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Mr. Hill: The hon. Gentleman is wrong to assert that the powers are being introduced on the assumption that the industry will have a tendency towards short-term decision making. No such assumptions are made. The powers are designed to take account of circumstances in which it is deemed that a short-term approach is being adopted. They constitute a fall-back, and will be used sparingly. We have no reason to believe that the relationship with the industry will not be voluntary and co-operative.

As a check, I confirm that the final decision belongs to the Rail Regulator. He will operate under the duties in section 4 of the Railways Act 1993. They include the duty to act in a way which he considers will not make it unduly difficult for the holders of network licences, such as Railtrack, to finance their activities.

8.15 pm

Mrs. Laing: Will the Minister give way?

Mr. Hill: Let me develop the argument. With respect, the hon. Lady is relatively new to the arguments. I was delighted to embrace the proposals in the Bill that she introduced under the ten-minute Bill procedure. However, it was on a different matter in relation to which I acknowledge her expertise. I want to develop my argument on return on investment, an important issue that the hon. Member for North Essex raised.

In all cases, the rail regulator must be satisfied that there will be adequate reward for the improvements or new facilities. That will depend on the facts and circumstances of the case. It means that the regulator will take a view that the facility owner will not be out of pocket. It does not mean that the facility owner will be remunerated in advance. We have made it clear that the rail regulator will be able to take account of indirect receipts and other benefits that are likely to accrue to the facility owner.

An independent economic regulator is best placed to decide whether compensation for any direction is adequate. The regulator is developing a framework for enhancing expenditure, including a policy statement that relates to enhancement. It will relate primarily to work on Railtrack's network. The regulator intends the policy statement to cover all sorts of enhancements, whether they are initiated by operators, funders or Railtrack, and whether they are undertaken by Railtrack or others.

The regulator envisages that the framework will establish the way in which he will assess the adequate reward for an infrastructure operator to improve facilities, including the appropriate rate of return and taking account of the risks.

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It is right for Railtrack, its customers and funders, such as the SRA, to understand in advance the treatment of enhancement of the network under Railtrack's financial regulatory framework. When the regulator publishes his final conclusion later this year, it will reduce the uncertainties that Railtrack has encountered in the past, give the company an incentive to improve, enlarge the network and thus serve the public interest better.

Amendments Nos. 414 and 415 would have the combined effect of removing the Secretary of State's power to give "general guidance" to the Rail Regulator. Instead, the regulator would be required to have regard to the Secretary of State's general guidance to the SRA.

I assure the House that the Government want to ensure that the Rail Regulator can continue to act as an independent economic regulator. However, clause 201(6), which is similar to the time-limited provision in the 1993 Act, does not undermine the Rail Regulator's independence.

As we explained in detail in Committee, subsection (6) does not permit the Secretary of State to dictate to the regulator how he should perform his functions. However, the regulator does not operate in a policy vacuum. It is right, given the extent of public subsidy and the enormous public interest in the railways, that he should have regard to the general direction in which the Secretary of State wants railway policy to develop, as part of an integrated transport system.

I repeat the assurance that any guidance will be at a general and high level. For example, I envisage guidance on the part that the Government expect the railway to play in their wider policy of integrated transport. The guidance may cover the Government's aim of a safe, growing and improving railway. It may also cover such matters as the policy balance that the Government support between a franchised railway and an open access one.

The guidance will not enable the Secretary of State to dictate Railtrack's rate of return--we would not wish to do that. That would be entirely inappropriate. The regulator is constituted as an independent and economic regulator, and that is how he will remain under the Bill.

The general guidance power in the Bill will not, as the hon. Member for North Essex asserted, politicise the regulator. He will have a duty to have regard to general guidance but he will remain independent. It is still for the regulator to decide what weight to give to the Secretary of State's guidance and to balance that against his other duties under section 4 of the Railways Act 1993. For those reasons, we think that it is entirely proper for the Secretary of State to be able to give guidance direct to the regulator. We see no reason for accepting amendments Nos. 414 and 415, which would substitute an indirect influence via the Secretary of State's guidance to the SRA. The SRA and the regulator have very different functions. It is wrong in principle to require the regulator to have regard to the Secretary of State's guidance to the SRA, when that guidance may and will cover matters in which the regulator has no role.

Amendments Nos. 414 and 415 would lead to uncertainty. The regulator might find difficulty in knowing what was general guidance of which he must take account, and what was detailed franchise-specific guidance to the SRA, which he would need to ignore.

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Mrs. Laing: Will the Minister give way?

Mr. Hill: Of course I shall give way, now that the hon. Lady has had a chance to listen to the development of the argument.

Mrs. Laing: I assure the Minister that I am not new to this subject. I remember every minute of the arguments that were advanced during consideration of what was the Railways Bill, which became the Railways Act 1993. The Minister was then only a member of the Select Committee on Transport, and he was quizzing the Conservative Government on what that measure meant. I have listened carefully to what the hon. Gentleman has said in the past five minutes or so. Does he agree that the general direction of everything that he has said during that period is to reverse the principles of the freedom that the 1993 Act gave to the railways and to take power back to the Secretary of State and the Government? The Bill is anti-commercial.

Mr. Hill: No, I do not agree. What is more, I think that the hon. Lady should understand that the premise of the Railways Act 1993 was to deal with a limited no-growth railway, and to privatise it. The thrust of the Bill is to take into account the success of the railway. I concede that it has been successful in many respects under privatisation and as a result of it. I think that we all acknowledge that there has been a great deal of innovation in the industry and a greater focus on customer care. However, there remain, as the hon. Member for North Essex must concede, several problems that are associated with the railway. For example, there are issues involving overcrowding and unpunctuality. By means of the Bill, we need to create a proper and flexible framework that will allow for an expanding railway. The intentions and purposes behind the Bill are entirely positive and supportive of a growing railway. I hope that my response reassures the hon. Lady.

There are some matters that the Secretary of State may wish to include in guidance to the regulator which would not be appropriate to include in his guidance to the SRA. For example, guidance to the regulator may include the Government's high-level objectives for the railway, whereas objectives for the SRA are already prescribed in clause 182.

I reiterate that I reject any suggestion that the regulator has become a politicised figure. He is independent and he will remain so. The Government have great confidence in the abilities and activities of Mr. Tom Winsor. However, I turn to the epicentre--

Mr. Jenkin: Does the Minister think that the regulator was right to issue the press release just after the Paddington crash?

Mr. Hill: Given the commencement of the Cullen inquiry, it would be unwise now for a Minister to make any utterance on that issue from the Dispatch Box. I hope that the hon. Gentleman will forgive me for not responding directly to his intervention. I hope also that he will understand the circumstances in which I decline to do so.

I move on to what I detect is the epicentre of the hon. Gentleman's anxiety, and that is his contention that no analogous power exists within the existing railway or

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other structures. It is true that no other regulator is subject to guidance from the Secretary of State. However, no other regulated industry receives more than £1 billion per annum in financial support from the Government. There is no equivalent in other regulated industries of the SRA. Railways are different from other regulatory models. A model that suits gas and electricity is not inevitably the right one for railways.

We have the right answer for the railways--[Interruption.] I hear the hon. Member for North Essex say from a sedentary position, "Renationalisation by the back door." During our many hours together in Committee and in the Chamber while considering the Bill, I have grown to become quite fond of the hon. Gentleman. That has not always been easy but, over time, it became possible. However, I shall have to confide to my diary my worries about a distinct tendency on his part to having bees in the bonnet. I dare hardly mention EUROCONTROL, of which we have heard far too much during our proceedings. We have heard from the hon. Gentleman that he regards clause 200 as evil. I believe that those are his words. I thought at the beginning of the debate that we had made progress and that the hon. Gentleman had abandoned his anxieties about renationalisation by stealth or the back door, but alas we have not. Although he tries to repress that attitude, deep down it is there, and from time to time it bubbles up. That is a pity, and I am worried about the hon. Gentleman.

There is one further point about the regulator and guidance from the Secretary of State. Under the Utilities Bill, my right hon. Friend the Secretary of State for Trade and Industry will have the power to issue guidance on any of the Government's social and environmental policies. In a limited respect, there are parallels to the relationship between the Secretary of State and the regulator as set out in the Bill.

Amendment No. 416 concerns penalties imposed by the SRA and the regulator. It goes to the heart of the purpose of penalties by seeking to spell them out in detail. It seeks to make them proportionate and to fulfil wider purposes. The amendment is not necessary because the objectives that lie behind it are already contained within the concept of reasonableness. That is the form of the drafting, and it captures the aim more succinctly and more comprehensively than the amendment.

The test of reasonableness covers proportionality, which the amendment specifies as being commensurate with the contravention. It also covers turnover and profitability. If a penalty is imposed that is disproportionate in terms of the company or the contravention, it would not by definition be reasonable and would not be within the power of the appropriate authority to impose.

The regulator and the SRA will have to publish their policies towards calculating the amount of a penalty and to have regard to the published policies when imposing a penalty. Such policies might include one on having regard to the need to secure compliance, the consequences of the breach and the deterrence of future breaches. We cannot specify what level a penalty will be in advance because that will, and must, depend on the breach. It can be a heavy one only if the breach is serious and where there has been harm. In a lesser breach the penalty would be less.

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I should mention the last part of amendment No. 416, which refers to penalties fulfilling the general section 4 duties. These duties are the manner in which the Rail Regulator or the SRA must exercise their regulatory functions. As they are not objectives in themselves, that is not appropriate. However, the wider purpose of the enforcement regime is, of course, to enforce the obligations which companies have entered into and to protect the interests of rail users, so some of the spirit of this is in the regime in any event. However, in exercising their respective functions, the regulator will be subject to his section 4 duties and the SRA will be subject to its clause 184 duties.

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