Examination of Witnesses (Questions 120
- 139)
MONDAY 19 JANUARY 1998
MR IAN
BYATT, MR
MIKE SAUNDERS,
and MR CLIVE
WILKINSON; MR
FRANK MARTIN
120. Yes, but at the end of the day you
have not protected the consumers' interests.
(Mr Byatt) I believe I have.
121. Too much money has been going out in
excessive dividends to monopolistic shareholders instead of being
ploughed back into the services which you admit are desperately
needed. Another point which you raised with Mr Leslie was you
said, and I quote, "the return on replacement costs of assets
is very low indeed". We have been over this course before.
What do you call replacement costs of assets? Which replacement
costs are you using?
(Mr Byatt) When I said that I was considering
the current cost asset values in the accounts of the water companies
which are derived by looking at what it would cost to replace
the system with the same service capability as the present system.
122. Do you remember the figures on this?
They paid £3.6 billion. At that time the Department valued
the assets, according to the National Audit Office, at £6
billion and the companies within months of taking over these assets
for £3.8 billion wrote them up in their balance sheets to
£150 billion.
(Mr Byatt) We did indeed go over that ground before.
123. Which figure were you using in calculating
your rate of return?
(Mr Byatt) What the assets were sold for so the
regulatory capital value, which is very much less than the replacement
cost of the asset,--
124. That is not what you said. You said
to Mr Leslie "return on replacement costs of assets is very
low indeed".
(Mr Byatt) That is absolutely correct.
125. Which replacement costs are you using?
(Mr Byatt) When I answered Mr Leslie I referred
to the replacement costs of the assets as they are valued in the
accounts.
126. Yes, which is the £150 billion.
(Mr Byatt) Yes.
127. £150 billion. Either it was a
misleading and irrelevant answer or I do not see why you are defending
it now.
(Mr Byatt) I am not defending it now, I am simply
explaining the figure that I used. The asset value which I used
in determining the prices in terms of a reasonable return on assets
is the value of the companies at sale plus net investment thereafter.
128. I see. So we are in agreement that
they paid £3.8 billion for assets which they knew the value
as being ultimately worth £150 billion and in the meantime
they have already made collectively £11.5 billion worth of
profit. It has not been a bad deal. You do not seem to have done
much to protect the consumers' interests.
(Mr Byatt) I changed the price limits significantly
in 1994. I will stand in defence of those price limits. The sale
value and the initial price limits are not my responsibility,
as you have pointed out yourself, Mr Williams. The question of
the return on assets is, the facts are, that at the moment the
companies are making about 10 per cent. on those assets. I believe
that in the long run that figure can come down, and should come
down at the next review, to something of the order of 6 per cent.,
but, of course, all precise numbers need to be carefully looked
at in this review.
129. Ten per cent. on £150 billion,
for which they paid 3.8?
(Mr Byatt) Ten per cent. on the initial value
at which they purchased the assets plus net investment and that
net investment has been very considerable. So the assets are now,
if you allow for that net investment, upwards of £15 billion
if you start off with what they were purchased for and then add
on the net investment.
Maria Eagle
130. Mr Byatt, the companies have an obligation
under the legislation to develop and maintain an efficient and
economical system of water supply in the area-efficient and economical.
What powers do you have if you consider that is not being done
in a particular area?
(Mr Byatt) Let us take leakage as an example.
131. Just generally, rather than taking
specific examples. What powers do you have? Can you compel them
to change their policies?
(Mr Byatt) The Act requires them to do so and
the Act requires that I should enforce their carrying out of those
functions.
132. How would you enforce that if you took
the view that you needed to? What would be your powers?
(Mr Byatt) Leakage is the example of where I believed
that leakage rates in many cases were too high and, therefore,
it was appropriate to set targets, which was the technique I used
in that area.
133. Would you consider other techniques
in appropriate cases?
(Mr Byatt) I would be looking at the situation
where I felt there was a failure and then deciding what to do.
In the case of Yorkshire in 1995, they clearly were not doing
the job efficiently and there I set standards for interruptions
from supply and on the waste water side in terms of flooding from
sewers, and standards were set in relation to those.
134. What is your biggest stick? If you
were minded to use it, what would be your biggest stick?
(Mr Byatt) The biggest stick ultimately is that
they lose their licence, so that once standards are set then they
have to keep to those standards and then we would have a process
of moving from that. So the first thing I would do would be to
set down in very precise detail exactly what they would do and
if they failed to do that then they would really be at risk of
losing their licence.
135. What happens to the company that loses
its licence? Does it lose its licence to print money?
(Mr Byatt) It loses its licence. It means it can
no longer supply water in that area, so it loses its ability to
make money from the water supply.
136. So that is rather a large stick?
(Mr Byatt) Indeed it is, which is why we would
approach it in a sense of systematic escalation to setting targets.
If those targets fail then we set more detailed targets, and if
those detailed targets failed and the company really could not
turn itself around, then, of course, it would have to go.
137. You are a man of whom the companies
might, in certain circumstances, be quite fearful. You are an
organisation-not you personally but you front an organisation
of which the companies, in certain circumstances, might be quite
fearful, do you not?
(Mr Byatt) I suppose that could be the case.
138. You are dealing with companies who
are private monopolies. You accept that?
(Mr Byatt) Yes.
139. There has been some comment today,
most of which I would agree with, about the way in which these
companies generally have exploited quite rationally their monopoly
positions to make what some might call excessive profits but what
everybody would accept to be large profits, is that correct?
(Mr Byatt) The companies have made profits which
enable them to invest very large sums of money in improving the
system.
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