Examination of Witnesses (Questions 240
- 259)
THURSDAY 6 JULY 2000
SIR IAN
BYATT AND
MR KEVIN
RIDOUT
240. The companies are saying to us, "We
have not got enough money to do this." For instance, again
to quote Thames as an example, they say they can spend £85
million on infrastructure over the next five years, £17 million
a year, and that is not just on sewer flooding reduction, that
is on leakage reduction. It is very difficult from our point of
view to see what is being specifically identified. How much do
you anticipate being spent on leakage reduction?
(Sir Ian Byatt) Leakage reduction is something which
should benefit the companies, because we are trying to get all
the companies towards the economic level of leakage, that is the
level of leakage where the costs of additional leakage operations
are balanced by the costs of doing something else. So while they
are above the economic level of leakage, and there is no doubt
in my mind that Thames are above the economic level of leakage,
then the money which they spend to reduce leakage, which I believe
is largely an operating expenditure matter, then benefits the
company.
241. What criteria would you use to set the
leakage levels, because you made that decision as to what the
leakage level targets ought to be?
(Sir Ian Byatt) We have asked the companies to do
studies on the economic level of leakage—and we have received
these studies and some of them are better than other studies—and
that they should all be at an economic level of leakage by 2002.
We then set annual targets which move them in that direction.
We find that some of the companies are, sensibly, voluntarily
moving in that direction, some of them need a bit of a push.
242. What I am not clear on is the criteria
you use to set those targets and how does that relate to the pricing
process.
(Sir Ian Byatt) The economic level of leakage is that
level of leakage which balances the cost of reducing leaks with
the cost of producing additional water. The cost of additional
water will be the operating costs of additional water plus any
capital expenditure associated with future resource developments
or reinforcements of the network. It is quite a complicated set
of calculations and, provided we are talking about the economic
level of leakage, that is a matter which can be dealt with within
price limits.
243. Just looking at the longer term, you have
talked about the need for more analysis of these questions—asset
maintenance, leakage, et cetera—what kind of analysis do
you want? There have been condition surveys done, these were part
of the report.
(Sir Ian Byatt) Yes, but the condition surveys are
only part of the story. If you look at MD161—I think we
have sent it to you so I will not bother to read it all out—you
will see what we are talking about in that analysis. As far as
leakage is concerned, I have briefly described what we are going
for but if any member of the Committee or the Committee generally
would like to see the papers we have sent companies on this, we
would be only too pleased to send them to you.
Mr Keetch
244. I will carry on about leakage, if I may.
You mentioned you have been in the post now for ten years, eleven
months. Sticking to Thames Water, the area Mr Gerrard referred
to, ten years ago what was Thames Water losing in leakage, approximately?
What percentage?
(Sir Ian Byatt) I have not come briefed on the particular
numbers. The numbers for Thames Water leakage have always concerned
me, they have always been high.
245. Has it come down in that ten years?
(Sir Ian Byatt) In recent years it has come down,
yes.
246. Has it come down sufficiently, given we
have known about this for ten years or considerably more than
ten years?
(Sir Ian Byatt) Has it come down fast enough?
247. Yes.
(Sir Ian Byatt) I have had to push Thames Water all
of the time on this one. I am hoping for another further reduction
from Thames, I do not have precise numbers yet, in future financial
years. I think Thames is a company where I have had to exercise
constant pressure. Thames, in fact, failed their leakage targets
and were put on to quarterly monitoring. I have my eye very closely
on Thames. If you were to say, "Have they been quick enough
on this?", the answer must be, "They have had to be
pushed", and therefore the answer must be they are not really
fast enough.
248. Is it fair to say that Thames would like
to have done more but you have not allowed them to do more in
terms of spending money on this?
(Sir Ian Byatt) Thames have had very adequate profits
to get on with this job. Also it would be in their own financial
interest to get their leakage down towards the economic level.
They are way out compared with other companies. All other companies,
if you look at this either in terms of litres per property per
day or lost water per kilometre of main—and it depends on
what kind of company, which is the best measure—you see
Thames sitting as an outlier.
249. Do you make any assessments on other businesses
and other industries about water leakage? London has a very specific
problem, has it not? There is a huge rise in the water table in
London. It was rising at the rate of a metre a year a few years
ago, because of the aquifer returning to its pre-industrial level.
That is costing a lot of companies a lot of money, not just Thames
Water. It is costing London Underground, for example. It is costing
buildings for de-watering pumps in basements to stop their foundations
becoming water-recent. That is a big problem, is it not?
(Sir Ian Byatt) I have not looked at other water users
but I do know that the water table is rising. It rises underneath
Birmingham and in really wet weather the bottom layer of our car
park is an inch deep in water. They have problems in other areas
as well. I think comparatively that Thames performance is poor.
Thames is not only London, Thames extends over a large part of
South East England.
250. It must be said that Birmingham does not
have an underground railway system, which London has, which is
being affected now by rising water levels. Those are rising water
levels which we have known about for twenty years for the aquifer
has been exacerbated from huge leakage from the main system.
(Sir Ian Byatt) I do not know whether the degree of
leakage is very large compared with the rising water table.
251. Have you not felt it is something in your
remit that you are concerned about?
(Sir Ian Byatt) This is an interesting development
which you are raising with me. I have not investigated the way
other people have coped with water levels.
Mrs Brinton
252. I would like to take us on to the whole
issue of sustainable development. I am quite aware that as the
Director General of Ofwat you do not have a specific laid out
duty to promote such development. In fact in your memo you have
said, "Such a duty better rests more with Government than
with the economic regulator". The Environment Agency does
have such a specific statutory duty to promote sustainable development.
They have concluded that the periodic review did present a very
major opportunity to contribute to Government's wider aim of sustainable
development. Some of the organisations that we consulted, like
RSPB and one aptly named as Surfers Against Sewage, and many others,
have argued that in the 1999 Review the sustainable development
theme was not very evident and, in fact, a major trick has been
missed, if you like. I would like to ask you what you think Ofwat's
contribution to promoting sustainable development is or should
be in the future?
(Sir Ian Byatt) As I understand, sustainable development
is a question of balance between economic factors, environmental
factors and social factors. The economic factors are concerned
essentially with how much things cost and how much people pay
in bills. People's living standards rise in relation to their
disposable income. At the very general level I think we are concerned
with sustainable development, because we are putting one particular
element into sustainable development, namely what is happening
to people's disposable income and their living standards. As far
as the environmental side is concerned I think that my main role
there is to do what I am asked to by ministers. The Environment
Agency advise ministers, and ministers make decisions about the
size of the environmental programme. They also make decisions
about the balance between improving drinking water, improving
rivers and improving coastal waters. I provide a lot of evidence
which helps them to make their mind up, evidence of the costs.
Those are costs which are initially generated by the water companies
but are very severely challenged by us before we pass them on
to ministers. I think we play an important part in the process.
I said that it was particularly a matter for ministers because
I think often the crucial decisions in this area are ministerial
decisions.
253. Obviously Ofwat and the Environment Agency
do have a balanced relationship with ministers. I am aware that
the Environment Agency has been given a specific economic duty,
I would like to press you a little more on this. Do you not think
that Ofwat should have a sustainable development duty? Would that
make the duties of these two organisations more evenly balanced?
Perhaps I have been a little unfair. Perhaps I have given the
impression that you do not care about environmental duties. Of
course you do, you do have basic environmental duties. As I see
it, these have tended to relate mainly to very traditional heritage
or conservation issues, that is not to down grade them, those
are, of course, important. Do you not think that in this modern
day and age where the environment is very much a topic of the
political agenda that your duties ought to be up-dated to reflect
a broader, sustainable development concern?
(Sir Ian Byatt) May I answer that in two parts, first
as Director General, then not as Director General. As Director
General I believe Ofwat has made an enormous contribution to the
environment, £50 million in fifteen years; that has never
happened in this country before. We played our part in that and
I am proud of the part we played. I am proud of the fact that
we have achieved that programme which has already produced enormous
benefits, and will continue to do so at a very modest cost to
customers. We have seen water bills this year, compared with 1989,
up by about 20 per cent in real terms. If you compare that with
what has happened in some other countries, that is a modest increase.
So, I think we have achieved a great deal. I think that we have
acted positively within the legal duties we have. You asked me
whether the legal duties should be changed and I cannot answer
you as Director General because my job is to carry out duties
as Parliament put them to me. Should Parliament change the duties?
I can only answer as an individual. In a sense, perhaps, I can
give you some advice on this, which I would do with enormous diffidence.
I think that because of the record the actions are already there
and it may not be necessary to encapsulate them in legislation.
Legislation is a very scarce commodity. I do not feel that things
would be radically different if it were to be in legislation.
It is up to Parliament.
254. Thank you for that one. Just a brief cash
question next, you have described the 2000 to 2005 Environmental
Programme with some pride as the largest ever. How would it compare,
in cash terms, and, indeed, real terms, with the 1995 to 2000
Programme? How do you evaluate the two?
(Sir Ian Byatt) We cannot do it in cash terms because
we do not know how much cash will be put out because we do not
know the course of future inflation. In real terms the answer
is I think that the environmental programme which was allowed
for in 1994—that includes drinking water as well, of course—was
8.8 billion. The programme which we allowed for in the 1999 Review
was £7.4 billion. In terms of output there is a world of
difference between the two. It is impossible to make exact comparisons
simply because we are dealing with a very different programme
between those two areas. The programme between 1995 and 2000 was
largely the implementation of the Urban Waste Water Treatment
Directive, so big primary and secondary treatments work, often
in coastal areas. What we are concerned with in the next five
years is the next stage of getting things right, which is putting
secondary treatment on to the primary treatment which has already
been put in. We also need to do a great deal of work on CSOs,
combined sewer overflows, where you get the sewer overflowing
when there is a great deal of rain. It is a very different kind
of situation. The amount of people affected was about twenty-five
million, my colleague tells me, in the first period, and about
five million in the second period. The prices have fallen since
then. The companies have become more efficient. I am confident
that the delivery of the programme would be a bigger delivery,
although its costs in inflation will not be higher.
255. Thank you for that. As we are talking about
price, I would like to refer to North West Water, which I believe
we have referred to quite a bit today. We have only just come
back from a trip there.
(Sir Ian Byatt) So I understand.
256. We have talked about the need for lower
prices here today. In terms of their survey what the customer
wanted was not so much radical price cuts but actually price stability
and quality elsewhere in the service. I would like your response
to that first. Then, secondly, in your memo you have made it crystal
clear that in your view it is the continuing investment in environmental
protection which is preventing a goal of even greater price cuts,
et cetera. It seems to me that in your role as Director General
environmental matters are a rather awkward and inconvenient tag-on
or bolt-on rather than things that are really central, really
at the crux and really integral to the water companies' statutory
duties and functions. Is that an unfair comment to make?
(Sir Ian Byatt) It is completely unfair if I may say
so, because it is quite inconsistent with what I said a moment
ago about the importance of the environment. Customers bills are
also important. Each year I get a number of complaints, and about
35 per cent of them are about high water bills. I have had many
complaints from Members of Parliament in the North West about
the level of water bills. What is happening to customers in the
North West over the next five years is that their water bill will
be falling by half a per cent a year on average. They are getting
not quite broad stability but largely broad stability as a result
of the decisions made by Government ministers and by us in Ofwat.
There is always a question of how much the environment costs and
the relationship between costs and benefits. To describe that
as the environment being an add-on at the end—I think I
have made all of the points earlier.
257. You really would not regard the environment
and environmental protection as the scapegoat when customers are
complaining about prices?
(Sir Ian Byatt) Certainly not.
258. Should improvements in standards of service
to customers be assessed on equal terms with drinking water quality
and environmental improvements?
(Sir Ian Byatt) Yes, services to customers are carefully
assessed. Every year we publish, and we will be publishing later
this month, our assessment of what has happened in the previous
financial year. Services to customers have improved greatly over
the period.
259. One of the features of our visit to North
West Water was sewerage. Going slightly away from my brief now,
I was very, very concerned about the amount of foul flooding that
is actually going on.
(Sir Ian Byatt) Did you speak to the Customer Service
Chairman of North West Water?
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