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The Independent said that the division between one third of the profit, which went to shareholders, and the remaining two thirds, which was ploughed back into the business, was

"a split which it is difficult to criticise".

Those reports display rather more financial realism than some Opposition Members.

South West's results for the latest year indicate that, although pre-tax profits have increased by 2 per cent., the level of the company's investment has risen by 45 per cent. Without commensurate returns for investors, the industry would find itself unable to attract the finance that it needs. Charges are having to rise to meet increased investment.

We recognised that after privatisation a strong framework of public regulation would be necessary, and it is for precisely that reason that the Director General of Water Services was appointed. He is an independent regulator, whose primary duty is to ensure that the appointed companies carry out the full functions of water and sewerage undertakers, and that sufficient finance is available for them to do so. He is also responsible for the protection of the interests of customers, and has a duty to facilitate competition and promote economy and efficiency.

The director is independent and must be free to undertake his statutory duties and to ensure that the companies can supply the water and sewerage services that are demanded of them as appointed undertakers. His duties to protect the interests of customers require him to ensure that in the setting of charges the companies properly reflect the demands upon them, but he must also ensure that customers are not being required to pay more than is needed to finance functions. In his capacity to promote efficiency and economy, the director will set the companies clear and demanding efficiency targets to ensure that customers benefit from the improvements that the companies are able to achieve. In setting those clear and demanding efficiency targets, one of the issues to which he will wish to pay regard is what the companies are doing about such matters as leakage.

The hon. Member for North Cornwall highlighted the provisions in the Water Industry Act 1991 under which the Secretary of State may give directions to the director. He considers that this should be used to direct the regulator in the matter of individual charges for companies. Ministers are in regular contact with the director about the whole range of matters affecting the water industry. Under this provision, the Secretary of State may give directions to the director, indicating the considerations that he should keep in mind in the exercise of his role. However, the final responsibility for setting and reviewing the limits on charges rests with the director. The Secretary of State has no power to give the director a direction which might require him to set any specific level of charge, or to impose on a company any condition which might put at risk its ability to provide the services for which it is the appointed undertaker ; nor has he any plans to seek such a power.

If the Secretary of State were to seek to impose restrictions on the freedom of the regulator to take an objective view on any matter, he would call into question

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the independence of the regulator and prejudice his relationship with customers, the other environmental regulators and the companies themselves.

In approving the increase in water charges for South West Water, the regulator had to consider the requirements on the company to meet tighter environmental standards under the bathing waters directive and the requirements which followed the decision to treat coastal discharges and phase out the dumping of sewage sludge at sea by the end of 1998. These objectives were welcomed by customers and environmentalists alike.

The director general had first to satisfy himself that the company could not, without an increase, fulfil its functions as a water and sewerage undertaker. He then had to determine how much extra was necessary to allow the company to continue until 1995, when he proposes to review the K factors for all the companies. The director concluded :

"I have a statutory duty to ensure that the company can finance its functions as well as a duty to protect customers. I have considered carefully the figures submitted by South West Water and believe that these increases are justified. These price increases will enable South West Water to manage its programme in the period up to 1994 when I will review the price limits for all the water companies." That was the judgment of an independent regulator, having regard to all the information that he had for South West Water.

Mr. Tyler : Will the Minister give an explicit answer to the questions about the green dowry that both I and the hon. Member for St. Ives (Mr. Harris) raised earlier, and to the question about European funds? If those were there, the whole equation that the Director General of Water Services would be considering would be quite different.

Mr. Baldry : The hon. Gentleman knows full well that, as my hon. Friend the Member for St. Ives made clear, the water industry, including South West Water, has already had, as part of the proceeds of privatisation, a substantial green dowry. Privatisation made available to the water companies the sums of money that were never available when it was a publicly regulated institution that had to depend year after year on Treasury grant.

South West Water has submitted applications for European regional development fund grants. Projects have to be additional to existing plans to qualify. I understand that consideration is being given by the European Commission to the possibility of a further grant, but that in no way detracts from the conclusion to which the director general has come--that the increases submitted by South West Water are justified.

Environmental standards are being set in many instances in European Community directives, and in some instances they may require us, in order to meet the timetables set, to undertake works at a faster rate than planned. What is certainly true is that all those living in and visiting the south-west, an area that depends heavily on tourism, will want to ensure that water quality in the south-west and elsewhere in Britain is of the highest possible standard. Ensuring such high standards involves investment and--

The motion having been made at Ten o'clock and the debate having continued for half an hour, Mr. Deputy Speaker-- adjourned the House without Question put, pursuant to the Standing Order. Adjourned at half-past Ten o'clock.

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