HL Deb 09 March 1992 vol 536 cc1187-205

4.8 p.m.

House again in Committee.

[Amendment No. 116 not moved.]

[Amendments Nos. 116A and 116E had been withdrawn from the Marshalled List.]

Clauses 28 to 33 agreed to.

Baroness Gardner of Parkes moved Amendment No. 117: After Clause 33, insert the following new clause:

("Parliamentary scrutiny

.—(1) There shall be a Committee of members of both Houses of Parliament with the following functions—

  1. (a) to keep under review the development of regulation as applied to the telecommunications, gas supply, electricity supply, water supply and sewerage service industries;
  2. (b) to consider the broader principles of regulation and recommend how proper weight can be given to long term as well as short term factors in the regulation of the industries listed in paragraph (a).
  3. 1188
  4. (c) to take evidence on issues where there has been failure to reach agreement between the Directors and their respective designated operators or public suppliers or undertakers;
  5. (d) to review the annual reports of each of the Directors; and
  6. (e) to make reports to both Houses of Parliament at intervals of not more than one year.

(2) In performing their functions under subsection (1), the Committee may take evidence from the Directors, from the designated operators or public suppliers or undertakers, from consumers representative organisations, from other persons or bodies likely to be affected and from other relevant persons.")

The noble Baroness said: I am pleased to move the amendment because I have read with interest the supportive comments that were made by other Members of the Committee on Thursday evening in anticipation of the discussion. Unfortunately I was unable to be present and my amendments were moved by my noble friend Lady Oppenheim-Barnes.

In keeping with the tradition of this Chamber and the interesting development of our constitution, the new clause after Clause 33 seeks to fill a gap that is developing in our democratic structure. Through a series of utility privatisation Acts the Government have created regulators to control and oversee the operations of the privatised utilities. I fully support the need to have strong regulators to oversee such utilities, especially in terms of their relations with consumers.

Many of the Bill's provisions further strengthen the powers of the directors over the utilities as a way of ensuring that customers' rights are increased. I personally support that. Therefore, we expect to have already strong regulators made stronger, relative to the utilities. And yet there are no corresponding moves to increase parliamentary scrutiny of the regulators.

Other Members of the Committee have already raised the question of how to regulate the regulators. Of course, there is the famous quote from Lord Acton that. Power tends to corrupt, and absolute power corrupts absolutely. We do not have corruption nor are there absolute powers, but we do not wish to reach that point.

The proposed clause attempts to fill the gap which is developing so that the temptation for future regulators to act unilaterally would be checked and the democratic process strengthened. Other Members of the Committee have suggested involving the Council on Tribunals. Amendment No. 99, in the name of the noble Lord, Lord Williams, sought to improve the accountability of the regulators by increasing the power of the Secretary of State to give directions prescribing standards of performance which should be achieved by the directors. Those are possible ways of meeting the same perceived need to increase the supervisory powers.

The proposed clause does that by increasing the role of Parliament. I suggest that there should be a committee of Members of both Houses. I appreciate that the mechanics of establishing such a committee are extremely technical, doubtless there are deficiencies in the drafting of the amendment. However, I wish to establish the principle, and I shall leave it to the specialists to draft any specific clauses required.

I shall briefly describe the various subsections. The amendment suggests a Joint Committee of both Houses. If that is thought to be too complex or inappropriate, I should be interested to hear whether it is felt that the committee should consist of Members of one place or the other.

The committee's first function would be to keep the development of the regulation of utilities under review. The Bill seeks to give regulators similar powers and the committee would make sure that regulation is implemented evenly and consistently across the industries.

Paragraph (b) intends to provide an informed forum to consider the important broader issues of how the regulation of privatised utilities in Britain should proceed. We can be sure that this Bill will not be the last in this sphere. It would be extremely useful to have a specialist committee of Parliament to consider the guiding principles beforehand.

Paragraph (c) would allow a supervisory function to be exercised where there has been a prolonged failure to reach agreement. It is not intended as a reviewing committee to become embroiled in day-to-day matters.

Paragraph (d) provides for the review of annual reports. That would allow a systematic analysis and scrutiny rather than the mere formality that we seem to have at present. Paragraph (e) expects the Committee to report regularly.

Subsection (2) provides for the important function of taking evidence. The ability of appropriate committees to take evidence from a wide range of relevant persons has been shown to be an important element of the parliamentary process. I accept that the existing departmental Select Committees can call regulators, like other relevant persons, as part of their inquiries. However, this is different from a specialist committee examining the specific issues in the regulation of the utilities in a systematic way.

Those issues are so important that I firmly believe that they deserve a special committee. I am not over anxious about the exact procedures for the establishment and operation of the committee. I am not familiar with that kind of detail. However, I believe that there is a basic need and I ask my noble friend Lord Reay to accept the broad proposals in principle and to agree to take them away so that the appropriate improvements leading to implementation can be made on Report. I beg to move.

4.15 p.m.

Lord Ezra

I support the amendment proposed by the noble Baroness, Lady Gardner of Parkes. I make it clear that I commend the work of the regulators. The four regulators concerned have acted vigorously in conformity with the Acts setting them up and also, in many cases, have shown a degree of commendable innovation.

We should hear in mind that the regulatory system which has now been set up in regard to those I enterprises is an entirely new departure in the economic management of our affairs. Therefore, it is right that all the time we should ponder as to how they can best operate. I support the point of principle made by the noble Baroness that there should be a review, possibly carried out annually, of the operations of the regulators.

I am rather apprehensive about paragraph (c) of the amendment, which proposes that the committee should look at specific areas of disagreement. I believe that that may mean that the committee would be in permanent session as there would be a temptation for virtually all issues to be referred to it when agreement could not be reached.

However, I have no doubt that there should be in place a machinery for a regular review of the regulatory procedure as now established in that vital area of our economic affairs. Therefore, I hope that the noble Lord, Lord Reay, will say that the Government will look at this matter.

Lord Williams of Elvel

I support the basic thrust of the amendment moved by the noble Baroness, Lady Gardner of Parkes. As she rightly said in introducing the amendment, this is the third shot that we have had at trying to solve the knotty problem of how to regulate the regulators.

The amendment in the name of the noble Baroness introduces what is to my mind an ingenious formula because we must recognise that every regulator and every operator and every consumer is in a position of having a possible conflict of interest. That is why we have regulators and operators: to protect the consumer and to protect the operator. Therefore, there are always two sides to the problem.

When there are two sides to the problem and when the problem is major, as it is as regards privatised monopolies, it is right and proper that those problems should be aired before the highest court of the nation; namely, Parliament. I believe that the behaviour of the people who are trying to resolve conflicts of interest of that nature should be open to parliamentary scrutiny.

I anticipate what the Minister might say in reply. It is not sufficient to say that the regulators are responsible to the Secretary of State and that they make their accounts available to Parliament. That will no longer do because major issues are involved. Indeed, there can be grievous problems and suffering as a result of those important monopolies behaving wrongly or the regulators acting in some way contrary to the public interest. Therefore, I hope that the Government will look sympathetically on this proposal.

There are many examples of joint committees of both Houses. I do not believe that in principle or practice, the proposal would cause many problems.

I take up the point made by the noble Lord, Lord Ezra, as regards paragraph (c) of the amendment. I suspect that if the Bill is enacted, the number of failures to reach agreement will be extremely limited. After all, the point of the Bill is to make sure that directors—regulators—have the power to enforce standards. The director can merely close negotiations by saying, "That is what I think, and these are the regulations I shall make".

Therefore it will not be an open-ended invitation for the committee to sit every day, all day and all night throughout the year. I believe that the regulators in these monopoly industries are now extremely powerful—here I agree with the noble Baroness, Lady Gardner of Parkes. One thinks back to the early 1970s when we created the Office of Fair Trading and thought that that would be a powerful body, but it is nothing like as powerful in its order-making powers as Ofgas or Ofwat and the other organisations we created under privatisation.

It is therefore proper that Parliament should exercise its historic right in scrutinising the behaviour and functions of those organisations to make sure that they are doing their job in the public interest. That is what Parliament is for. I hope that the Government will agree to the amendment of the noble Baroness.

Lord Hacking

I too join the noble Lords, Lord Ezra and Lord Williams, in supporting the intent of the noble Baroness's amendment. I do so with no criticism—here I join the noble Lord, Lord Ezra—of the performance thus far of the directors general in their regulatory roles. However, the important point, which the Committee considered at an earlier stage, is that the regulators under the Bill are being granted more extensive powers which move them into a quasi-judicial role. For that reason also we should support the noble Baroness in her amendment.

I only hesitate from going fully with the noble Baroness on whether the best means have been chosen of, as the expression was earlier used in Committee, "regulating the regulators". I say that not simply because it was my amendment which was considered in Committee at an earlier stage, but because I believe the rationale behind my amendment was better for regulating the regulators.

I am concerned that the watchdog of Parliament proposed by the noble Baroness will affect the independence of the directors in their administrative decisions. I therefore hesitate to put the watchdog of Parliament over them. For that reason, I go back to commending—in so far as the noble Minister is still listening—the formula which I tabled for the Committee, supported by the noble Lord, Lord Williams; that is, to have a single scheme of regulations under the auspices, to put it broadly, of reference to the M MC. That will involve the Office of Fair Trading and the established regulatory procedures that are already working under the licensing regime.

Having said that, the noble Baroness draws attention to an important matter and the principle of the amendment should be supported. I hope it will be.

Baroness Phillips

I too support the amendment. Again there is an attempt to confuse matters with the reference to the regulating committee regulating the regulators. I should like to liquidate the liquidators, but that is a different matter!

The noble Baroness has not called for wide powers. When one uses the terms, "to consider", "to keep under review" and "to take evidence", one does no more than what is required of a Parliament—that is, to see that the legislation it has introduced is being carried out.

There is nothing unreasonable in the amendment and nothing too far-reaching. The Government will find it a great vote catcher—I do not know why I am constantly giving them these ideas; they do not take them up. It will be popular. It will be reasonable in the way that it tackles the problem again on behalf of the millions of consumers.

Lord Reay

The effect of Amendment No. 117 would be to establish a joint committee of both Houses of Parliament which would review and report on the activities of the four utility regulators—that is, the directors general of telecommunications, gas supply, electricity supply and water services—and consider issues where there had been a disagreement between the regulator and the utility. The amendment would give the committee no powers other than, by implication, to make recommendations in its reports to Parliament.

Let me say at the outset that it would be an unusual step to establish a joint committee of both Houses. The noble Lord, Lord Williams, said that there were plenty of examples of it, but my information is that at present there are only two joint committees, the Joint Committee on Statutory Instruments and the Joint Committee on Consolidation Bills.

Lord Williams of Elvel

Perhaps the noble Lord will allow me to intervene. As a member of the Ecclesiastical Committee, I have to say that it is a joint committee of both Houses.

Lord Reay

In that case, there is an alarming lacuna in my brief. Both committees consider the technical aspects of legislation brought before either House. I am not aware of any precedent for a joint committee to oversee the policy and activities of independent bodies.

I accept entirely that the regulators should be accountable for their performance—and they are already accountable in a number of different ways. First, they must operate within the framework laid down by Parliament in the relevant legislation; that is, the Telecommunications, Gas, Water Industry and Electricity Acts. Parliament has laid down in that legislation clear duties for all the regulators. The regulators also have a continuing, direct accountability to Parliament: for all four the legislation requires the director general to make an annual report to the Secretary of State, which must be presented to Parliament. In addition, as my noble friend recognised, the directors can be called before the appropriate Select Committee in another place.

Secondly, the directors' performance of their statutory duties is subject to judicial review and their decisions can be overturned by the courts if they fail to act reasonably. Case law makes clear that a failure to give reasons is also likely to be grounds for judicial review. However, as I said in replying to the noble and learned Lord, Lord Brightman, on our last Committee day, I am considering whether to amend the Bill to require the directors to give reasons for their decisions.

Thirdly, the director cannot impose regulatory requirements without the consent of the utility or without independent backing. The legislation requires the utilities to have a licence or authorisation from the Secretary of State or the director before they can operate as utilities. These licences include much of the more detailed regulatory requirements within which they must act. If the director sees a need for a change in the regulatory regime, for example a change in the price cap, it will need to be reflected in an amendment to the licence. The director can only amend the licence by agreement with the regulated utility. If the director and the utility cannot come to an agreement, the legislation already provides for the director to refer the matter to the Monopolies and Mergers Commission for a determination.

The regulators are also constrained informally by public opinion: they consult widely before taking major decisions. For example, when Ofgas reviewed the tariff price formula recently, it published consultation documents inviting formal responses and held 14 special meetings throughout the country to discuss the proposals in a less formal process.

Fourthly, the directors are appointed by and are answerable in broad terms to the appropriate Secretary of State. If the director does not carry out his duties satisfactorily, he can be replaced.

The regulators' powers are therefore subject to a number of safeguards. We believe that those safeguards are proper and adequate and that there is no need for further mechanisms to be established. Indeed, we deliberately set up the directors as independent bodies to distance the regulation of the utilities from the political process. If Parliament wishes to consider and make recommendations about the activities of specific regulators or the system of regulation in general, there are already adequate opportunities for it to do so.

Ultimately, someone must be responsible for striking a balance between the interests of the industry and its customers and for deciding on appropriate regulation to reflect this. We believe that the regulator is the appropriate person to do that. The legislation makes it the regulator's duty to do so and all the regulators have carried out this duty very effectively. I am grateful to the noble Lord, Lord Ezra, for his commendation of the way in which they have carried out their duties. If the regulator fails to carry out his duties he can be replaced.

Finally, if Parliament did consider that the existing committees do not allow adequate opportunity for consideration of the regulators, it does not require legislation to establish further Select Committees. It would be better to do so through the normal procedures than to enshrine it in legislation. For all those reasons, I do not believe that a sufficient case has been made to look at this matter again.

4.30 p.m.

Baroness Gardner of Parkes

I thank my noble friend for his detailed reply and I shall certainly consider it carefully in deciding whether to pursue this matter further at Report stage or to leave it to a later occasion when the pressures of events which are now happening are not with us. I have no doubt that this issue will come back again at some stage. I confirm my agreement in that none of us is criticising the regulators at all. When this Bill becomes an Act the situation may become more apparent of necessity. We must wait and see what happens. I thank those who have supported me in this amendment and I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Clause 34 [The 25,000 therm limits]:

Lord Hacking moved Amendment No. 118: Page 31, leave out lines 30 to 40.

The noble Lord said: As the Committee will observe, Part II of the Bill and Clause 34 go to the matter of gas supply and the issue of competition. This amendment is of concern to the gas industry. Subsections (1) and (2) of the proposed new Clause 8A of the Gas Act 1986 give the Secretary of State powers to reduce each reference in the Act to the current tariff threshold of 2,500 therms per annum to a figure which he believes appropriate. The proposed subsection (3) goes further than that. It gives the Secretary of State power to remove all references to tariff thresholds while still retaining the obligation in Section 10(1) of the Gas Act on the public gas supplier to meet all requests for a supply for up to 25,000 therms per annum within 25 yards of a main.

Perhaps I may refer to those sections in the Gas Act 1986 because, for the purpose of this amendment, they are critical. Section 10(1) of the Gas Act, after a proviso at the beginning, reads as follows: a public gas supplier shall, upon being required to do so by the owner or occupier, give and continue to give a supply of gas to any premises which—

  1. (a) are situated within 25 yards from a relevant main of the supplier; or
  2. (b) are connected by a service pipe to any such main and in the case of premises falling within paragraph (a) above, shall also provide and lay any pipe that may be necessary for that purpose".

That sets out the wide obligation resting on the public gas supplier. Section 10(5) reads as follows: Nothing in subsection (1) above shall be taken as requiring a public gas supplier to supply gas to any premises in excess of 25,000 therms in any period of twelve months".

Therefore, the Committee will see the relevance of the 25,000 therms per annum and the proposal by the Government progressively to reduce that threshold and in doing so to increase the element of competition. By way of history, this proposal follows a review by the Office of Fair Trading and the Government's support of that review by the Office of Fair Trading that the supply to tariff customers should be progressively abolished. The Secretary of State has indeed stated that he wishes to reduce the tariff threshold initially from 25,000 therms per annum to 2,500 therms per annum.

When Members of this House were considering that matter at Second Reading the Minister said: I shall begin with the gas competition provisions. At present only British Gas has the right to supply householders and small firms who use 25,000 therms a year or less and are within 25 yards of a gas main. Yet customers at or below the 25,000 therms threshold account for two-thirds of the total gas market. The Bill gives the Government powers to end that monopoly which we intend to reduce by stages. As my right honourable friend the Secretary of State for Trade and Industry said in another place, we should expect the initial reduction to be to a level not lower than 2,500 therms, and to take place in the next Parliament. Such a reduction would open up to competition about 7 per cent. of British Gas's market, giving some 200,000 businesses, like the big firms, the right to buy gas from anyone, with the possibility of obtaining better terms and lower prices. After that, the next stage will be a review in 1996 to determine the date at which the monopoly will end, opening the rest of the market to competition".—[Official Report, 14/2/92: cols. 934–5.]

That brings me to the first reason for this amendment. By excluding subsection (3), as my amendment does, we are removing a provision which at this stage is premature in the light of what the Minister himself said at Second Reading; namely, that the Government intend to bring the threshold down to 2,500 therms and then to carry out a review in 1996.

The second reason for this amendment is that it fails to show parity in the supply of gas between the public gas supplier and other suppliers of gas: namely, the public gas supplier (not the other suppliers) remains under this obligation in Section 10(1) and 10(5), which I have read to the Committee, to supply gas.

The third reason for my amendment is that the removal of the tariff limit in a comprehensive fashion from the Gas Act requires considerable amendment to the Act and further time should be taken to produce a suitable comprehensive provision, if required, following the 1996 review proposed by the Secretary of State and repeated to this Chamber. Those are the three reasons for my amendment and therefore I hope that the Government will be willing to think further about it. I beg to move.

Lord Reay

By quoting so extensively from what I said at an earlier stage of the Bill the noble Lord has removed the need for me to repeat at any great length much of my argument. The effect of this amendment would be to remove the power which the Bill gives the Secretary of State completely to abolish British Gas's statutory monopoly of supply to customers who use 25,000 therms a year or less and who are within 25 yards of a gas main.

Under the noble Lord's amendment the Secretary of State would, however, still be empowered to make an order reducing the threshold of 25,000 therms to any level which he considers appropriate. The Secretary of State would therefore still be able, in theory, to reduce the monopoly threshold to any level down to one therm per annum.

It did not seem, and it does not seem to me, sensible to have legislation which would in theory permit the monopoly threshold to be reduced to as little as one therm, but which would not permit it to be removed entirely. For that reason I hope that the noble Lord will withdraw his amendment.

Lord Hacking

There are the practical difficulties which I have tried to advance to the Minister. Therefore, I must express some disappointment. At an earlier stage of this Committee I expressed concern about the future timetable of this Bill. I confess that that concern is greater today in Committee than it was when I expressed it on the first day of Committee. I am not a suspicious person by nature, but the Minister said that he expects this Bill to reach the statute book. The noble Lord, Lord Williams, referred in Committee to this Bill not just being a Bill but "an Act" which he hopes will reach the statute book. I am glad that the noble Lord, Lord Williams, has returned to the Chamber for there has also been the matter of the withdrawal by the noble Lord of some 26 amendments to the Bill.

Is all this going to bring about the result that later this week our Standing Orders are going to be suspended and that —perhaps on Thursday—this House will be invited to take this Bill both at Report stage and Third Reading in one session? If so, there must be considerable concern among Back-Benchers like myself who have, during the passage of this Bill, received representations from outside this House not concerning matters of politics, with a capital P, but matters of great concern to various sectors of the utilities industry.

I have certainly tried in this Committee to represent the views of British Telecom and British Gas, this amendment being directed to a concern of British Gas. As a Back-Bencher, I am not privy to the discussions through the usual channels; but noble Lords, particularly Back-Benchers moving amendments such as I have attempted to move—and the noble Lord, Lord Allen of Abbeydale, the noble Baroness, Lady Gardner of Parkes, and other noble Lords—for practical, sensible reasons have every reason to be concerned about our Standing Orders being suspended and the Bill being taken through at a sharp pace. I hope that other Back-Benchers will join me in expressing concern.

Having said that, it is clear that I shall not be able to press with any success this amendment at this stage. I am given no choice but to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Gardner of Parkes had given notice of her intention to move Amendment No. 119: Page 31, line 42, at end insert ("and the Council").

The noble Baroness said: This matter was debated last Thursday and so I shall not move the amendment.

[Amendment No. 119 not moved.]

Clause 34 agreed to.

Lord Reay moved Amendment No. 120: After Clause 34, insert the following new clause:

Conveyance and storage of gas

(" .—(1) In section 4 of the Gas Act 1986 (general duties of Secretary of State and Director General of Gas Supply), the following subsection shall be inserted after subsection (1)—

"(1A) In relation to the conveyance and storage of gas the Secretary of State and the Director shall, in addition, each have a duty to exercise the functions assigned to him by this Part in the manner which he considers is best calculated to secure effective competition between persons whose business consists of or includes the supply of gas."

(2) In section 7(7) (a) of the Act of 1986 (inclusion of conditions in authorisation of public gas supplier) the words "relating to the supply of gas, or requiring information to be furnished to the Director or published" shall be omitted.

(3) In section 19 of the Act of 1986 (acquisition of rights to use pipe-lines), subsection (8) shall be omitted.

(4) In section 24 of the Act of 1986 (modification of authorisation on reference to Monopolies and Mergers Commission), for paragraph (a) of subsection (1) there shall be substituted— (a) whether any matters which relate to—

  1. (i) the supply of gas by a public gas supplier to tariff customers, or
  2. (ii) the conveyance or storage of gas by any public gas supplier,
and which are specified in the reference operate, or may be expected to operate, against the public interest; and".

(5) In section 27 of the Act of 1986 (modification of authorisation by order under section 56 of the Fair Trading Act 1973 or section 10 of the Competition Act 1980), after the words "supply of gas through pipes", in paragraphs (a) and (c), there shall in each case be inserted "or the conveyance or storage of gas by a public gas supplier".").

The noble Lord said: In moving this amendment perhaps I may speak at the same time to Amendment No. 127. The purpose of these amendments is to underpin an undertaking which the Office of Fair Trading is currently negotiating with British Gas in respect of its gas transmission, distribution and storage business. This undertaking is part of a wider set of voluntary undertakings which the Office of Fair Trading is seeking from British Gas aimed at promoting competition in the supply of gas. The other undertakings relate to British Gas's share of the contract market and the early release of gas, currently contracted to British Gas from North Sea suppliers, to other companies to buy and supply to end users.

The undertaking to which these amendments relate will require British Gas to run its transmission, distribution and storage business as a separate unit which will treat the gas trading arm of British Gas and external customers on a wholly even-handed and transparent basis. These amendments will give the Director General of Gas Supply statutory powers to regulate British Gas's transmission, distribution and storage business.

The new clause includes amendments to Sections 4 and 7 of the Gas Act to enable the director general to include conditions relating to these activities in British Gas's authorisation. He is not at present able to do so. In addition, it amends Section 24 of the Gas Act to enable the Director General of Gas Supply to refer British Gas's transmission, distribution and storage activities to the Monopolies and Mergers Commission if changes in the authorisation cannot be agreed voluntarily.

It also amends Section 27 to ensure that, following a reference to the Monopolies and Mergers Commission by the Director General of Fair Trading under his Fair Trading Act or Competition Act powers and an adverse MMC finding, any order made by the Secretary of State in response to the MMC finding could provide for a modification of the gas supplier's authorisation in respect of transmission, distribution and storage. Without this amendment, such a remedy would not be available to the Secretary of State. The amendment to Schedule 2 is a small consequential which is required as a result of the proposed new clause.

The Director General of Fair Trading and the Director General of Gas Supply both agree that Ofgas should have these new powers. British Gas has also accepted that the Director General of Gas Supply should regulate its transmission, distribution and storage unit. I hope therefore that noble Lords will support this necessary and important amendment.

Lord Ezra

I support the amendment. It moves very much in the direction of the views recently expressed by the OFT report that it will encourage competition. It is important that the conveyance and storage of gas should be conducted by British Gas at arm's length from its trading operations because the conveyance and storage are by law meant to be available to third parties who could be in competition in the trading of gas. Therefore I very much hope that the amendment will go through.

On Question, amendment agreed to.

Clauses 35 to 39 agreed to.

Clause 40 [Bulk supplies of water]:

4.45 p.m.

Lord Reay moved Amendment No. 121: Page 35, line 33, leave out from ("applicant") to end of line 36.

The noble Lord said: In moving this amendment perhaps I may speak also to Amendments Nos. 124, 126, which are incorrectly attributed in the Marshalled List to my noble friend Lady Gardner of Parkes, and Amendment No. 128. These are minor and consequential amendments to the parts of the Bill dealing with bulk supplies of water and conditions for connections to water mains.

Amendment No. 121 is a drafting amendment. Variation and termination of bulk supply agreements are now covered in new Section 40A, inserted by Clause 40. This makes the reference in new Section 40 of the Water Industry Act unnecessary and the amendment removes it.

My noble friend Lord Elliott of Morpeth drew attention at Second Reading to difficulties which the present wording of Clause 46(3) of the Bill would cause for the water companies in maintaining services to customers. I said then that I would give further consideration to the issues raised. As a result I have brought forward Amendment No. 124. It will enable a water company to insist on separate service pipes to premises if it is reasonable for it to do so in order to be able to carry out its water supply functions efficiently. Any dispute about whether separate service pipes can reasonably be required can be referred to the director for determination.

Amendments Nos. 126 and 128 are consequential to Amendment No. 124. They amend Section 64 of the Water Industry Act so that an undertaker cannot use that provision to insist on separate service pipes when it would not now be able to do so under Section 47 of the Water Industry Act, as amended by Clause 46 of this Bill. I commend these amendments to the Committee.

On Question, amendment agreed to.

[Amendment No. 121A had been withdrawn front the Marshalled List.]

Clause 40, as amended, agreed to.

Clauses 41 to 45 agreed to.

Lord Reay moved Amendment No. 121B: After Clause 45, insert the following new clause:

Protection of interests of customers of water and sewerage undertakers

(" .—(l) In section 2 of the Water Industry Act 1991 (general duties with respect to water industry), in subsection (3), the following paragraph shall be inserted after paragraph (b)— (bb) to ensure that the interests of every such person are also protected as respects any activities of that company which are not attributable to the exercise of functions of a relevant undertaker, or as respects any activities of any person appearing to the Secretary of State or (as the case may be) the Director to be connected with that company, and in particular by ensuring—

  1. (i) that transactions are carried out at arm's length; and
  2. (ii) that that company, in relation to the exercise of its functions as a relevant undertaker, maintains and presents accounts in a suitable form and manner;".").

The noble Lord said: In moving this amendment perhaps I may speak also to Amendment No. 124A in my name and Amendments Nos. 122 and 123 in the names of the noble Lords, Lord Ezra, Lord Williams of Elvel and Lord Desai.

Amendment No. 122 would require appointed undertakers to separate their water and sewerage business from any other activities they carried on. Amendment No. 123 seeks to require appointed undertakers to isolate diversified activities which are not related to their statutory function in separate subsidiaries and to require the director to establish rules to prevent any cross-subsidy to the diversified activities from customers of the regulated functions.

I appreciate the concern which lies behind the proposed new clauses. It is clearly important that the director should have power to ensure that an appointed undertaker's ability to carry on its core business is safeguarded. Under existing legislation there are powers expressed in general terms for the director to impose conditions restricting diversification by water and sewerage undertakers. However, I accept that there is a case for making explicit the director's responsibility for ensuring that customers' interests are protected in relation to diversification by water and sewerage undertakers. I have therefore tabled government Amendment No. 121B and the consequential Amendment No. 124A to address those concerns.

The amendments would add to Section 2 of the Water Industry Act an explicit duty for the director to ensure that customers' interests are protected when water and sewerage undertakers diversify into activities which are not part of the regulated water and sewerage business. In particular, the director would be required to ensure that transactions between the core water services business and other activities are carried out at arm's length; and that the undertakers maintain separate accounts covering their statutory functions.

The Director General of Water Services has been consulted about the government amendments. He had previously expressed concern that diversification could, in certain circumstances, act to the detriment of the interests of customers of the appointed business. He therefore amended the companies' licences to provide for regular certification that adequate financial and management resources are available to the appointed companies, so as to ensure that their ability to meet their statutory obligations is not compromised.

The director welcomes the Government's proposed new clause as strengthening his powers to protect the interests of the appointed undertakers' customers and potential customers. In particular, it will provide the basis for him to ensure that transactions between appointees and other group companies do not involve any cross-subsidisation from the appointed business. I commend government Amendments Nos. 121B and 124A to the Committee and hope that the noble Lords opposite will withdraw Amendments Nos. 122 and 123. I beg to move.

Lord Ezra

I should like to express my appreciation for what lies behind Amendment No. 121B, especially the requirement that the other transactions should be conducted "at arm's length" and that the interests of consumers should be taken into account. However, I regret to say that the amendments do not go far enough. In particular, as regards Amendment No. 123, it is proposed that not only should those other activities be conducted completely separately—that is, not just at arm's length—but, more importantly, under subsection (2), it is also proposed that, customers of any water and sewerage undertaker pay no charges or make any contribution to the undertaker for the activities of any of its subsidiaries". We are not saying that water companies should not engage in other activities, but we believe that it should be made entirely clear that if they do engage in such other activities then they should be run quite separately. It is especially important that consumers of water should in no way be financially penalised for the results of such operations. I very much hope that the noble Lord will be prepared to amend his amendments to take account of those views.

Lord Williams of Elvel

I generally agree with the remarks made by the noble Lord, Lord Ezra. I support the idea; indeed, my noble friend and I have attached our names to the noble Lord's amendments —Amendments Nos. 122 and 123. Subsection (1)(bb) (ii) of the Government's proposed new clause says, that that company, in relation to the exercise of its functions as a relevant undertaker, maintains and presents accounts in a suitable form and manner". I very much hope that the Minister will be able to tell the Committee that the words, a suitable form and manner include the items which the noble Lord, Lord Ezra, has in mind—in other words, that there will be no cross-subsidisation between the water side of the business and the other side of it, so that water consumers will not be penalised by investments made outside of the water industry. If the Minister can reassure us that that is what the director will deem to be, a suitable form and manner of such accounts, then I think that the government amendments achieve as much as we hoped to achieve with Amendments Nos. 122 and 123.

Perhaps I may say a little more about some of the thinking lying behind the amendments tabled by myself, my noble friend and the noble Lord, Lord Ezra. The major problem is that water undertakings are, generally speaking, generators of cash. There have been occasions—and I am thinking especially about South Wales—where the water undertaking has decided that it wishes to join forces in one way or another with the electricity undertaking in the same area. That has given rise to a great deal of grievance in South Wales.

I very much hope that what the Government propose will he able to deal with the matter. It is important because the water industry is an industry which we on these Benches do not believe should be in private ownership. I want to make that point absolutely clear. This is the one privatisation which we fundamentally oppose. Given the opportunity, and when such an opportunity arises in the course of time —and I cannot put any timetable on it—I am sure that we shall endeavour to bring the water industry back into public ownership. When that happens, although I cannot put a timetable on it at all, the activities which may lie outside the water industry and in which water companies may have engaged would have to be dealt with in one form or another. Having said that, I must say that I am grateful to the noble Lord for bringing forward the government amendments. I shall not oppose them.

Lord Reay

Perhaps I may attempt to answer some of the questions raised. The noble Lord, Lord Ezra, expressed the view that my amendments did not go far enough. Subject to the necessary scrutiny by the director to ensure that the core activity is safeguarded, in our view diversification should be a commercial matter for the companies. Involvement in a range of activities—for example, exporting treatment plant, research undertaken for other companies and waste disposal—can bring benefits to the company and to the environment in this country and more widely. Companies should also be free to make the maximum use of their assets for the benefit of customers and shareholders, especially where this is related to their duty to ensure that the water and land that they have are made available for recreational purposes.

The noble Lord, Lord Williams of Elvel, asked me whether the words in a suitable form and manner would ensure that cross-subsidisation did not take place. The answer to that question is, yes. The director general will be able to ensure that transactions between appointees and other group companies do not involve any cross-subsidisation from the appointed business. I hope that that allays the noble Lord's fears.

On Question, amendment agreed to.

[Amendments Nos. 122 and 123 not moved.]

Clause 46 [Conditions for connections with water mains and for supplies of water]:

Lord Reay moved Amendment No. 124: Page 41, line 30, leave out from ("unless") to end of line 33 and insert ("it is reasonable to do so in order to ensure that the undertaker will be able to perform its functions, in relation to the supply of water to the relevant premises or any part of those premises, efficiently.").

On Question, amendment agreed to.

Clause 46, as amended, agreed to.

Clauses 47 to 50 agreed to.

Clause 51 [Short title, commencement and extent, etc.]:

Lord Reay moved Amendment No. 124A: Page 43, line 41, leave out ("46 and") and insert ("Protection of interests of customers of water and sewerage undertakers) to").

On Question, amendment agreed to.

Clause 51, as amended, agreed to.

5 p.m.

Schedule 1 [Minor and Consequential Amendments]:

Baroness Gardner of Parkes moved Amendment No. 125: Page 46, line 42, at end insert: ("(2B) If the customer refuses to accept any conditions relating to safety, the installation of the meter, the prevention of interference with the meter or with the connection between the meter and the supplier's electric lines or electrical plant and such other conditions as the electricity supplier may reasonably require then such refusal shall be deemed to be reasonable grounds for the purpose of the sub-paragraph (2A) above. (2C) If a customer fails to comply with any of the conditions referred to in sub-paragraph (2B) above then, for the purposes of paragraph 10(1) below, the meter belonging to him shall be deemed not to be in proper order."").

The noble Baroness said: The amendment is fairly clear and relates basically to meters. We all know what an electric meter is, but I should tell the Committee that, technically, it is a piece of equipment for measuring electricity consumption and, in some cases, the maximum demand. We need meters because they require that payment for electricity is related to the measured consumption and, again in some cases, to the maximum demand.

Why do the public electricity suppliers believe that the accuracy and security of the meters is so vitally important? The meter is the main interface between customer and supplier. It determines the revenue of the public electricity supplier, and its accuracy and security are vital to the ascertainment of the correct level of the charge. A small but significant minority of customers seek to defraud the supplier by interfering with the accuracy of the meter or by trying to bypass it. I went into detail on that matter on Second Reading because I have personally seen many such meters.

What does the law say about meters? The Electricity Act 1989 has elaborate provisions about meters. In general, they must be certified and installed in an approved manner. At present, domestic customers cannot provide their own meter—a change in the law that was made in 1989. That is why the issue has become so relevant again in this Bill. The meter examining service of the Office of Electricity Supply Regulation—known as OFFER—oversees the provisions about certification and approval of an installation. OFFER has published a "Metering Consultation Paper", which advocates the installation of sophisticated two-way communicating meters. I believe that I have explained such meters previously to your Lordships. Eventually, it should be possible to read the meter by telephone or by someone simply passing a customer's house in a van. There is no power to require customers to install such meters should the customer have opted to provide his or her own meter, which is now permitted. While advocating customer choice, the paper states: The concept of a single basic design meter would in itself reduce metering costs and allow greater flexibility for both suppliers and customers alike.

That is inconsistent with choice.

The present law is inadequate to safeguard against unsafe practices and meter frauds because in general terms the public electricity supplier is allowed, under the present law, to specify where a meter shall be located and to require that the meter is fixed in a vertical position to a secure surface and connected in accordance with the method on the meter. That method is usually just an indication of to which terminals the cables are to be connected. The law makes no requirements as to the sealing of the connections to the meter, a practice which is used to maintain safety and to deter fraud. There is no power to specify the design of the meter provided it is certified. The public electricity supplier has no right to supervise or to make the connection. To make a safe connection, the fuse has to be removed from the public electricity supplier's cut-out. This needs to be done either by the public electricity supplier or under its supervision to ensure safety and to make sure that the cut-out is resealed. There is no power to ensure that that is done.

There is a need for a regular visit by the public electricity supplier because under the Electricity Supply Regulations of 1988 (Regulations 25 and 27) the public electricity supplier has a duty to ensure that its own works on customer's premises are safe and protected by a fuse or an automatic cut-out, and to be reasonably satisfied that the customer's installation is safe. In practice, meter readers are trained to carry out an inspection of the public electricity supplier's equipment and at the same time to look for any evidence of tampering or interference. The public electricity supplier tries to arrange at least one visit a year.

So, why does paragraph 14 need amending? In the light of what I have just said, the paragraph is inadequate in that it does not give any guidance as to what might be reasonable grounds should the matter come before the director general on appeal. It makes no provision for reasonable conditions to be imposed to ensure continued safe and secure operation of the meter. The paragraph should allow an agreement to cover the following points: first, the making or supervising of the connection by the public electricity supplier; secondly, the specification and carrying out of safety and anti-fraud safeguards in relation to the connection; thirdly, the design requirements of a meter to match any two-way communication system; and fourthly, the on-going need to inspect and maintain the seals and the other safety or security safeguards. Finally, there should also be provision for meeting the costs that are incurred by the public electricity supplier, if needed. The amendment is drafted to cover those points. I beg to move.

Lord Tombs

I support the amendment that has been tabled by the noble Baroness, Lady Gardner of Parkes. I do so, having 23 years' experience in the electricity industry. The metering equipment provides the interface between the supplier's mains and the consumer's equipment. Its integrity is of the utmost importance for two reasons. The first relates to safety; and the second to avoiding meter fraud. Both of those are difficult technical areas requiring the proposals that have been put forward in the amendment. I therefore believe that the amendment is in the interests of the great body of consumers, and I hope that the Minister will feel able to accept it.

Lord Reay

This Bill enables domestic electricity customers to install approved meters of their choice, as gas customers and non-domestic users of electricity are already permitted to do. This should allow them to maximise the advantages now available as a result of advances in meter technology which, for example, include better cost and use measurement and energy management equipment. I entirely agree with my noble friend that accuracy and security are vital, and with the noble Lord, Lord Tombs, that—in his words —"integrity is of the utmost importance".

However, it will still be the case that meters provided by the customer will have to satisfy the provisions in Schedule 7 of the Electricity Act, including approval and certification by OFFER's meter examiners and installation in an approved manner. In addition, the provision in the Bill enables public electricity suppliers to refuse to allow a customer to provide a meter where there are reasonable grounds for doing so and is designed to cater for the sort of conditions envisaged in my noble friend's amendment.

However, the amendment would give the public electricity supplier extremely wide powers to refuse a customer permission to choose his own meter. We believe that that would inhibit the growth of competition and the supply of electricity in the longer term. A recent consultation document published by OFFER pointed out that the extension of customer choice in metering as a result of the Bill will facilitate competition when the statutory monopoly of supply ends in 1998 by allowing customers to change supplier without incurring the costs involved in a change of meter. The amendment would allow public electricity suppliers to constrain that right. I do not believe that that is a desirable consequence, and it is not one that would be in the customer's best interest. I hope that I have allayed some of my noble friend's worries and that she will not feel bound to press the amendment.

Baroness Gardner of Parkes

I thank my noble friend for that reply. It does not satisfy me, because I do not understand the circumstances in which under the Bill the customer can own his meter. There might be a need to check whether its use was fraudulent. It might be different from any other meter in the area. That could involve a great deal of extra cost. I spoke about the possibility of reading the meter by telephone, but if one or two people in an area were determined to hang on to a type of meter that cannot be checked in that way it would mean that someone would have to he sent to check those meters.

Fraud is one of the most important aspects of the matter. I appreciate that everyone wants to be assured that the electricity meter is safe. Most people who are out to defraud the supplier do not intend to blow themselves up. Real disasters happen in the gas industry, because it is dangerous to interfere with a gas meter. When people want to defraud the electricity suppliers they usually do so by interfering with the meter. In some cases they make it go backwards. That is curious and interesting, but it is no way to pay one's electricity bill.

It is important to consider this matter more thoroughly. I can see that my noble friend does not want to commit himself to allowing too wide a power, but I believe that the Bill is defective in regard to safety and the security of meters against fraud. It is important that we have an opportunity to discuss this matter before Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees (Lord Hayter)

My Lords, there is a misprint in the Marshalled List, the next amendment (Amendment No. 126) should be in the name of the noble Lord, Lord Reay.

Lord Reay moved Amendment No. 126:

Page 47, line 23, at end insert: (" . In section 64 of the Act of 1991 (supply of water by means of separate service pipes)—

  1. (a) the words "within its area" shall be omitted from subsection (1); and
  2. (b) in subsection (2), for the words "was provided to those houses before 15th April 1981 wholly or partly by the same service pipe and continues to be so provided" there shall be substituted "is provided wholly or partly by the same service pipe".").

On Question, amendment agreed to.

Schedule 1, as amended, agreed to.

Schedule 2 [Repeals]:

Lord Reay moved Amendment No. 127: Page 48, line 19, at end insert:

("1986 c.44. The Gas Act 1986. In section 7(7)(a), the words "relating to the supply of gas, or requiring information to be furnished to the Director or published". Section 19(8).").

On Question, amendment agreed to.

Lord Reay moved Amendment No. 128: Page 48, line 32, column 3, at end insert ("In section 64(1), the words "within its area".").

On Question, amendment agreed to.

Schedule 2, as amended, agreed to.

House resumed: Bill reported with amendments.