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

10.12 pm

The Parliamentary Under-Secretary of State for the Environment (Sir Paul Beresford): I must thank my hon. Friend the Member for CroydonSouth (Mr. Ottaway), who is also my neighbour, for bringing this issue to the attention of the House. It is a serious matter and it raises a number of interesting issues.

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

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

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

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

That will still mean that charges will vary from company to company. But differences in charges cannot be used as an indicator that one company is more efficient than another. Indeed, taking the companies in question, Ofwat, as part of its periodical review, identified East Surrey as one of 10 companies "being more efficient". Thames, with 13 other companies, was identified as being of "average efficiency" in the way in which it handled its operating costs. Inevitably, the level of charges imposed by a water company will depend on its particular circumstances. The larger customer base of Thames Water, for instance, and the proportion of its customers who are in relatively densely populated areas and can therefore be supplied less expensively, are factors in its lower charges. The company, however, also supplies more sparsely populated areas such as the Cotswolds. I am sure that my hon. Friend will know of the large amount of capital construction that it undertakes each year, the new London ring main being an outstanding example.

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

Mr. Andrew Mackinlay (Thurrock): What about the profits--the large profits--the excessive profits?

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

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

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

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

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customers as 20,000, we should divide them into streets. The same point still applies, however: the individuals still exist. I understand the problem. However, the opportunities arise only when there are differences in charges between companies, which do not necessarily indicate differences in efficiency. Any change--if we went along the lines suggested--would still be highlighted at the new boundaries between the companies. The likely effect of allowing customers to change supplier in the way suggested would be a further rise in the charges of customers remaining with the original company. We have already heard a legitimate protest from my hon. Friend the Member for Surrey, East (Mr. Ainsworth).

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

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

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

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

Question put and agreed to.

Adjourned accordingly at nineteen minutes past Ten o'clock.

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