Examination of Witnesses (Questions 20
-39)
WEDNESDAY 28 FEBRUARY 2001
MR PHILIP
FLETCHER, MR
MIKE SAUNDERS
AND DR
BILL EMERY
20. I see the problem. I do not think there
is necessarily a really perfect solution to that.
(Mr Fletcher) I agree with you.
Mr Grieve
21. Could we turn to what water consumers want?
Of course, like most things they may wish for incompatible or
contradictory things; doubtless most people want low prices, at
the same time if they are asked in broad terms whether they want
water conservation they will make that point as well. It is clearly
for you to an extent to try to reconcile those different pressures.
May I just turn to this? Last year when we looked at the matter
we felt that there was an array of customer surveys all being
done from a slightly tendentious point of view and not really
very constructive. We recommended a comprehensive and independent
survey done by the DETR to look at public expectation and particularly
at the question of environmental improvements and longer term
policies. We said that the structure and content of that research
should be agreed within the quadripartite group. What has actually
happened in relation to that? Have you been consulting? If so,
with whom and with what result?
(Mr Fletcher) May I first go back to the Committee's
report? I went to the minutes of evidence taken and I can see
how perhaps a slight misconception arose from them. Ian Byatt
was not attempting to mislead at all, but he may have underplayed
the significant survey which Ofwat did undertake—1,200 so
a representative sample—and perhaps overplayed the very
tiny sample of customers who were particularly vulnerable. There
was an Ofwat general survey in advance of the Periodic Review.
I can well understand why the Committee, if it took the view that
had not happened, said DETR ought to do it if Ofwat were not.
Ofwat will and Ofwat sees it as very important that we should
conduct proper surveys and what is more that we should do it as
the Committee is asking, that we do consult the stakeholders before
we actually launch on the various questions. That is not to rule
out surveys by the water companies themselves of their customers.
It is very important that they should know what their customers
think. We do see it as our job to conduct proper surveys and as
an earnest of that we intend to conduct a large survey this year
into customer service issues, not specifically this time looking
forward to the next Periodic Review, which is still a way ahead,
but on things like customer satisfaction and reasons for dissatisfaction,
the relative importance of different issues, the very point you
are making, does Ofwat really understand how customers balance
things, and we will share that with DETR and all the other stakeholders.
22. As well as sharing it with them are you
consulting with them prior to doing it or is this just your own
activity?
(Mr Fletcher) No, it is something we are consulting
on. It appears first of all in our forward programme as something
we are going to do and that in itself has been subject to consultation.
May I bring in Mike Saunders, whose job it will be to ensure the
consultation happens?
(Mr Saunders) The answer is yes, we will consult with
the companies before we carry out the survey, so that we have
everyone else's comments on the objectives and how we are going
to set about it. We will consult with the Agency, outside consumer
groups and the Department.
23. Is that likely to lead to the consequence
that they may be willing to rely on single surveys of this type
in future rather than doing their own thing or is it just a question
of asking them a few questions before you do your own thing?
(Mr Fletcher) We cannot stop other interested parties
deciding they want to do something which is specific to their
interests. It is noticeable that what you have described as the
plethora of surveys last time had some pretty common messages
coming through, but also there were some messages which tended
to be specific to whoever had commissioned that particular survey.
We cannot dragoon everything into one. We can look to deliver
value for the money of the water customers, who are paying for
it, and to ensure that we embrace where it makes any sort of sense,
the sorts of thing that other stakeholders and colleagues want
us to ask. We shall aim to do so.
24. May I move on to the question about the
Environment Council and your role and involvement with that and
employing best practice within their methodology? What progress
has been made on that? You previously indicated that you were
interested in signing up and joining with the other stakeholders
to pursue that line. Where are we now?
(Mr Fletcher) We have joined the Environment Council.
We are still in the early days of actually coming to grips with
their approach to stakeholder confidence and dialogue. I have
been through their documentation. The reservation I have is that
a process of setting a review going, involving a number of different
clear interested parties, is not in itself a negotiation leading
to a compromise conclusion. This is always going to be something
where people are unhappy with the conclusion for one reason or
another. So it is very important that I understand what the various
positions of everybody else involved are and I understand those
positions clearly. I cannot hope to come up with a compromise
which satisfies all.
Mr Thomas
25. We are hoping later on to explore some of
the restructuring things which lay behind the Glas Cymru proposals
but may I ask you now about the consultation at that time? The
consultation which took place on the Glas Cymru proposals, for
example, consisted of the publication of the proposals, they were
available on the website, two public meetings in Wales certainly—I
do not know whether there were any in the part of England which
is covered by Dwr Cymru—one organised by the company itself
and one organised by the customer service committee, at which
attendance, being public meetings, was not particularly high.
Certainly the stakeholders in terms of the Agency and the National
Assembly of Wales seem to have had a good say in the matter. Are
you convinced that the customers of Dwr Cymru/Welsh Water really
know now or even knew then during the consultation period, what
was being proposed for the company which would deliver various
services? Is there anything in your involvement now with the Environment
Council which would make you really look at these sorts of consultations
in the future? May I say that from my point of view, in the way
in which I represented my constituents and dealt with it, I felt
that the process was a little opaque and certainly too attenuated
for the purposes set out? I know the cities do things very quickly
but when the public are involved they need much more time to understand
what exactly is being proposed for them.
(Mr Fletcher) In terms of length of time for consultation,
the period we had was eight weeks which admittedly included Christmas,
so I recognise that was less than perfect. It is a question of
a balance here. It has to be time enough properly to consult customers;
that is an absolute. But, if the length of time for consultation
jeopardises the whole proposition then that is hardly fair to
those who are making the proposition, who are risking funds and
their own stakeholders and money in making the proposal. It was
a conclusion that this was an appropriate length of time. That
was really the yardstick I took throughout. Is this an appropriate
investment by the company, Glas Cymru, by others including the
customer service committee under the Ofwat banner and by Ofwat
itself in ensuring—just your point—that customers
were given as full an opportunity as possible to be made aware
of what was going on? I could have asked for something more. I
could at one extreme have said that there should be a ballot of
every customer of Dwr Cymru. I thought that would be inappropriate
here because, unlike a mutual, the customers are not being asked
actually to own the company. What was done over and beyond the
list you have already given, was for the company itself to seek
to maximise the coverage, not only with the obvious, the National
Assembly itself for example, but writing to every opinion former
they could think of—I very much hope they wrote to you—not
just MPs, Members of the Assembly and a whole host of others and
conducting in-depth surveys as well. I would attach quite a lot
of weight to those in-depth surveys. These were trying to get
to the genuine customer through small but representative samples.
The rather healthy response which came through from those samples
was: on balance tend to be more in favour than against, but the
first thing we as a customer want, is a safe, secure supply of
drinking water at the right pressure, at bills we can afford.
That seems to me to be a very appropriate customer reaction.
26. Would you agree with the conclusion that
Ofwat has certainly moved a great deal in the way it consults
with stakeholders, groups, agencies, the emerging devolved administrations
and so forth? That there may still be more work to be done in
terms of consulting with the individual customer for them to understand
how what is being proposed may affect the cleanliness of their
water, the pressure of their water or the reliability of supply
of their water.
(Mr Fletcher) With any sort of proposal for restructuring
that is the $64,000 question. Frankly if drinking water were put
at risk, if companies' duty as a sewerage undertaker were jeopardised
by this reorganisation, it would never get past square one. I
and my colleagues, Michael Rouse, the Chief Drinking Water Inspector,
Baroness Young and Sir John Harman for the Environment Agency,
have to be convinced that there is more than a reasonable prospect
that this is going to work properly and that all the requirements
are going to be delivered. That is why it is quite difficult to
excite the customer because protecting the customer is an absolutely
non-negotiable starting point. Are we becoming more consultative?
I hope so, but I do not see this as in any way a step change from
my predecessor. I am simply building on the lines my predecessor
had already set.
Mr Gerrard
27. You talked earlier once or twice about asset
maintenance and capital spend and you said you did not think it
was perhaps entirely fair of the Committee to suggest that Ofwat
had neglected the question of asset maintenance. Ofwat's response
to our report accepted that "insufficient attention has been
paid to developing a complete and intellectually robust framework
and that Ofwat has a role to play in its development". Have
you changed your mind on that?
(Mr Fletcher) No. Intellectual neglect sounds as though
we have been giving no attention to the issue at all, so perhaps
I am just being too thin-skinned on behalf of my predecessor.
28. You thought we were being a bit too cruel.
(Mr Fletcher) I fully accept, as my colleagues do,
and it is particularly Dr Emery's area of expertise, that Ofwat,
with the industry, needs to be devoting a great deal of work to
this topic and we are looking to do so. We are working first of
all with the Drinking Water Inspectorate on a study. We are looking
to take that further forward with the Environment Agency and we
are looking to participate fully in the industry's own work on
this, most obviously through a study which UKWIR, the Water Institute
Research Association, is undertaking.
29. You mentioned that in your evidence.
(Mr Fletcher) I said I hoped for something by the
end of February, but I have not received it yet I am afraid; it
has slipped a bit.
30. One of the other things you said in response
to our report was that the change in the ability of underground
assets to deliver was likely to be gradual. Is the evidence really
there to back that statement up? When we were shown the age profile
of mains we could see very large cohorts in certain periods; it
is not an even age profile at all. Can we really say that it is
going to be gradual? Do we know that at the moment?
(Mr Fletcher) I did pick up the Committee's point
that there had been step change periods of past investments, rather
like baby boomers after the war, of whom I am one, who are getting
old together. The evidence available to us does not suggest, given
the overall huge scale of the water infrastructure, that there
have actually been such significant periods of investment in the
past such as to cause us to believe that there will be significant
periods which, simply on age grounds, would lead to failures in
the future. In fact there is not a very good correlation between
age and failure at all. For example, some of the Victorian sewers
are doing very well indeed; some sewers which were only put in
20 years ago are not doing nearly as well, either because they
were not as well installed or because the ground conditions generally
work against serviceability of those assets.
31. You say you are developing indicators of
serviceability. Can you give us any indication where you are on
that, what those indicators might look like, what sort of indicators
they might be?
(Mr Fletcher) We work currently with 11 serviceability
indicators, things like for the underground water infrastructure
low pressure problems, interruptions to supply, then the above
ground stuff, the coliforms, the pollution, enforcement issues,
quality compliance issues, then sewerage, overloaded sewers, pollution
incidents, sewer collapses and how far sewage treatment works
comply with the requirements. All of those indicators are about
outputs and outcomes and that is where we really ought to be concentrating.
Not to say we are backing over the cliff, but to say and to accept
that we need to introduce more of a forward looking element as
we develop the sophistication of our approach, as the industry
develops its approach working with us. Those are the main serviceability
indicators we use and they are set out in notes which Ofwat produced
now virtually a year ago.
32. I am sure you remember that one of the things
we said in the report was that looking at what happened last year
is not necessarily a very good predictor of what is going to happen
next year.
(Mr Fletcher) It is back to the over the cliff worry.
33. From that list you read out how many really
are forward looking? Should we be trying to develop better forward
looking indicators?
(Mr Fletcher) May I give a few indicators which lead
us to believe that overall the fitness for purpose, the serviceability
of the infrastructure, is not getting worse and may well be getting
better? The reduction in leakage, is a real achievement over the
last five years—admittedly with a good push both to the
regulator and to the industry from Government. Thirty per cent
down to 21 per cent is a big achievement; not yet complete, still
more to do. A reduction in the number of properties at risk of
receiving low pressure: 350,000 ten years ago and 30,000 now.
Cutting by two thirds the number of the most serious pollution-related
incidents since 1995. Those are really indicators that the industry
is making progress, closely watched by me and by the other regulators.
No complacency about it. Accept that we need to go on working
about the level of investment required in the capital infrastructure.
It will, I am sure, be a key controversial issue for the next
Periodic Review and that is why we are doing the work now, because
this is long-term work which will only yield results over time.
34. How soon do you think it will be before
it is possible really to see trends in those indicators?
(Mr Fletcher) We are seeing the trends now.
(Dr Emery) Philip Fletcher has already gone through
the kind of indicators we are using. With the Drinking Water Inspectorate
we are looking at the quality side, particularly drinking water
quality, to get some more indicators. We are looking primarily
at indicators which analyse the wealth of information which exists
in the companies now, to give us trend data. You do need to establish
three, to four to five years of annual data before you can actually
establish a trend. We have that with the 11 indicators we are
using at the present time. We are looking within this study we
have with the Drinking Water Inspectorate and the parallel study
we are having with the Environment Agency to analyse historical
information in a different way which can better inform our assessment
of the current position and performance of the companies as the
starting-up point to see whether the next period is going to be
significantly different. It is using those indicators and using
the information in asset inventories and things like this to guide
us as to whether or not the next period is likely to be different.
The future look is in the second stage of our analysis which I
think we set out reasonably well in the annex to our response
to this Committee.
35. You said earlier on that there was a paucity
of data on sewers. You said in your response to the Committee
that you were looking at a joint initiative with the Environment
Agency to start to develop serviceability indicators on sewers.
What sort of timescale is that going to be?
(Mr Fletcher) That is the next phase which should
start in parallel with the work which is now already well in train
with the Drinking Water Inspectorate on drinking water quality.
We look to start that work later in this year.
(Dr Emery) We have had some preliminary discussion
with the Environment Agency. They are actually themselves looking
at some of the data. We are waiting for the end of the feasibility
study which is being done with the Drinking Water Inspectorate
because the same principles apply to the analysis of data. We
are then going to bring them both in parallel. We hope by the
middle part of this year to have got some substantive way forward
on this. We shall be consulting with the industry on the findings
of this initial study and where we are going. We can, within our
annual reporting cycle, start to get some additional indicators
in these matters into our annual reporting round for 2002 hopefully
and definitely by the 2003 June returns.
(Mr Fletcher) May I just come back to your first point
and why not just take the age or the overall asset condition?
The Competition Commission, as you will know, looked at two small
companies which appealed to them from the last Periodic Review.
They gave both of them some increase and capital maintenance was
an issue there. The Commission did not think the Ofwat approach
was as yet fully formed and they were not prepared to take that
as their way forward. In the end, for want of anything better,
they did take a rather crude asset condition issue for Sutton
and East Surrey, a small company south of London. It is interesting
that the company itself does not propose actually to deal with
the assets which are in the worst condition, for which it has
been given the money. It is their right to choose to renew different
assets which they regard as a higher priority. I do think it is
an indication, rather out of the horse's mouth, that just going
for asset condition would not be the right way forward.
36. If companies start to do that, and let us
suppose you are asking a company to make a certain level of efficiency
savings, is there a danger that not doing asset maintenance becomes
a nice easy way of making some of those efficiency savings? Do
you think there may be a perverse incentive there?
(Mr Fletcher) We have the two sorts of maintenance
here. There is the day-to-day maintenance which is a crucial part
of keeping an asset going, as it is in this 150-year-old building,
making it still fit for purpose, and then there is the capital
maintenance which is fully enshrined in the capital programme
and which is remunerated through prices, it is part of the Periodic
Review. We watch the companies very closely in terms of what they
are doing on efficiency. We report on it annually. We report too
on their progress towards their capital programmes. We are watching
all of those issues very closely.
37. On this whole general issue, you said in
your evidence that the main responsibility has to lie with the
companies, that there is a role for Ofwat. How far do you think
the companies can be left to their own devices on this? Do you
think they will produce a reasonable methodology for long-term
capital maintenance?
(Mr Fletcher) They would have a very reasonable grouse
with Ofwat if we simply left them to their own devices and then
picked and chose what we liked or did not like, having given them
no guidance on what was being asked of them. We accept that it
is Ofwat's job to help to set the tone, to work with the industry
to develop things, so long as it never becomes, "Oh, it's
Ofwat's job to see capital maintenance right". It is our
job but it is primarily the company's job. They are answerable
to the world for the maintenance of their assets.
Chairman
38. You seem to be saying what you have always
said.
(Mr Fletcher) There is continuity then.
39. But we are not making any progress on this
point. I still find it hard to understand how you can say that
if you have indicators of service over the past, these will be
replicated in the future necessarily. There must be some sounder
methodological approach to this than just saying that if it has
not broken it will not break again next year.
(Mr Fletcher) I would suggest that it is always sensible
to look at the past performance as a starting point. Back perhaps
to Mrs Walley's point about the precautionary principle: is there
reason to believe that we are approaching step changes on the
overall state of the infrastructure?
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