Examination of Witnesses (Questions 220
- 239)
THURSDAY 6 JULY 2000
SIR IAN
BYATT AND
MR KEVIN
RIDOUT
220. Water UK has put it to us that the basis
and the methodology you are using to assess the need for future
asset maintenance spending is really, and I quote, "to almost
plan on the basis that you can continue to reduce the amount of
expenditure until such time as you have a failure in the system."
Surely we do not want to be planning future expenditure on the
basis of a failure in the system because that would mean that
the individual water companies would be in breach of their licence
conditions.
(Sir Ian Byatt) That is what Water UK say, but that
is not the case.
221. So you refute that?
(Sir Ian Byatt) It is not the way I see it at all.
That is an economy with the truth.
222. So what information do you have, and what
information did you have at the time of the previous review, about
the amount of money that the companies were intending to spend
on asset maintenance and why was what they were spending not properly
monitored?
(Sir Ian Byatt) We did monitor what they were spending.
Yes, we had quite a lot of information, and there is a graph—I
am sorry to refer to particular pages but it is rather an illuminating
graph, I believe—on page 102 of this document, Final
Determinations: Future Water and Sewerage Charges 2000-2005,
and what it shows is the difference between what the companies
thought they needed to spend when they put in their business plans
in 1994 and what they told me was necessary, and what they actually
spent, which was very close to what we allowed for. So we said,
"Your views are not properly thought out, therefore you will
continue to spend, we will allow in your price limits for you
to continue to spend, at the same level ...", which of course
was a big increase compared with the past.
223. So are you saying that because that information
was not very clearly audited by the water companies that you were
content to allow the amount of money to be spent to be in line
with the projection back in 1994?
(Sir Ian Byatt) No. In 1994 we set price limits, and
we observed then that capital maintenance expenditure had risen
very considerably in the late 1980s and early 1990s; virtually
doubled. We saw the water companies saying, "What we want
is another doubling of capital maintenance expenditure and we
actually want the price limits increased very substantially so
that can be financed."
224. Can I interrupt you because the point I
am really wanting you to answer is how did you know what the companies
had set out to spend and whether or not they actually did spend
that? How was that being monitored and audited?
(Sir Ian Byatt) I am so sorry. Every year we get returns
from the companies which indicate what they spent, and we can
compare that with what we allowed for in the price limits.
225. How does that relate to what should be
spent if we were taking proper stewardship and care of our assets?
(Sir Ian Byatt) On the basis of the information which
we have, we believe we are taking proper stewardship of these
assets.
226. To go back to Mr Chaytor's question about
the clarity between yourselves and North West Water, we are in
the situation, are we not, where the asset life of North West
Water's infrastructure is something like 425 years. Are you saying
that is an acceptable level of replacement?
(Sir Ian Byatt) I do not know how many assets North
West Water have which are 475 years—did you say?—old.
227. No, I am saying that is the basis of renewal.
(Sir Ian Byatt) I was brought up in the North West,
so I know the area quite well. That is a funny number, if I may
say. I do not know how that number is generated.
228. It is actually 425 years. The real concern
is whether or not the rate of renewal should be based on what
might be a realistic expectation. In some cases we have been told
it could be one in a thousand years.
(Sir Ian Byatt) Some of these numbers, I submit, are
crazy numbers. 475 or 425 years ago, the North West was in a very
different position from what it is now.
229. No, what we are saying is that it would
take that long for the present asset to be renewed.
(Sir Ian Byatt) People do these calculations illegitimately
because they do not allow for the fact that the stock of assets
is growing and therefore these implied life calculations are,
frankly, nonsense. What is important is that the water company
should be maintaining serviceability and it does that sometimes
by renewing old assets, some of which in the North West are quite
old—
230. If I can just cut you short, would you
not agree that we should be having some kind of methodology which
allows a proper, constant rate of renewal of existing infrastructure
of below-ground sewers and drains in order that we are not going
to have them suddenly collapsing, that we need to be replacing
and renewing them on a systematic and sustained basis?
(Sir Ian Byatt) We want a systematic programme which
ensures serviceability is maintained.
231. Are you satisfied that you have arranged
for that?
(Sir Ian Byatt) On the evidence which we have so far,
I am satisfied. But, as I explained, I do not believe that is
the end of the story and I think more work needs to be done by
the water companies on the economics of this.
Mr Gerrard
232. On that point, you are saying it is the
responsibility of the water companies. You said a moment ago that
you worked on the assumption that what had been satisfactory in
the past would be satisfactory in the future, but when we look
at some of the rates currently—and one water company we
saw recently told us their mains were being renewed at half a
per cent a year—surely no one believes that can persist
long-term and we can continue to renew at that sort of rate and
still have serviceability in the future? So who should be doing
this planning? Can it be left to individual companies to do?
(Sir Ian Byatt) You hear all kinds of stories from
water companies, of course, because what they would like is higher
price limits. It does not follow that if they had higher price
limits, and they had perfectly satisfactory price limits last
time round, they would spend anything like what they say in business
plans and to you, ladies and gentlemen, they want to spend. So
you have to look at all this with a fairly beady eye. The key
job that Ofwat has to do is to ensure that serviceability is maintained
and that serviceability is maintained in the future as in the
past. We have maintained serviceability. We believe in order to
be sure we are maintaining serviceability in the future, not only
do we need to allow the amount of money for the companies which
we have allowed in their price limits, but also to encourage them
to do much better analysis of this. I have been disappointed but
they must do the analysis. I am not the managing director of UK
Water, it would be quite wrong if I were, but I am encouraging
the companies to get on and do the kind of analysis which they
should have been doing for years.
233. I understand that point and I understand
perfectly well what you said about profits a few years ago, because
a lot of us were very unhappy about what went on then, but you
are approaching serviceability on the basis of what has happened
over a ten year period when, surely, what we ought to be looking
at is a much, much longer timescale ahead.
(Sir Ian Byatt) Certainly.
234. Is that something that realistically can
be done by a whole stream of individual water companies?
(Sir Ian Byatt) I cannot invent figures which go back
longer than ten years.
235. No.
(Sir Ian Byatt) So I have looked as far back as we
can. As we know, the future is a question of analysis and not
fact and I believe that there should be better analysis in the
future, yes. I hope that is done not only by the water companies
but that we encourage other people in universities and other research
establishments to look at these matters much more systematically.
236. You also seem to be saying that you will
make judgments about the companies' capital programmes, and if
you do not feel they are capable of delivering that capital programme
you will not let them spend that amount of money.
(Sir Ian Byatt) No, I did not say that. If I did appear
to say that, I gave the wrong impression.
237. You gave the impression that some capital
programmes had been rushed and that seemed to be an implication
that you will control those capital programmes.
(Sir Ian Byatt) No, it was not a question of controlling
them. I was making the point that if you rush something, or move
quickly, you may find yourself spending more money than if you
do it at a pace which enables you to look for all the efficiencies.
Ultimately, the scale of the environmental programme is a matter
for ministers to decide. I advise ministers in terms of looking
at it from the point of view of costs and the point of view of
the customer. I think I am right to do that but they take the
decision. If the minister said, as he said to me on North West,
"I want this programme to go faster", in other words
for it all to be completed by March 2005 rather than December
2005, then we allow for that in price limits. That is the job
we have, to secure that the companies properly carry out their
functions, which includes the environmental obligations, and can
finance them.
238. How then would the decision be made, for
instance, in the Thames area, where Thames say that they want
to deal with 3,000 properties which are subject to sewer flooding
and Ofwat says, "No, you cannot do that, we will allow you
to spend enough money to deal with 1,500 and you cannot spend
it until 2003"?
(Sir Ian Byatt) We have not said that.
239. That is what Thames claim you said.
(Sir Ian Byatt) Please let me tell you the situation.
We do not control capital programmes, that is why I reacted in
the way I did when you asked me that question. We set price limits
which allow companies to spend certain amounts of money, and that
is overall, it is not on any particular thing. In building up
that figure, we do of course build it up, we hope, in a rational
way knowing the kinds of things to be done, but when it comes
to expenditure that is a matter for the companies. I keep telling
the companies that they must look at their priorities in the light
of what their customers want. The question of sewer flooding is
a national issue, it appears in all areas, and the customers are
saying they want something done about it, they want the companies
to put priority on that, and that is quite right. We are not in
the old world where the company then says, "Terribly sorry,
we have not got the resources to do that." Of course, they
have the resources to do it, and they should sort out their priorities
in their capital programme, so that the things which customers
want get priority.
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