposals. Only a few weeks after that debate my right honourable friend the Secretary of State for the Environment announced that the Government were putting back the legislation for the privatisation of the water authorities so that we could extend the period for considering the complex issues involved.

In the manifesto, we reaffirmed our commitment to water privatisation. We said, however, that we would confine it to the utility functions of water supply, sewerage and sewage disposal. The non-utility functions of regulation and river management would not be privatised but transferred from the 10 water authorities to a single new national body, the National Rivers Authority. We provided more details of the NRA proposals in a consultative document last July, and a policy statement which was issued just before Christmas.

The utility functions of the water authorities represent on average some 90 per cent. of their expenditure, which now stands at about £2.5 billion on the revenue account, and about £1 billion on the capital account. So the water utility companies of the future will be very major businesses. Placing them in the private sector will open up to them a range of new opportunities. However, I stress that there will not be unfettered ability for them to raise their prices. Charges will be controlled, we intend, by a director general of water services whose task will be to ensure that customers are getting a fair deal. By contrast, in expenditure terms, the water authorities' regulatory and river management functions account for a far smaller part of their operations. But those functions are nevertheless absolutely vital.

In the months that followed publication of the 1986 White Paper we listened to the many voices which spoke up about our proposals. In particular, the Government were persuaded that it would not be right for a private company to have powers to regulate the activities of others in terms of what people can put into and what they can take out of rivers and other water sources. In that context, it has to be said that there have been increasing signs recently that the existing water authorities' structure is coming into question even within its public sector context. I am sure that your Lordships will know of the 1985 river quality survey which showed that the progressive improvement in the quality of river waters since the late 1950s had faltered somewhat and that there was a very small, but still worrying, number of instances of deterioration.

Although many factors can affect water quality at the institutional level we have increasingly been led to question whether responsibility for safeguarding river quality should be left in the hands of those who, by operating sewage treatment works, are responsible for the single, most significant polluting load which the river system has to bear. I do not say this in any way to denigrate the good work which water authorities have done, and continue to do, in cleaning up all forms of pollution. But the tension of their dual role under their present responsibilities is undoubtedly a difficulty.

Therefore, the Government have concluded that we should leave the regulatory functions in the hands of a public body to be called the National Rivers Authority. The authority must have an effective presence at regional level in the river-basins to take over the work of regulation. Its decisions will be, and will be seen to be, impartial, consistent within a national framework and based on a proper knowledge of local services.

Care for our rivers goes beyond regulation and also includes the activities of water resource control, flood defence, land drainage and fisheries. We have therefore decided that the N RA must be responsible for those functions as well. I must say that our proposals have been widely welcomed by those who have responded to our consultation and Clause 1 will enable us to take those proposals forward as quickly and as efficiently as possible.

The Bill also paves the way for the privatisation of the electricity supply industry by conferring in Clause 1 an express power on electricity boards and the Electricity Council to prepare for the restructuring which my right honourable friend the Secretary of State for Energy announced yesterday in another place—a Statement which was repeated in your Lordships House. I will therefore briefly say that the Government's intention is that privatisation should give customers and employees a better deal and a real stake in the electricity industry. We believe that although it has a good record, the industry will achieve even more once it is in the private sector and thus freed from government interference and made accountable to its customers and shareholders. The proposals announced yesterday are based on six principles which were set out in the White Paper and which I will not repeat today.

An essential element in the new structure of the industry, which was mentioned yesterday, will be the increased scope for competition, particularly in the generating side of the industry. It is to ensure that this will develop that the changes we are proposing to the Central Electricity Generating Board's role are necessary. We look to the industry's management and employees to assist in carrying out these changes; and we believe that this Bill will help them to play a constructive part in that process.

That is the reason for Clause 1. I apologise for the rather lengthy explanation but I felt that this was the moment when I could run over the ground. The remainder of the Bill, Clauses 2 to 7 and Schedules 1 to 3, is mostly concerned with providing a special regime for compulsory water metering trials. These clauses and schedules also clarify and update the existing law on metering and water charging generally.

The possible extension of water metering to domestic consumers has been debated at length for years; but in 1985 a joint water industry and Department of the Environment study recommended that the Government and the water industry should begin to work on the presumption that an extension of water metering might be worthwhile from an economic point of view. This was because metering should reduce demand by improving the detection of leaks and cutting down on inessential use. In turn, this will lead to better planning and programming of future investment on expensive infrastructure. The study also suggested that water undertakers should carry out a number of controlled trials of compulsory metering and recommended a number of changes to legislation.

However, since the group reported we have introduced a Bill in the other place to abolish domestic rateable values in most parts of England and Wales. New domestic properties and conversions will no longer be assigned a rateable value after 1st April 1990, and new charging methods will have to be found for water services. In addition, the rateable values for existing properties—largely those stemming from the 1973 revaluation—will become increasingly out of date.

The Government therefore intend to amend the Local Government Finance Bill, which is in the other place, to prohibit the use of rateable values for water charging purposes as from 1st April 2000. This will give the water industry a period of 10 years in which to introduce suitable alternative means of charging for water services. Metering is the most obvious but not the only option. Other suggestions include those based upon household size, floor area or a flat rate charge—possibly with extra charges for, say, hosepipes and garden sprinklers.

It will be for each water authority and water company to evaluate each of these options and decide which method is most suitable for its area. The decisions will not be the Government's. But whatever method is chosen it will have to comply with the essential principles set out in Section 30 of the Water Act 1973, repeated in Clause 3 of this Bill; namely, that charges must have regard to costs and must not unduly discriminate against, or show any preference to, any classes of persons.

Last year the water industry announced the sites it would like to include in a nationwide co-ordinated programme of trials. Since then the industry has been consulting its customers, who are likely to be affected, about the implications of the proposals. The industry has done so, of course on a provisional basis. Although it is still early days and tariffs have yet to be agreed by the Secretary of State very few customers have objected to the principle of the trials. Indeed, some undertakers have received complaints from people who are disappointed that the area they live in has not been proposed for a trial.

Clause 2 of the Bill confers charging powers on statutory water companies similar to those of water authorities under Section 30 of the Water Act 1973. The power will be additional to, rather than as a replacement for, their existing charging powers which are mostly in local Acts. The whole point of Clause 2 is that it will make it easier for the statutory water companies to participate in the metering trials and to introduce alternative charging systems to replace domestic rateable values in the future.

Clause 3 re-enacts the provisions, which I have already mentioned, of Section 30 of the Water Act 1973 relating to having fair charges enshrined in statute. These concern having regard to the cost of providing services and not showing undue preference to, or discrimination against, any class of persons.

Clause 4 provides for a special regime for charges made in connection with the metering trials. The difficulty is that no matter how carefully a water undertaker may fix trial charges, those customers taking part or those who are excluded could claim that they are being discriminated against compared with other customers. Furthermore, it may not be possible for undertakers to ensure absolutely that the tariffs in certain areas, being experimental, reflect costs precisely.

So under Clause 4 the constraints of nondiscrimination and cost-relatedness are lifted from charges in the trial areas. Instead, each water authority or statutory company wishing to carry out a trial is to submit proposals to the Secretary of State. He is then required to take into account the interests of the customers taking part in the trial and various other matters, including consultations with customers. My right honourable friend will then wish to see that the proposed charges are as reasonable as possible in the circumstances.

Clause 5 and Schedule 1 contain detailed operational provisions dealing with regulations, the metering of new domestic supplies, powers of entry, meter installation costs, information about meter readings required by undertakers where water and sewage services are provided by different undertakers, and arbitration in cases of dispute. The remainder of the Bill is largely technical, dealing with consequential amendments, repeals and definitions.

There is one more matter. One of the most important metering provisions is to be found in paragraph 6 of Schedule 1. This makes it clear that when a water undertaker's customers are metered compulsorily, the water undertaker and not the customer will in normal circumstances be required to meet the cost of installing the meter and any associated equipment. Under paragraph 1 of Schedule 1, however, developers will be responsible for meeting the cost of metering new domestic supplies where this is required by undertakers.

There is no doubting that although this is a comparatively short Bill it contains important provisions which are designed to enable two of our key utility industries to prepare for privatisation and for the water industry to decide what alternative to ratable values they wish to use as the basis for charging customers in the longer-term future. I beg to move.

Moved, That the Bill be now read a second time.—(Lord Belstead.)

11.42 a.m.

Lord Williams of Elvel

My Lords, the House will be grateful to the noble Lord the Lord Privy Seal for his introduction of the Bill and for taking us through it in his usual meticulous and clear manner. I apologise for my noble friend Lady Nicol, who I am afraid is indisposed today and is unable to take part in the debate. I know she would have liked to take part in it because she has strong views on these matters, particularly on water. As the noble Lord the Lord Privy Seal said, she initiated a debate at rather a crucial time in the evolution of government policy.

As the noble Lord has said, this is a short Bill but an important one. I say straight away that we do not like it. We are opposed in principle to the privatisation of utilities. We believe that utilities should stay within the public sector. I understood the noble Lord to say that the question of principle has been decided by the electorate. I shall have something to say about that later. The Bill also deals with the arrangements that the Government propose. I shall comment upon them in, I hope, sufficient detail for the noble Lord to answer certain questions about what is going to happen.

Before I do that, I should like to say that there are certain consequential effects of privatisation to which the noble Lord did not refer when he introduced the Bill, and the initial provisions of it, with a eulogy for privatisation. There is a welfare problem. I do not have to go over the ground that your Lordships have already covered in the cases of British Telecom and British Gas. It is clear that when utilities are privatised the treatment of the consumer is not necessarily—if I may put it at it lowest —better than it was when the utilities were under public ownership. I remind your Lordships that in the days when local authorities collected water and sewerage charges disconnections never happened. The local authority paid the authority on behalf of defaulters and then took action against them as rate defaulters to obtain payment, with all the necessary welfare considerations that a local authority will bring to bear.

When the water authorities decided to go for direct billing not only was this a large extra expense but it introduced the curious phenomenon of waterless households. The numbers are now rising. In default of any assurance to the contrary we must assume that, if and when water authorities are privatised, the commercial imperatives which these companies will have to follow will lead to even greater numbers of waterless houses. The welfare argument is one which we cannot ignore.

There is a second consequential effect of privatisation in the economic argument. Privately-owned utilities will inevitably look for their supplies at the cheapest rate in the short term. They are not particularly interested in ensuring that other industries which may be their long-term suppliers have a healthy future. Perhaps I may explain by citing one example of what I mean. I take the case of the South of Scotland Electricity Board and British Coal. The South of Scotland Electricity Board uses 4 million tonnes of Scottish-mined coal per annum and there are agreements in operation until 1992 and 1995.

The SSEB has recently tendered for future supplies from other sources. Despite good and improving offers from British Coal there is a real possibility that it will be undercut by subsidised foreign coal. The loss of the SSEB contract will effectively close the Scottish coalfields which were themselves developed to meet the needs of the board. There would be a loss of 4,000 jobs simply because of that policy. Generally speaking, imported coal is subsidised and it is cheap. Once the home fields are put out of action they can never be recreated and they can never be reopened.

If the SSEB is privatised—which is the intention of the Government—in whatever scraps and bits and pieces the Government have in mind, it too will go for the short-run advantage in procuring its supplies and it will pay no regard to domestic industry in the process. We are liable to see our coal industry decline simply because, for the moment, Australian, American or Polish coal is cheaper than British coal. That may not be the situation for more than a year or two, but once a mine is closed down it cannot be opened up again.

The proper costing for supplies to the utilities, particularly for generating electricity, should be on the basis of the long-run marginal cost. It should not he on the basis of short-run marginal cost because these are long-run investments.

Turning to the Bill itself, as the noble Lord said, Clause 1 deals with transfers. In passing, we note that these transfers will be the first pieces of privatisation to take place under the Financial Services Act. We note the general provision under Section 47 of the Financial Services Act which applies to all of us. It says: (1) Any person who—(a) makes a statement, promise or forecast which he knows to be misleading, false or deceptive or dishonestly conceals any material facts; or (b) recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive with a view to inducing investment commits a criminal offence. The penalty for such an offence is a maximum of seven years' imprisonment. The Government have to make sure that they do not make, recklessly or otherwise, any misleading statements about what will happen in their privatisation of electricity and water.

Transfers of undertakings to companies are governed by Sections 103 and 108 of the Companies Act and require auditors' reports. I wonder whether, when he comes to reply, the noble Lord will be able to tell us how the Government will establish a fair value for the transfer of water authorities and electricity boards. In the case of water authorities, the 1973 Act allowed for transfer of assets. The assets were then mostly unregistered. At the time very few water authorities had a complete register of their assets. Even now, a number of water authorities do not have a complete asset register. They know that a pipe starts here and ends there but they do not quite know where underground it goes. These assets were transferred at historic cost.

At the time nobody quite knew what the historic cost meant. Since then water authorities have compiled accounts according to historic cost and in some cases CCA accounting. Is that the right basis of accounting for such a transfer? There is no mention in the Bill of the transfer being at fair value. But it must be at fair value; otherwise the prospectus cannot be written accurately and will be misleading. If it is to be at fair value, how will that fair value be established? On what basis are the assets to be valued?

Secondly, with the creation of the National Rivers Authority, as the noble Lord pointed out, part of the activity of the present water authorities will be hived off into a new quango—a name we used to hear in those early days of 1979 and 1980. This new quango will take over part of the activity and part of the costs of the water authorities. In any prospectus for a water authority plc, we will need a five-year profit and loss account. That profit and loss account will have to be audited and restated for the past if, within five years of flotation, we are to take account of the removal of the activities which will go into the National Rivers Authority. I invite the House to imagine the accounting problems of restating water authority accounts to 1984 or 1985 when the water authorities are privatised.

If that is a problem, what about the problem with electricity? The electricity authorities, like the water authorities, have little idea of the exact locus of their underground assets. The White Paper to which the noble Lord referred says that the CEGB will be split up, area boards will have new responsibilities and the national grid will be partially owned by each area board and so on. The accounting problems and legal problems in splitting the CEGB and making a proper prospectus will be formidable. If the noble Lord thinks that that can be done overnight or easily, I advise him to try his hand himself. I have tried. And splitting up even small companies is complicated. If one tries to split up an activity like the CEGB, which does not know where a good many of its assets are, one really is in trouble.

The requirement not only of the Financial Services Act but of the Companies Act is that there should be an audited statement to say that the accounts will be true and fair. I challenge the noble Lord to demonstrate to us how these accounts can possibly be true and fair in the light of the proposed government policy. Clause 2 does something quite simple. It confers on statutory water companies the power to levy taxes. That is an extraordinary constitutional doctrine. I have always understood that taxes were levied by Parliament and not by private companies. However, Clause 2 gives the same power to statutory water companies as is at present held by water authorities in the public sector and therefore under the control of the Secretary of State who is responsible to Parliament

If a statutory water company or a water authority plc is allowed to fix charges—such charges as the company thinks fit—and is then allowed to demand and recover charges fixed in the manner it feels fit, this is equivalent to a tax. Up to now we have had a rate. When water authorities charge through the local authorities, it goes with the domestic rate. It still comes as a water rate and is charged on the basis of valuation of the property. I shall come on to metering in a moment. The problem is that metering will not be universal for a long time and so water companies, as they are to become, will continue to have to charge on the basis of a property valuation. That is a tax. I find it hard to see how Parliament can possibly confer on statutory water companies or anybody else the right to levy such a tax.

In Clause 3 there is nothing about the welfare argument. I brought up that argument in my introduction but Clause 3(3) deliberately sets out, as the noble Lord said, to ensure that no undue preference is shown to any class of persons. There is no ability to make allowance for welfare situations. If people are dying of hypothermia, it is tough luck. If people do not have water and cannot have a bath, that is tough luck. We cannot discriminate in their favour because the Bill tells us that we are not allowed to. That seems rather odd.

The noble Lord said that a good deal of the Bill is concerned with metering trials. Indeed it is; and I shall not go into the complications involved in water metering because, as the noble Lord said, we have debated this on many occasions. The problems are formidable. I come now to the major problem. Who will pay for all the work that will have to be done to implement the Bill? The Explanatory and Financial Memorandum says that the Bill contains no public sector manpower implications and that the costs will add to public expenditure only if, and to the extent that, external financing limits need to be increased for these purposes. The vast army of accountants and lawyers who will march into these organisations will be paid for by the consumer or by the investor when he comes to invest.

What will happen—and it could easily happen—if privatisation is not a success? What will happen if the market is not receptive to the flotation of water authorities? What will happen if the market is not receptive to the flotation of the electricity boards? Who will then pick up the tab? It will be the consumer. The consumer ultimately will pay. I can conceive of many types of market condition that will not allow the Government to float the water authorities and the electricity boards.

Millions of pounds—and I mean millions of pounds—will be spent on professional fees to set up the system which the noble Lord has described. He says that the Government have a mandate from the electorate to do this. The mandate doctrine is a difficult one. The mandate does not make it mandatory on the Government to do something. The mandate is permissive. If a policy turns out to be so lacking in sense that the Government decide that although they thought it right at the time of the general election they have come to the conclusion that it is not right and have decided to withdraw it, there is nothing in the doctrine of the mandate which says that they have to do it. Many people on all sides of the House feel that the privatisation, especially of water, is a serious mistake. On electricity there are definitely divided views. We are clearly opposed, and some noble Lords opposite are in favour.

As we go forward we see that privatisation is rapidly becoming something of a farce. I am sure your Lordships will remember a film—before the war I think it was—called "King Kong". King Kong was a giant gorilla who ultimately went berserk and ran around New York smashing up everything and pulling down the Empire State Building. I think that the Government's privatisation programme has become rather like King Kong. The Government are running around and smashing up companies and, similarly, as happened at the end of "King Kong", all the taps will run dry and all the lights will go out. That is what will happen if the Government pursue this policy.

Therefore I ask the noble Lord, the Lord Privy Seal, in all earnestness to take this unpleasant little Bill away and throw it in the waste paper basket.

12.1 p.m.

Lord Diamond

My Lords, I too should like to thank the Lord Privy Seal for having explained not only what is in the Bill but also what is intended by it, although not expressed therein. I also thank him for having explained the purpose of it so clearly and in a manner which is likely to keep the temperature as low as possible. I must say that I too do not like the Bill. But I come to that conclusion not in advance of considering the Bill but on having considered its intentions.

First I should deal shortly with what is in the Bill, which of course is very little. If I leave out the first clause, there are six clauses and three schedules dealing with water charges, the main effect of which is to remove from the consumers the choice that they at present enjoy of whether to pay their bills by volume or on the basis of rateable value. As I understand it, ever since 1981, domestic consumers could have opted for payment by volume but they have not done so. As regards domestic consumers, not more than one-tenth of 1 per cent. have decided so to do.

The noble Lord put forward the argument of the need to be less wasteful with water. I cannot attach much importance to his argument. Supposing, for example, the compulsion of paying by volume had the maximum effect of saving some 10 per cent. in the use of water by domestic consumers, it would thereby save approximately 4 per cent. of the total consumption of water. That is the most that any such compulsion could achieve.

So what happens to water? Seven and a half times that amount—30 per cent.—goes down the drain; 30 per cent. is lost because it leaks into the ground through faulty pipes, and so on, in the course of distribution. That is where we should look for saving in water. But to put a compulsion on the consumer to pay by volume for the sake of saving a comparatively minor quantity is not acceptable. Nor is it acceptable that the Government should, by way of the Bill, take wholly excessive powers in two respects. First, the powers that they take—albeit they are described in the Explanatory Memorandum as being, Powers to prepare for privatisation"— of course go much wider than that.

There is no single mention—not one word in the text—about privatisation or the NRA which is also contemplated. The Bill provides, as the noble Lord, the Leader of the House said, that any property or functions of a relevant public utility"— when they are being transferred, shall include the power to do anything which in the opinion of the utility…is appropriate for the purpose of— (a) facilitating the implementation of the proposal for the transfer". The transfer could be any type of transfer. If they wanted to do so the Government could decide to transfer the whole of the electricity industry to the Corporation of London. That is a body corporate. I cannot see much point in them doing so, but what I am trying to make clear is that the Bill provides powers which go far beyond privatisation alone. If I have that wrong, no doubt the noble Lord will tell me so when he comes to wind up. Indeed, to be fair to those who have drafted the Bill, the rubric refers to: Power to act in relation to proposals for privatisation etc.". It is the "etc." that is the important part.

I also dislike the removal of accountability from Parliament. In subsection (4) it states that: the powers conferred by this section"— which as I have already said are very wide and much wider than the Government need— in relation to a proposal shall he exercisable whether or not Parliament has given any approval on which the implementation of the proposal depends". If, for example, the Secretary of State for the Environment has a further change of mind, he is entitled to think again on certain matters. He has already had one important change in regard to the NRA. Let us suppose that, on thinking again, he should decide that the pressure is now moving in the other direction, and he wants to remove the NRA, but much expenditure has been incurred by the water authorities in preparing for a reconstruction which involves that body. Then Parliament could not complain at all even though all that money would be wasted. As the noble Lord, Lord Williams of Elvel, pointed out, millions of pounds will be involved in the preparation towards privatisation which the Government have in mind. Secondly, we are, by way of the Bill, invited to say that the expenditure shall no longer be subject to the criticism of Parliament. Therefore, in those two major respects we think that the Bill goes too far.

The main focus of the Bill is privatisation of two of our major industries and two of the remaining national assets which the Government have not yet got their hands on. On these Benches, our approach to privatisation or nationalisation is not dogmatic as it is on the opposite Benches. We do not regard changes of ownership as being crucial. Whether an industry is owned by the Government, in trust for the nation, or owned by private individuals, it can still function efficiently. We do not accept the view that it is automatically more efficient for an industry to be run in the private sector than in the public sector. It is often alleged but it is never proved. However, we accept that if you have good management in either sector, you achieve good results; conversely, if you have bad management, you have bad results.

It is evident that the Government and everyone else seem to be wholly satisfied that the management of both electricity and water is good. We do not accept the argument that the Government keep trotting out: that one of the major advantages of privatisation is that the presently nationalised industry will be free from government interference. That is a most extraordinary argument to come out of the Government's mouth.

If the Government think that their actions are damaging the nationalised industries; if they think that Cabinet decisions are unwise and that they should stop interfering, as they put it, with the nationalised industries, it is open to them to do so. They need not continue to reach had decisions and interfere in a damaging way. They could come before the House and say, "We had better privatise this industry, because so long as it is nationalised, it will he subject to our damaging interference".

I do not accept the view—I had a great deal to do with this matter, as does every Chief Secretary— that the contribution to the thinking made by the Treasury, and which no doubt continues to be made by the Treasury, is anything other than helpful in the national interest. We reject the rather silly argument that the only way to get rid of government interference of the wrong kind is to privatise an industry.

Nor do we believe that an industry should he free from accountability. It should be accountable to Parliament through the Government (through a Minister) or to its shareholders. The White Paper is ambivalent about the industry being accountable to its shareholders. On the one hand, the White Paper says that it is right that the industry should be accountable to its shareholders, and that that will exercise a beneficial influence on the actions of managers, directors, and so on; but, on the other hand, it compares that with accountability to the Government and thinks that one is much less than the other. Accountability is necessary in each case.

We judge each privatisation proposal on its merits. We try to see where the national interest lies, but we state that it is up to those who want to make the change to prove that the change is in the national interest. The onus of proof lies on whoever wants to make the change, whether from nationalisation to the private sector or the reverse.

We believe that where a natural monopoly exists, the natural place for that monopoly is in the public sector. The public should be protected by a public corporation, with all the familiar safeguards that go with it. What is anathema to us is a private monopoly of the kind that gas has clearly turned out to be and, if we are not careful, the industries we are talking about—I know that we are not dealing with their privatisation at the moment, but that is what the Bill is about—are likely to be.

A private monopoly is anathema to us because the protection which the Government say that they can provide artificially through Oftel, Ofgas and all those other bodies which are supposed to have the power to protect the consumer against the commercial driving force of the boards of the privatised industries, would have to be so burdensome as to stifle the enterprise and initiative which is held to be the justification for privatisation.

We conclude that if either a public or a private sector industry is working well, we should leave it alone. Water and electricity are held to be highly efficient. When the Secretary of State introduced the Bill in another place on 21st October, he praised the water authorities for their efficiency, labour-saving, high investment and sound financing. As to electricity, he said that the industry's safety record was second to none.

The noble Lord, Lord Marshall, has been universally acclaimed to be a good boss. With regard to the recent hurricane, we all recollect that the managers and workers in the electricity industry coped magnificently with the difficulties involved. Against all that, there must be pretty solid arguments to justify the enormous upheaval that will be involved in privatising those two industries.

Let us look for a moment at water. As we all know, some 99 per cent. of all households are connected to a public water supply. The supply of water is a natural monopoly. That was so stated by the Prime Minister in January 1985 when she said that the water authorities were natural monopolies. It was repeated by the Secretary of State in October last year when he said: I recognise that the provision of water services is a natural monopoly". I repeat, the natural setting for a natural monopoly is a public corporation or public utility where the goal is the most efficient way of serving the public, rather than the maximisation of profit for a shareholder. The Government recognised that in the other place when the Secretary of State, in introducing the Bill, said: The business of protecting the environment and the conservation of rivers, and of ensuring that all the disparate interests, including those of the utilities. are protected, is essentially a public sector regulatory function".—[Official Report, the Commons, 21/10/87; col. 770.] That is why the Secretary of State is setting up the NRA. We accept that if we are to have such a reconstruction, the NRA is essential. But it is difficult to see—we do not yet know the details of the way in which the water industry is to be reconstructed—that there is much scope for competition in the distribution of water. The consumer will still be left with no choice. That is clear. He will have one tap, or two if he has hot and cold water coming from the same source. It will not be open to him to obtain his water from a different source. The only difference that the Bill provides is that he will no longer have the option to pay by volume.

Most of what I want to say about electricity has already been said. I see that the clock is ticking on. We cannot see that the creation of two generating boards in the place of one will provide the kind of competition that is essential to protect the consumer where there is again a natural monopoly which will be turned from a public monopoly into a private monopoly.

We feel strongly that there is nothing in the Government's proposals or the White Paper about protecting the environment, so we conclude that the restructuring of the electricity supply industry does not necessarily involve a change of ownership. The little bit that has been done could have been done by making two generating boards in place of one. It could have been done very easily without changing the whole, with all this upheaval. The customer will still face a monopoly supply. It will be a private monopoly instead of a public monopoly. We share the criticism of the noble Lord, Lord Marshall, that at the end of the day the consumer will have to foot the bill.

I say to the Government that if these two industries are—indeed they are—working well, if there are going to be all these difficulties in trying to turn them into monopolies with a modicum of competition which will be totally inadequate, why not leave well alone?

I am afraid that the Government have made it absolutely clear that their first priority is not the efficiency of the industry. Their first priority is the transfer from the public to the private sector, according to their dogma and philosophy, of every industry which rests in the public sector. We know why they are going to do it. They are going to do it because at the end of the day the Government will get a once-for-all windfall which will not be available to any future government; a once-for-all windfall of immense proportions, which they will use not for reinvestment either at home or abroad. They will use it for reducing the burden of taxation in a way which inevitably helps those who already pay the larger share of the burden; that is to say, it will help the rich rather than the poor. It will accentuate the divide between the haves and have-nots

It will, in turn, result in the sucking in of foreign imports and will thereby imperil the one sensitive, vulnerable part of our economy which even noble Lords on the other side of the Chamber accept; namely, the balance of payments. That is what will come if this Bill goes through and the Government's proposals go through with it.

12.20 p.m.

Lord Nugent of Guildford

My Lords, I should like to thank my right honourable friend in another place and my noble friend the Leader of the House for the exposition of the Bill which he gave us, delivered most lucidly and with his usual charm and persuasion. I may say that it was very far from the ravaging King Kong suggested by the noble Lord, Lord Williams of Elvel. It all seemed very sound and sweet, though I have one or two comments to make.

My noble friend referred to the debate which I raised here on an Unstarred Question two years ago on the White Paper which was produced at that time on the Government's plans for privatising the water industry. My major objection to the proposals which I explained to the House was the constitutional one. At that time the Government's plan was to privatise the regional water authorities, complete with their existing functions. They would then become owned by private shareholders, being made responsible for the statutory regulatory functions under the 1973 Act and for the statutory water quality standards under the 1974 Control of Pollution Act and the EC regulations. The Government have met my objection satisfactorily by creating the National Rivers Authority.

Here I take up a point which the noble Lord, Lord Diamond, made. It is curious that the National Rivers Authority, which after all will be a very important statutory body, is only mentioned in the Explanatory Memorandum and is never mentioned in any of the clauses. It would have been normal to take powers specifically in one of the clauses, anyhow—perhaps in a subsection of Clause 1—to give a definition of what the National Rivers Authority will be. My noble friend may care to look at that.

He has told us that this is the paving Bill for privatising the water industry and that we shall get substantive legislation in the next Session. The Bill will split the industry into a National Rivers Authority appointed by Parliament, responsible for statutory functions, and 10 regional plcs responsible for the operating functions. I do not know whether or not the Government took note of my earlier observations, but they certainly met my observations completely. Of course, they do so at the price of splitting the industry.

My second major point is that in last summer's general election my party, as my noble friend rightly said, campaigned on privatisation policies, specifically mentioning water. Thus the wish to do this has been fully endorsed electorally. Indeed, governments all round the world are now busy privatising. Even Mr. Gorbachev is trying to do so. So I do not think I can continue to oppose this in principle, though I doubt whether there will be much joy in it for the Government or anyone else.

The economic structure of the industry is one of static demand plus huge environmental responsibilities. So profit prospects are not good. I accept that in principle my noble friend is entitled to do this; therefore I must give the best support I can to making the Bill as good as it can be when it comes along next year.

First, let me say to my noble friend that the Government's statement on the NRA is in my view entirely satisfactory, clear and rational. But inevitably it amounts to a process of amputation limb by limb of the functions of the existing regional water authorities and their transfer to the National Rivers Authority. This is painful reading to all who have worked so hard over the past 14 years to make a success of the Water Act 1973, with its concept of integrated river basin management which is generally acknowledged by water engineers to be the best in the world. However, given the Government's decision to privatise, this is the price that has to be paid for the strengthened incentive, which I recognise, towards management efficiency which my noble friend believes he can achieve with privatisation.

Certainly the NRA needs a regional structure, to which my noble friend referred, and it must be in constant contact with the life of the rivers on the ground. Rivers are living things and arouse strong local loyalties and passions. This is to be achieved by taking over the regional water authorities' regional committees for land drainage, fisheries and navigation where appropriate. But it implies taking over some thousands of staff from regional water authorities and creating the NRA, turning it into a quite hefty organisation. There is a danger of an overlarge bureaucracy growing up, and, more serious, a duplication of expensive professional services such as monitoring and hydrometric work which will also be needed both by the NRA and by the new private water companies for their functions.

I have heard that the regional water authorities are now making doubtful noises about whether they could offer contract services to the NRA to perform some of these functions for the NRA in order to avoid duplication. I urge my noble friend to look at this very closely, to try to make sure that where possible the new private water companies on contract perform professional services, in order to avoid duplication by the NRA, consistent of course with the independence of the NRA.

I now turn to the financial structure. As my noble friend has told us, the water plcs are to be free to make the best profit they can for the benefit of their shareholders. My noble friend has told us that the charging limits will be laid down for each plc by the director general of water services. The water quality objectives will he laid down by the NRA. Within those parameters, the water plcs will he free to make the best profit they can and pay the highest dividend that they can to their private shareholders—the new owners of the industry.

I believe that that is a mistake both in principle and in practice. The better structure is that of the existing private water companies—a statutory limitation of dividend—where the surplus goes to reducing charges to the customer. This system has been tried and tested by the private water companies over many years and it works very satisfactorily.

It also has the initial attraction of eliminating the need for the impossibly difficult task of the director general of water services of annually fixing the charge level for each new water company which is consistent with its making a profit and not charging too much to the consumers.

In my view there are two main reasons why that preference should be accepted. I believe that most people will feel an ethical objection to the idea of the water charge they pay to a monopoly supply company providing a profit which pays an increased dividend to private shareholders. The weight of that objection is obviously a matter of opinion, but I believe that that is cogent.

The second reason is a practical one and relates to the long-term capital needs of the water industry. The capital expenditure of the industry now runs at about £1 billion a year. It is the major element in the annual increase in water charges which everybody dislikes. This heavy rate of capital spending will not decrease. On the dirty water side, in addition to renewal and expansion of treatment works and long-sea outfalls there is the formidable liability to renew the greater part of hundreds of thousands of kilometres of sewers. The water authorities have been diligently surveying these buried assets. In my notes I have put a query after that word, as I do not know whether they are assets or liabilities. But the ultimate cost of renewing or replacing these is unknown. Nevertheless, it will be large and it will stretch over many years.

The clean water side is probably well provided for as regards supply for the present; but transmission problems are comparable in scale with the sewers. The present ad hoc policy of "repair on burst" needs to be replaced by a comprehensive programme of repair and renewal again involving huge long-term expenditure.

Then from time to time there will be windfalls of the kind that we have just had of de-nitrification which will cost the industry something in the order of perhaps half a billion pounds. That kind of thing may arise as a proposal from the EC or by some environmental matter which blows up from time to time. That is inevitable. The industry is basically concerned with protecting the environment.

Unlike conventional industry, the continuous heavy capital expenditure for the water industry is to be seen against the background of a virtually static demand. So despite the economics of modern technology, the trend for charges is inevitably upwards.

One or two private water companies may have scope for private property development, but the heavy weight of capital expenditure will continue as now to be the major influence on the annual increase in charges. I ask my noble friend in all seriousness whether he really sees the new private water companies, clobbered as they are with this big capital expenditure and with increased charges, ever considering paying an increased dividend to their shareholders? I just do not believe there is scope for that.

I suggest to my noble friend that the proposal to free plcs to make an unlimited profit is unsound in principle and impractical in practice. I hope that he will give further thought, and that my right honourable friend the Secretary of State will also give further thought, to turning to the statutory structure of the existing water companies.

The noble Lord, Lord Williams of Elvel, mentioned the problem of preparing for privatisation by completing an audited statement of the existing assets. That of course clearly has to be done before going to the market. I have never seen such a statement, but I think that it would be a formidable undertaking.

I wish to add one point about the metering trials. Yes, I am sure that this measure is absolutely right. Clearly when the new community charge comes in, the exposure of the existing rates basis for charging becomes even more theoretical so the introduction of meters must be right. There is also the constitutional point that for the private companies to go on indefinitely levying what is in fact a tax in principle as the noble Lord, Lord Williams, said is most undesirable even in the interval up to the year 2000. I am entirely in favour of compulsory metering.

I have one point on tariffs which I should like my noble friend to consider. When the government are constructing the tariff structure, they should construct the tariff on the basis of a small fixed charge for a minimum quantity of water which would he sufficient for small households with low incomes, such as retired people and others, so that the quantity measurement would only come on after consumption of that minimum amount. That would relieve households with small incomes of anxiety about the use of water. It would possibly save them anxiety about hardship as a result of hygiene. That is a small but I think important point as regards the community as a whole. Apart from that, the metering arrangements seem to me to be good. I was glad to see in Schedule 1 that the cost would fall on the industry. It is a very tepid welcome that I give to the Bill. I hope that my noble friend will take note of my points.

12.36 p.m.

Lord Elliott of Morpeth

My Lords, I am very pleased to follow in this debate my noble friend Lord Nugent of Guildford. My noble friend has a very detailed knowledge indeed of the water industry which I think we all recognise him to have. In fact I think his experience in the water industry is possibly unique. I do however have some experience myself and I declare an interest. I am at this time chairman of one of the bigger statutory companies. I am a vice-president of the Water Companies Association and for 12 years I had the honour to be the president of that body.

I have no objection at all to privatisation in principle. This Government's privatisation programme is one of the main reasons for their outstanding successes. To roll back the frontiers of state ownership and to provide the nation's utility services with the greater strength and direction of purpose which life in the private sector brings must be to the benefit of all. Not only is the improvement of services encouraged, but privatisation means that the substantial drain on the public purse is eliminated.

I was so very pleased to hear what my noble friend Lord Nugent said about the statutory model in the industry. The statutory water companies have been in existence for a very long time. They have served society for a very long time. In July of this year, I hope, I shall preside over the 143rd annual general meeting of the Newcastle and Gateshead Water Company, and I shall be very proud to do so.

For several hundred years, in some cases, the companies have demonstrated to the public that they give a very good service indeed. Therefore, it is wholly appropriate as I see it that the water industry can he privatised in that a quarter of it is privatised already. Something like 25 per cent. of the population of England and Wales receives its water from the statutory companies.

The companies vary in size. The largest supplies a population of 1.3 million, but all of them are completely in the private sector. Their shares are listed on the Stock Exchange and are traded in the normal way. They raise money for capital works by making new issues of stock, if I may say so, without any difficulty at all.

They are liable to corporation tax. They are not a drain on the public sector borrowing requirement. Where they differ from public limited companies and others in the private sector is that Parliament in its wisdom has subjected the companies to a series of financial controls in order to make absolutely sure that the consumer is protected against the abuse of a monopoly.

In any monopoly situation there must be some form of regulating mechanism because the consumer is captive. In the normal commercial world the interests of the customer are looked after by competition and market forces. A business failing to satisfy its customers does not remain in business. Where consumers have a choice, they exercise it.

However, where a monopoly exists, competitive market forces must be replaced by some form of regulating mechanism. In an absolute monopoly situation such as that found in the water industry, I believe that the regulatory mechanism must be absolutely effective. The system of regulating the statutory water companies at this time is based on profit limitation. Dividends are subject to maximum limit and coupled with that, the law requires that any surpluses made by the undertaking are returned to the consumer. The expectations of shareholders under that system are fettered and each company and board can devote its energies to forming judgments as to how its legal responsibilities to the consumer may he discharged.

The statutory company, as we constantly suggest, is consumer oriented. I noted with interest that when the Bill was before another place, Mrs. Virginia Bottomley put it in another way. It was a rather nice way. She said: Statutory water companies, based on a philosophy of service, act as mutual companies together with the consumers". [Official Report, Commons, 2/2/88; col. 941.] That is the system of regulation which has been in existence for a long time; it is well proven and effective. Throughout the privatisation debate in another place, ministers consistently paid tribute to the proud tradition of service of statutory water companies and the great contributions that they have made to the nation's water supply industry. I take this opportunity, as a vice-president of the Water Companies Association, to thank them for their regular tributes.

I should like to turn for a moment to the government proposals. It is proposed that the utility functions of the water industry should be privatised as plcs with no limitation on profits. Instead, consumers are to be protected by a new body which will put a ceiling on prices and lay down standards of service. The suggestion is that shareholder pressure on the utility companies will encourage them to operate as efficiently as possible so that they can produce the maximum dividend which the price-regulated income from consumers permits.

Perhaps I may make this comment about the industry in general. The water industry in this country is a very substantial business. There are 10 regional water authorities and 29 statutory water companies. It is the intention, I understand, that the water companies, under the terms of the Bill, will be brought under the same regulations as the new plcs.

I ask your Lordships to imagine the size of the body which will have to be brought into being to undertake this regulation. The noble Lord, Lord Williams, used the term "quango". I had not heard that term for some time; nor had I heard of King Kong for some time. Possibly it is appropriate. It will be necessary for that body to be absolutely certain that the consumer is properly protected. Such an organisation will have to be very large. It will also be expensive. Where is the money to come from? There is only one source, as I see it, for that money. That is the consumer. Whether consumers will be happy about having their water charges increased because of that method of privatisation, I leave your Lordships to judge.

I make clear at this point that I wholly agree with the setting up of the National Rivers Authority. As has been said several times in the debate, we all accept the common sense of keeping the important responsibility for water resources and environmental regulation in the public domain. My remarks are directed at the proposed office of water services.

As my noble friend Lord Nugent and several other noble Lords have stated, the water industry is very capital intensive. From my own practical experience of the industry as chairman of a statutory company, I can confirm that capital investment is constant. It is essential. As anyone experienced in the commercial sphere will realise, the obvious way of maximising profits in a situation of price regulation would be the reduction of capital expenditure, and the potential for that in the water industry—again, I speak from experience—is very considerable. Much of our capital investment is unseen. It is under the ground. A great deal of it has to be scraped, lined and renewed. The mains are constantly in need of repair and maintenance.

In addition to that, water is a long-term business. There has been great criticism in the North of England over the Kielder reservoir. It has been said that it contains far more water than is ever going to be needed. The same was said about the Catcleugh reservoir which is owned by the Newcastle and Gateshead Water Company and was constructed at the beginning of the century. It was obvious to those living and working in the North of England that had the Catcleugh reservoir not been constructed at that time the North-East of England would have been very short of water just after the last war. I give that as an illustration of how long-term, capital investment in the water industry is. One must look ahead 50 or 60 years, or even longer.

If there is a reduction in capital investment, the security of the water supply, both in terms of sufficiency and quality, can be jeopardized in the longer term. I recognise that the Government fully appreciate that potential underinvestment would be dangerous and serious. The Bill proposes that the director general of water services will have a responsibility for monitoring capital expenditure to see that it is sufficient. He must also, in conjunction with his new body, make quite sure that the capital investment has been made. Again, I ask your Lordships to envisage the resources which will be necessary for that official to carry out his task.

One is tempted to say that with all the controls which this new body will have to put on the new plcs, it will be very difficult for the plcs to operate as such. The Government also seek to make it clear, and have done in another place, that the director general will not be responsible for the running of the water undertaking. However, surely effective regulation requires that in fact, if not in law, that will be what he shall have to do.

I therefore go on to pose the question of whether, even given adequate resources, the regulatory system which is proposed will provide protection for the consumer which is adequate. As I said earlier, an absolute monopoly must have absolutely effective regulatory control. I have touched on capital investment. However, there are other matters such as water quality, pressure and customer service which are just as vital.

Those of us in this House with experience of the commercial sector will be well aware of the pressures on management to provide the best possible return to the shareholder. I find it difficult to believe, as I am sure other noble Lords will, that any system of regulation can be devised which will permit and encourage shareholder pressure and yet effectively protect the consumer. To put it another way—again, I follow my noble friend Lord Nugent—I believe that the plc ethic and effective protection of the consumer are incompatible in a total monopoly situation. Either the consumers are properly protected and the shareholders are disappointed or it will be the other way round.

Having dealt with the disadvantages of the plc model, in fairness I should like to examine the statutory company model in the same way. As I have said, I believe that the efficiency, good service and value for money which has been provided by the water companies over many years is not in question. What is said, and has been said in another place, is that the regulatory system of profit control provides too little spur to efficiency, since expenditure can be passed on directly to the consumer. That may be so, but it has not been borne out in practice. Before changes in the water authorities' rates of return requirement made comparison meaningless, over two-thirds of the statutory companies charged domestic consumers less than the relevant authorities. Moreover, until 1974 the statutory companies were subject to price regulation as well as to profit control. It was not at the behest of the companies that price regulation was removed at that time.

If this is the only disadvantage of the statutory model, I suggest to my noble friend that it can be remedied much more effectively, economically and simply than can the disadvantages of the plc model. Is there any reason why there should not be a small office of water services created to carry out the same role as that currently undertaken by the Monopolies and Mergers Commission? If that were done, would it not provide an external spur to efficiency? It would be far less unwieldy and much less expensive, but the well being of the consumer could be absolutely assured.

It is for these reasons that I appeal to the Government through my noble friend to give further consideration to the utility services of water, sewerage and sewage disposal—what in the industry we call the core business—being privatised on the profit-limited statutory model adapted as I have suggested. The non-core business would then be dealt with by plcs within the same corporate group. This view is very strongly supported by the CBI.

I apologise for having taken up so much of the time of the House, but I believe that if the Government were to privatise the core business on the statutory model they would find their proposals for privatising the water authorities much more acceptable to consumers in business and private sectors alike.

12.53 p.m.

Viscount Hanworth

My Lords, this is enabling legislation and perhaps the last chance of influencing the Government's policy for privatisation of the electricity industry. Since yesterday's Statement, it is clear that no major changes in their policy are likely. Nevertheless, I still think it is not inappropriate to state the objections to the policy; and perhaps at later stages of the implementation some notice may be taken of what I say, since I represent the views of many.

The Government's contention that the cost of electricity can be reduced by privatisation is surely a chimera, and is only used for political argument. Where can savings and increased efficiency come from? The CEGB's power stations are as efficient as modern technology can make them—some say even at the expense of reliability. Some small savings in the number of staff employed might be possible, but comparisons with manning levels on the Continent are not valid because the CEGB provides design and maintenance staff, which should not be counted in making a fair comparison. There will be the ability to buy cheaper foreign coal, but that is a side issue which need not depend on privatisation.

Having said that, I am not in principle against the creation of new privately-owned generating stations, large or small. The difficulty is in formulating a longterm agreement for the use of their potential output. The grid ought to bring in power stations in order of their efficiency to meet the load. In any case, you cannot ship large quantities of electricity over considerable distances without significant loss and also destabilisation of the grid, due to the reactive current component. To dismember the whole of the CEGB and privatise the area boards is simply upsetting something which is working well.

Here I quote from an American's remarks on this subject: If you were starting to organise your system from scratch, we'd have a darned good try at selling you our way of doing things with regulated investor-owned monopoly utilities. But if you've got a good system that works efficiently—and we think you have—then don't mess it about.". If the recent article in the Financial Times represents the Government's thinking, the controls they propose for the privatised industry render the definitions of free enterprise and competition within the industry quite meaningless in this context. The Government seem set on the dogma of privatisation regardless of the circumstances, and I am reminded of the sportsman who shot at anything that moved. The Government seem to desire to privatise anything that trades. However, the Government are not complete fools and I suggest that in this case there are even more important considerations. These are, first, that if new power stations could be paid for by private funding it would greatly reduce the PSBR, and if any existing power stations could be sold off the money would be useful, as it has been from other sources.

Secondly, it enables the Government to escape from the obligation of taking most of the coal needed by the coal-fired power stations from our own pits at much higher prices than those of imported coal. This would of course conceivably introduce desirable competition in our own coal industry. Thirdly, there is no doubt a desire to avoid trade unions having the potential power to bring this country very quickly to its knees by a strike in the electricity industry. But in this area we have most sensible and responsible unions. Splitting up the industry could lead to a much more dangerous situation. So much for open government and informing the public of the reasons for government policy.

Finally, if the Government are determined to pursue their policy, regardless of its side effects, into an uncharted sea, I remind them of the CEGB's policy and that of the electricity boards of trying to buy British. I suggest to the Government that in an uncharted sea one should move slowly, first noting any lessons from the experience of other industries both in this country and abroad. In this context they might properly try to get the private sector to fund some new coal-fired power stations. They will privatise the area boards, but that is hardly relevant because it may well increase the costs to the consumer. As it is, the existing arrangements have only to cover running and capital costs: they do not make a profit. Many of us deeply regret the dismemberment of an efficient organisation and the move into the unknown without at least having felt the way forward.

12.59 p.m.

Lord Monk Bretton

My Lords, I should like to give this Bill a word of welcome and I can assure your Lordships that it will be brief but cordial. I do not feel that it should really be regarded as a contentious measure because it is not the measure that is in fact going to privatise water and sewerage: nor is it going to privatise a single electricity-generating enterprise.

On what would be more contentious—in other words, actual privatisation—I am not sure that the subject is strictly relevant to the Bill. I do not intend to say too much about that primary decision at this stage. Perhaps the less I say the better. I am tempted to make a few brief remarks. What matters is not who owns and runs the services, but whether the regulatory framework adequately protects the public. Thereafter it is how the services are best run that we have to consider.

I believe that privatisation has brought some advantages. It can better motivate; it can take a load off the public sector finance; it allows greater flexibility in provision of services, and so forth. In that connection it is fair to mention that since privatisation British Telecom's charges to the public have fallen by nearly 9 per cent. in real terms. There have therefore been some benefits to the customer therein.

So much for politically charged remarks. I shall give the ultimate in shorthand descriptions of this Bill as opposed to the admirable way in which the Bill was introduced to us by the Leader of the House. The Bill does two things. It enables an advance setting up of a shadow organization—that includes in particular the new national rivers authority—prior to privatisation. It also provides this pilot scheme for metering water supply.

With regard to the first aspect, I believe that it will provide us with smoother transition in advance of privatisation. It is a much more complicated matter than it looks, and therefore there is much to be said for endeavouring to run in this machinery in good time, and carefully, and to think further about some of the difficulties and problems that have been mentioned today in this debate. Another advantage is that it will probably reduce staff uncertainties in the industries concerned. That is very much to the good.

On the matter of water metering, this has been written on the wall for a very long time. I listened to what the noble Lord, Lord Diamond, said. He felt that metering would save so little. I believe that that is what we want to find out. We know that a substantial amount of water is supplied by meter as commercial supplies. There is no proposal to introduce universal metering in this case. It is simply an attempt to do so in those areas where it would help the situation most. My feeling is that metering is much more a matter of logistics and not a matter of politics. It is something that is likely to take place anyway. Therefore there is everything to be said for a pilot scheme.

I should like to take this opportunity to make a few remarks about water in particular where it impinges upon rural affairs and the land, a subject on which I am better informed. I say at once that I also have an interest. First, perhaps I may congratulate the Leader of the House and his right honourable friend the Minister in another place on achieving a great meeting of minds in this area since the initial proposals on water privatisation made before the last election. First and foremost, I welcome the decision to retain in government hands the policing function and to set up the National Rivers Authority for the purpose of looking after the environmental aspects thereof, and in particular the matter of pollution.

I believe that whatever may be said for total river basin management, it is absolutely right for government to have retained this policing role and not to have allowed water undertakings to be judge and jury in their own court. That has been very strongly held in both National Farmers' Union and Country Landowners' Association quarters. I know how greatly relieved they are that this matter has been handled in the way that it has. I do not think that such an enormous chunk has been taken out of the total river basin management concept. I understand that it is about only 10 per cent.

The NFU and the CLA are naturally keenly involved in riparian matters. For this reason they are very pleased that it has been decided to retain the regional flood defence committees, formerly the regional land drainage committees; and that the Ministry of Agriculture is to appoint two members out of the 10 or 12, one for agriculture and one for fisheries. They had hoped for three. The proposal was originally for only one. I am glad that they had at least half a loaf; or it might be fairer to say that they received two-thirds of a loaf.

I should like to ask about one point. In forming the National Rivers Authority, will the same balance of representation be accorded to the Ministry of Agriculture? I hope that my noble friend will be able to tell me something about that.

In conclusion, perhaps I may say that the Government deserve congratulations on progress to date. I wish the Bill every success and an easy passage.

1.7 p.m.

Lord Belstead

My Lords, I am grateful to your Lordships for taking part in this debate. It has been interesting. It has well illustrated the close attention that your Lordships always pay to the water industry as part of our concern for wider environmental matters. Although some of the points that have been put to the Government have not been uncritical, this has been a short debate that has shown a depth of knowledge and experience of the water industry, and of the power industry, which would not necessarily have been matched elsewhere.

The noble Lord. Lord Williams of Elvel, in his later remarks in a robust speech, suggested that the doctrine of the mandate did not necessarily pertain with regard to the proposals of the Government to privatise both water and electricity. I felt that my noble friend Lord Monk Bretton gave a quiet and effective reply. He thought that privatisation had carried with it advantages for other industries over the past few years. My noble friend Lord Elliott was very robust in expressing his support for privatisation, although my noble friend made no secret of the fact a little later in this speech that he would like to see privatisation on a rather different basis than the one put forward in the proposals of the Government at the present time.

Perhaps I may make one very simple point of which I think we are all aware but it is worth making for the record. This is a Bill that does not represent the measure to privatise either the water or the electricity industries. We intend to bring forward in due course, as soon as we can, the main Bill to privatise both water and electricity.

Lord Diamond

My Lords, before the Minister strays too far from the point that he was making about the mandate, I should like to point out that it has been stated that at the last election the Conservative manifesto did not include a reference to water but, having regard to the fact that the progress of water privatisation had come to an abrupt halt, the impression given was that it was no longer part of the Government's policy. Is the noble Lord in a position to throw any light upon that assertion?

Lord Belstead

My Lords, I shall correct myself in a few moments if I am misleading the noble Lords. My memory is quite clear that my right honourable friend the Secretary of State for the Environment made an important speech early in the election campaign during which he made absolutely clear the Government's position as regards intended water privatisation. Early in my opening speech I covered the ground which, in effect, was covered by my right honourable friend's speech in May of election year.

Lord Williams of Elvel

My Lords, perhaps I may remind the noble Lord of the manifesto on which his party fought the election. The proposal appeared in it, stating that the Conservatives would, establish a National Rivers Authority to take over responsibilities for ensuring strict safeguards against the pollution of rivers and watercourses and to pursue sound conservation policies. The water supply and sewage functions of the water authorities will be transferred to the private sector".

Lord Belstead

My Lords, the noble Lord, Lord Williams of Elvel, is reading from my party's manifesto. I am delighted to see that the noble Lord sees fit to have a copy of the manifesto on the Bench beside him——

Lord Williams of Elvel

My Lords, I was reading from the National Rivers Authority document.

Lord Belstead

My Lords, I am sorry. I am mistaken as to what the noble Lord was reading out. I remember that document very well. An important consultation document, it was followed by a second document just before Christmas. That led us through to the position in which we find ourselves today of having a paving Bill which will lead towards the main privatisation proposals that we have not yet reached but that will need to be the subject of privatisation Bills.

I should like to stick to the point that I was making to the noble Lord, Lord Diamond. It is that in an important speech early in the election campaign my right honourable friend the Secretary of State made the Government's position absolutely clear. It was the ground covered by my right honourable friend to which, among other matters, I referred in passing earlier in my speech. I was pointing out the fact that we have not reached the main privatisation Bills because my noble friend Lord Nugent said that the National Rivers Authority is not mentioned in the Bill. That is because at this stage the Bill does not and could not establish the NRA. Instead, Clause 1 empowers bodies to prepare for transfer of property or functions to other bodies—not merely the NRA but a variety of public limited companies. That is why the drafting is probably right although, as with everything else my noble friend puts to me, I shall look again at the point he made.

I turn to deal with the second part of the Bill. Several noble Lords have expressed concern that compulsory metering could mean hardship and even threaten public health standards. That was said by the noble Lord, Lord Williams, and it was echoed elsewhere. The noble Lord suggested that there is at present a rising trend in the number of disconnections made by water authorities. The evidence does not bear that out. The figure for 1986–87 showed that approximately 7,400 disconnections were made by the water undertakers; that is about the average for the last decade.

As regards the future, to which the noble Lord quite rightly referred, I can advise your Lordships that water undertakers already observe a stringent code of practice in respect of disconnections. As a result, they cut off a water supply only as a last resort. That code of practice will continue to apply over water authorities' utility once the water authorities' businesses have been privatised.

From the considerable experience of metering overseas, and in the major area of non-business metering in the Malvern area where it has existed for about a century, there is no evidence to suggest that metering discourages essential use. I believe that my noble friend Lord Monk Bretton is right to say that one of the reasons for metering is that we wish to see whether it is possible for water to be used with greater care than is sometimes the case.

The noble Lord, Lord Diamond, suggested that metering would almost inevitably lead to a reduction in demand of approximately 4 per cent. and he considered it far better to concentrate on the detection of leaks. One of the purposes of the trials is to discover whether metering leads to a reduction in demand. In 1985 the Department of the Environment water authority committee concluded from its study of experience overseas that a reduction in both indoor and outdoor use is possible. The committee also took the view that metering will lead to the better detection of leaks, and the trials will prove whether such reductions are possible.

I believe that metering is unlikely to lead to a greater number of disconnections due to increased charges. As I said to the noble Lord, Lord Williams, the code of practice will exist in the future in the same way as it has in the past.

I should now like to give two assurances which I did not include in my opening speech but which it may be useful to have on the record. In opening, I mentioned that Clause 3 re-enacts certain provisions of Section 30 of the Water Act 1973 which regulates water authority charges. Some concern has been expressed—although not by your Lordships today—about the direction-making power within the provision vested in my right honourable friend the Secretary of State. The clause as drafted retains a power to compel water undertakers to comply with directions given by my right honourable friend relating to the composition of charges. The power has never been used but the Government have agreed with the Water Companies Association that the Bill should be amended to make it clear that the Secretary of State's power of direction under the provision does not prejudice the statutory companies' abilities to provide a reasonable return on capital so long as they remain under their present financial framework.

The second assurance I should like to give relates to the scope of consultations on proposals of water undertakers wishing to carry out trials. It has not been raised by your Lordships but it has been raised many times in another place and outside the House. The Government accepted a suggestion from the Opposition in another place to ensure that the Secretary of State must also have regard to consultations with consumer bodies as well as with consumers. We intend to amend the Bill accordingly.

I should like to answer some of the points raised by noble Lords. The noble Lord, Lord Williams, waxed eloquent about the difficulties as he saw them in valuing water authority assets prior to the moment of privatisation. I was a little intimidated by the noble Lord who not only appeared to be blinding me with science but was possibly frightening me off ever getting as far as being party to bringing forward the necessary prospectuses. Yet as I listened to the noble Lord there was a hint of the old adage about trying to find a difficulty for every solution.

The fact of the matter is that the value of water authority assets has been put by some people at £27 billion, and I think that that is how they stand in accounts. That represents depreciated current replacement costs of assets which are in use. The noble Lord will be the first to say to me that that is not the worth of the assets. The value to be put on the business as a whole, of which assets are only one part. will depend on many things: profit levels, investment needs and investment opportunities. The market will determine the value and Her Majesty's Government will ensure that the value is obtained.

The noble Lord then said, "How do you account for the split-up of water authority assets into the National Rivers Authority components?" Most of the existing assets, including all the reservoirs, expect to transfer to the public limited companies but some of the assets will go to the NRA. The water authorities will be expected to produce schemes of organisation which, among other things, show what assets are going to the NRA, and our accountants and those of the water authorities will be working closely to ensure that all the prospectus's accounting requirements are met.

The noble Lord took me to task—or rather took the Government to task—because Clause 2 gives water companies the power, as the noble Lord said, to levy taxes and to fix charges as they feel fit and therefore Clause 2 is nothing more or less than a taxation. With respect, I do not believe that that is so. The ability to fix charges as they see fit is constrained by the requirements of Clause 3(3) which I spoke of in my opening speech. I shall not go over that ground again except to say that perhaps the noble Lord will remember that the requirements are that charges must have regard to costs and not show undue preference against any class of persons. These requirements have ensured fair charges in the past and will continue to do so in the future.

I was grateful to my noble friend Lord Nugent for his support for metering and I am grateful to him for his support for the concept of the National Rivers Authority. My noble friend and, indeed, my noble friend Lord Monk Bretton both made the point that it is important to have it seen to be the case that the public limited companies of the future are not judge and jury in their own cause. That is something which both my noble friends feel the setting up of the NRA will achieve and will also meet the point which has been put sometimes about a need for a competent authority in European Community terms. Both my noble friends referred to the importance of the NRA from an environmental standpoint.

My noble friend, Lord Nugent warned about the dangers of having an overlarge NRA. It will be important to see how much work may be contracted out—another point which my noble friend particularly put his finger on. My noble friend also asked whether the Government would use their best endeavours to see that contracts were made possible. The nature of the work involved in each of the NRA's different functions is varied. Work such as land drainage can be very different in various parts of the country. Therefore, there will be different durations of contract and the choice of different arrangements will need to reflect that. We anticipate that there will be a varied pattern of arrangements, as there is at present, in the way in which work is carried out by different authorities.

My noble friend also asked about the hydrometric network and whether or not it is important to see that there is not unnecessary and wasteful overlap. The hydrometric network measuring rainfall, ground water and river flows is needed by both the NRA and the plcs—hence the difficulty. The aim would be to avoid unnecessary duplication by exchange of information wherever possible, and detailed arrangements will have to be worked out, depending on local circumstances.

My noble friend, together with my noble friend Lord Elliott, made important points about their desire to see the profit-limited statutory model being used as the basis for this privatisation. As regards the 28 statutory water companies, we have said that we intend to bring them into the framework of economic regulations which will apply to the privatised utilities plcs. That will include charges control, existing government controls over the statutory companies' dividends and related matters that will be ended. It will then be for each statutory company, or rather for its shareholders, to decide whether it wishes to continue in its present form or to opt for conversion to a public limited company.

The Government carefully considered whether to privatise this industry on the statutory water company model, but we have rejected this approach for two main reasons. First, we do not think it is sensible to write out the constitutions of the new utilities in pages and pages of statute with all the inflexibilities that involves. The plc model under the general framework of the Companies Acts avoids those difficulties. Secondly, the statutory water company model, although it has served us well for many years—and my goodness me, my noble friend Lord Elliott had every right to be able to claim that he is involved in a part of the industry which has a proud record—is set up with a constitution which does not contain within it the stimulus inbuilt to efficiency.

If I may say so, that may be all right for the statutory water companies that we have known producing water supplies. We shall be talking about rather different companies because there will be companies of the plc status in the future which will not only be providing water but will be involved in sewage disposal and sewage treatment. The stimulus is provided by the plc model under a price control regime because share is the one we have favoured because shareholders will have an incentive to make their companies more efficient and so more profitable. However, I have listened carefully to both my noble friends and I shall be drawing the whole of this debate to the attention of my right honourable friend.

My noble friend Lord Nugent ended by saying that measured tariffs should include a free or cheap allowance to encourage water consumption for essential purposes. A number of different tariffs will be tested in the trials, including some which include a free allowance within the standing charge and also rising block tariffs incorporating a cheap block.

Perhaps I may briefly make one or two quick points on electricity before I finish. The noble Lord, Lord Diamond, made the point that the creation of two generating companies will not provide competition and that the consumer will still be subject to a monopoly. With respect, I believe that that is a little less than fair. The privatised electricity distribution companies will have a wide choice of sources of generation: the two new generating companies, existing and new private generators, the distribution companies if they wish to generate themselves, and supplies from Scotland, France and elsewhere. Competition will provide downward pressure on costs and prices and we believe will thus benefit the consumer. There will also be competition between the distribution companies through comparison and emulation and there will indeed be an effective system of price regulation to protect the consumer.

The noble Viscount, Lord Hanworth, made the point that the grid is very important and the proposals of the Government will risk destabilising it. However, the grid will be retained as an integral national network. It will direct power stations so as to meet demand at the lowest cost and the major advantages of the grid with a merit order of an operation will be maintained. What will be different is that the grid company will operate on the basis of contractual relationships with generating and distribution companies.

Viscount Hanworth

My Lords, that is not the point I made. I was saying that there is a limit how far current can be shipped economically. If it is shipped too far the reactive component will destablise the grid. It is a technical point that I made, and nothing else.

Lord Belstead

My Lords, perhaps I may look again at the point made by the noble Viscount. If I have missed anything I shall write to him.

The noble Viscount referred to shipping, and this brings me to the final point. The noble Lord, Lord Williams, and other noble Lords asked what effect the Government's proposals will have on British Coal. I simply say that coal will continue to be the major source of fuel for electricity generation for years to come. British Coal has increased its productivity by 50 per cent. in the past four to five years. Perhaps I may add that investment has absolutely poured into the industry. I believe I am right in saying that we have seen some £6 billion invested by the Government in the coal industry since 1979, with £2 million a day being invested, and that has led to the provision of much better machinery. This will mean that in looking for contracts—because that is what we will be talking about for the future—British Coal, on the doorsteps of the power stations, will be in a very stong position.

I conclude by thanking your Lordships for taking part in the debate. The Government are committed to the genuinely popular ownership of industries which have been nationalised in the past. This Bill will help to achieve that objective in two of the most significant industries in this country. However, in the water industry there is the additional objective, particularly mentioned by my noble friends Lord Nugent and Lord Monk Bretton, of helping to achieve the birth of the National Rivers Authority, with all the benefits we intend that that will have for the management of our river systems and our other river resources. The Bill is but a preliminary step on the road to the major changes which lie ahead, but it is a vital first step and once again I commend the Bill to your Lordships' House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

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