Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 80 - 99)

TUESDAY 20 JUNE 2000

MS PAMELA TAYLOR, MR JOHN CUTHBERT MR BOB BATY AND MR ROBERT WEEDEN

  80. But it remains a matter of concern that we do not easily have all the information that is available as to the amounts of work to be done and it is not transparent, it is out of sight, out of mind.
  (Ms Taylor) We share your concern.
  (Mr Cuthbert) We have been making the point that that is a fundamental problem with the infrastructure.

  81. Which you believe should be addressed?
  (Ms Taylor) Yes.
  (Mr Cuthbert) Which we believe needs to be addressed.

Mr Chaytor

  82. Could I ask about the question of information availability and openness and transparency. The picture that is coming out is that there is a continuing dispute over the information about customer perceptions, customer preferences, information about the quality of the infrastructure. For example, you commissioned your own customer survey and Ofwat commissioned a different one and the two sets of results were in conflict. For example, you commissioned Professor Binnie to carry out a review of funding of capital maintenance in Ofwat's draft determination in 1999 and you described that as an independent survey. You commissioned it and you paid for it, how could it be independent?
  (Mr Weedon) He is an independent consulting engineer. We did not set any constraints on what message he had to deliver at the end of it.

  83. The survey was paid for by yourselves, therefore it was unlikely that he would have come up with a conclusion radically different or any different from your own.
  (Ms Taylor) The customer research was paid for by us as well, so you are right in terms of that, but in terms of influencing the outcome, we could not influence the outcome.

  84. I appreciate that but does it not substantiate the argument that there is really a need for an independent resource and information base away from Ofwat and away from Water UK and the constituent companies and this needs to be fed into the next review?
  (Ms Taylor) Certainly I would not argue with your point.

  85. This is a reasonable point to argue for, more independence of information. Within the previous periodic review, what did you think about the supply of information, the availability of information? You criticised Ofwat for demanding too much information from you and Ofwat have criticised you for the inadequacies of the Business Plans. What are your comments on that?
  (Ms Taylor) If I can begin with a general comment. One of the things that the regulator said that he would do this time was to be more open in terms of the amount of information that there was available and the type of information there was available. Certainly there has been a shift from the previous review, more information was available and that level of information was clear, whereas when it came to company by company where they wanted to explore why decisions had been taken then that information seemed to be missing. That is a gross generalisation, I know, but can I turn to John and to Bob in terms of specifics.
  (Mr Baty) One would reinforce the point that at a strategic level and almost at intermediate level it is very transparent, the Director General sets out very clearly in a number of documents exactly what he is expecting and what we have to return.

  86. Is this publicly available?
  (Mr Baty) Publicly available to all parties in very clearly set out publications, one would have no criticism whatsoever, very, very clear. The level of detail that is required is substantial and that is all I can really say, a lot of detail.

  87. You think it is unjustified?
  (Mr Baty) It is difficult to perceive just how it is handled frankly given the number of companies that are submitting the volume of data, just how it is analysed to be meaningful. That is what the Director General asks for. It is certified by third party Certifiers. To go back to the point of who pays, we pay for them all, we pay for the process and we pay for the Certifiers, although the Certifiers report to the Director General to ensure that the data that is being submitted is robust but in accordance with the Director General's requirements. It is certified by third parties who are appointed and removed by the Director General, although we pay their fees. There is an enormous amount and it is difficult to see how all the information is used. Then when it comes down to the detail of what is actually missing and why certain decisions have been made there is a distinct lack of clarity as far as that is concerned. There are changes made on some of the submissions and to find why, in our case, £50 million has been missed out of one particular investment area we cannot find out. We asked the Certifier to write and ask why it has been deleted but we did not get an answer.

  88. The problem is not so much the openness of the information but the responsiveness of the organisation?
  (Mr Baty) The process is very transparent, what is actually happening is very transparent, but how that impacts on the detailed level is where it becomes opaque.

  89. Are there any specific areas where you think the financial model that Ofwat uses is not available?
  (Mr Baty) That is not available.

  90. Is there an argument for opening that up?
  (Mr Cuthbert) We believe it should be available.
  (Mr Baty) Why should it not be is the question.
  (Ms Taylor) Also, Ian Byatt had a panel of independent advisers and they have written a report for him and that still has not been published. He wanted those independent business advisors because he felt Ofwat lacked a business understanding. That is commendable, but to appoint them without open terms of reference and then each of them we saw had a different understanding of what their role would be, and also then not to publish the report, presumably he has their advice and presumably he has made some decisions based on it but that information has not been put into the public domain and it should be, not just for us but for all the stakeholders.

  91. This panel of advisers is drawn solely from within the water industry?
  (Ms Taylor) No, they were from within the business community.

  92. Can I just ask about the work of the Reporters that the companies have paid for and Ofwat uses. Are you satisfied with the system as a whole?
  (Ms Taylor) We would be satisfied if Ofwat then took notice of their own Reporters that we are paying for. When they override them and cross out things which are actually there, if you like, on the page and alter figures and do not give any reason for it then obviously we are not satisfied.

  93. There has been a reference to Certifiers and Reporters, what is the difference in their roles?
  (Mr Baty) They are the same people. Some people refer to them as Certifiers, some people as Reporters.

Mr Jones

  94. I would like to go back to two points that have raised questions in my mind. Mr Cuthbert, you were explaining that in your view there was a pendulum that swung between resource planning and environmental considerations and you thought that maybe the pendulum had swung too far towards the environment away from resource. Is it reasonable to have a pendulum between resource and environment for England and Wales and the different parts of England and Wales when clearly the resource issue is very different between one part of the country and another?
  (Mr Cuthbert) Clearly regional differences do have to be taken into account and in making my pendulum analogy— You will have to excuse me because I am quite keen on the pendulum analogy and I probably use it too much. That was not to imply that too much had been spent on environment but merely to say that the weighting of the review had been towards the environment. It is the case also that the pendulum is not being pulled by just those two issues because you have got maintenance as well. That really is what the periodic review process is all about, it is trying to assess how much investment is needed in each of these very important areas. Of course it will differ from region to region. If you are in the North East of England, for example—

  95. Does the regulator reflect that?
  (Mr Cuthbert) Yes. The plans that are submitted for the regulator's consideration, the Strategic Business Plans, are very much built around the situations and the circumstances within which the companies find themselves with regard to all of those issues, with regard to resource, to maintenance and to environmental costs. They do differ quite significantly from company to company, whether you are talking about coastal discharge which is a big issue for some companies, a huge issue for South West Water for example proportionately, but not a problem at all for Severn Trent and less of a problem for other companies, so the business plans reflect all of those circumstances.

  96. I noted that Mr Baty said earlier that he was particularly concerned about coastal waters and whether there was sufficient understanding that more money would need to be spent—perhaps that reflects his area. I was approached some time ago by a number of people who worked for or worked around the Welsh water industry and they took the view that insufficient credit was given to the environmental works that they were doing within the regulation process and their resentment was at being asked to downsize what they wanted to do in one way in order to come up with a one-size-fits-all process rather like the policy on water metering, which is a classic example of a one-size-fits-all answer, where you have not got one question that you should be asking but several different questions because you have got several different sorts of resource problems.
  (Mr Cuthbert) I think it all needs to be placed within a framework that ultimately will result in prices and you are balancing how much money do you have available in terms of a capital programme and is that affordable in the view of customers and that is where, with the division of responsibilities within the regulators that we were talking about earlier, Ofwat exercised their judgment. I am sure there are other examples of companies that were putting forward proposals within their strategic business plans on either resources or on environmental schemes, these discretionary schemes, the ones that are not covered by legislation, but at the end of the day Ofwat may well have taken them out of plans because they considered that the price reduction was more important than the proposal that the company was making for additional investment.

  97. Mr Baty, you described to the Committee the peculiar nature of the business in that you had this vast capital investment and capital resource but the business itself was about managing how people get water and how the sewerage is taken away and charges on it and you talked about this vast capital asset and depreciating capital asset. How would you advise any customers who were offered by somebody, "We will hand you over this depreciating capital asset?" Would you advise them to take up the offer or would you say, "You are being conned?"
  (Mr Baty) The short answer to that is I honestly do not know. I have read in the newspapers what you have read in the newspapers about the proposals that are around. There are a number of proposals that are around in the industry, simply reflecting the fundamental position of most water companies at present. Their capital asset value on the Stock Exchange is less than their asset value when one adds up the value of their individual assets. There is a mismatch there and there are a number of suggestions to see how that can be rebalanced. I have not got the details of that particular one because I am not party to that particular proposal. I have only got access to what you have got and what is said in the newspapers. The short answer is I do not know and I am not equipped to comment on it, I am afraid.

  98. If the Managing Director of South West Water is not equipped to answer that question I wonder how the customers in Yorkshire will be able to do it.
  (Ms Taylor) I think it is because at the last review each company then would have had to look at the figures as they relate to that company and they would have to make some tough decisions particularly when you looked at the share prices at the time and the screen was a sea of red. Certainly companies had to make decisions and they had to make them fast because through Ian, through efficiency savings, was wiping millions out of the industry so the decision had to be taken there and then and got on with quickly. You had no time to sit around and make the decision, you had to make the decision at the time. Companies will make different decisions based on the facts that they have in front of them. What we are saying is that it may or may not be appropriate for Kelda, may or may not be appropriate for Northumbrian or South West Water, it is not that we are saying that the model is inappropriate and therefore we cannot comment; the model is fine, it is question of what is most appropriate for that company. We do not have access to their figures in terms of the way in which they want to look at their business, only they do, so they must make that decision and then of course they must explain that in terms of their customers and that is quite rightly their responsibility not Bob's responsibility, Bob's responsibility is to his customers.

Chairman

  99. Customers will not be asked in the case of Yorkshire.
  (Ms Taylor) No, but in terms of the explanation to them and explaining to them the kind of company they will be dealing with in future.


 
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