Examination of witnesses (Questions 40-59)|
TUESDAY 30 JANUARY 2001
40. Can I just check something you said. You
said that the deliberations of the Panel would be in confidence,
or be confidential; presumably, once a decision had been made,
any deliberations that had taken place in the Panel would become
(Mr Fletcher) I think that would be very much an option.
If we thought about the Monetary Policy Committee as some sort
of precedent, you could conceive circumstances in which the deliberations
remain confidential but the views expressed are part of the picture
when the decision is announced, so that it is clear whether the
regulator has agreed with his Panel or not.
41. Do you have a view as to what sort of people
you would want on the Panel?
(Mr Fletcher) The people I have on the Regulatory
Policy Committee now, and I have got room to expand it a bit,
and intend to, I am still fairly new in the job, are a former
banker, in fact, a very active banker but past normal retirement
age, an engineer and an expert from the gas and electricity sector,
who helps me by bringing in expertise from a different sector.
I would want to build on that. I would not necessarily want to
confuse the advice I get on environmental issues already, from
bodies like English Nature, by having, for example, an environmentalist
there, but I can see that that could be another option. My mind
is very open to it.
Sir Paul Beresford
42. As you possibly know, I like the idea that
there is a point where the buck stops, and your idea of having
a single individual, but some of the water companies might not
agree. Your predecessor made a decision that was challenged by
two of the water companies, went to the Competition Commission,
they won their case, they were allowed costs but the costs were
set against the customers of the water companies, or could perhaps
have been set against the company and its shareholders; either
way, it did not seem really fair, and it seemed as though the
Ofwat arrangement ducked the issue. Can you see a way in which
this could be set back, so that you would actually be responsible
for your decision, if it was overturned?
(Mr Fletcher) The money that finances my office and
my salary comes from the water customer, and I am always very
conscious of that, by levy on the industry. On the particular
point, I think the Competition Commission, whether it agrees with
the regulators or not, is an absolutely essential part of the
system, holding the individual or board regulator to account.
You have touched on a particular point, where I think something,
frankly, went wrong, and where maybe this Water Bill could be
helpful, which is that it should not be automatic that the costs
of a Commission hearing flow straight through to the customer;
in previous times, the shareholder has normally borne that cost.
43. Why should either bear the cost, that is
what I am really getting round to; because, if we take the previous
evidence, the effect, if it goes on the shareholder, is quite
disastrous on the investment in the company?
(Mr Fletcher) That is obviously one of the things
that has, in the past, deterred companies from going on from the
regulator, not just in this sector but in others, to the Competition
Commission, on a price appeal.
44. So you do not have an answer?
(Mr Fletcher) The option, if it is not the customer,
if it is not the shareholder, is the taxpayer. Now whether Parliament
would actually want that is obviously for you.
Mrs Dunwoody: Only in Sir Paul's concerns.
Sir Paul Beresford
45. Not necessarily; the thought of the PAC
looking over you warms my heart.
(Mr Fletcher) Personal surcharge is something
46. I have not got back to that area yet.
(Mr Fletcher) Is something every accounting officer
is aware of, and it is normally when something, as you know, very
bad goes wrong, not a misjudgment but out and out corruption,
Sir Paul Beresford: No, I was not accusing you
of that, I know you too well.
47. Mr Fletcher, can I ask you to comment or
to explain why in your evidence you feel that the proposal to
give the Secretary of State and the National Assembly for Wales
powers to set standards of service inevitably increases uncertainty
(Mr Fletcher) This is going back to Dr Helm's points.
Uncertainty would be about what the Government was going to do,
what Ministers were going to do. If they were going to impose
further and tougher standards thanlet us take leakage as
an example. We seek to regulate by reference to what we call the
economic level of leakage, that is the level to which the company
should be reducing leakage, to optimise the overall cost as between
the cost of repair, on the one hand, and the cost of the loss
of the water, on the other. Now Ministers might want to take a
different view, they might say, "We want much more severe
standards than that," for which there would be a cost. Now
that cost would flow through the regulatory price regime to the
customer; so far, I think, that is automatic. The bit that is
less clear is whether the uncertainty about the possibility of
Ministers setting a much more severe standard would tend to raise
the cost of capital to the companies, which, as Dr Helm said,
is hugely important, £50 billion worth of investment since
privatisation, through to 2005, and the clear evidence from the
City is that it would, because the uncertainty increases the cost
of capital and flows through eventually to the customer.
48. Are you saying there are no circumstances
in which the Secretary of State should be able to set standards
(Mr Fletcher) No, I am not saying that; but I think
the Secretary of State can get an awful lot of what he wants through
the powers that he has already got. For example, again, the environmental
and water quality elements of the programme are not a matter of
the regulator saying, "This is what it should be;" in
effect, the investment in the environmental and water quality
elements of the programme is decided by Ministers and taken into
account by the regulator after dialogue. And we saw examples of
that in the last round: a vast programme, but on some issues the
regulator said, "I don't think this one has really proved
itself yet; oh, Minister, back to you, please, and the Environment
Agency, to have another look at it." And some of those are
now starting to flow through, sometimes at significantly reduced
cost to the original proposal.
49. But what you are actually saying is that
you should not put in this legislation something that really is
repeating the powers that the Minister has already got?
(Mr Fletcher) I would suggest that the legislation
should not be passed if it is just, "Oh, well, it would be
nice to have this in reserve, just in case." I could draw
to the Committee's attention analysts' reports, which I do read,
but I am not suggesting that we all need to pay huge attention
to every jot of it, but which do bring out the point that the
mere taking of a power, which would then enable Governments to
set standards by regulation, without primary legislation, is something
that the City reflects on, and tends to charge a high cost of
capital as a consequence.
50. Do you think the City really reflects on
it, or is it not the case that these analysts want to prove that
they have done something for the £600 or £700 that they
charge for their views?
(Mr Fletcher) I do not know that I want to offer a
view, Chair, on this one. They vary in quality, and some of them
are very good, and I do read them avidly, as part of my job, as
I read all sorts of other things.
51. Since the power to disconnect consumers
was removed, water clearly has been given a particular status,
it is an essential supply. Do you think, therefore, that the charging
structure is progressive, in other words, relates to customers'
ability to pay, and I am thinking particularly of families on
(Mr Fletcher) Very broadly, yes. The rateable value
basis of charging, for the great majority, still some 80 per cent,
of domestic customers, has an admittedly crude but broad correlation
with ability to pay, low rateable value tends to mean, as you
know, low income, low affordability. Then, on top of that, there
are the provisions that the Government has put in place, and which
it is due to review this year, to apply particular assistance
to customers on low income, and there is, of course, the rebalancing
that happens within the tariff, from some customers to others,
which tends to have the same effect. I look at the charging schemes
for each company, each year, and have a dialogue with them about
that, and I think that the ability to pay is very much part of
52. And how about applying those principles
in relation to metered supply?
(Mr Fletcher) For metered supply, the provisions in
the regulations, which are now in effect, do provide some help
for those particular customers on benefits. They are not comprehensive,
but there is specific help. This will be part of the review which
the Government has undertaken to do this year, of how those regulations
53. I understand that some help is provided,
but some would argue that that is not sufficient?
(Mr Fletcher) There is always room for debate about
where you draw a line in relation to a benefit, in this case a
reduction in your water bill, and whether there are not deserving
cases, as there almost always are, that lie just beyond the boundary
that you have drawn. So, for example, in this year, I am looking
to move the boundary out, in respect of those who have medical
conditions which require them to use a lot of water, to make it
a bit more extensive than it was last year. And that is the sort
of debate, that just needs to go on, where you will never get
it exactly right and you need to watch it; at the same time, if
you push it too far out, then you deny the possibility of taking
forward competition in the water industry which, potentially,
at least, and in the sort of way that Dr Helm was outlining, I
think, offers support and help for all customers, by pushing for
more efficiency across the industry. So, again, a balance has
to be drawn.
54. Should your post have a responsibility for
sustainable development? Your predecessor did not appear to think
that was a terribly good idea; do you?
(Mr Fletcher) My first thought, which is in my evidence
to the Environmental Audit Committee, on their recent report,
is, no, it should not, for much the reason that Dr Helm gave.
Again, I am concerned that the regulator, the economic regulator,
in this case, an unelected official, appointed under an Act, should
have very clear duties, that it should not be too woolly. And
the Secretary of State, and it is expanded in the draft Water
Bill, would have power to give me guidance on social and environmental
issues; he already has a power, this is reinforcing it. My second
thought is, on looking at the sustainable development duty, for
example, that Parliament has recently passed into law in relation
to Regional Development Agencies, that maybe that would be all
right. It is the sort of thing I would like to go on thinking
about, we are still at an early stage in the debate.
55. As I understand, one of the arguments that
the water industry puts is, because different people can take
different decisions that impact upon their business, this raises
the risk versus the cost of capital. Do you think that the structure
that is being proposed does as much as could be done to try to
address that issue, is it one that needs to be addressed?
(Mr Fletcher) Within the Water Bill itself; this is
where the gaps are particularly frustrating. If we look, for example,
at the abstraction regime, which has been developing over a long
time, where I fully agree there needs to be further clarity about
how it is to be done, we have got two big gaps. First of all,
the Government has still to announce its decision on economic
instruments, which could be a very important part of how the abstraction
regime works; and, secondly, its decisions around competition,
which needs to interact with the abstraction regime. Dealing with
the ultimate supply, it has got to be correlated with control
on environmental grounds.
56. So we really need to see how the competition
proposals are going to work, in order to make a proper judgement?
(Mr Fletcher) I think it will be very hard to judge
the Bill overall until we can see it as a whole, and I do not
think the Government has made any pretence of the fact that at
the moment this is a contribution towards the Water Bill, not
a complete picture.
57. What about abstraction; what should be done
(Mr Fletcher) I am not competent, Chairman, to offer
a view simply from the environmental end, so I will not try to
do that. I would say, the controls on abstraction are solely about
the very important, and I do not underestimate it, the very important
business of ensuring that water is used wisely, that we have adequate
resources to recharge low-flow rivers, and so on. The bit that
concerns me is to try to introduce elements that ensure that,
when judgements are taken about abstraction, the reinforcement
of competition is an important part of the picture, as well as,
if you like, the command and control element, which is very clearly
there in the Bill at the moment, on environmental grounds.
58. What does that mean, exactly, Mr Fletcher?
(Mr Fletcher) At the moment, the Environment Agency
is looking, as I understand it, to regulate abstraction
59. No; when you say, very specifically, that
competition must be one of the elements, what does that mean?
(Mr Fletcher) If we break competition into three elements,
the supply, the distribution and then the retail, the first crucial
element is supply, there is already the possibility of new entrants
coming into water, with a supply which they have access to. And
one of the issues I have raised in my response to the Bill is
the possibility of giving the economic regulator the power to
ask a water company to seek a bulk supply, which could be both
environmentally and economically better than leaving the water
company, within its regional boundaries, to say, "No, I wont
take water from a new entrant, I'm going to hang onto my own water
supplies, even though they cost more, even though they're more