My Lords, rather late in the day we are approaching a rather important issue, which concerns the powers of Ofwat to reopen a price review within five years if circumstances change or if information received from companies on their performance raises serious issues. Considering Ofwat’s role in a more dynamic market, this seems very important.
At present, we set the price maxima for five years. Companies can reopen the five-year settlement if circumstances change; for example, if they need to expend more capital than was allowed for in the price review, they can go back in. Thames Water went back in to see Ofwat about additional money for the super-sewer. It was knocked back by Ofwat but it had the right to ask. I imagine that companies do not do it more often because if the company reopens the price settlement, Ofwat has the right to reopen it as well. It is not a big feature but I am arguing that there should be an equivalence.
Ofwat does not have the power to initiate a reopening. It uses informal powers, and has been quite successful in negotiating with some companies over the current five-year period for reductions in prices because of changed circumstances—mainly reflecting the fact that the cost of capital was significantly less in practice than had been allowed for when the price review was concluded. In reality, as my noble friend Lord Hanworth has pointed out more than once, that allowance for capital has permitted a significant degree of profit enhancement and dividend enhancement by companies, and it is important that Ofwat keeps an eye on this.
Amendment 137 would allow Ofwat to reopen the settlement if it thought that the way in which it was operating was no long appropriate to the economic circumstances, or that the company’s own behaviour gave it cause to reopen it because the terms of the settlement were no longer appropriate. Amendment 146 would provide some background for this. It would require water undertakers to provide information to Ofwat on a regular, annual basis on their financial affairs. This could be dealt with separately from the other amendment, but we have grouped them together for these purposes and there is an interrelationship. If this is a different provision from the very detailed cost breakdown that Ofwat now requires from companies in advance of the price review every five years, and if we move to a more competitive market, the details of that form of regulation may not have to be so onerous over time.
This amendment looks at how companies perform during the price period. It will provide a big picture of how the financial operation as a whole is working out. As we have constantly reiterated, there is a problem in this industry of a vertically-integrated regional monopoly, with higher levels of gearing, dividends—they have been at over 90% of income over the past few years—and rates of return on assets, in a relatively low-risk industry, paying relatively low levels of taxation. There are issues about the totality of the finances of the sector that a regulator ought to be free to query. It certainly should have information on it. Your Lordships may have heard a recent programme about this on the BBC’s “File on 4”. I did not agree with all of it, but it pointed out, for example, that some of these companies have at least seven levels of executive decisions before reaching the real decision-makers at ownership level. That applied to Thames Water in particular.
It is important that Ofwat can challenge the way in which these companies conduct their financial affairs. Amendment 146 would provide it with the information for doing so and Amendment 137 would allow it to
reopen the price settlement if it saw that there were serious and endemic concerns about the way in which a company was operating, or about changes in the cost of capital or the level of corporate internal transfer pricing and so forth. It is important that Ofwat understands the total system and it is important that it has the ability to reopen the settlement. Of late, water companies have received fairly bad publicity because of their overall financial structure. At the moment, the regulatory system cannot really address that and does not have the information needed in order to address it. This is a gap in Ofwat’s powers that needs to be filled. I beg to move.