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Lord Harmar-Nicholls: My Lords, the noble Lord answered my point about signing cheques by saying that he too signs the cheques for these bills. Are the cheques he signs bigger or smaller than they were four years ago?

Lord Haskel: My Lords, I shall come to that point in a few minutes.

On any reasonable measure, the profits of the utilities have been very high. Over the period 1991-94, Oxford Economic Research Associates has calculated that the average total returns to shareholders of the regional electricity companies has been in excess of 38 per cent. Meanwhile, the average total returns calculated on the same basis for the Financial Times All Share Index over the same period are just under 16 per cent.

At the same time, because of a number of tax credits and allowances granted by the Government to many of the utilities, some of them have paid very low levels of tax. A recent analysis of company accounts of the water companies has revealed that, on mainstream profits of £7.8 billion, water companies have paid just under £107 million--a tax rate of just 1.36 per cent. So the taxpayer too has lost out.

Meanwhile, water rates are set to rise to the end of the century. Domestic electricity consumers pay an average of 9p per kw/hr, almost double the US average.

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Certainly electricity prices have fallen since privatisation, but only from the very high levels to which they were raised prior to privatisation.

It is quite clear to me that the level of profits provides the best guide for regulators. Like the noble Baroness, Lady Hamwee, I find the concept of profit sharing entirely reasonable. A "normal" level of profit would be agreed, an excess profit beyond that level would be shared between the utility and the customers in the form of rebates and lower prices. Because the utility would retain a share of the excess profits, there would still be an incentive towards increasing efficiency, and funds would be available for investment.

The calculation of a normal level of profit would not be a difficult burden for the regulator. Such a calculation is common to all forms of regulation, including the present RPI-x framework. Profit sharing has the advantage that the profit sharing rule would require the normal level of profit to be made public and not, as at present, hidden away in the regulator's assumptions. It would provide the greater transparency for which the noble Lord, Lord Skelmersdale, asked.

Meanwhile, business has to go on. Regulators have a lot to do. Companies have to motivate their staff and service their customers. Business managers know that demoralised staff rarely deliver good service.

There was a time when people joined the public utilities out of a sense of service, and there was something rather high-minded about that. That high-mindedness has been destroyed now that the overriding priority is cost cutting. Is it a sign of poor management that the sense of public service has gone out with the cost cutting, and the sense of high-mindedness which made the work worthwhile for many people has not been retained?

Now that the cushion of excess water and electricity supplies has been removed, thus making the chance of cuts more likely, the regulator's concern with service must extend to seeing that the people who work at the utilities have a feel-good factor too. We know that the directors have a feel-good factor--we have heard quite a lot about that recently.

The regulator will have to come to terms also with the take-overs and mergers among the utilities. It was only after strong pressure from Labour that the President of the Board of Trade recently referred the bids by PowerGen and National Power for Midlands Electricity and Southern Electricity to the MMC, but only after allowing a similar take-over of ManWeb by Scottish Power to go unchecked.

We are also seeing water companies taking over electricity companies. How are those going to be regulated? It is naive to think that the accounting can be kept separate. We need to be assured also that the regulator is properly screening companies which are taking over our utilities. There are some disturbing stories about the unethical behaviour of prospective and current owners, especially those coming from abroad, who may be attracted by the more lax regulatory regime we have here compared with the United States. That screening of their past behaviour has to be opened up to the public.

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Several noble Lords have discussed the qualities of the regulators themselves. Obviously regulators must be more than honest and incorruptible. They need to be sophisticated and aware. They must be paragons. They must insist that utilities carry out best practice, not just in management and technology but in corporate governance. Otherwise they will easily have the wool pulled over their eyes. I hope that the Government have a number of people in training. We need too a reply to the question: "Who regulates the regulators?".

The noble Lord, Lord Ezra, is right--it is time that this state of affairs was reviewed thoroughly by the Government. As the noble Baroness, Lady Seear, told us, it is a new experience, and because of that it needs a review. We are most grateful to the noble Lord, Lord Ezra, for introducing the debate and, it is hoped, starting the process of review. Perhaps the Minister will tell us whether that is happening.

Like any business, utilities need to change and evolve continuously. Regulation must allow for that, so there is no universal easy answer. Regulation must be light enough to allow for that continual change, but sufficiently severe and balanced to look after the interests of all. It is obvious that privatisation is the easy part. Regulation is the hard part.

5.20 p.m.

The Minister of State, Department of Trade and Industry (Lord Fraser of Carmyllie): My Lords, I welcome the opportunity provided by the noble Lord, Lord Ezra, to debate once again an important subject of wide public interest. A number of important points have been raised and I will attempt to answer them tonight.

The privatised utilities touch everyone in the country. All of us take a keen interest in their prices and quality of service. The Government are well aware of this. Indeed, as was said by the noble Baroness, Lady Seear, it was a desire to improve the performance and service of the utilities that led the Government to privatise them, to introduce competition where feasible, and to adopt a stable regulatory regime which would deliver increased efficiency, lower prices and better quality.

Perhaps I may say at the outset that no system of regulation is, or ever will be, perfect. We have learnt much from experience both here and overseas. We are still learning and considering possibilities for further improvements. I hope that that is sufficiently modest in setting out where we see the debate on regulation as lying.

As this debate has shown, there is no shortage of ideas for change. But I emphasise that we have built much scope for change into the existing regulatory system. Thus, regulators may and do make changes to licences including, if appropriate, changes to price caps.

There is also scope for changes to the structure of industries following, if necessary, references to the Monopolies and Mergers Commission under general competition law. This has already helped to transform British Gas, separating out its monopoly transmission business and allowing further competition in gas supply. My noble friend Lord Harmar-Nicholls was right in

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saying that it is this system of regulation operating at arm's length from Government, and so it should be, with competition introduced wherever possible, that has provided incentives for the companies to improve their performance dramatically. For example, National Power and PowerGen have doubled their labour productivity and British Telecom has more than doubled its productivity. This has in turn helped to bring down prices. BT's prices are down 35 per cent. since privatisation. Domestic gas prices are down 23 per cent. and domestic electricity prices are down 7 per cent., with further reductions to come. Telecoms, electricity and gas prices are now all among the lowest in Europe.

The quality of services is up. Over 95 per cent. of BT's phone boxes now work! In gas and electricity, the regulators have required demanding new guaranteed standards of service for customers, backed up by compensation. The number of disconnections for debt has gone down in gas by 70 per cent. since privatisation; in electricity by over 95 per cent.; and in water they have fallen rapidly since Ofwat guidelines were issued in 1992. For other interruptions, supply is now being restored within 24 hours in over 99 per cent. of cases in gas and electricity. The number of properties at risk of low water pressure has now fallen for the fourth successive year to 1 per cent. of connected properties.

Noble Lords spoke of the levels of investment that are required and the noble Baroness, Lady Hamwee, spoke of the water industry. Privatisation has enabled that industry to undertake a capital investment programme averaging approximately £3 billion per year. That is double the rate that was in place prior to privatisation. The benefit of this investment can be seen in significant improvement in river and coastal water quality and also in drinking water. Therefore, the noble Baroness has everyone's approval in deciding to drink tap water in such circumstances.

My noble friend Lord Skelmersdale indicated that he thought that regulation was a substitute--and a poor substitute at that--for competition. To that extent I agree with him--

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