Examination of Witnesses (Questions 60
- 79)
TUESDAY 20 JUNE 2000
MS PAMELA
TAYLOR, MR
JOHN CUTHBERT
MR BOB
BATY AND
MR ROBERT
WEEDEN
60. And post-2005, what would you anticipate?
(Mr Weeden) No-one knows but obviously there are a
number of environmental programmes, new Directives from Brussels
and so on, that are likely to take place.
61. One of the other things you said in your
submission was that the industry's overall feeling was that customers
had been cheated by the regulator. How have they been cheated?
They are getting price cuts and there are a lot of people who
do not find it easy to pay the bills, people on low incomes, have
they not got some reasonable expectation that they should benefit
when you have big efficiencies?
(Mr Weedon) We did a lot of customer research. One
of the most interesting pieces of work that was done was we asked
customers if there was a cut in bill by a certain amount, £5,
£10, £20, would they like that to come to them as a
price reduction, or bill reduction, or would they like to have
it spent on some service improvement. As you increased that amount
of money they went to the 50/50 option increasingly as the amount
of money increased. We felt that there were some people who wanted
price reductions but equally there were some people who wanted
service improvements.
(Ms Taylor) One of the main things that people told
us that they would like is price stability. We are not convinced
that it helps anyone particularly to have the regulator saying
"there will be a one-off price cut and then inevitably prices
will need to increase but we do not know why or by how much because
we will be doing the next review as another five year chunk".
What we would prefer is to know what are the overall goals, how
much of the social programme should there be in terms of water.
We are not saying there should not be one, we are saying what
should it be so that we can understand it and then all of us can
have a shared understanding as to what it is we are trying to
achieve in terms of the balance between price, environment and
so on.
62. You have mentioned surveys of customers,
did Ofwat not have a survey that said exactly the opposite?
(Ms Taylor) Ofwat did a survey of 48 people whereas
the industry did the largest surveys in its history.
(Mr Baty) As did the DETR and the EA and other bodies.
(Ms Taylor) All of our research was pretty much in
line. Ofwat, surprisingly, went in a different direction. Also
in their research people were invited to contribute so I think
that probably skewed the 40 something as well.
63. You said you are not convinced that there
is any need for an independent customer survey. If you had something
that was a bit more independent would that not make it a bit harder
for the regulator just to ignore it and go off and do his own
thing or have a survey that is geared to produce what he wants?
(Mr Cuthbert) We are back to the theme that has run
through much of what we have said this morning. If it were possible
to bring together various key stakeholders in the periodic review
process and agree a piece of customer research that all the parties
would subscribe to then I think the industry would look very seriously
at that. Our position is somewhat tainted by the fact that in
the review in 1994 the industry felt that its research had not
been properly taken into account and, as a consequence, companies
did significantly more in depth research in 1999. We feel again
that the research was regarded as very interesting but we were
told that we did not ask the right questions.
(Ms Taylor) Although, interestingly, Ofwat were part
of helping to design the whole research and actually signed it
off before we did it.
(Mr Baty) That applied to individual questions, the
questions were agreed with the local customer services committees
and the EA to give it some credibility and understanding so people
did not say that we had asked the wrong questions. We did try
to do it professionally and we used professional organisations
to get it as successful as we could but it was not interpreted
in the way we expected it to be interpreted.
(Mr Cuthbert) We need to do it better next time!
64. Can I come back to the question of job cuts
that has been raised a number of times. If you had a different
price profile, you had some stability in the price profile that
you say you wanted, but the overall investment programme had not
changed in size, or had gone up, would you still have been in
the business of job cuts? You mentioned that some of the job cuts
were possibly job cuts that were coming along anyway and were
just accelerated.
(Mr Baty) It is a difficult question to answer that
because, in common with all organisations, there is a requirement
to be continually looking at the way we carry out our responsibilities,
technologies are coming along, different techniques are coming
along, and that is an ongoing pressure on businesses to look at
particular resources that are most cost-effective. It would be
wrong to say specifically that these were due to a particular
output of the periodic review. There is an ongoing requirement
in common with all organisations to be reviewing resources and
in any event some of them would no doubt be reduced because of
that.
(Ms Taylor) There was a cause and effect that we predicted
and UNISON went to Michael Meacher about and told him it would
happen and, sadly, it did.
65. Are you arguing now that there is a problem,
that what the price limit has done is forced job cuts which are
then going to have spin-offs in terms of environmental effects
or health and safety?
(Ms Taylor) No, we are saying that it will make it
next to impossible, but not impossible, because the companies
have to take those responsibilities. They cannot let us down,
the companies, they will have to make the job cuts that they think
and they can still deliver. We cannot let society down in terms
of the environment and health and safety, so those are givens
that we still have to provide and deliver.
(Mr Cuthbert) And public health of course.
66. What view have you had from the Environment
Agency on this?
(Mr Cuthbert) I think they have made the point that
they expect companies to meet their obligations.
(Ms Taylor) And we have said yes.
(Mr Cuthbert) And we have said yes. Companies will
not do anything that will in any way jeopardise the outputs that
they are looked upon to deliver.
67. One last issue on the price review which
is the question of appeals. You said that you would prefer a shorter
and issue specific appeals process rather than having an appeal
which looked at the whole determination. Is it not reasonable
to look at the position in the round rather than trying to pick
bits out of it? You also seemed to suggest that you did not have
a great deal of confidence in the Competition Commission as an
appeals mechanism, that it was very unlikely to go against the
decision of the regulator and you seemed to be almost questioning
its independence.
(Mr Cuthbert) I do not think we are questioning its
independence, I think maybe some companies, those who went to
the Monopolies and Mergers Commission as it was, have taken a
view as to the balance of cost risk and potential reward and their
experience has led them and a number of other companies to think
that maybe it is a very expensive process, to actually go to the
Competition Commission on a full review of all the aspects of
the determination. I know talking to colleagues in other companies
that it was not a decision, ie a decision not to go to the Competition
Commission, that was reached very easily and a number of companies
spent a lot of time debating within their boards whether or not
a reference was the right way forward. A number took the view
that the alternative of actually getting on with the job and concentrating
on trying to deliver was a better use of their management resources.
68. Especially assuming we manage to improve
the review process in the certain way you have suggested and have
all the players involved in that review, that we get an outcome
which is more satisfactory, is it then reasonable to suggest you
should be able to go to appeal on bits of it?
(Mr Cuthbert) There are certain fundamentals within
the review, many of which are industry-wide issues, for example
something like the cost of capital is a fairly major item within
the price determination process, which arguably should not be
influenced by the size of the investment programme, should not
be influenced by the extent of the environmental obligations or
the quality obligations or the efficiencies going forward. We
feel there are some things, like the cost of capital, that could
be looked at as a single issue and in a sense could be looked
at on an industry-wide basis rather than a specific company issue.
The current arrangements simply allow for individual companies
to make a reference, there is not anything which allows the industry
as a whole to take any of those industry-wide issues forward.
That might be something which is worth considering as an improvement
to the current situation.
Mrs Brinton
69. Just very, very quickly on this jobs issue
again because it is something that does concern me. First of all,
I have got very close relations with UNISON and certainly their
presentation to me of their attitude re job cuts was almost entirely
opposite from the one that you have described.
(Ms Taylor) I am very, very surprised.
70. In fact, it did affect jobs in my own area
and I was alerted to it in terms of horror by UNISON. I just wanted
to make that quite clear. The second thing that does concern me
is the phrase you used earlier, the "jobs cut programme".
I thought that we had job creation programmes or job expansion
programmes and I am very worried that the use of such a phrase
implied that what happened at the end of last year was not just
one accelerated thing that fell like a sword of Damocles but actually
was institutionalised job cuts.
(Ms Taylor) If I gave that impression I apologise.
What I was attempting to say was that where there was a jobs cut
programme that had been agreed already with the unions and was
in place, what some employers did, what some companies did, was
to go back to the unions and to agree that could be accelerated.
I apologise if I gave a different view on that. In terms of UNISON,
maybe there were specific reasons locally why they did what they
did, and I certainly do not doubt it, but in terms of the work
that we did we were putting out joint statements and we shared
a joint platform with them and we gave our evidence jointly.
Joan Walley
71. If I could pick up one of the issues relating
to the job cuts as well and perhaps I should declare an interest
in terms of my membership of CROSS, which is the Campaign for
the Renewal of Old Sewerage Systems. Can I pick you up on what
you said just now, that you have a responsibility to society and
whatever happens you would not let society down in respect of
the givens in the Environment Programme in terms of the ongoing
ability to, if you like, service that agreement. Can I ask you
about that that is not given and that part that is not included
in any Environment Programme, specifically in respect of older
sewers and in respect of new sewers as well in terms of the serviceability
and the ability that you have both in terms of capital investment
that is available but also in terms of the workforce that is needed
to maintain and renew older and new sewers. Is it not the case
that we are now in a situation where we are light years ahead
of other European countries and we do not recognise, because of
the way that this review has come about and been concluded, the
integral role of the sewerage infrastructure in this whole debate?
Could you comment on that, please?
(Mr Baty) I think we do recognise the importance of
it.
72. Where is it in the programme? Why do we
only have a rate of one sewer renewal over 100 years?
(Mr Baty) Can I put the two things in context. I know
you are talking about sewerage but there is the water distribution
network as well which falls into the same category. It is what
level of investment is required to maintain those assets at least
at their current level and in some instances improved where necessary.
There is a substantial amount of work going on in repairing sewers
and renovating them, the question of the level of investment in
the longer-term, as we indicated earlier, is do we wait until
they totally collapse and then replace them or do we have a programme
in place for the maintenance and maintenance investment?
73. What are we doing at the moment? Are we
waiting for them to collapse or do we have a programme of renewal
and, if so, at what level?
(Mr Baty) There is a partial renewal programme, it
is a question of whether that is sufficient to prevent us getting
into a situation where perhaps it will overtake us.
74. Who decides that?
(Mr Baty) That is part of the debate and part of the
discussion and what the Director General has decided, the level
of investment that is required.
75. You are saying that he has decided the level
of investment?
(Ms Taylor) Yes.
(Mr Baty) Yes. If you say the whole thing is actually
getting better then that reinforces the level of investment is
sufficient. If it is seen to be deteriorating we have two sanctions,
one that the licence will be withheld from us and, secondly, we
will be penalised for not doing enough, as it were. It is a very
subjective area. That is the sort of area that we would prefer
at the outset to get a proper understanding on, to get some clarity
on, and then determine what those investment programmes should
be in the maintenance area as opposed to where it is rather more
clear, "I want the sewage works here, I want the reservoir
here, I want the water treatment plant here". That is comparatively
easier than judging the rate at which pipelines are deteriorating
to the point where insufficient maintenance will manifest itself
in collapse at some future date. We want to get to a level, and
we feel we are below that at present, where that maintenance expenditure
should be higher to prevent us getting into the situation that
you are identifying. It will lead to higher costs.
(Mr Weeden) There is a huge gap between what the companies
wish to spend, £8 billion, and the regulator has cut that
back to £6 billion, so there is a £2 billion gap and
that gives rise to the problem you have identified.
76. You are confirming that the sewerage infrastructure
is not incorporated at all in terms of standards for renewal and
replacement and maintenance?
(Mr Baty) It is a judgmental issue as to what that
level should be. It is being done, it is not being ignored, it
is a question of whether the industry believes it would be prudent
and sensible to be doing more.
77. How much more do you believe you should
be doing? Where are you going to get the workforce to do that
when you have actually sacked so many people?
(Mr Baty) It is flexibility which comes into all of
these things. That particular work is carried out by contractors
who specialise in that sort of activity required, so it will build
up that resource which is the way we manage changes in peak loading
in any event. There is not necessarily an issue of that nature,
it is a question of the funding that is available to support whatever
work needs to be done and understanding the magnitude of the work
itself.
(Ms Taylor) There has been a complete difference of
opinion, as Robert has said, between what the industry says is
required in terms of expenditure and what it is Ian Byatt has
actually allowed in terms of expenditure.
78. Have you quantified what you believe is
necessary in terms
of—
(Mr Baty) Yes, every company has.
79. Has the Committee had details of that?
(Mr Cuthbert) Each of the companies submitted a Strategic
Business Plan which had within it very, very detailed proposals
on the investment plans that they believed were necessary. I do
not think the Committee will have had copies of the Strategic
Business Plans because you would need a room this size just to
file them and then some poor soul would have to read through them
all.
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