Water Bill [Lords]

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Mr. Morley: Just to clarify the point about ''shall'' and ''may'', it is simply so that both Welsh and English can be used. If the word ''shall'' were used it would not be possible to have an English version. In relation to the appointments, the Secretary of State has responsibility—

Mr. Hugo Swire (East Devon): The Minister is wrong about that. It says ''in Welsh'', rather than ''in Wales''.

Mr. Morley: I am not going to argue about Welsh and Wales. The issue about the appointments is that the Secretary of State has responsibility in relation to this issue as she does for a number of appointments. It is normal where there is a Welsh interest and where legislation covers England and Wales for the Welsh Assembly to be consulted. In—

The Chairman: Order. I am reluctant to interrupt the Minister, but again I am afraid that he is talking about schedule 1, to which we shall come shortly.

Question put and agreed to.

Clause 37 ordered to stand part of the Bill.

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Schedule 1

The Water Services Regulation Authority

4.45 pm

Mr. Andrew Lansley (South Cambridgeshire): I beg to move amendment No. 239, in

    schedule 1, page 133, line 8, after 'Chairman', insert 'a Chief Executive'.

The Chairman: With this it will be convenient to discuss the following amendments:

No. 240, in

    schedule 1, page 133, line 8, leave out 'at least two' and insert 'no fewer than four'.

No. 241, in

    schedule 1, page 133, line 9, at end insert—

    '(1A) Including the Chairman, the majority of members of the Authority shall be nonexecutive members.'.

No. 69, in

    schedule 1, page 134, line 15, at beginning insert—

    '(1) The Secretary of State shall, after consulting the chairman and the Assembly, appoint a person (who may, subject to subparagraph (2), also be a member of the Authority) to act as chief executive of the Authority on such terms and conditions as the Secretary of State may think appropriate.

    (2) A person appointed as chief executive may not at the same time be a chairman.'.

Mr. Lansley: In approving clause 37, the Committee has just agreed to the proposal that the director general's office as an individual appointment should be abolished and a body corporate established. If one can characterise it in this way, that is the current best practice in terms of regulatory authorities and bodies. The form in which schedule 1 and the parts of it to which the amendments relate set up the Water Services Regulation Authority is very like the Utilities Act 2000. There is pre-history of this legislation there.

My hon. Friend the Member for Leominster (Mr. Wiggin) will speak to his amendments, but I think that we are of the same mind. The purpose of amendment No. 239 is to establish whether the Government intend, in establishing the Water Services Regulation Authority, to follow a further element of best practice: that the chairman and chief executive of the authority should not be the same person. That is a matter not simply of regulatory good practice but of good corporate governance as experienced in the private sector.

The Better Regulation Task Force report of July 2001 on economic regulators refers in page 33 to the response of stakeholders to economic regulation. It says that the stakeholder consultation gave rise to the view that most stakeholders

    ''felt the roles of chairman and chief executive of the board should not be combined. This is not best practice in public companies or in other public bodies. Postcomm, for instance''—

that is the new postal services regulator—

    ''has been set up with a board of seven commissioners, one of whom is part-time chairman and another is full time chief executive.''

Amendment No. 239 is pretty straightforward. It would put into the legislation a structure that requires that there be both a chairman and a chief executive.

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Amendments Nos. 240 and 241 address the question of how many members the authority should have. Although schedule 1 is very like the Utilities Act 2000, for reasons that I do not understand, instead of saying ''no fewer than two'' it says ''at least two''. Amendment No. 240 is designed to examine whether there should be no fewer than four additional members, rather than at least two. Obviously, in the absence of amendment No. 239 that would be four in addition to the chairman. That would give the potential for there to be a non-executive majority while the chairman and at least one other member of the authority were executive, or regarded as tantamount to executive, members.

Amendment No. 240 is designed around the proposition that the chairman is effectively an executive member of the authority and that at least one other executive member is appointed, presumably a chief executive, even if that is not required in the legislation. There would therefore need to be three other non-executive members to make up the authority with a majority of non-executive members.

The point in amendment No. 240 is made more explicitly in amendment No. 241. The question is whether the non-executive members include the chairman—in my view, the chairman should be a non-executive member. The Minister may well draw the conclusion that the authority could have just three members: the chairman as a non-executive member, one other non-executive member and one executive member, who would be the chief executive of the authority. That would constitute a majority of non-executive members and be consistent with the structure in the schedule.

If the amendments are all rejected, we would need an assurance from the Minister on the Government's intentions. Otherwise, much of the good practice in corporate governance currently being followed in the private sector would not be reflected in the Bill, and many of the developments in best practice in relation to regulatory bodies in the public sector would also not be replicated.

I confess that I should have gone away and checked this, but from memory—the Minister will no doubt correct me if I am wrong—although Ofgem can consist of a chairman and no fewer than two other members, in practice it has a larger number of members. I think that it has seven members—the Minister's advisers will tell him if I am wrong—but the figure is either five or seven. Ofgem certainly operates on a corporate basis with a majority of non-executive members, and from this autumn it will operate with a chairman and a chief executive. Under Callum McCarthy, there was a chairman who was also effectively the chief executive. The principles have been introduced to Ofgem, which has the same structure that the Government are proposing.

The Minister could easily to say to me, ''Well, Ofgem has adopted those best practices and has done so with a legislative structure that is no different from that proposed in the Bill.'' However, the Bill should reflect our current understanding of best practice in regulatory structures. The way in which other utilities are regulated has moved on since the Utilities Act

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2000, and it would be desirable to change the schedule to reflect those developments.

I commend amendment No. 239 to the Committee and am happy to acknowledge that the other amendments were tabled to explore the Government's intentions.

Norman Baker: I concur with the hon. Gentleman's eloquent and convincing comments.

The evidence from other bodies, including Ofgem, is that it is generally regarded as healthier to have a separate chairman and chief executive. No matter how talented a person may be, combining the two posts risks concentrating too much power and authority in one person. Generally speaking, a critical mass of people who can exchange views and work together is a safeguard for anybody performing such a function. Once the number of members falls below that critical mass, there is the danger that one personality might dominate, which may not be helpful and may be contrary to the effective operation of that authority.

As a matter of practice, it is right to separate chairmen and chief executives. Some of the best organisations such as the Environment Agency do that very successfully. Although I have great respect for both the people at the top of the Environment Agency, I would not like to see one of them carrying out a dual function, which would be detrimental to both their performance and that of the agency. The same principle applies here: the division of roles between the chairman and chief executive should be generally endorsed as a matter of course in Government bodies, and it seems entirely proper to put that in the Bill.

It is wrong and potentially dangerous to permit as few as two members. The Minister may say that practice suggests that there will be more than two members. If that is the case, however, why not increase the number? There is nothing to be lost by that. Keeping the figure at two suggests that it is permissible but undesirable; if it is undesirable, we should increase the number.

I have one more point on staff matters. I notice that paragraph 3(2)(b) says:

    ''A person holding office as chairman or other member . . . may be removed from office by the Secretary of State on the grounds of incapacity or misbehaviour.''

One would not want any Secretary of State to be able to remove someone because they did not agree with what that person was doing, rather than because of incapability, so the word ''incapacity''—whatever it means in this context—is important.

I notice that there is the safeguard that there must be consultation with the Welsh Assembly, so if we believe that the Secretary of State is behaving inappropriately, we have to rely on the Assembly to protect us. That is not an appropriate mechanism.

Mr. Swire: The hon. Gentleman is being a little pedantic. Presumably, if the chairman is dismissed by the Secretary of State on the grounds of misbehaviour

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or incapacity, he can challenge that dismissal in the normal way. New legislation is not necessary for that.

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