Examination of Witnesses (Questions 20
- 39)
MONDAY 19 JANUARY 1998
MR IAN
BYATT, MR
MIKE SAUNDERS,
and MR CLIVE
WILKINSON; MR
FRANK MARTIN
20. Are they prioritising investment sufficiently?
(Mr Byatt) They are now investing around £3
billion a year compared with the position in the 1980s of, let
us say, £1¾ billion a year, so investment in the
1990s is running at almost double what it was in the 1980s. So
the scale of investment has increased very greatly, so that we
are now able both to bring up the quality of the system to modern
standards and also meet objectives largely from the European Directives
for better water. At the same time the companies are investing
in certain levels of service which are quite expensive, such as
reducing problems of pressure, such as reducing flooding from
sewers, and there are some very substantial reductions in the
number of people who are experiencing those problems.
21. Before you go on, the main point I am
trying to establish is whether you feel that water companies are
prioritising investment as a proportion of their total income?
Do you want to encourage companies to invest more of their income?
(Mr Byatt) No. Things go up and down and a year
or so ago I was concerned about the level of investment and I
said so.
22. But you are not now?
(Mr Byatt) Last year investment levels were up
20 per cent. and the information which I have about the current
financial year, which we are about halfway through, shows about
another 10 per cent. increase, so I am cautiously confident.
23. So are you going to be trying to get
even further improvements in terms of encouraging water companies
to invest more of a proportion of their income?
(Mr Byatt) I believe you have to think about the
effect on the customer there, because the more the investment
then the more the customer will pay because ultimately the customer
has to finance that.
24. Not necessarily. Do you accept that
there has been excessive profit-taking and dividend payments taking
place since privatisation?
(Mr Byatt) The price limits were set by the Secretary
of State in 1989 and I reset those price limits and reset those
price limits for very much lower increases for broad stability
in 1994. I assumed in those price limits that the profits of the
water companies would remain stable and would fall as a percentage
of capital as the capital base rose because of the high investment
levels. That has been happening, although the companies have also
been increasing their efficiency faster than I thought.
25. So do you have a view about whether
dividends are excessive or not?
(Mr Byatt) Yes, I have a view that at the next
price review the return on capital will come down sharply and
that can mean a real reduction in the level of bills for customers.
26. I hope so because, according to the
figures that have been obtained from your office and others, apparently
more than two-thirds of the total pre-tax profit levels of the
water companies since privatisation have actually been taken out
of the industry in dividends. Do you not regard that as excessive?
(Mr Byatt) The water companies have borrowed very
heavily. They have borrowed something like £5 billion and
so you have to take account of that as well. It is certainly true
that I believe that some of the companies have paid dividends
which do not show a proper concern for their customers. I do not
want to get into the situation of controlling dividends but my
views about what they have done on dividends are very well known.
27. On average, nearly a quarter of customer
bills, 24.2 per cent. of customer bills, have been used to finance
dividends, so a quarter of the customers' money in their bills
has been going straight to dividends. I do not regard that as
particularly successful regulation.
(Mr Byatt) This is an extremely capital-intensive
industry. I think it is probably the most capital-intensive industry
in the country.
28. Is it dividend-intensive?
(Mr Byatt) Please. The return on capital in terms
of the return on the replacement cost of the assets is very low
indeed because of the very large amount of capital in the industry.
The return on capital as a percentage of the regulatory capital
base, which is essentially what the shareholders paid and have
put in subsequently, is of the order of 10 per cent. I believe
it can come down to something of the order of 6 per cent. and
will do at the next price review.
29. I am very concerned about the amount
that customers are contributing to the dividends that are going
out of the industry. This is something that concerns me a lot.
I think there is one statistic, the highest of them all, South
West Water. Since privatisation their customers have paid on average
£509 towards dividends since privatisation. Do you not think
that is unreasonable?
(Mr Byatt) I think that the scale of environmental
investment was such that prices did have to rise quite substantially.
I do believe that the regime has also shown that companies can
be more efficient and those efficiency benefits are now coming
into operation. It is very important, I believe, not to be changing
the price limits too rapidly, so rapidly that you do not allow
the incentives to come through. Therefore, because of the greater
efficiencies of the companies, even greater than we thought at
the last price review, although at the last price review a great
deal of the investment came out of the efficiency of the companies,
I believe that even more will come at the next price review and
customers can begin to see immediate benefits. I am extremely
keen on seeing that.
30. I believe that this point needs to be
looked at in a little more detail because if profits are going
straight to investment that would be one thing, but it seems that
the great bulk of the profits are going out of the company in
dividends. You have to look at companies like Severn Trent where
95 per cent of their total profits have gone out in dividends.
They are borrowing a lot of money but in a way that is propping
up their dividends.
(Mr Byatt) Some of those dividends are special
dividends which are matched by back-to-back transactions of cash
so there are some special elements there. Your general point about
dividends I agree with. I think companies have been paying at
unsustainable levels of dividend but, of course, they will still
have to carry out their environmental obligations. There can be
no question of "terribly sorry, the money has gone",
they still have to do the work. I do believe that at the next
price review we can switch gear to a lower level of profit and
then, of course, there might not be the resources to engage in
anything other than a prudent dividend policy.
31. Because a lot of the reason that it
seems dividends have been paid out a lot of time is for restructuring
the plc, parent companies or share buybacks. Do you regard that
as an acceptable use of its money?
(Mr Byatt) The industry was floated with an odd
capital stock in relation to the way utilities would normally
operate, in other words with essentially no debt. The Government
of the day believed, having listened to its financial advisers,
that was necessary to float the companies. I think it is now quite
clear that companies can have a great deal more debt than was
assumed then and I have been operating on the basis of setting
price limits on that basis. Getting from a very low geared position
to a much more highly geared position may sometimes involve buybacks.
The key thing about a buyback is not the existence of the buyback
but what happens to the dividends subsequently. I have my eye
on dividends. I am very keen not to control dividends because
I believe that leads to inefficiency. I certainly say things about
dividends. Your point about dividends often being unsustainable
and too large I entirely agree with.
32. I am glad that we are getting some progress
on that. I would particularly want to urge you to make sure that
you do regulate the profiteering in the industry and make sure
that you stop a lot of these companies ripping off their customers
because that is what a lot of customers are feeling, that their
money is going to the dividends. Would you not accept that?
(Mr Byatt) I think the points you are making,
if I may say so, are very valuable ones and they are certainly
things which we shall be paying a lot of attention to in the forthcoming
price review. I do also believe that the companies have been much
more efficient than they have ever been in the past and that giving
them incentives is important, maintaining those incentives is
important and if those incentives really work then they may well
lead to higher dividends to customers. Provided those are justified
by higher efficiency I personally would have no objection to them.
33. Let me move on to water metering and
your very focused efforts to encourage water metering throughout
the industry. Can you actually point to any evidence that meters
reduce demand?
(Mr Byatt) There is a great deal of work done
on the effect of water metering run by the Water Research Association
and quite a lot of international evidence on the matter and also
Anglian Water have a running survey whereby they measure people
and do not charge, and measure and charge, so you get the difference
between the two. Some work has been done on matched samples as
well as on more micro studies. Particularly a lot of work has
been done on the Isle of Wight. We believe the conclusions show
that having meters leads to something of the order of a 15 per
cent reduction in the amount of water used from a household point
of view and at the peak hours something like 30 per cent. Those
figures are subject to a fairly wide range of error. It is also
interesting to see that business demand is falling and of courses
prices have been rising. I think many businesses have been very
keen to save water.
34. That is quite curious because, like
the Chairman, I am a Member from a constituency covered by the
Yorkshire Water area and they admitted that although 80,000 of
their customers have taken up the free metering scheme there has
been no reduction in demand from those customers. They actually
say that it is really only people taking advantage of lower bills
who are benefitting.
(Mr Byatt) That may be true in Yorkshire of the
optional metering scheme. You have the information, I do not.
Where people have done matched samples of people who are either
paying one way or another there is very significant evidence of
this reduction in demand.
35. Coming back to the point about prioritising
investment, it is important that OFWAT realises that when you
are encouraging metering you are urging a lot of those water companies
to subsidise the meter process rather than maybe prioritise leakage
reduction. Do you not think that leakage reduction would be a
more effective mechanism of saving water resources?
(Mr Byatt) We do not believe it is either/or,
we think that they should do both.
36. Pound for pound which would you say
gives better value?
(Mr Byatt) It depends very much on the circumstances.
When it comes to metering sprinkler users in leafy areas on summer
evenings I think the benefits of water metering are very considerable.
When it comes to different kinds of situations the reduction in
leakage can be very beneficial indeed. I do not think you can
say it is an either/or situation, we want to address them both.
37. Can I just ask finally whether you accept
the almost ethical question about water metering. When you ration
water by price is it not the case that the richer people in society
have that water to waste and the poor have their health and hygiene
compromised in an effort to save money? Do you not think that
is slightly dubious?
(Mr Byatt) I have advocated a policy of selective
metering and that selective metering being concentrated on, for
example, new houses where it is very cheap to instal and where
people have a choice of whether they go to a new house or whether
they do not, and also in areas of water shortage. It is much more
important from a national point of view that Anglian Water should
pursue a policy of water metering than, for example, Northumbrian
Water where there is a great deal more water. We have also investigated
the social impact of water metering and my colleague, Mr Saunders,
can say more about this. We have tried to identify the hardship
groups. They are relatively small but they are very important.
It is very important to make sure that in certain places like,
for example, new estates sympathetic and sensible policies are
pursued. Of course people are helped to save water by the landlord
putting in proper water saving devices. It is a selective process.
You are quite right, there are a number of objectives and issues
to balance.
Chairman: I will ask witnesses to
keep the answers a little briefer.
Mr Campbell
38. Mr Byatt, I would like to ask you primarily
about the quality of service that is provided but could I just
start with a couple of preliminary questions. Paragraphs 3.3 and
3.24-3.28 deal with the way in which you monitor a company's ability
to maintain supply in dry weather. In your view, do companies
have sufficient water supplies for the next year, or should I
say this year?
(Mr Byatt) As far as essential water supplies
are concerned, that is for domestic purposes, we believe that
water companies, if they operate properly and efficiently, do.
The one case since 1976 when there was a risk that essential supplies
were put at risk, namely in Yorkshire, although that did not actually
happen, we believe was due to the incompetence of the company
which was investigated and dealt with. Since then I have agreed
with all the companies that if they do risk a shortage of domestic
supplies, then there will be automatic compensation for customers
even though there may be a drought order in operation. So as far
as essential supplies are concerned, I am currently confident
about the situation. Of course, we are looking at the assessments
of the companies in the price review for the years ahead. When
it comes to water for, for example, hosepipes and sprinklers,
I think it is a different situation and there it is much more
an economic matter, which is why I want to pursue these charging
methods rather than pure physical facts.
39. You would say, would you not-you do
say-that it is reasonable occasionally to restrict the non-domestic
use of water? You would say that to water companies? Is that situation
acceptable? For example, not only would I not find it acceptable-fortunately,
I am in Northumbrian Water, so I hope it is never going to happen-but
I would not find it acceptable if it were, for example, the supply
of gas or electricity to my home.
(Mr Byatt) I think it depends on what the alternatives
are, because if the alternative is to invest so heavily that water
is supplied for people to use sprinklers overnight, at very considerable
expense at a peak hour, and the rest of the population has to
pay for that, finance investment for it, I would regard that as
in a sense unacceptable, so I think it is a question of getting
a balance. Therefore, I do distinguish between water used for
domestic purposes inside the house and water used by households
outside the house and would regard a hosepipe ban, for example,
as often the lesser of evils although, of course, it is not very
desirable. It also turns out, of course, that it is not terribly
easy to predict the climate exactly and to invest on a scale that
allows for every conceivable opportunity, and never a hosepipe
ban of any kind I think would require some investment which I
very much doubt the public would want to pay for.
|
