Examination of Witnesses (Questions 40
- 59)
TUESDAY 20 JUNE 2000
MS PAMELA
TAYLOR, MR
JOHN CUTHBERT
MR BOB
BATY AND
MR ROBERT
WEEDEN
40. You identified you thought water supply
issues had a lower priority than environment issues. Can you explain
why do you feel that?
(Mr Cuthbert) I think it is a question of balance
again. Certainly in the 1995 review there is no doubt there was
a much greater emphasis given to environmental improvement than
had been the case, for example, at the time of the last review.
We have highlighted that we feel as one tries to get the pendulum
balanced somewhere sensibly that this time it is very much skewed
towards environmental improvement. We feel there is an issue around
the amount that has been allowed for maintenance. We feel that
maybe maintenance has suffered this time for the money that has
gone across to environmental improvement. Similarly with water
resources, there are some companies, and of course it does not
affect all, it is only those companies that are in resource stressed
areas where there is forecast increasing demand, new housing,
etc., who feel that maybe this time there has been a short-term
position taken to effectively defer the decision. To wait for
a period of time because, as I was saying before, water resource
development is medium to long-term and you are not making investments
and putting in place plans today to deliver additional water resources
next year or the year after that or the year after that, you are
planning on a ten to 15 year horizon. A number of companies would
argue that in their view rather too much has been hoped for with
regard to demand management through metering and through water
efficiency as a means to actually defer making a decision on water
resources.
41. You certainly said, again in your memorandum,
that you thought the Environment Agency should look at some of
the small polluters. Do you think you are an easy target?
(Ms Taylor) We are there.
42. Are you paying for everybody else's pollution?
(Ms Taylor) Yes, that is how it happens at the moment
certainly. We are the people who are at the end of the process,
if you like, we have to clean up the rivers, clean up the beaches,
clean up the drinking water, so, yes, it is the water industry
that picks up that responsibility. It is our customers who pay
the bill.
43. Do you feel hard done by by that?
(Ms Taylor) I think our customers ought to feel hard
done by, yes.
44. Your customers, not you.
(Ms Taylor) They are paying.
Mr Jones
45. My apologies for coming in late, the Welsh
Grand Committee is going on concurrently with this. To pick up
the point that you feel you are being asked to carry everybody
else's burden, some months ago we had some representations about
the various Green Taxes and we had representations from farmers
and agri-economic businesses about pesticide tax and in that we
discovered that a very large proportion of expenditure that you
undertake, or is undertaken by the water industry, is undertaken
to clean up pesticides.
(Ms Taylor) Yes.
46. You have made no representations to Government
about that, so why complain about it to us now but you said nothing
when the opportunity was there?
(Ms Taylor) I think with a new organisation we have
to look at the issues that are facing us and to decide what are
the issues we really should address. In terms of, if you like,
polluter pays, those who generate pollution should pay, I think
the industry feels, as Bob was saying earlier, we have got work
to do ourselves in any case and we are beginning to do that very
successfully. That will then show up other pollution that needs
to be dealt with that is, if you like, being put there by others.
Rather than our coming in on the end of it and pointing the finger
and saying "you do this, you do that, you do this",
we would like to develop a more constructive approach to it. We
have been talking with the Minister, Michael Meacher, about the
concept of polluter pays and about the concept of greater awareness,
for example, of zinc from your shampoos and so on. We are talking
about maybe setting up voluntary agreements in terms of protecting
water sources more and so on. We are looking to do it a different
way from the way you are suggesting. I am not saying that we are
right but that was what we thought would be the best way to begin
in terms of addressing this issue in that if we could get together
with other polluters whom we could clear up after and develop
codes of practice and so on, that may be an effective way forward.
47. Is that answer another way of saying "until
we get our own house in order we are not going to criticise anybody
else"?
(Ms Taylor) I think it is partly that.
48. Or if you are in a glass house you are not
going to throw stones at somebody else's glass house?
(Ms Taylor) I think it is fair of you to imply that
criticism of my answer and I do not have a problem with that implied
criticism. What I am saying is that the industry has moved ahead
miraculously in the work that it is doing. It has got to continue
to do that work and at the same time we believe we should draw
on the others to work in partnership.
(Mr Cuthbert) I think particularly on pesticides there
was a question of timing as well because whilst this was a very
helpful debate around Green Taxes, etc., the industry was under
an obligation to remove pesticides from drinking water. That was
an obligation that has been largely dealt with over the last five
years. In a sense the industry was obligated to invest the amounts
of money that have been invested to meet the drinking water regulations
and there was not time in that regard to wait for alternative
solutions to come about. The industry had to make that investment
to meet the quality regulations. In the company that I represented
in the south our largest investment, which was something of the
order of £100 million, went on pesticide removal. It is an
interesting question to ask should that problem have been dealt
with in a different way? I am sure there are alternative ways
of resolving it but that was a pressing requirement, it was a
legislative requirement on the company and we had to take that
action.
49. My question to you really was not about
should it have been dealt with in a different way but should it
have been paid for by a different group of people rather than
by your customers? Why should they have paid for the removing
of pollutants that they did not necessarily have any part in making,
depending on what sort of foods they bought?
(Ms Taylor) Carrying it to its logical extension there
is no reason for £140 million on pesticides, our customers
having to pick up that bill. Underlying this we have to bear in
mind that with any industry you start the discussion from where
you are, not where you would like to be. The industry previously
did not enjoy a good reputation. Yes, it was fair, yes, it was
easy to say to the industry "this is your responsibility,
you do it", that was the way in which the legislation was
framed in order for the industry to pick up the responsibility
and to do it. There are lessons that we have learned from that.
As a result of that we are now working, as it happens very successfully,
with the Crop Protection Association.
Chairman
50. Could I just come back to this financial
point which Mrs Walley raised. You have now got a big investment
programme and a big investment programme means you can make big
efficiency gains and the profits are expressed in terms of greater
returns on capital. International comparisons suggest you are
amongst the highest profit makers in the world, are you not actually
protesting too much?
(Ms Taylor) We are not the highest profit makers in
the world.
51. Among the highest.
(Ms Taylor) I think that was some research that was
carried out by somebody in Wales who gave an interview on the
Today programme and then disappeared on to a train never
to be found again. I do not think that had any credibility at
all. Bob, you were talking about so-called profits earlier and
re-investing more than you had in terms of profit.
(Mr Baty) The big issue, of course, and I only picked
up the tail end of that particular debate, was from my understanding
it certainly was not comparing like with like; that was the fundamental
problem. If we look at what we are trying to do, when you say
bigger investment programmes, bigger opportunities to make profits,
the truth of the matter is the Director General in setting his
targets has demanded enormous efficiency requirements in making
those investments based on some of the efficiencies.
52. Which you have achieved.
(Mr Baty) He has claimed those back again which then
present companies with yet another challenge forward. We do not
balk at that, we have to accept that. We cannot go on forever
getting efficiencies. We are not particularly looking for big
programmes to do that, we are just looking for clarity on what
we are required to deliver and, as I say, we will do our best
to deliver those in the most cost-effective way.
53. Big programmes do give you the opportunity
to make big efficiencies.
(Mr Baty) They give you big opportunities to make
a big loss as well, of course. Look at all the other kinds of
investment around the country, and there are some classic examples
about, were they delivered to time and were they delivered to
budget? Some were delivered to time but they did not quite make
the budget. The bigger the problem, the bigger the challenge.
Let us not look at it in one direction. We are looking to deliver
the outputs but we have to do it in the interests of all parties.
The customers want to see the installation in place bringing benefits,
we as a company want to deliver it as efficiently as we can and
if we can get some benefits out of that which keeps our shareholders
supporting us then that has got to be the win-win situation that
we are looking for.
54. You have been successful in the past. Is
the Government wrong to say that you ought to be able to carry
that on in the future?
(Mr Baty) The answer is that the industry is accepting
what has been asked for if it is to go forward and we will see
if we can deliver that. It is increasingly more difficult to deliver
because the opportunity for generating efficiencies gets squeezed
out of the process each time somebody says "they have done
that, we will have that back in". I understand that is part
of the process but the challenge still remains. The incentive
in the regulation process is right, we should be continually challenged
to do that and the industry believes that it can continue to keep
support of investors but just at present as you look at the market
you can see there are serious doubts as to whether or not the
industry is going to be delivering that, we have yet to prove
that. As I say, we can only base it on our track record so far
which has delivered the outputs and maintained the budgets.
Mrs Brinton
55. Can I take the issue on to jobs and, more
precisely, job cuts. Is it fair to say that towards the end of
last year water companies actually announced a whole string of
job cuts and, in fact, those job cuts certainly did not go down
terribly well with Environment Minister, Michael Meacher. In fact,
I think it is a matter of public record that he said he did not
think such cuts were at all justified when the water company profits
have in fact been so large that they were liable for more than
one and a half billion in windfall tax. The whole question of
jobs and job cuts is very, very important economically but also
in terms of the public image of the water companies. Do you have
a view on that?
(Ms Taylor) Yes. In terms of job cuts, we had a meeting
with Michael Meacher in advance of the final determination and
we told him that from our estimation of looking at the draft determination
we were predicting job cuts and we gave him a figure which turned
out to be very accurate. We pointed out to him that when you are
faced with a very tough determination and no choice but to deliver
obviously, when you look at the figures in front of you you look
at what can give and what cannot give and obviously, like all
organisations, the water industry is not alone in this, it is
in line with everybody else, you look at the variables, you look
at where you can have an impact, and one of the places where you
look is the cost of your staffing bill. As it happened, we worked
very closely indeed with UNISON throughout this and, in fact,
the representations we made to Government we made jointly with
UNISON. In fact, there was no difference between Water UK and
UNISON in terms of what we were saying about the problem of jobs
going forward. Obviously those cuts have been made. Some people
have accelerated the job cut programmes that they had in place
in any case, other people have had to revise them and so on. The
thing that we have to always bear in mind as an industry is we
have a responsibility to deliver, and we will ensure that we do
that, but obviously we have to do it in a way that could reduce
levels of staffing. Bob and John both had to deal with this.
(Mr Baty) Windfall tax, of course, does increase borrowing.
If nobody has the money you have to go out and borrow more money,
so that changes our ratios on borrowing. That is how windfall
tax is paid. The key issue, as I said earlier, is we actually
spend every day more than we get from customers. Profit is the
difference between the turnover into the business and our day
to day operating costs. It excludes capital expenditure which
is an enormous cost driver within the industry. We then have to
support that capital expenditure and, again, that is supported
partly by the investment of our profits and by further borrowing.
You then come down to what drives costs within the industry. Because
of the enormous capital programme what that drives is depreciation,
so the cost of depreciating these enormous assets is a big cost
driver that we have no control over at all. We have interest costs
on the money that we borrow so the interest costs are a big driver.
When you actually get down to your controllable costs you are
really focused on three areas: manpower, power and chemicals.
When you are looking for efficiencies those are the areas that
you can look at. Costs to many parties are inflation linked, the
regulatory process, the EA charges, those are all inflationary,
so they all go up. Power costs are something which we look at
in accounting and procurement costs are the other area. The opportunity
for cost reduction is on a very small area of business but you
cannot do anything about depreciation and very little about interest.
You come back to those fundamental areas, it is no different from
any other business. Things that distort the water industry is
the size of the capital programme relative to the size of the
business. Nobody invests money in capital in anything like the
proportions that the water industry does. That is totally outside
economic business modelling.
Mr Gerrard
56. You have obviously made very clear your
dissatisfaction with the process of review and you ask for clarity
as well and knowing where you stand. Was Ian Byatt not doing precisely
that, giving you some clarity, when he said at the beginning of
the process "this is where I think we ought to be going"?
(Ms Taylor) It has not resulted in clarity at the
end of the process. We would want to judge a process by the outcome
rather than the intentions at the beginning. I would not argue
that it was Ian's intention to ensure that there was clarity but
the way in which the process was carried out meant that we ended
up with some discussion about "is this part of the environmental
spend in or out?" To have that at the end of all those months
and months is completely undesirable in terms of an outcome.
(Mr Cuthbert) I think it is also wrong just to focus
on one aspect. In the conversation this morning we have touched
on a number of dimensions that the water industry is involved
in. It is wrong to begin a process with a single objective in
mind and, in our view, that clearly was one of the weaknesses
of the approach which Ofwat adopted. They began the process with
the end objective of providing a substantial price reduction without
any regard at that stage for the potential scale of the investment
programme that was going to be required both for quality obligations
and also for the various environmental investments that were needed.
57. On the price issue, you have made it clear
in your submission that you think price rises are inevitable over
the next few years.
(Ms Taylor) Yes.
58. Can you give us some idea of the scale of
what those prices rises is going to be? What do you think that
price profile is going to look like over the next few years? What
would you prefer?
(Mr Weeden) Ofwat imposed a set of price limits which
had an initial price reduction of the order of 12 per cent over
the next two years flat prices in real terms and then two years
of prices slightly increasing by two or three per cent. We think
there was things that have been left out of the determination.
For example, there were £900 million to environmental investment
that Ofwat said it thought might crystallise during the five years
but did not specify what that would be. That would add an extra
cost. In addition, there are a number of extra costs where Ofwat
made provision for companies to claim interim price increases
if they needed them. Again, we do not know what those figures
will be until we know how many people, for example, have taken
up the free metering option.
59. But you are effectively saying that no new
obligations thought of after 2000 could be implemented before
2005 without a price increase.
(Ms Taylor) Yes.
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