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At the time, the Better Regulation Task Force said that that could create uncertainty for industry, which would be inherently undesirable. We want regulation to be predictable whenever possible, and we therefore want any possible conflicts of interest within the statutory objectives of the regulator to be interpreted in a way that is relatively predictable for the industry. The taskforce recommended that this should be done each year through the business plan of the authority concerned. In this case, the authority describes its business plan as its forward work programme, and clause 38 contains a number of provisions relating to the forward work programme of the authority. It does not, however, include an obligation to set out in the programme how the authority intends to reconcile its objectives and duties. That is an omission in comparison with the legislation that we passed last year on the establishment of Ofcom, which does have such explicit obligations built into its structure. I hope that the Minister will be able to look positively at this issue.

The purpose of amendment No. 22 is to reflect regulatory practice among a number of regulators when considering the question of access pricing. I will not bore the House on this subject in the manner in which I detained and bored the Committee. I will simply say that, in recent examples, other regulators looking at access pricing for the purpose of stimulating competition have taken different views on how that should be done. The different approaches can be characterised either as a retail-minus or a cost-plus approach. The former looks at the retail price of what has been a monopoly undertaking and subtracts from it the avoidable costs of providing the service to customers, which is to be substituted for by a new entrant to the marketplace, and to say to that new entrant, "It is your responsibility to ensure that the amount paid to the monopoly or statutory undertaking is the equivalent to the amount that it would have expected, less the avoidable costs."

The cost-plus approach says, "Let us find out the costs to the statutory undertaking of providing the service to the new entrant, and, through the new entrant, to the customer." Of course, that triggers a debate about

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what costs are properly attributable. Members who are interested in this subject will find exactly that kind of debate taking place in the current Postcomm decision about access pricing to the Royal Mail network, where they will find a full discussion of the subject. It is therefore a matter of debate as to what extent the fixed overheads of the statutory undertaking are attributed to the new entrant or, via the new entrant, to the customer. That is why I have tried to make life simpler than it was in Committee by restructuring my proposals.

Amendment No. 22 is therefore very straightforward. It incorporates in paragraph (a) the structure that reflects the legislation as it is currently drafted, which takes the retail-minus approach. Paragraph (b) contains a simple description of a cost-plus approach. In addition, however, I have added sub-paragraph (3A), which would provide the authority with a discretionary power to determine which of those approaches to pricing the authority may use, and, in doing so, to take into account the effects of such a decision on competition. The Minister and other Members who served on the Committee will recall that I was very concerned that the structure of pricing that has been written into the Bill will make the reality of competition far less than it ought to be, even in the limited industry to which competition is to be applied.

Mr. John Redwood (Wokingham): Does my hon. Friend agree that when challenges have been proposed, they have normally resulted in a 10 to 20 per cent. proposed reduction in water supply prices? That does not sit easily with the monopolists' view that they need a price increase. How might the matter be dealt with under the formula that my hon. Friend suggests? The monopolists will clearly say that they can only offer the price because they are cherry-picking, while the challengers will say that it is because they are more efficient.

Mr. Lansley: At least two mechanisms will operate. There is the extent to which the regulator can deliver price reductions as a consequence of regulatory contestability, and there is the actual impact of competition. My right hon. Friend and I will probably have no trouble in agreeing that regulatory proxies of contestability have proved only modestly successful in comparison with the benefits of competition in delivering cost and thereby price reductions to consumers.

My right hon. Friend's point about a 10 to 20 per cent. reduction is an indication—a modest indication—of what has often been delivered by the introduction of competition. I well remember that when BT introduced competition, certain people who had better be nameless were willing to go to the wall for the defence of the retail prices index formula, claiming that if the reduction went below RPI minus 1 the world as we know it would cease to exist. In fact I think the telecommunications formula reached RPI minus 12 within a few years.

I do not know what degree of cost reduction is available in this case. As we said a number of times in Committee, the actual cost of water in relation to the cost of the fixed infrastructure that the undertaker will have to continue to maintain is very low. That means that it will be difficult to find opportunities for competition to deliver a margin to new entrants to the

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marketplace while also delivering a benefit to consumers. That is one reason why the amendment is needed, especially in relation to determining the appropriate amount for access pricing by reference to the need for competition. Otherwise I think it will be squeezed out. If the primary undertakers are to receive the amount they expected, less identified and avoidable costs—which constitute a very small part of the overall price to customers, even the very large customers who will be the subject of competition—it will be difficult for secondary suppliers to enter the marketplace and deliver a margin against that.

I am grateful to my right hon. Friend for his intervention, which has allowed me to extend the argument a little. This is not just about offering the authority the flexibility that it ought to have in relation to access pricing; we should also provide a statutory power to help the delivery of competition. As I said in Committee, I am surprised that having talked of the introduction of competition, the Government have framed the Bill in a way that makes it extremely unlikely that it will be effective. It is important for us to challenge that now.

The benefit of the cost-plus route, as opposed to the retail-minus route taken by the Bill in its present form, is that it would expose the costs of primary water undertakers. In the case of Royal Mail, the principal difficulty for the new regulator was the lack of any accurate attribution of costs, or even an understanding of them, in the Post Office on which prices could be based. If the calculation had been made on a retail-minus basis, all the inaccuracies and inflationary elements of costs would have been set in stone, and Royal Mail's management would not now be having to deal with them.

I have gone on longer than I intended to, but that often happens when we discuss access pricing. It is not everybody's cup of tea, but it is terrifically important. It may be hidden away in schedule 4, but in the absence of amendment, I fear that one of the main objectives of the Bill will be damaged.

Sue Doughty (Guildford): I shall speak first about Liberal Democrat amendments Nos. 127 to 130, then comment on new clause 5.

Our amendments reflect our concern to ensure that any new standards are based on common sense and that there are no unforeseen results. The Bill gives the Secretary of State the power to introduce new standards of performance in water supply and sewerage services for water companies. Until now, standards of performance have been set either by legislation—for example, on drinking water or bathing water quality—or by the director general of water services. In making recommendations, the director general has to strike a balance between the duties given to him by Parliament towards present and future customers. Within the limits of those powers, the director general has been independent of short-term political pressures.

We are worried because the proposals in the Bill infringe both the independence of the authority that will replace the director general of water services and the principle of parliamentary supremacy in setting the framework for water industry regulation. The proposals risk imposing unwarranted costs on customers in

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pursuit of standards of performance set in accordance with short-term political pressures. It is not realistic to expect the proposals on standards of performance to be deleted outright; instead, there should be a duty on the Secretary of State when setting those standards to carry out a full appraisal of the standards and to implement them only if the benefits outweigh the costs.

Mr. Redwood: Can the hon. Lady explain what the Secretary of State and the regulator should do in the event that, say, the quantitative evaluation is positive, but adverse qualitative matters have to be taken into account? If not all the factors are quantified, how are they to form a judgment?

Sue Doughty: We should be examining the cost of changes. There are times when we have to consider standards, sustainability, regulation and other aspects of change, but in cases in which those aspects are neutral and the costs of minor changes outweigh the benefits, we want the Secretary of State to take a view. We do not want a change that will cost an arm and a leg to implement but will bring about no real benefit. Perhaps the Secretary of State has taken a view on public health or on the environment and minor changes are proposed, but the cost of those changes far outweighs the benefit. We are therefore concerned about the regulatory impact assessment. Our aim is to ensure that the Secretary of State takes account of such matters. We want to ensure that unrealistic costs are not placed on water companies and thereby on their customers, and that the checks and balances are determined by Parliament.

We were inclined to support new clause 5, but we have some concerns, in particular about proposed new subsections (8) and (9), which refer to percentages of the relevant undertakers that have to be in agreement. A policy must be considered in the light of the number of objectors

The nature of the water industry is such that a small number of companies control the largest market share. The result may be a policy that is skewed in favour of a few companies, as the proposals would allow them to club together to oppose the authority's proposals on a policy statement. We fear that some of the regulatory teeth would thereby be removed.

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