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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