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South West Water

4 pm

Linda Gilroy (Plymouth, Sutton) (Lab/Co-op): This is a particularly timely debate, because the periodic review of water prices will reach the point of final determination at the beginning of December and there is considerable concern among my constituents about what that will mean for their water and sewerage bills.

I appreciate that the Government have made important progress on water policies since 1997. Leakage has been cut substantially, drinking water is the safest ever and our rivers and beaches are much cleaner. Legislation has ended disconnection and it has improved metering rights, including the right to a free water meter. In a similar debate in December 2001, which took place in the context of the then draft Water Bill, I argued that a new settlement would be needed to guide the resolution of conflicts between environmental, social and economic goals, certainly as far as the area covered by South West Water was concerned and increasingly in some other water areas too.

The experience of the current periodic price review suggests that a reappraisal is now essential. Apart from the question of affordability, there are also wider questions as to whether the present framework serves the interests of companies, shareholders and workers, and the competitiveness of our regional economy. I want to spend a minute or two to reflect on how we came to have such high prices before I go on to discuss how we might find solutions.

Following privatisation in 1989, average household bills increased steeply in the south-west. In 1999, a review was introduced that reduced water prices by 12 per cent. on average across the country and by 12.25 per cent. in the south-west. That was welcome, but it did not by any means undo the previous price hike.

Since disconnections were banned, access to water is not a widespread problem but the costs can be. The average water bill amounts to about 1 per cent. of a household's income. However, for many low-income households, the proportion is many times that. In its sustainability indicators, the Department for Environment, Food and Rural Affairs set 3 per cent. of household income as a measure of affordability. Nationally, more than 2 million households spend more. A greater proportion of such households are in the South West Water area, where some pensioners and those on jobseeker's allowance pay 9 per cent. and 13 per cent. of their income—significantly more than people in the same position in Birmingham.

The problems in the south-west lie in the original settlement at the time of the Conservative privatisation of the industry. At almost every event that I have attended to seek a solution to the south-west charges, it has been recognised that the south-west share of the green dowry fell far short of what was needed or fair. The inadequacy of the green dowry has given us the highest water bills in the country: more than £100 more than the average bill. Against such a background, an increase of 17 per cent. on the average bill can be viewed only with apprehension by those who have to try to find the means to pay it, as well as by those who have to collect it and those who work hard to make our economy competitive.
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As WaterVoice South West points out, the Ofwat presentation of price increases is misleading. It cites a 17 per cent. increase in the average bill for the five years between 2004–05 and 2009–10, but the typical measured bill and the typical unmeasured bill over the same period will increase by 29 per cent. and 35 per cent. before inflation. That will put the typical unmeasured bill at nearly £600 by 2010.

I am aware that as part of the periodic review process the Secretary of State said in her initial guidance that due weight must be given to the economic and social effects, especially with regard to vulnerable customers.

Mr. Paul Tyler (North Cornwall) (LD): I am following the hon. Lady's speech with great interest, because she has campaigned on this issue inside and outside Parliament over the same period as I have. Does she accept that the figures that we now face are so much more dramatic precisely because lower-income households in our region have been badly hit over many years and this is only adding to that considerable burden? She said that the original legislation introduced by the Conservative Government in 1989 caused the problem, so does she accept that the absence of any rebate for low-income households in the legislation has been a major factor in the south-west?

Linda Gilroy : I agree that the root of the problem lies    in the initial privatisation settlement when, ironically, the leader of the Conservative party, the right hon. and learned Member for Folkestone and Hythe (Mr. Howard), was the Secretary of State for the Environment. Over the past five or so years, there has been some stability compared with that period. We must tackle the issue at some stage, although it will not be easy.

I hope that DEFRA's review is finding ways of addressing concerns about affordability and associated debt matters that many organisations, such as WaterVoice, the National Consumer Council, the Public Utilities Reform Group—PURGe—Water UK and others, have raised over a long time. I pay tribute in particular to the National Consumer Council for its recent work in "Lifelines". As the Minister will know, I have been associated with such issues in Parliament since I was elected as co-chair of the Public Utilities Reform Group.

I suspect, however, that the review will find it challenging to come up with effective answers inside the existing parameters within which the industry and its regulators operate. I therefore wish to set out for the Minister's observation the arguments for dealing with such issues in a wider context. By no means, are they all new ideas, but together they make the case for more fundamental work to be undertaken. Outdated charging systems based on rateable values last looked at in 1989 need to change. Water companies should be required to devise alternatives to charging on that basis, taking account of local conditions—one size may not fit all regions—and undertake a calculation of economic efficiency, environmental sustainability and social justice. According to its latest annual report, the Pennon Group, which owns South West Water, managed to spend £6.5 million on an abortive takeover bid in its
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non-regulated sector. If it, and other water companies, were to put in a fraction of that amount to fund an independent reappraisal of how the system could be changed, we might begin to find some answers.

The remit of such a review could include an assessment of other relevant issues, such as clarifying the amount allowed in benefits and tax credits for water bills and the relationship between methods of charging and ease of debt collection, which would make it easier to distinguish between people who cannot pay and those who will not pay, a matter about which the industry has some concerns. I have heard about a figure of as much as £10 being passed on from the "won't pays" to other customers, including poor and vulnerable customers.

The review could cover whether the costs involved in the voluntary metering programme is the best means of achieving conservation benefit. I have done a quick back-of-the-envelope calculation on what the 117,000 meters that may be required in the next periodic review will cost. It runs into tens of millions of pounds, especially in the south-west where conservation is perhaps not the prime issue compared with other regions. Again, perhaps one size does not fit all regions.

Some interesting proposals are emerging from a recent study by the Joseph Rowntree Foundation about the impact of green taxes on poor households. In the case of water, the report investigates the effects of universal water metering and of 11 alternative charging methods, including a lower tariff for low-income households on benefit, a free water allowance for some households and a variable tariff linked to the council tax band. Such a review could consider whether it is now time to end the ban on mergers that has resulted in overseas water companies and companies with other United Kingdom activities being able to take on water companies, but does not allow mergers between water companies in this country.

Some 15 years after privatisation, it is a little difficult to think that the injustice of the inadequate green dowry might be unpicked but, given that each periodic price review builds on the unfair settlement, surely it is not unreasonable to look for a solution that will break the vicious circle in which we are caught. I am talking not only about social justice, but the unfair competitive position that our businesses and industry are in.

I would also like the review to look into whether second homes in the south-west pay for a fair share of the costs of providing their water. My hon. Friend the Minister will know that recent changes have been made to council tax to ensure that such second home owners shoulder a fairer proportion of the price for local services. As I understand it, about half of total water and sewerage costs come from infrastructure capital costs. Is it fair that those who come to enjoy the amenity of our clean rivers and beaches and a connection to their second homes end up paying little for the benefit, as they use relatively little metered water, and that at peak times?

I know that my hon. Friend the Minister is working to ensure that the "polluter pays" principle is fully and correctly applied, so that costs that should more appropriately be paid by others are not passed on to customers. I am thinking particularly of the costs of diffuse agricultural pollution. However, I think that I am right in saying that the issue will not be resolved
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according to that determination. There is also the matter of highways drainage costs, which has considerably exercised WaterVoice South West.

In a previous debate, I mentioned the difficulty arising from the long-term nature of decisions that need to be taken on investment in the water industry, and the problem of aligning those decisions with the five-year price review. In his submission to the Environment, Food and Rural Affairs Committee's first review, which reported at the end of 2003, Dr. Dieter Helm of Oxford university said the difficulty

He advocates

an interim determination process

The issue was also the basis of much searching questioning in the most recent review of the determination process, conducted by the Select Committee over the past month.

Those are just a few of the subjects that merit closer examination, not just to help us resolve some of the all-too-obvious tensions in the south-west, but to ensure fairness and transparency and, through that, best value elsewhere in the country. Unless there is fairness and transparency, we will not necessarily have the best possible value. When all is said and done, regulation acts as a substitute for competition in the market, which would otherwise deliver best value.

I hope that a few of the issues raised will be addressed in the hardship review that DEFRA has in hand, but I suspect that most will not. Some of the ideas that I have put forward might provide more effective medium and long-term solutions. The wider review for which I am calling needs two stages. The first would identify the options, shortlist those likely to provide really effective solutions, and identify those that might need legislation. At that stage, all stakeholders would have a role to play. Stage 2 of the review would be for Government to take responsibility for a detailed analysis of the impact of those shortlisted options before arriving at decisions.

The regulator has made a commitment to reviewing the price determination process, but he is constrained by what statute requires of him. Even if he were not so constrained, I suspect that the whole culture of the regulator in the current framework of legislation would mean that he would look at too narrow a range of issues to come up with that full broad range of options that it would be beneficial to consider. They say that for every complex problem there is a simple solution, but that it is usually wrong. For water, that is particularly the case, and that is why I advocate a wide-ranging review.

In conclusion, I hope that by raising these matters at the present point in the price-determination cycle, I will be able to obtain from the Minister a commitment to discuss them with his colleagues in other Departments—such as, perhaps, the Treasury, which would have an interest in aspects of the matter, the Department of Trade and Industry, which has an interest in regulatory and competitiveness issues, and the Department for Work and Pensions. Those Departments come
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particularly to mind.There is a need to revisit the regulatory framework to stop the price-hike misery for my constituents—which is likely to cause problems, too, for our water company and possibly its shareholders, and to form the basis for a continuing competitive disadvantage to our economy.

4.15 pm

The Minister for the Environment and Agri-environment (Mr. Elliot Morley) : I congratulate my hon. Friend the Member for Plymouth, Sutton (Linda Gilroy) not only on the way she has raised this issue but on her long involvement, through PURGe, in campaigning on utilities regulation and prices. The subject is an important one and the debate about how to deal with the issues continues.

My hon. Friend is right to say that the root of the problem is the nature of the privatisation process and the green dowry, and the base prices that were set, which now underpin future price increases and which have clearly worked to the disadvantage of the south-west. I do not dispute that.

I am conscious that water bills can be a significant cost to many households, making price increases significant too. As my hon. Friend said, the Government are currently reviewing the way in which lower-income households are helped with their water and sewerage charges. That includes considering the existing vulnerable groups provision for people on water meters and the potential for other ways of helping, such as, perhaps, setting up trust funds, as happens in some water company areas; they are used to help people on low incomes who have difficulty with bills.

My hon. Friend raised important points about water pricing and the regulatory system in general. There has been considerable discussion about that. The Government reviewed the water charging system in 1997–98. That review resulted in the Water Industry Act 1999, which introduced, for example, protection against disconnection because of important health and welfare considerations.

We have not shut down the idea of a review of structures, prices and tariffs. We remain open to new ideas about them. I shall make a point of looking at what the study done for the Joseph Rowntree Foundation had to say about green taxes and their application. I have considerable sympathy with the idea of variable tariffs, for example, but there are many different ways, as my hon. Friend will know, of applying variable tariffs. Those ideas are nevertheless worth exploring. I have in the past put forward the idea that we should consider them.

Linda Gilroy : Perhaps my hon. Friend would agree that one size does not fit all and that there might be scope in the future to encourage water companies to consider the charging solutions that best suit their region.

Mr. Morley : Yes; if we are to examine the charging system generally, it is not unreasonable to consider regional differences. As we know, there are now regional differences in cost, although the charging mechanism is based on a similar formula.
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There is likely to be an increase in bills. We want to continue with investment, which, as my hon. Friend said, has made this country's rivers and beaches the cleanest they have been in probably 100 years. People are worried about prices and we are sensitive to that, but consumers are also quite keen on high environmental standards and high quality. Those are popular and people want them. Making sure that we get those improvements at the lowest possible cost to consumers is, of course, an issue to be dealt with.

Prices rose an average of 3 per cent. in April, and customers of South West Water paid the most, with an average bill of £361. However, the figures that I have, just as a matter of interest, show that in 1999 the average bill for the company, taking inflation into account, would have been £394.

The Government have commissioned and published research into alternative methods of unmeasured charging, including charges based on council tax bands. However, that research shows that switching to any of the proposed alternatives would create not only winners but a large number of losers, including many of those least able to afford it and particularly those with the lowest rateable value properties. That is one problem with variable charges. It is essential that any proposals for new charging arrangements provide adequate transitional arrangements and that we consider those issues. I accept that we should consider a range of issues and that we can approach that in different ways.

In the south-west, Ofwat's proposals would lead to an average increase in bills of £61 to £418 over the five years to 2010, before inflation. Incidentally, that is less than half what the company has been asking for. I am well aware that that is an average and that there are different price impacts and I know that my hon. Friend is, too.

Linda Gilroy : Because there has been an unusual volume of switching to metered supplies in the south-west, averages are particularly misleading there. There is the average for unmeasured and the average for measured. The gap between them is increasing and one has an impact on the other.

Mr. Morley : I accept the points that my hon. Friend makes. However, most customers in the south-west will save money by switching to meters, and I would encourage them to do so. My hon. Friend is well aware of that. Under water regulations, meters are provided free of charge, and that is one way to reduce bills for a large number of consumers in the south-west. That said, I know that it will not help those who are already on meters and that there are issues about unmeasured charges. There are complexities in this matter and I do not want to be glib about average increases. Let us take the increase, for example, from 1999 to 2009; the average increase in the south-west is 6 per cent. Even though that is a very low figure because of the decrease in the last round, I know that that hides significant increases for other consumers.

Mr. Tyler : I welcome the Minister's open-minded approach, on which I think both the hon. Lady and I would congratulate him. However, I hope that he will recognise that the difficulty with an open-minded
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approach and saying that many of these issues can be examined might be that that will take a great deal of time, and this is a very urgent problem. Although the rises from 1999 to date are not that great, the rises from 1989 to now are very great. That is the background, and the problem is very urgent for next year.

Mr. Morley : It is true that there was a very sharp increase from 1989 and that prices have been smoothed because of the decrease in the last round and the change that the regulator has suggested to business plans now. That is right and proper. However, there are real complexities with regard to how we consider this issue and the benefits system, for example, and how we measure the affluence of both the country and regions.

There have been positive changes, including in the south-west. Let us consider the reduction in unemployment, for example. The latest figures, which go up to September this year, show that, compared to 1997, there has been a reduction in unemployment in Plymouth, Sutton of 63.5 per cent. There has been a reduction in North Cornwall of 57.5 per cent. That is significant.

The changes in tax and benefits that the Government have introduced in recent years mean that, in real terms, families in the south-west with children are, on average, £1,360 a year better off. Families with children in the poorest fifth of the population will, on average, be £3,000 a year better off. Pensioner households will, on average, be £1,350 year better off—about £26 a week. The poorest third of pensioner households will have gained £1,750 a year. That is the result of the Government focusing on raising overall living standards, particularly those of people on lower incomes.

Linda Gilroy : My hon. Friend has been patient in giving way. As long as the sort of difference that I described exists for those in the south-west with pensions or the jobseeker's allowance, who pay two or three times as much as their equivalents in Birmingham, we will never be able to solve the poverty problem. Much though I welcome the fact that we have taken a million children out of poverty, there is still more to do.

Mr. Morley : I accept that. Part of the equation is the fact that Ofwat's proposals would lead to an increase in bills of between £61 and £418. The company's business plans have been significantly reduced by Ofwat, as my hon. Friend knows. In fact, it will be allowed less than half the increase that it was asking for.

The jobseeker's allowance includes a calculation to reflect the cost of such things as water. The JSA and income support are covered by what is known as the Rossi increase, based on the retail prices index to reflect cost of living increases. The Rossi index takes account of increases in a wide range of goods and services, including water and sewerage charges. However, it takes no account of housing costs or of income support help with mortgage interest payments, which are provided for separately through housing benefit. I know that those payments help people on benefits, but some people on low incomes are just above the benefit level, so not all the issues raised by my hon. Friend have been resolved.

I was interested in my hon. Friend's comments about the merger policy. It is not unreasonable that the policy should be renewed. I have said so publicly. However, I
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must be careful what I say. When visiting the south-west, I said very mildly that I thought my hon. Friend the Member for Falmouth and Camborne (Ms Atherton) had a reasonable idea about merger policy, but my expression of mild support caused a share price movement. I got into a bit of trouble for that, so I must be careful.

We should look at all options. We should consider everything, including affordability, how to dealt with debt and the polluter-pays issue, which was raised by my hon. Friend the Member for Plymouth, Sutton because it throws costs onto consumers that they should not have to pay. She was right to say that we are addressing the problem, although it will be some time before consumers see the benefits of any measures that we put in place.

We must also consider the question of second homes. I certainly agree that their owners should pay their fair share. However, as my hon. Friend said, there have already been some changes. Indeed, those changes apply
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to Members of the House, and they are entirely justified. I also take my hon. Friend's point about looking at the legislative and regulatory framework when addressing such issues.

I reassure my hon. Friend that the regulator is dedicated to ensuring that increases are no higher than they need be. That is reflected in how he dealt with the draft business plan. The range of views that my hon. Friend expressed on the potential options need to be examined. It is important to keep an open mind about charging methods, tariffs, how to help people on low incomes, metering and fairer ways to pay for water. It is not always easy, but it is nevertheless important. I give my hon. Friend the assurance that although it will not happen overnight we will seriously consider those issues, which are important for the future.

Question put and agreed to.

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