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Mr. Lansley: I am grateful to the Minister for at least partially answering the question, but of course, the Better Regulation Task Force report that he quotes from predates the Higgs report and the new combined code of corporate governance. When the Government constitute the authority, do they intend to appoint a non-executive chairman and a chief executive, or to combine the two roles into one?
Mr. Morley: It would be premature to give an opinion on that, because the legislation is not in place and we have first to consult the devolved Welsh Assembly, as is only right and proper. There are also consultation procedures that must be gone through.
Amendments Nos. 20 and 21 deal with the board's size and non-executive make-up. Again, I have checked, and the Bill's provisions fulfil the taskforce's recommendations. The report clearly states that, although the taskforce recommends that all regulators should have a board, its size is for the regulator and the parent Government body to decide. The Bill is in line with that conclusion, in that it provides broad parameters but does not dictate the structure. Given the regulator's existing duties, I would certainly expect it to have rather more than just three members. But the taskforce's earlier report pressed for a reduced regulatory role if the market allows for that, which would suggest a much smaller regulator.
On the balance of executive and non-executive directors, the taskforce recommends that at least half the board, excluding the chairman, should be non-executive. The make-up of the non-statutory Ofwat board already meets that recommendation. When Ofgem was set up, it had five executive and six non-executive members; such an alternative is also a possibility. We agree that there is value in the point made by the hon. Member for South Cambridgeshire (Mr. Lansley), but we prefer to avoid the problems that could arise if such a provision were set down in the Bill and operated in, for example, the case of vacancies. However, the structure of the non-statutory board of Ofwat provides a very fair balance and meets the points that he made.
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The taskforce report also emphasised the need for flexibility and the importance of avoiding a one-size-fits-all approach to setting up and managing a regulatory
body. Although it is too early for the official Government response to the taskforce recommendations, I can reassure the hon. Gentleman that, in appointing the board, the Secretary of State will apply the recommendations and any other developments in best practice. That will also take into account the report "Independent Regulators" of October 2003.Under new clause 10, the authority would have a duty to carry out impact assessments of any proposals that it makes that may lead to a change in its activities or that may have a significant impact on the water and sewerage industry or the general public. Ofwat's work with the greatest impact is, by its very nature, the periodic review of water prices. The whole review process is structured like a regulatory impact assessment but on a huge scale. It includes the preparation of broad methodology, the proposal and challenge of investment options, assessment of possible efficiency gains and financing prospects, and repeat consultation with companies and other stakeholders. We are in the middle of that detailed and thorough process, so new clause 10 is effectively asking for a regulatory impact assessment on a regulatory impact assessment. Such a provision is not necessary in the Bill.
We concede that RIAs are good regulatory practice and Ofwat is already committed to carrying out such assessments of new policies or policy changes that are expected to have a direct effect on water and sewerage companies or other stakeholders. That is set out in Ofwat's recently published code of practice, which will become a statutory requirement under the Bill. The requirement for RIAs will be a statutory requirement in the Bill. As I have recognised, such duties have been placed on other economic regulators, most notably Ofgem under the Sustainable Energy Act 2003.
The new clause would require the authority to carry out an impact assessment for all major activities regardless of where the initiative originated. One problem with that is that many water initiatives originate in the European Union, and we already carry out RIAs on them. By leaving such a requirement out of the Bill, the authority will be able to decide when an impact assessment is genuinely needed, reflecting the context of this particular regulator.
Amendments Nos. 127 to 130 seek to put into statute the requirement on the Secretary of State to carry out an RIA whenever standards of performance are proposed under these clauses. The amendments would apply only when the initial proposal was the Secretary of State's, but not when Ofwat was proposing the standards. We certainly support the intention behind the amendments, but we do not think it necessary to place such a provision in the Bill. The Secretary of State is already committed to producing an RIA as well as to widespread statutory consultation whenever these clauses are used to propose standards of performance. Hon. Members may recall that we reaffirmed that commitment in the RIA that accompanied the Bill, stating that a separate RIA would be prepared every time the power was used. We are also committed to producing separate assessments that take account of the environmental, public health, competitive and social impacts of proposals.
Amendments Nos. 128 and 130 would seek to prevent the Secretary of State from making regulations if the RIA showed that the costs outweighed the benefits. That consideration is an integral part of the RIA process.
Amendment No. 22 proposes to allow the authority discretion to apply an alternative pricing principle. That risks access and wholesale prices being unduly linked only to costs incurred in serving a particular customer while ignoring certain other common costs. I am not content that such a pricing process would deliver the Government's objectives for competition in the water industry.
Mr. Lansley: I am disappointed that the Minister has not read amendment No. 22 to find out that its structure expressly allows for fixed costs to be attributed, so it does not address only costs that were directly attributable to the customer in question.
Mr. Morley: I understand the hon. Gentleman's point but risks would accompany that approach. We are worried that incoming competitors could cherry-pick benefits. That would work against the interests of consumers, especially those in high-cost areas such as rural areas.
I listened carefully when the hon. Gentleman cited the examples of Postcomm and Ofgem, but water is not like other utilities. There is no national network for water and costs are inevitably highly localised. Within any tariff group, therefore, there are geographical cross-subsidies. Allowing access and wholesale prices to be based on direct costs alone would lead to the unwinding of those geographical cross-subsidies, which would permit the entry of suppliers in low-cost areas even if they were less efficient than the undertaker. That would prompt undertakers to raise prices in high-cost areas, such as rural areas, to cover their costs, which is my worry.
Although there are essentially no cross-subsidies between tariff groups, there are common costs that undertakers have to incur to meet important statutory and social obligations, such as providing free fire-fighting water and lead pipe replacement programmes. Those costs are not associated with a specific customer, so under the amendment a new entrant could avoid some or all of them. The result of that would be that other customers, including households, would have to bear a greater share of the total cost.
New clause 5 would give water and sewerage companies greater certainty about the policy intention, and likely outcome, of the periodic review. Despite the intention that the provision should clarify the review process, I do not think that it is necessary and fear that its impact would do more harm than good. Ofwat already produces and consults on a comprehensive methodology for the periodic review. It is in the regulator's interest to understand concerns about the review and the impact that it might have on those that it regulates. Given the thorough nature of the periodic review process, I cannot understand how it would benefit from the additional long and rigid timetable that the new clause would impose.
The new right of appeal that new clause 5 would offer to companies would be excessive and could considerably lengthen an already long process. It would strengthen
the interests of companies against those of consumers still further. The balance has to be right but the provision would not achieve that. The Better Regulation Task Force report on independent regulators that was published in October had important things to say about regulatory appeals. It commented on stakeholders' ability to appeal, including those on whose behalf regulation is carried out, who include consumers. It also said that stakeholders should not be able to use an appeal mechanism merely to delay a decision that a regulator has to make. New clause 5 fails to address both those points.New clause 7 would widen the scope for companies to question the validity of enforcement orders issued by Ofwat or the Secretary of State if conditions of appointment or relevant statutory duties had not been met. That is not necessary because the Water Industry Act 1991 already provides a transparent appeal system that ensures that Ofwat acts appropriately when issuing an enforcement order.
New clause 6 would require the Secretary of State, the Assembly and the authority to consult the Health and Safety Commission and undertakers about safety matters. I reassure the House that that has already been agreed in a memorandum of understanding between the HSC and the water regulators.
Amendment No. 18 would require the authority to include in its forward work programme a description of how the projects that it plans to undertake would deliver its wider objectives and duties. Although I do not disagree with the general intention of the amendment, it is not necessary because the authority will have the power only to carry out an activity that complies with its overall duties, and Ofwat is already committed to monitoring performance against objectives.
Amendments Nos. 29 to 31, which were tabled by the hon. Member for Ceredigion (Mr. Thomas), would strengthen the role played by the National Assembly for Wales in the appointment of the authority. There is careful consultation between the Secretary of State and the Assembly and they have a close relationship that works very well. The amendments would ensure that the Secretary of State would consult the Assembly before appointing any member of the authority. The Secretary of State is committed to working with the Assembly constructively and openly, as has been demonstrated on many occasions. With that in mind, I believe that the amendments are unnecessary.
I hope that I have answered all questions asked by hon. Members and commend the Government amendments to the House.
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