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Baroness Byford: My Lords, the noble Lord, Lord Borrie, has more faith than we do and this is why we recommend the amendment. We hope that the Government will deal with it sympathetically.

Baroness O'Cathain: My Lords, I, too, recommend the amendment. In my experience people like to live in silos and do not communicate. The noble Lord, Lord Borrie, grimaced but that is the reality. People build up empires and say, "No one can come near me. I'm king of my castle so forget it". I support the amendment.

Lord Whitty: My Lords, we are all in favour of co-operation, co-ordination and communication between regulators. This amendment is better than the previous one, but it is not quite there yet. The problem is that, in one sense, it is so simple. That is not the motherhood and apple pie objection, but the amendment proposes that the regulators shall exercise all their statutory powers and so forth "in a co-ordinated manner".

Each regulator has a separate and distinctive role and to co-ordinate on every exercise of power with the other regulators is not particularly appropriate. To provide for that in a general way in subsection (3) is clearly highly desirable, but subsection (2) might be over-prescriptive.

However, I share the noble Lord's general objectives and I shall take the matter away and consider whether we can move some way down this road without unintended side effects.

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Lord Dixon-Smith: My Lords, I am grateful to the Minister for that helpful reply. It removes from me the obligation to remind the noble Lord, Lord Borrie, of his remarks in Grand Committee. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness O'Cathain moved Amendment No. 60:

    After Clause 39, insert the following new clause—

After section 2 of the WIA there is inserted—
(1) The Authority shall prepare and publish a statement of policy with respect to its determination of charges in periodic reviews and interim determinations under all or any of the instruments of appointment of companies as relevant undertakers made by virtue of Part II of this Act.
(2) The Authority's statement of policy under this section shall include a statement of its policy with regard to the following matters—
(a) the carrying out of its duties under this Act insofar as they relate to its determination of charges;
(b) the matters to be taken into account and the methodologies to be applied in its determination of charges; and
(c) the extent to which the performance of functions by persons with powers and duties conferred or imposed by or under this Act or any other enactment are relevant to its determination of charges.
(3) The Authority shall determine charges in periodic reviews and interim determinations under a company's instrument of appointment as a relevant undertaker on the basis of the most recently published statement of policy.
(4) The Authority may revise its statement of policy and where it does so shall publish the revised statement.
(5) Publication under this section shall be in such manner as the Authority considers appropriate for the purpose of bringing the matters contained in the statement of policy to the attention of persons likely to be affected by them and shall not be made less than twelve months before a periodic review.
(6) When preparing or revising its statement of policy under this section, the Authority shall consult relevant undertakers and such other persons as it considers appropriate, subject to the requirements of subsection (7) below.
(7) For the purposes of subsection (6) above—
(a) consultation shall be by way of written notice given by the Authority not less than six months prior to the publication of the statement of policy which it is preparing or revising;
(b) such notice shall state—
(i) the matters which the Authority proposes to publish in its statement of policy and its reasons for including them in the statement; and
(ii) a period of not less than three months within which that person may give written notice of objection with respect to the matters referred to in the notice; and
(c) the Authority shall give each person a reasonable opportunity to make oral representations to it on the matters referred to in the notice.

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(8) The Authority shall not issue or publish a statement of policy unless—
(a) no notice of objection to the policy is given to the Authority within the time period specified in its notice under subsection (7); or
(b) one or more relevant undertakers gives notice of an objection to the Authority within that time and—
(i) the proportion (expressed as a percentage) of the relevant undertakers who have given notice of an objection is less than such percentage as may be prescribed; and
(ii) the percentage given by subsection (9) is less than such percentage as may be prescribed.
(9) The percentage given by this subsection is the proportion (expressed as a percentage) of the relevant undertakers who have given notice of objection, weighted according to their market share in such manner as may be prescribed.
(10) If the conditions referred to in subsection (8) are not met, the Authority shall (within three months of its receipt of the first or only notice of objection) refer the policy to the Competition Commission for review.
(11) Where a reference is made to the Competition Commission under this section, it shall be the duty of the Competition Commission to determine whether the policy which is the subject of the reference operates in a manner best calculated to fulfil the duties of the Authority arising under this Act.
(12) Where a reference is made to the Competition Commission under this section, the Authority shall not prepare or revise its statement of policy other than on the basis of the determinations of the Competition Commission.
(13) The Secretary of State may by regulations make such provision as he considers appropriate for regulating the procedure to be followed with respect to any reference to the Competition Commission under this section.
(14) Without prejudice to the generality of the power conferred by subsection (13) above, regulations under that subsection may, in relation to any such reference, apply (with or without modifications) the provisions of any enactment relating to the references to the Competition Commission under the provisions of this Act, the Fair Trading Act 1973 (c. 41) or the Competition Act 1998 (c. 41).""

The noble Baroness said: My Lords, Amendment No. 60 requires the water regulator to consult on and publish on a timely basis a statement of policy on how the regulator plans to conduct a price review; and also to state the methodology that it will use to set prices.

If a water company feels that there are some elements of methodology with which it is unhappy, the clause then allows the company to appeal to the Competition Commission for a strictly limited time period. The review which a company can seek must be of the whole of the methodology, to recognise that the methodology must be internally consistent. There cannot be cherry picking. All of this would take place well before a company submits a detailed business plan to the regulator, with detailed numbers to be used in price setting.

The purpose of the amendment is to achieve better decision making by the water regulator. It seeks to ensure that the regulatory mythology—that was a Freudian slip!—methodology is well-based and agreed long before discussion of detailed plans and numbers takes place under the periodic review.

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At the moment, a company can appeal against a defective regulatory methodology only right at the end of the process, when it can appeal to the Competition Commission. This is far too late in the process.

In the past, Ofwat has used defective methodologies that have been criticised by the Competition Commission. In the previous price review, the Competition Commission rejected an adjustment that Ofwat had made to depreciation allowances to align them with expected maintenance expenditure—the so-called "broad equivalence" rule. It also criticised a number of other detailed elements of the methodology. The Commons Environmental Audit Committee believed that the insufficient attention given to capital maintenance amounted to "intellectual neglect" on Ofwat's part. That appeared in the 7th report, Water Prices and the Environment.

An appeal mechanism at the methodology stage could have picked this problem up and resolved it before further detailed numbers work. So the benefits of getting the methodologies right at an early stage would be substantial.

In Grand Committee, the Minister said he thought that it was somewhat bureaucratic and would not improve the conduct of price reviews. Only one extra step is introduced into what is already a complicated process—that is, the referral to the Competition Commission on a strictly time-limited basis of the defective methodologies.

The benefits of getting the methodologies right early on greatly exceed the costs of this process, and introducing this referral provides an important incentive to the regulator to get the methodologies right.

The Minister also felt that it would greatly limit the flexibility of the regulator and his opportunities to innovate and would give companies the right to obstruct policies. Companies cannot obstruct policy. All they can do under the clause is to ask for a review. The amendment ensures that the regulator follows due process and consults properly, and enables peer review of methodologies by the Competition Commission. It builds on existing practices; it does not attempt to overturn them.

The final objection raised by the Minister was that the balance of influence between the companies and the consumers is disturbed. This is simply nonsense. The regulator's new duty to pursue the consumer objective is not altered in any manner whatever. I beg to move.

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