Examination of Witnesses (Questions 260
- 279)
THURSDAY 6 JULY 2000
SIR IAN
BYATT AND
MR KEVIN
RIDOUT
Chairman
260. Yes, we did.
(Sir Ian Byatt) He is certainly concerned about sewer
flooding, we all are. We all think the water companies should
prioritise their programmes to get this down to a minimum. There
are, unfortunately, some cases where dealing with sewer flooding
is an extremely expensive business, but for the people living
in the houses it is intolerable.
261. A point about the environment that Mrs
Brinton is raising, the Royal Society for the Protection of Birds
has made the point that there are too many end of pipe solutions,
short-term solutions, which is another way to look at these environmental
problems. It is rather encouraged by this five year period which
you look at these days. Perhaps taking off your hat and reflecting
on your experience of what might happen in the future, when you
are not in charge, would it not be better to have a rather more
evolutionary approach rather than the big bang every five years,
when everything is settled and fixed in concrete?
(Sir Ian Byatt) There are pros and cons to that one.
From the point of view of giving the companies incentives to efficiency
then a periodic review with prices set in real terms for five
years is highly desirable and it has produced enormous benefits,
not only in the water industry—
262. I was thinking more of the investment programmes
in the environment, they are a more long-term issue.
(Sir Ian Byatt) I do not think it is possible to be
setting price limits beyond five years. The original plan in 1989
was to have ten year price reviews. That was certainly Nicholas
Ridley's view, because he saw it as a very long-term industry,
as we all do. However, it turned out that things change and do
not stay still. I think that we felt you can only do these things
every five years. It is still very desirable from an economic
point of view to have five year price limits. That has meant a
certain amount of concentration in thinking about the environmental
programme at one point in time. But I think that has not precluded
reflection on what are the most cost-effective solutions. It is
a particular function of the Environment Agency to think about
the most cost-effective way of doing things. There is also a mechanism
which we set out in our documents for incorporating new environmental
obligations as and when they arise.
Chairman: Cost-effectiveness.
Joan Walley
263. You said it was a function of the Environment
Agency to determine what it meant by cost-effectiveness. I wonder
how Ofwat would define cost-effectiveness and where the emphasis
would be?
(Sir Ian Byatt) We have seen our role as a challenge-making
role rather than a decision-making role in this area. When it
comes to customer service we, of course, go the whole way. But
because the decisions on the environmental programme are essentially
decisions by ministers, and because ministers are advised by us
and by the Environment Agency I have seen my role as a challenge-making
one. First, saying these are the costs, what is the assessment
of the benefits to outweigh those costs? Not as regard the general
environmental programme but in particular ways and particular
kinds of schemes. Then to say that I believe that the more work
that can be done in objective analysis of these benefits, following
the work by the Foundation for Water Research, for example, the
better decisions we will get. In the meantime, decisions are taken
and I am sure they are good decisions.
264. If I can just press you on those decisions,
the final determination that we have just seen has actually excluded
a number of schemes proposed by various companies and various
schemes supported by the Environment Agency on the grounds of
cost-effectiveness. What you say about the minister having the
final responsibility, it seems to me Ofwat have excluded some
schemes on the grounds of cost effectiveness. I am not sure what
Ofwat means by cost effectiveness. Can you just elaborate on that
a bit more?
(Sir Ian Byatt) Of course. There are, I believe, sixty-two
schemes. I do not think they amount to a very large amount of
money but it is set out in our document. We thought because these
were very expensive per mile of river improved. For example, if
you take the whole programme, the cost per mile of river improved
was—I turn to my colleague in case I get these numbers wrong—£140
per metre.
(Mr Ridout) That is right. The average unit cost of
what we allowed was £130 per linear metre. The average unit
cost of the 62 schemes, which were excluded from price limits,
was over £800 per linear metre. In one case it was up to
£10,000 per linear metre of river improved.
(Sir Ian Byatt) That was only a first filter. On the
basis of those numbers we said, "We think there is a good
case for looking at some of these schemes to see whether more
costs effective ways can be achieved for meeting those objectives".
Chairman
265. It is a question of cost and expense. You
thought these schemes were an expensive way—
(Sir Ian Byatt) Prima facie we said these were
£800 per metre, we said, "Surely these should be looked
at very carefully?" I spoke to the Deputy Prime Minister
about the matter in the summer, and I spoke to Michael Meacher
about the matter between July and November and he agreed that
it was sensible to look at these schemes again. In the meantime
one of the schemes had indeed been looked at and the capital costs
had shifted from £10 million to £0.5 million. That was
some gratification that we should get more environmental benefits
for less money. I hope that process will continue.
Joan Walley
266. Am I right in thinking then that your objections,
were not about the need for specific schemes, but were much more
a technical assessment, of what had been put forward as gold-plated
schemes?
(Sir Ian Byatt) Either gold-plated or there was a
better way of doing it. In the case of the scheme near Darlington,
it was a question of treating the sewage to one standard before
discharge to one river or treating to a lower standard before
discharge to another larger river further away and it turned out
to be cheaper to discharge it to the second river. It was a bit
disappointing that somebody had not thought about that originally.
267. If I go to my own constituency, I can think
of examples—given this expenditure we are talking about
is only a very small proportion overall of money that comes through
from EC directives, and so on—where I could see that there
are proposals where investment is desperately needed which really
stand very little chance of getting adequate funding if this whole
measurement is applied. In a way, it is a message coming down
from the regulator that it is the cost that actually matters rather
than the relief from flooding or whatever else it might be. That
will come about as a result of this expenditure.
(Sir Ian Byatt) I do not think that is the case. Both
matter, of course. The regulator is simply saying, "If it
is a very expensive thing, let it be looked at again". It
may be when looked at again, and the Environment Agency and companies
will look at it again—I hope the Environment Agency will
press the company for other solutions and think about the gold-plating
issue, if there is gold-plating, and that will all be looked at.
Then they can come back for further consideration by ministers
and if ministers say, "That was the best scheme. There were
not any alternatives. It is very expensive, but it still produces
the benefits", then it is not only my statutory duty to incorporate
that into price limits, but it would be a very sensible thing
to do.
268. In your conversation with the Chief Executive
of North West Water—it just so happened we were there earlier
this week and we were talking about these very issues—will
you then be taking up with him, if you like, the mismatch that
we now have between schemes which were excluded from North West
Water's programme of investment? We understand that this is evidence
that Mr Meacher gave before the Environment Sub-Committee, which
you referred to in your opening remarks. He told the Committee,
"At the margin there was a view that the Director General
of Water Services held that some of those projects were not as
cost-effective as they might be. They should be left out of the
periodic review. I, of course, listened very carefully to that
advice and in some cases I accepted it. In the case of North West
Water, I did not. I insisted it was a full programme as required
by the Environment Agency and should be in the periodic review
of 2000/2005". Yet, I understand that the full programme
is still not in it. How, between the minister, the DETR, the Environment
Agency and the regulator is all this going to be resolved?
(Sir Ian Byatt) There are two issues there. One is
the issue of a few particular schemes, where I believe reassessment
is still needed. I believe that the Environment Agency should
take the lead in that with the company and advise the minister
accordingly. There is then the question of the schemes, and the
point I referred to earlier, about whether schemes should be completed
by March 2005 or December 2005. The change between the July and
November determinations related to that timing issue, I think,
is probably what the Minister was talking about.
269. Could you just remind me, how many schemes
in the programme are currently under reappraisal, all told, for
the whole of the country?
(Sir Ian Byatt) There are 62.
(Mr Ridout) Plus four abstraction schemes.
270. Is Ofwat in a position to help the Environment
Agency in terms of getting better access to some of the information
to assist with the assessment of schemes that are coming forward?
(Sir Ian Byatt) You mean cost information?
271. Yes. How are you doing that?
(Sir Ian Byatt) If they ask us questions, we will
do our best to answer them.
Mr Gerrard
272. Do you provide the Agency with site specific
costs?
(Sir Ian Byatt) The companies look at the site specific
costs. We are not currently set up with a sufficient number of
specialist engineers to look at individual sites. The mechanism
for doing that is that the company looks at the costs, we have
a reporter who is there to keep an eye on that. And then we also
have our own views about which companies, on the whole, are high
cost and which are low cost. We challenge those costs in those
ways and we have always provided the Government Agency with the
information emerging from those challenges. We do not specifically
go to a site specific level. The Agency, who have more resources,
I think are probably better placed to do that.
273. When you are challenging schemes on the
basis of cost, how do you assess the benefit? What expertise would
you believe you would have within Ofwat to assess the environmental
benefit?
(Sir Ian Byatt) In the case of those 62 schemes we
did not assess the benefits. We did not claim or purport or in
any way suggest that we were making final decisions. If we were
making final decisions, we would need different legal powers to
start with and we would need our own equipment for assessing benefits.
All we did is say those, prima facie, were very expensive
schemes. They were a small element in a very big programme. We
believe they should be looked at more carefully again. That seems
to me to be a sensible thing to do.
274. Are you trying to push the Environment
Agency towards doing a full cost-benefit analysis?
(Sir Ian Byatt) The Environment Agency has a duty
to consider costs and benefits when putting advice to ministers.
I do not think they need me to encourage them to do that.
275. They said to us that they did not have
any duty to do a detailed cost benefit analysis on every individual
case. They obviously have to give some consideration to costs
and benefits.
(Sir Ian Byatt) They must give such consideration
as they think consistent with their statutory duties. I am not
going to answer whether I think they are carrying out their statutory
duties, I have no reason to suppose they are not.
Mr Thomas
276. Turning to the whole management of the
Periodic Review Process, in the evidence Water UK said to us they
see the process as needing, "Stronger management, more data
sharing and a common vision from all participants." I understand
that the quadripartite process is not a legislative one, it is
a protocol-based process, if you follow. It was in place in the
last periodic review. What is your view on the clarity and the
responsibility between the different partners in this process?
Looking back, it is the second time this process has now worked
and, of course, the introduction of devolution into the process
as well. Have you any views on how that did work, how it changed
views of Water UK's need for stronger management in that process?
(Sir Ian Byatt) I am not quite sure what Water UK
mean by stronger management. I know what I mean by stronger management
in some areas of water companies. I have already illustrated that
today. I think the quadripartite process which was set up before
the last review has really been extremely valuable. It has been
an information process. It is a process which is chaired by the
Department of the Environment, Transport and the Regions, quite
rightly. We have used it and found it very helpful. The decisions,
of course, may be aided by what goes on in the quadripartite process,
but the decisions are taken by ministers, by the Environment Agency
and by Ofwat. The Environment Agency take their decisions on what
to recommend to the ministers in the way of the environmental
programme. We provide information which we also hope will help
ministers making those decisions. It is then my decision to set
whatever price limits enable the company to finance the functions,
including those environmental functions. It is then the job of
the Environment Agency on the environment side, the Drinking Water
Inspectorate on the drinking water side and Ofwat as far as customers
service are concerned to make sure that it is all delivered. I
think the arrangements and communications between us perfectly
well.
277. Is there nothing you would change for the
future?
(Sir Ian Byatt) Just as when water companies say to
me they have achieved the perfection of efficiency and I do not
believe them, I do not believe we have achieved perfection of
the bureaucratic process but I think it is working quite well.
Sometimes people point out there are different emphases between
the different players, and that may be right. That is the purpose
in setting up the arguments rather than implementing the decisions,
where I think there is very close working between all of the people
concerned.
278. That process deals with the main players.
How does the wider stakeholder's interest become involved in this
process? Were the NGOS demanding meetings with environmental bodies?
How did you respond to them and how would you refute any allegations
that it is a two-tier level or a stakeholder involvement in the
whole process?
(Sir Ian Byatt) One part of your earlier question
I did not answer was about devolution. Of course the National
Assembly for Wales is very important in water. I had discussions
with the First Secretary and I also have appeared, on two occasions,
in front of the National Assembly for Wales. I have built up what
I regard as a good working relationship with the National Assembly
for Wales. As far as NGOS, etc, are concerned I have regular meetings
with environmentalists. They come to Ofwat. People such as Chris
Hines from Surfers Against Sewage I know very well. He has delivered
messages to my office, we have talked about these matters. I think
I am fairly well briefed on what it is that they want. Not everyone
gets everything they want, and every now and then I have to hoist
my point that you cannot please everybody. I do feel I am listening.
If anybody feels that listening process is not working well then,
please, tell me and we will try and make it better.
279. You say that your door is open to other
stakeholders, is it to the individual water companies?
(Sir Ian Byatt) Absolutely. I come out of what some
people regard as a rather secretive public sector process, where
you were taught you only released information on a need to know
basis. That has completely changed in Ofwat. We work on the basis
that everything is exposed, unless it happens to be confidential,
and there is a good reason for confidentiality in some cases.
We have tried to put a lot of effort into making our processes
open so that all stakeholders can play a part. I am sure we have
further things we can do on that and I much welcome suggestions.
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