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Lord Hunt of Wirral moved Amendment No. 131:

The noble Lord said: In the absence of my noble friend, I rise to move Amendment No. 131. It seeks to remove from Clause 57 subsections (3) and (4) to which I referred in an earlier debate. Clause 57

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specifies the interests of national security and includes the definition of public security. As the noble Lord, Lord Borrie, pointed out, it is perfectly in order for the Secretary of State to add, remove or amend any consideration under subsections (3) and (4).

I can well understand that my noble friend Lord Hodgson of Astley Abbots wished to remove that opportunity from the Secretary of State. It refers back to the debate we had earlier where the Minister said that there might be considerations such as the cutting edge of science and technology where the Secretary of State might want to intervene. I merely repeat that this, just as in the previous situation in relation to Amendment No. 125, provides a temptation to the Secretary of State to introduce other considerations which could include social employment. There is no reason why subsection (3) in any way fetters the Secretary of State's unbridled discretion to add whatever consideration he thinks fit on the grounds that he believes that it should be added. Amendment No. 131 would remove that temptation. I beg to move.

Lord Sainsbury of Turville: We covered the arguments when we debated Amendment No. 125. I do not think that there is anything to add. The issue is whether one has a residual power which could be used in unpredicted and extreme circumstances for the Secretary of State to say that there is a public interest involved in this case.

We believe there is a need for that provision, even though it is difficult to specify what that is for in advance. If we knew what it was in advance we would put it into the Bill. One must make a judgment as to whether it is right to give that latitude to the Secretary of State. We believe that it is in matters of this importance.

Lord Hunt of Wirral: I accept that the Minister is repeating his previous assurances. I ask him to reflect further—not now, but perhaps he could write to me to explain why it is necessary to have both subsection (3) and (4) to Clause 57 and the additional words at the end of Clause 41(3). If the latter were to remain without the words that I sought to delete earlier, it would still presumably be perfectly open to the Secretary of State to add any specific consideration under Clause 57(3) and (4). I am not sure why both belt and braces are necessary. I may well have missed something fundamental, but perhaps the Minister will let me have a response on that. My view remains that the Secretary of State should not be able to add anything.

Lord Sainsbury of Turville: Perhaps I can be helpful. Clause 41(3) provides for the intervention itself; Clause 41(7) means that the Secretary of State must lay the order; Clause 57(3) provides the order-making power. But if it would help the noble Lord, I am happy to write to him to set that out in detail.

Lord Hunt of Wirral: I am grateful to the Minister for his usual courtesy. I shall reflect and look forward to receiving that further information. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Clause 57 agreed to.

Clauses 58 to 62 agreed to.

Clause 63 [Cancellation or variation of references under section 61]:

Lord Sainsbury of Turville moved Amendment No. 132:

    Page 46, line 2, at end insert—

"(2A) Where, by virtue of subsection (2), the Commission treats a reference made under subsection (2) or (3) of section 61 as if it had been made under subsection (3) or (as the case may be) (2) of that section, paragraphs 1, 2, 7 and 8 of Schedule 7 shall, in particular, apply as if the reference had been made under subsection (3) or (as the case may be) (2) of that section instead of under subsection (2) or (3) of that section.
(2B) Subsection (2C) applies in relation to any undertaking accepted under paragraph 1 of Schedule 7, or any order made under paragraph 2 of that Schedule, which is in force immediately before the Commission, by virtue of subsection (2), treats a reference made under subsection (2) or (3) of section 61 as if it had been made under subsection (3) or (as the case may be) (2) of that section.
(2C) The undertaking or order shall, so far as applicable, continue in force as if—
(a) in the case of an undertaking or order which relates to a reference under subsection (2) of section 61, accepted or made in relation to a reference made under subsection (3) of that section; and
(b) in the case of an undertaking or order which relates to a reference made under subsection (3) of that section, accepted or made in relation to a reference made under subsection (2) of that section;
and the undertaking or order concerned may be varied, superseded, released or revoked accordingly."

On Question, amendment agreed to.

Clause 63, as amended, agreed to.

Clauses 64 to 67 agreed to.

Schedule 6 [Schedule to be inserted in the Water Industry Act 1991]:

Lord Borrie moved Amendment No. 133:

    Page 208, line 31, leave out "substantially"

The noble Lord said: This amendment and Amendment No. 134, which is grouped with it, stand in my name and in that of the noble Lord, Lord Hodgson of Astley Abbots. That demonstrates that they are non-party political. Clause 67, which we have just agreed, and Schedule 6, deal with the special features of mergers between water companies. As has been the case during the 11 years since privatisation, most such mergers must be referred to the Competition Commission—they are mandatory references. The key test that the commission must apply is whether the particular merger referred to it will adversely affect the water regulator's ability to make comparisons between water companies when he undertakes his five-yearly task of setting price limits for water companies. Of course, the regulator is the Office of Water Services (Ofwat).

The amendment is inspired by WaterVoice, which comprises the 10 regional statutory Ofwat customer services committees. I mention that because I should also declare an interest as a non-executive director of Vivendi Water UK.

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As we know, each water company in the UK is a monopoly supplier in its area. The so-called yardstick competition—that is, the regulator's ability to compare the performance of different water companies in order to set robust price and customer service standards—is the vital regulatory tool used by Ofwat in setting its price limits. Few would doubt that, over those 11 years, it has produced significant advantages for the consumer.

The Bill sets a new threshold, based on the combined turnover of the companies, at 10 million. The Office of Fair Trading, rather than the Minister, will make the reference. Otherwise, the Competition Commission is, under the Bill, to continue to give particular weight to the regulator's ability to make comparisons between water companies. When the matter is before the Competition Commission, the only qualification is that the commission should continue to be able to take account of customer benefits that the merger may provide. However—this is an important point—the customer benefits must be "substantially" more important than the prejudice to the regulator's ability to make comparisons between water companies, which would normally be reduced when a merger takes place and reduces the number of companies.

The amendment would delete the word "substantially" from the remit of the Competition Commission and give the commission more flexibility in determining whether, in the public interest, the merger should be allowed. Water Voice, the body representing water consumers that inspired the amendments, is of the view that, 11 years on from privatisation, the remit of the Competition Commission acts as an unduly powerful block on mergers of water companies in England and Wales. Foreign companies that have little or no experience of the water industry in this country are free to come into the sector and are not affected by the provisions of the Bill. Water customers may be denied the benefits of lower prices and better services that a merger of existing water companies might bring. Why not give the Competition Commission free rein to assess the issue, instead of obliging it to establish that the benefits to consumers would be substantially greater than any loss to the water regulators caused by the reduction in the number of comparators?

It is well known that the structure of the industry is becoming ossified. The Director-General of Water Services has told me that he does not favour the amendments. Yet, he said publicly—he repeated the point in a letter to me—that he did not seek to freeze the water industry in its present structure. The amendments would help to unfreeze the water industry. I beg to move.

Lord Sainsbury of Turville: I had a feeling that my noble friend Lord Borrie and I would be the only people who would feel a burning urge to talk about water mergers.

The Bill makes several reforms to the special regime for assessing mergers between water enterprises to align procedures with the general merger regime. For

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example, in line with the removal of Ministers from most merger decisions, it gives the Competition Commission responsibility for deciding final remedies in the event of an adverse finding. The changes also build in references to the new concept of customer benefits, in place of references to the broader public interest. The Bill, however, seeks to preserve, as far as possible, the substantive effect of the current regime. Accordingly, mergers between water enterprises above a certain de minimis threshold will continue to be subject to a mandatory reference. Once they are referred, special weight will continue to be attached to the water regulator's ability to make comparisons between different water enterprises.

The current substantive test applied by the Competition Commission is set out in Section 32(3) of the Water Industry Act 1991. In deciding whether a merger will operate against the public interest, the commission must have regard to the principle that the regulator's ability to make comparisons between different water enterprises should not be prejudiced. The commission can have regard to other factors only if, inter alia, the achievement of those other purposes is of substantially greater significance in relation to the public interest.

I should like to stress the term "substantially greater significance". It is that phrase that we have sought to replicate in the new context in Schedule 6 to the Bill where it provides that customer benefits arising from a merger should be substantially more important than the prejudice to the regulator's ability to make comparisons before they can be taken into account in determining remedies. To remove the reference to "substantially" would be to downgrade the importance of comparators from where it is now.

Given the current and anticipated levels of competition in the water industry, we and the water regulator do not think it is appropriate to make substantive changes to the water regime. In the absence of a competitive market, the water regulator's ability to make comparisons between different enterprises remains a key regulatory tool. An assessment of comparative efficiency is taken into account by Ofwat in the five-yearly periodic review of water charges. It has allowed the regulator to set tough price controls to the benefit of consumers. Inefficient companies are forced to improve their performance if they are to secure reasonable returns, while their customers do not have to pay for inefficient business practices. Furthermore, as overall efficiency improves, the industry benchmark advances. Comparative competition has made a major contribution to the water sector achieving efficiency savings on a scale similar to those achieved in other regulated utilities. It is not a mechanism to be interfered with lightly.

I wish to respond to the point made by my noble friend Lord Borrie on the water industry becoming ossified. I do not think that that is totally correct. In fact, there has been considerable consolidation in the industry since 1991. I understand that there are now 23 separately licensed companies where there were 39. The regime does not prevent all mergers and will not

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do so in the future. Mergers with other non-water companies are subject to the same regime as any other merger.

For mergers of water enterprises themselves, it is up to the proponents to set out a convincing case for the scale of the customer benefits. It is for the commission to establish their robustness and to make the crucial judgment about whether the benefits to the group of water customers directly affected by the merger are of sufficient materiality to outweigh the loss of a comparator which affects all water customers. Given the importance of comparators to the regulatory framework, we believe it is right that the benefits should be clear and unambiguous—in short, substantially more important than the effect of the loss of the comparators. Having heard this explanation, I hope that my noble friend will be prepared to withdraw the amendment.

9.45 p.m.

Lord Hunt of Wirral: I am sorry to disappoint the Minister. He said that he had been looking forward to a duologue. However, I wanted to intervene because, while I understand why he wishes not to interfere with the existing wording, the word "substantially" is important. He is saying, in effect, that the relevant customer benefits could well be more important than the prejudice concerned. On that I think he used the phrase, "of sufficient materiality". But in fact the word "substantially" is far stronger than the phrase, "of sufficient materiality". He is depriving customers of potential benefits unless not only are they are of sufficient materiality, but are substantially more important than the prejudice concerned.

As well as wishing to keep to the existing wording, has the department undertaken any analysis of the circumstances in which "substantially" is to be preferred? Have tests been carried out or examples foreseen where such a protection is still necessary? I ask that because I found myself persuaded by the noble Lord, Lord Borrie, in his wish to free up the situation in the water industry. I realise that there are several key vested interests, but I believe that it would help the Committee if the Minister felt able to explain a little of the background as to why he and his colleagues have felt it necessary to keep strictly to the existing wording.

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