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Water Industry

12.30 pm

Linda Gilroy (Plymouth, Sutton): I am very pleased to have secured this Adjournment debate. It gives me the opportunity not only to raise an issue of great interest to my constituents but to highlight a matter of importance to the public as a whole.

As well as speaking in my capacity as Labour and Co-operative Member of Parliament for Plymouth, Sutton, I speak as chair of PURGe—the Public Utility Reform Group, a loose coalition of stakeholders with an interest in regulatory issues. The aim of the organisation is to ensure that regulation achieves a fair balance between stakeholders—customers, employees, shareholders and those representing the interests of communities. The latter group is particularly important in respect of environmental issues and our responsibility to pass our country on to future generations in at least as good a state as we found it.

In the short time that I have, I intend to detail some specific and urgent problems facing many people who receive water services from South West Water plc. However, those problems highlight just some of the issues that need to be dealt with in the forthcoming Water Bill. The Bill has been delayed, which is regrettable, although I believe that we now have the chance to ensure that this important piece of legislation enables us fully to address the challenges that lie ahead. As I shall argue, it is my conclusion that a new settlement is required which will take our water industry into the next decade.

However, let us start at the beginning, and in the south-west. Ofwat has just allowed South West Water to increase the bills of constituents by more than £26 in real terms over the period 2001-02 to 2004-05, rather than the original determination of a £13.79 real-terms increase. As if that were not bad enough, it must be borne in mind that our bills are already the highest in the country. A typical South West Water unmeasured household water and sewerage bill in the south-west of England is £357 per annum—before these increases are applied. That represents about 2 per cent. of income for a household with an income of £18,500, but 7.5 per cent. of the minimum income guarantee for a single pensioner on £92.15 per week.

A typical metered bill for south-west England is £218—a saving of £139. It is little wonder, therefore, that so many households have moved to having a metered supply. Such customers are estimated to number 55,011 in the period to 2004-05, which is above the November 1999 assumption of 32,698.

The problem is made worse by two Government policies—or perhaps I should say lack of policies. There is no policy that addresses the fact that the south-west has 30 per cent. of the United Kingdom's beaches but only 3 per cent. of the population. So those 3 per cent. pay for the cleaning up and improvements—very welcome and necessary—from which the whole population and many tourists benefit. These are national—some would say international—assets, and what economists call national public goods. Some mechanism that acknowledges that that is not fair would be most welcome. Arguably, the green dowry at the time of privatisation provided such a mechanism,

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but it grossly underestimated the value of our beaches and the costs associated with cleaning them up. Other mechanisms that come to mind are the energy efficiency and the fossil fuel levies. It has also been suggested that a mechanism that includes a cost benefit analysis of environmental improvements, similar to that required in respect of clean air standards, would help to achieve transparency.

There is another problem in the South West Water area—the growing number of people who are switching to water meters. That is not surprising, given that they can achieve savings on the scale outlined. I am pleased that our Water Industry Act 1999 removed the uncertainty of some as to whether they would benefit from a meter, by allowing them to change back at no cost. What about others such as the larger households, whose use does not allow them to benefit from a meter? Their bills are going up, not down, owing to water meters. We therefore have an iniquitous two-tier situation, with two different pricing mechanisms. While some poorer single households are benefiting and so are better-off single people, families who are far less well off are paying more.

The problem with meters in the south-west merely highlights a problem that must be addressed nationwide. The current system, under which non-metered customers pay according to the rateable value of their dwelling while metered customers pay according to usage, is inherently unstable across the country. As the take-up of metering continues, many households on low and medium incomes will lose out in terms of equity—not just the narrowly defined "vulnerable" group.

What, ultimately, are we to do? The absence of solutions and even debate, never mind policy, is alarming. I and others have serious doubts whether this problem—which is but one of a number of future or potential problems in the industry—would be containable within the current legal and regulatory framework. They are essentially political issues, and we should not lose the opportunity to answer them in the forthcoming Bill.

The Government have already made a series of significant, albeit piecemeal, changes with regard to the water industry, such as the very welcome ban on disconnections. While that was surely the right way to start, such changes, especially when combined with industry-inspired developments, eventually need to give way to a more all-embracing approach.

At the beginning of our second term, perhaps we should, with humility and caution, take heed of those who tell us that we may have responsibility for the nation's well-being for some time to come. In the case of the framework governing the water industry, this calls for a fundamental change of perspective. Whatever modifications were made during our first term to the system that we inherited, the challenge now is to create a system that will still function smoothly a decade or more hence.

Water privatisation was especially unpopular. After privatisation in 1989, prices rose by around 40 per cent. until 1999, since when they have fallen back by about 10 per cent., following the last price review. The number of employees has declined by almost a third since privatisation.

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The balance of opinion seems to be that the regulatory system in water has delivered the investment to improve standards. That was, I understand, the major strategic objective at the time of privatisation. Of course, there have been some serious incidents—Camelford and the Yorkshire Water drought come to mind—and some serious criticism, over pay, for example. Nevertheless, the industry has by and large retained public confidence. It has not gone the way of Railtrack, and nor is it likely to do so. However, the structure of the industry and the way in which it operates have changed little since privatisation in 1989. On the whole, water companies continue as monopolies in their country, region or area. In most cases, they continue to own and operate the assets. The ban on taking one another over means that the biggest change has been the acquisition of the companies by foreign companies or domestic, non-water companies.

Beneath the surface, however, considerable pressures are building up, as detailed in a recent report by the New Policy Institute. I am grateful for its permission to draw at length on its report "Energy and Water: the Dangers Ahead". It identifies the following significant risks in the medium and long term. First, there is the long-term sustainability of continuing rises in environmental standards, price controls and the companies' continued reliance on borrowing to fund investment. The strains, which are significant in the south-west, are increasing and are likely to increase elsewhere, with no obvious mechanisms for resolving conflicting objectives. If the structure "gives", either the higher standards will not be achieved, or the companies will get into financial difficulties, or the price controls will have to be eased.

There need to be incentives for investment in infrastructure to maintain the current assets. Some incentives work in the opposite direction; in a short, five-year cycle of the price-setting process, within the regulatory system, investment is deferred where possible. There is an absence of immediate obvious problems if the replacement of ageing but functioning assets is postponed, but that may lead to serious and expensive problems over time. The concern here is more with the sewerage system. That is less discussed but it, rather than the clean water portion, is the larger part of the business and generates most of one's bill.

We also must factor in the balance between supply and demand. The potential for imbalances comes from changes in the climate and our use of water. In a nutshell, our use may go up—some say by as much as 75 per cent. in the next 25 years—yet there may be less rain as warmer weather continues.

The Environment Agency rightly takes a long-term view, but company actions depend on plans put forward to Ofwat within five-year planning cycles, which may be too short. Prolonged shortage—as well as, paradoxically, flooding—could become big political issues, and we must seize the day and, wherever possible, prevent and ameliorate those problems with new solutions. My right hon. Friend the Deputy Prime Minister made a huge contribution to getting companies and the regulator to recognise the scope and the need to tackle this issue through leakage reduction. That resulted in a commendable 27 per cent. reduction in the period to 2000, but that very success means that the further scope for that to contribute to companies' options and flexibility is limited.

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The recent developments show that the industry is already trying to resolve some of its problems through various attempts—successful and unsuccessful—to restructure itself. Welsh Water, Glas Cymru, has managed to do so, and its assets and operations are now separated. Scotland is in the process of returning to one company after a brief, six-year experiment with three water boards. English companies are looking for ways to escape from the current industry structure, but there are dangers. Do we want yet more piecemeal change; or do we need an English solution, just as there are separate solutions in Wales, Scotland and Northern Ireland, where I understand water and sewerage services are paid from general taxation?

Is it not time at least to relax the prohibition on mergers, so that companies can work together for the benefit of all stakeholders? There are also other opportunities, and we should not be afraid to think more widely. For example, we could have some element of public stakeholding in the ownership, or we could free up the companies, so that they develop as international water operators.

Ms Candy Atherton (Falmouth and Camborne): My hon. Friend is making a powerful argument, but does she agree that accountability is still a great issue in the water industry? Does she envisage a role for the regional development agencies or regional assemblies in forthcoming years?

Linda Gilroy: I thank my hon. Friend for that intelligent intervention; she took the words right out of my mouth. We should also examine what roles there may be for the RDAs, regional chambers or, indeed, regional government, and we look forward to the forthcoming White Paper in the new year. If we are to face a period of higher prices to finance improved standards, a model of greater, more open and transparent accountability than we have at present will almost certainly prove necessary.

There is also the matter of the introduction of competition in water. Although the NPI report does not examine that issue in detail, it does raise the question whether competition is the right big challenge with which to present the industry when other strategic issues clearly need to be addressed. Competition would certainly seem to have the potential to produce only a limited effect on the problems that I mention.

The report suggests that there is a sense in which the future of the water industry is uncertain in a way that it was not just five years ago. There are increasing challenges and questions that suggest that the settlement made at the time of privatisation no longer serves and ought to be revisited, and that a new settlement is needed. Besides clarifying the industry's public policy objectives, such a settlement would set out an intellectual framework to guide the resolution of conflicts between environmental, social and economic goals. It would also establish an institutional framework which, while allowing the industry room to develop of its own accord, could steer it as time passes and new circumstances arise.

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Such a settlement could only be created following a review. The Government should take note of that analysis, and I urge them to initiate such a review in water. There is a clear opportunity, given that the new Water Bill is not due until the autumn of 2002. A water review needs to focus on the underlying conflicts now present and the intellectual framework needed to resolve them. In particular, it needs to focus on the tension between meeting environmental standards, the costs of financing the investment to achieve them and charging consumers fair and affordable prices. The instability and possible lack of sustainability in the current two-part pricing structure should also be addressed, as should the scope for new forms of ownership and organisation.

I mention the possible role for regional assemblies and the contribution that a new mutual structure for the industry might achieve, learning the lessons from Glas Cymru. On 16 November, Utility Week reported that efficiency savings at Welsh Water have generated savings of £41 million, which has been earmarked for extra investment. The developing technical and legal body of knowledge being amassed by the mutual sector and its new project "Communicate Mutuality", which I recommend to the Minister, will enable it to launch its new publishing arm, Mutuo, later this week. One of its first publications is entitled, "Ownership Matters—New Mutual Business Models", and has great relevance to today's debate.

A wide-ranging review would also help the Government decide whether competition is the right big issue to guide and shape the industry in the future. In addition, the review would need to address two issues: whether responsibility for driving forward the Government's social agenda for those industries could be vested in a separate institution devoted to the task; and how multiple regulators should take one another's concerns into account, as well as how conflicts between them should be resolved.

That is a lot of questions, but I conclude by reminding the Minister of the problem in the south-west. The challenge that we have faced and continue to face is perhaps a harbinger of things to come. It is clear that those questions need to be resolved by all the stakeholders, companies, unions, consumers and academics, as well as by local, regional and national government in the coming months. If in considering those questions we can perhaps find a solution to the unfairness that is the legacy of the Conservative privatisation programme with which we in the south-west in particular live, my constituents and those elsewhere would welcome it greatly.

12.46 pm

The Parliamentary Under–Secretary of State for Environment, Food and Rural Affairs (Mr. Elliot Morley): As you know, Mr. Pike, it is traditional to congratulate hon. Members on obtaining an Adjournment debate to raise an issue of their choice. I should like to place on record the fact that I think that my hon. Friend the Member for Plymouth, Sutton (Linda Gilroy) has made a genuinely thoughtful and intellectual contribution to a very complicated issue. She has suggested a thoughtful way forward in relation

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to the water and sewerage services that are provided in our country. I also very much welcome the intervention made by my hon. Friend the Member for Falmouth and Camborne (Ms Atherton), who also raised some important issues.

As a regular visitor to the west country, I am well aware of the concern that was felt post-privatisation. Privatisation was deeply unpopular, and a significant increase in prices took place at that time. Indeed, the people of the south-west now have to face that legacy, to which my hon. Friend the Member for Plymouth, Sutton has referred. As you will know, Mr. Pike, many years ago, I served on the Committee that considered the Water Act 1989, under which the water companies were privatised. Many of the issues to which my hon. Friend refers were raised at that time, and some of the problems that have arisen since then are no surprise. The question is where we go from here. That is what my hon. Friend the Member for Plymouth, Sutton focused on, and I congratulate her on doing so.

The Government have made much progress in relation to water provision since 1997. Leakage has been cut by a third. Drinking water is now the safest ever, and rivers and beaches are cleaner. There are improved metering rights, including the right to a free water meter, which is of particular interest in the south-west. Compulsory metering has been ended, which was a big issue in my constituency and other parts of the country. There is a scheme to help vulnerable groups with high water use and low incomes. All that is very important.

After privatisation in 1989, average household bills increased steadily, especially in the south-west. In 1999, a review was introduced, which caused water bills to be reduced, on average, by 12 per cent. across the country and by the 12.2 per cent. in the south-west, which was very much appreciated at the time, although it did not reflect the huge increase in prices that took place in 1998. I am glad to say that, by 31 March 2005, the average household bill will still be lower in real terms than in 1999, although that suggests that the price increase at that time was very large.

Ms Atherton: The problem with average bills is that we in the south-west are at the top end of the scale. If we were taken out of the equation, the average bill would be significantly lower. We are asking for special measures for the south-west to reduce the national average.

Mr. Morley: My hon. Friend is right. We have to be careful about averages, because the south-west is at the top end of average prices. The issue is how we can best address the particular problems that the west country faces.

My hon. Friend the Member for Plymouth, Sutton put forward some interesting suggestions and asked some pertinent questions, which I shall try to address. As she knows, prices are reviewed every five years. The reviews take account of quality improvements, asset maintenance, and savings made through improved efficiency. South West Water operates under the price limits that were set in 1999. Those imposed a sizeable cut in prices in 2000-01, followed by very small increases to 2004-05. The overall effect would be a decrease of £36 in the average annual household bill by 2004-05. We are back to the issue of averages.

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It is important to be aware of what the bills are paying for. To be fair to South West Water, that includes modernising 5,500 km of drinking water mains and replacing old and rusting pipes which can lead to water becoming discoloured. The river quality objectives will be achieved for 93 per cent. of river length in the area by 2005, and that is good. At the same time, leakage has been reduced by 40 per cent. since 1995-96.

Water companies can apply for interim determinations to increase their price limits because of specified material changes in their circumstances. This year, South West Water appealed for an increase in price limits for four reasons. First, it had a higher than expected take-up of the free metering option. As my hon. Friend said, that was a popular option in the south-west, for understandable reasons.

Secondly, there was an increased spend to meet costs of monitoring cryptosporidium, following requirements placed on companies by the drinking water inspectorate. Thirdly, the company cited costs associated with the climate change levy and, fourthly, changes to the programmes to reduce lead in water. All those are desirable objectives, but they should all be included in the company's forward investment programme.

Ofwat scrutinises closely requests for a change in price limits. In its draft consultative response, Ofwat proposed to accept aspects of some of South West Water's points, but it has questioned and reassessed the costings made by South West Water. In the case of the costs associated with climate change levy, Ofwat proposes to reject that claim, because the costs should be neutral overall. The assessments are only preliminary, but Ofwat expects that the effect would be that the average household bill in the south-west would go up by £27 between 2001-02 and 2004-05—as my hon. Friend suggested. That is compared to the projected cost of £14 at the time of the 1999 periodic review. I accept that that is a significant increase, but the average household bill will still be less in 2004 than it was in 1999. However, I will bear in mind the point made about average costs. Having considered all the comments on its consultation, Ofwat will announce its final decision on South West Water's application by 14 December.

My hon. Friend also spoke about the more general future of the industry. As chair of the Public Utility Reform Group—PURGe—she takes a great interest in the future of water and energy utilities. She referred to the draft Water Bill, which already addresses a number of issues facing the industry, and many people look forward to its introduction.

Linda Gilroy: Will my hon. Friend acknowledge that a lot of water has gone under the bridge since the draft Bill, and that the changes taking place in the structure of the industry merit closer examination?

Mr. Morley: I agree, and I shall shortly address some of the detailed points that my hon. Friend made. One of the advantages of a major Bill such as a Water Bill, which we aim to introduce once we have parliamentary time, is the opportunity to consult on it and take into account issues such as the important ones raised by my hon. Friend. That consultation will influence the Government's thinking on the final shape of the Bill.

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At the moment, the Water Bill will include measures aimed at reforming abstraction licensing and improving water management and conservation. That is important in the south-west, as it is all over the country. It will include measures to require water undertakers to prepare and maintain drought plans to address how a water undertaker might restrain demand for water in its area. Recently much of my time has been taken up with the opposite of drought, but we should not forget that parts of the country experienced severe droughts only a few years ago. We need to look ahead and take into account the rising demand for water for domestic, industrial and agricultural purposes. Those demands have to be balanced and managed thoughtfully. The Bill will also include proposals to create a consumer council for water, which will be independent of Ofwat. It will provide advice to customers and represent their interests. It will also include measures to improve accountability, including increasing the scope and availability of public information on water resources.

My hon. Friend referred to a recent report by the New Policy Institute. The report raised a number of points that are fundamental to the water and sewerage service in England and Wales. My hon. Friend mentioned the debate about the most appropriate structure for the water industry. Is it public ownership or private? Is there a role for mutual ownership? My hon. Friend gave some examples of mutual ownership, which were very interesting, and the mutual models could have a role to play in providing essential public sector infrastructure. Those areas are worthy of exploration. Other issues include the shift from equity to debt, the rising demand versus the effects of climate change, and the gradual shift from unmeasured to metered charging. That is a logical shift in relation to the most sustainable use of water resources.

I know that my hon. Friend wishes to discuss the NPI report and my right hon. Friend the Minister for the Environment would welcome a meeting with her—and with Ofwat—to discuss the issues and their relevance to future models. My hon. Friend will be aware that she raises fundamental questions that require some thought and discussion. I know that she will wish to be involved in that.

The Government are aware of the challenges facing the industry. We aim to produce a water industry strategy paper for consultation in the new year. Without being complacent, we must not forget the water industry's successes and the quality of drinking water and river and coastal waters that we enjoy as a result, and I know that my hon. Friend regards that as important. I have been pleased with the improvements that we have seen around our coastline, and that many of our beaches now meet the bathing water directive.

Linda Gilroy: I hope that in his consultation my hon. Friend will also address the problem that I raised of 3 per cent. of the population having to pay for the cleaning up of 30 per cent. of the coastline.

Mr. Morley: I understand the point that my hon. Friend makes. Our beaches, coastline, water quality and marine and river habitats are of national importance and interest. The Government inherited a structure that was not of our making and has those inherent weaknesses. To bring about changes in that structure,

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we will need to address the fundamental issues that my hon. Friend raised in her thought-provoking speech. The issues will not be easy to resolve and I do not wish to give my hon. Friend a false impression. However, she has correctly identified serious issues that will face her region and her constituents. We will take seriously the issue of future structures for the water industry and I hope that the Water Bill will give us that opportunity.

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