Examination of Witnesses (Questions 40
WEDNESDAY 28 FEBRUARY 2001
40. You do not really know that. Do you not
need to know more about your assets before you can make statements
of that kind?
(Mr Fletcher) It is true to say that we need to go
on pushing the companies to know more about the state of their
assets. I am not saying that it is easy. We are talking very largely
about assets which are underground and which may still be fit
for their purpose even whenand I have no doubt the Committee
has been to see themsome of them look in a very ropy state
indeed. I too have been shown them. If they are still doing the
job, and they are looked at by engineers whose professional job
it is to say whether it is about to fail, whether it is about
to become unfit for purpose, then although the stitch in time
principle is a valid one, our start has to be what is going on
now. What is happening across the industry and what we are seeing
are indicators of outputs and outcomes which lead us to believe
that things are certainly not getting worse and if anything getting
41. Is this not the same problem that the railway
industry faces? Suddenly we are confronted with a huge crisis
which really resulted from intellectual neglect of the problem
of asset maintenance.
(Mr Fletcher) Clearly the regulators do talk to each
other and I am not talking here about my colleagues in the Environment
Agency and the Drinking Water Inspectorate but the economic regulators,
to ensure that we are learning lessons from each other. In talking
to Tom Winsor, the Rail Regulator, I seek to learn from him what
the circumstances are. I do not believe that a ready analogy can
be drawn between water and railways, where the passage of a high
speed train over a cracked rail leads potentially at least to
an absolutely catastrophic crash with loss of life. That is not
to say that within the water environment there are not some things
which require just as much care and attention. The maintenance
of dams to prevent catastrophic failure or reservoir dams is obviously
one such and there is legislation in place and very careful inspection
in place to ensure that. I have experts behind me who would tell
you a lot more about it than I can. But, when we are talking about
the sewer age and the drinking water mains, it is a very different
category of infrastructure, one in which yes, bursts are an important
thing. Sometimes they can be quite damaging when they boom suddenly
and you get a jet of water going right through the road. But that
is not a very common circumstance in the middle of a busy thoroughfare
and it is the company's job to keep a watch on their asset, using
things like bursts to indicate to them where more than just going
on making do and mend is needed and where they need a full-scale
relining or renewal.
42. Is there a financial problem here in the
cost to do a proper asset survey? You talked about Tom Winsor.
There is some criticism of him for example that he paid too much
attention to bearing down on questions of quality and service,
understandably and properly, to the neglect of maintenance.
(Mr Fletcher) I can only obviously speak in respect
of water. First of all I absolutely accept what you said that
regulators must not concentrate on one single part of the task
to the exclusion of others. I do not think that is what we are
doing in water. We are looking to ensure a proper balance and
the last Periodic Review aimed to do just that between the need
for a very substantial programme of investment, double the level
of capital investment which existed before privatisation. It has
been steadily doubled each year since privatisation. Mostly at
the moment to deliver quality improvements, but those quality
improvements, many of them with a primarily environmental goal,
do in the course of their delivery also lead to an upgrading of
the infrastructure. I absolutely accept capital maintenance must
be looked at carefully and must be given proper investment. The
debate is about what the proper level is. There I do accept that
we have more work to do and I note the Committee's stricture that
we have not got there yet.
43. May I press you a little more on that? When
we were talking about the comparisons with the Rail Regulator
and not having a situation where we have great big bursts of water
coming up from burst water mains, my concern about the possible
effects which could come about if we ignore this issue of asset
maintenance and serviceability standards is a public health one.
It concerns me that you have not mentioned that public health
concern once, which brings me back to the importance of the precautionary
principle. I should like to press you on this point and put it
to you that if Ofwat has 11 serviceability standards which it
has traditionally used, it is important that we now look to see
how those serviceability standards could address concerns about
public health arising from the condition that our pipes are in.
I am also concerned because you mentioned many times the drinking
water issues and we are very fortunate that the Government very
early on had a water summit where all these things were brought
to the fore and where pressure was subsequently put on the water
industry and put on Ofwat. I do not see that because we have not
had a sewage summit there has been the same concern about the
standards of what is in the infrastructure when it comes to standards.
When I think of a report whose name and title I cannot quite rememberI
think it was done by Salford Universitywhich on top of
all of this set out ways in which there has not been the transparency
about money which has been allocated to the water companies and
the way in which they have actually carried out that work, I begin
to have serious concerns that we cannot just wait for a little
bit of work before the next review, but Ofwat really has to redirect
its energies to look at the serviceability standards and change
what has historically been done to public health concerns about
the future. I really should like to press you and ask you what
you are doing on those concerns.
(Mr Fletcher) May I first take the public health issue?
I imagine we would all accept that the primary concentration must
be drinking water of the very highest quality. That is where the
public health issue is most serious and that is where attention
has been particularly concentrated and where I believe there is
a very good record, learning admittedly from things which go wrong
as we tend to do. When we turn to sewerage, and I accepted earlier
that sewer flooding is at the very least an extremely unpleasant
experience, with potential, if it is not dealt with promptly,
public health concerns, the number of houses most at risk of flooding
from sewers has halved since 1990.
44. I am not just talking about flooding, I
am talking about seepage.
(Mr Fletcher) That is an indicator. It is no use saying
the number at risk has halved to anyone who has sewage in their
home. They have sewage in their home and it is awful. I accept
that. I suspect the Salford University study was Dr Shaoul's study.
(Dr Emery) Looking at public health I suppose the
other area would be on pollution incidents and would be regulated
by the Environment Agency, so that in fact both those areas are
looked at quite closely. In terms of whether we are doing enough,
since 1990 Ofwat has established the measures of serviceability,
has pushed the companies very hard to get a sound basis for reporting
those, has looked and pushed the companies to do drainage area
studies, to do distribution drainage studies, so they understand
what is happening in their systems. It was Ofwat who pushed the
companies to do the asset surveys as part of the business plans
in 1994 and again in 1997 and 1998. In a sense we have been following
quite closely on these things and we are pushing the companies
to try to utilise all the information we have to understand these
46. I do not think it is enough.
(Dr Emery) That is set in the context that the performance
is improving. It is also set in the context of the Secretary of
State taking the precautionary step in 1989 when he doubled, through
the last Periodic Review, the level of maintenance of these systems
on relatively limited data from the position in the 1980s. You
had a step there which assumed there was a need to do a great
deal more and since then we have been putting in place systems
of monitoring the position and everything points to the fact that
we are not backing off a cliff. In fact we are getting a handle
on it and we are pushing the companies in the next few years to
get a proper handle on the relationship between the activities
they do and the service performance of their asset systems. That
is the key to understanding where the future should lie, to maintain
service for the next period.
47. I too am very very concerned about this,
particularly following a visit we made as a Select Committee to
one of the water companies.
(Mr Fletcher) I believe you went to the North West.
48. Yes, we did.
(Mr Fletcher) Which of course needs to and does have
a much higher level of capital maintenance investment that most
other of the water and sewerage companies.
49. The interesting thing about it is that we
did not raise the sewage matter. They did. It then tended very
much to dominate. I saw them separately afterwards in London and
what they are saying about it is quite simply this. They do not
have the money. I am not talking about patching up, because they
are saying they could patch up. That will cost money as well but
it would anyway only be a sewerage life of an extra 50 years.
They are saying that unless there is radical money put into it
what we are insisting on is a nineteenth century system of sewers.
We are now in the twenty-first century, there needs to be not
just patching up but new ones. That is going to take political
will. It is also going to take much more pressure from Ofwat on
Government to get Government to look at that than is going on
at the moment.
(Mr Fletcher) Just on the point about Victorian sewers,
and here we are in a Victorian building, a lot of the Victorian
sewers are in good condition because they were built to a very
high standard and because they are in ground which allows them
to continue to be in good condition. Back again to my answer to
Mr Gerrard, age alone is not an indicator that replacement is
needed. Condition alone, although it is important, and we want
the companies to know the condition of their assets, is not enough
in itself to say replacement is now needed rather than patching.
Is it continuing to perform properly? Accepting the point that
we need to look forward rather than backing off a cliff, is there
every indication that it is going to go on performing properly?
I suggest that ought to be the key indicator that we use in broad
50. You obviously did know that we had been
to North West Water and I get a sense of "They would say
that wouldn't they, because there are problems in that area?".
May I tell you that there are also problems in Finchley? I was
to shocked when I heard this. I had to phone my office and my
assistant, who lives in Finchley, said yes, it happens in Finchley.
The thing is, as you quite rightly said, that it is horrible if
you have a situation where wherever you live in the country your
house is flooded with sewage. This is not just happening to people
once, one horror of a lifetime. For some people it is actually
happening every two years. I think that has to be a public health
(Mr Fletcher) Yes and with the deluges we have been
having, though it is the deluge which tends initially to cause
the problem, there may wellas I guess a number of you know
through your constituency bagbe particular problems which
emerge. We are very conscious of that and the industry is very
conscious of that. Clearing up is part of the job but it is only
part of it. The level of investment, whether it is into specific
sewer flooding issues or the much wider issue of capital maintenance
generally, is something which is going to go on being debated.
Trying to get an appropriate pointthere is no one right
level of investmentis going to be a debate where the industry
and the regulator's concerns that we should not be spending more
than is appropriate in terms of customer interest in keeping the
bills down, are never going to reach an absolutely agreed position,
but we do need to understand each other and yes, we need to go
on working at this and that I accept.
Chairman: It is a question of what method
you use to reach this judgement that we are concerned about and
that you previously seemed to rest too much on historic information.
51. And we feel that you ignore surveys and
only look at output. You do not take account of the surveys which
have been done.
(Mr Fletcher) We do not allow asset condition to mesmerise
us. However, asset condition is part of the picture which is why
the companies and through the companies Ofwat need to know what
the picture is.
52. How often has Ofwat told a company to spend
more on asset maintenance than the company was actually proposing
(Mr Fletcher) I would guess never.
(Dr Emery) I am not aware of any time when in fact
the bid that the company has put in has been exceeded by Ofwat
allocation. That is not a surprise.
53. Can you envisage a position where that should
be happening, if you believe some proper assessment is being developed
of condition, that you may say a company is not spending enough
on asset maintenance?
(Mr Fletcher) May I remind the Committee that it is
always in the company's legitimate interests to maximise the capital
programme approved by Ofwat within the Periodic Review, because
of the way that then flows through into their turnover and eventually
into their profit?
54. But part of the game is for them to make
savings on asset maintenance.
(Mr Fletcher) But to have the highest possible figure
accepted in the Periodic Review. I should be surprised if we ever
got to the position where a company was so negligent of its shareholders'
interests as to put to us a proposition which was less than the
minimum they ought to be putting forward and to have Ofwat or
other players drawing their ignorance or their inattention to
their notice. That said, the underlying point you are making is
that this is important and yes, we need to go on working at it.
(Dr Emery) We identified three companies in the Periodic
Review where the trends in the indicators and the surveys they
carried out also supported that, that they might well need to
increase the level of maintenance from the historical trend, particularly
related to the sewerage cycle. So we increased the level of funding
that we would assume for those three companies. Since then we
have been at pains to go to those three companies to ask to see
exactly what they are going to be doing to restore the trends
in service performance of their systems such that by the time
we come to 2002-03, before the next review, they will have restored
the service performance for their networks. That has involved
them looking very closely at integrating older information, defining
the hot spots on their systems where there are problems, to bring
together that data and to put forward plans to address areas where
in fact, if they invest in those areas, together with other areas,
they will have sustained or started to improve the performance.
That is the approach we have been adopting. We are going out and
we have been to see those three companies. Also part and parcel
of our approach to this has been some discussions with the companies
as to how they are tackling our MD161 economic appraisal and capital
maintenance issues. We are in active dialogue with companies.
Last week I was with North West Water to discuss with them how
they were getting on and the tools they were developing. They
recognised that the basis upon which they were forecasting future
levels in 1999 was inadequate. It was essentially about dealing
with improvements to the system, improvements to service, to get
them up the league table in performance rather than maintenance
levels as it stood. They are looking at that. We are actively
looking with them. We are going to be trying to bring all these
things together in what we think is best practice and what they
are doing towards the middle of this year. This will link into
the water industry work with UKWIR on capital maintenance where
they are going to be identifying best practice in these areas.
We think there is a good prospect of the decisions that the company
has to make and the decisions the regulator has to make in 2004
will be much better informed than they are and were in 1999.
(Mr Fletcher) And thereby much closer. We can only
say that when we get much closer to 2004 and we are seeing how
the strategic business plans of the companies match our expectations
in the light of the further work which will have been done by
55. So there are tools and best practices which
are being developed. There are methodologies here.
(Mr Fletcher) Absolutely. We are particularly talking
about three studies. There is the work of the industry under the
UKWIR banner, there is the work we are doing with the Drinking
Water Inspectorate on the drinking water assets and the work we
are beginning to get going with the Environment Agency on the
56. It would be very useful if you could let
us have a short note on exactly what these tools and methodologies
and best practices are. 
(Mr Fletcher) We expect, as I said in
my written evidence to the Committee, to have first results starting
to emerge from the Drinking Water Inspectorate study really very
soon. We hoped to have it by today but it has not quite come.
We can provide the Committee with the usual very quick note, but
look to go on providing the Committee with further updates as
the situation develops.
Chairman: That would be very useful.
Thank you very much indeed.
57. May I move on to two quite specific issues
which arose out of our enquiry, where we felt we had not quite
got to the bottom of the issue? The first is the financial model
and as I recall Mr Byatt in his evidence under questioning said
that he had made the financial model available. Then it later
emerged that it was the outline of the model which was available,
but not necessarily the formulae and assumptions on which the
calculations were to be made. What interested us was the question
of transparency and why this degree of secrecy was felt necessary.
May I just press you on this point? Why is there any need at all
to keep anything secret? As long as Ofwat is holding information
back, we are in the position we were with the debate over the
market research. We had competing forms of market research and
we had competing financial information and it was just impossible
to get a common starting point between the regulator and the companies.
My question is: what is to prevent you from making all aspects
of the financial model available, putting it all in the public
domain, being transparent?
(Mr Fletcher) First of all, going back over old ground,
what we did was to publish in October 1998 our rulebook and it
included a full copy of the equations used in the model. What
we did not make publicly available was the financial model encoded
in the software. We did not pass the whole software out. The reasoning
there was that the whole Periodic Review is designed to finish
up with a figure, a package, not to have every particular detail
crawled over. The worry was that the full publication of the modelevery
detail, every part, the full softwarewould lead to a rather
misleading debate between Ofwat and the companies about, inevitably,
the bits of the model that they did not like, leaving aside the
things they liked or quietly thought were over generous to them.
May I then move on to the future? As we develop a new model, and
this is what we are doing, (as I said in my introductory remarks,
which we need to do to give us greater flexibility to enable us
to move faster as we come to the Periodic Review time and to exemplify
more options,) I think we should be looking to develop it in a
form where we can release the software to the industry. Because
we are still at the very early stages of the project, we have
not let the contract yet, I hesitate to give an absolute guarantee
to the Committee this afternoon, but I am trying to come as close
to it as I can.
58. Can you think of any reason why you would
not commit yourself?
(Mr Fletcher) Subject to the reservation we have that
it would tempt the companies to start wanting to crawl over every
detail and of course it would inevitably be only those bits they
did not like which they would raise with us. This could be an
awful distraction in a period where a great deal of work has to
be packed into a very short period of time to come up with the
appropriate answers in the Periodic Review. That would be a reservation
we would continue to have. The trade-off against sparing ourselves
the criticism that we are too secretive, that we never share things,
that we are not prepared to be open, we are not prepared to stand
up and defend our practice, those arguments weigh more heavily
59. Picking up another point you mentioned earlier
which was your discussion with your fellow regulators, can you
tell us what happens with the other regulators?
(Mr Fletcher) Again we are looking at the past. I
believe what we have already been doing is a bit more transparent
on the price setting arithmetic than Oftel have customarily been,
a bit less than Ofgem, if I take them as the obvious exemplars.
If David Edmonds and Callum McCarthy, my fellow regulators, are
listening, I do not offer that as an absolute. I am not guaranteeing
3 See page 31. Back