Examination of Witnesses (Questions 1-19)
WEDNESDAY 7 FEBRUARY 2001
MR PHILIP FLETCHER, MR MIKE SAUNDERS AND DR BILL EMERY
Chairman
1. This afternoon we will be taking evidence on the Comptroller and Auditor General's Report on the Office of Water Services: Leakage and Water Efficiency. We welcome Mr Philip Fletcher, the Director General of Water Services since August of last year. Your first appearance before us, Mr Fletcher?
(Mr Fletcher) The first in this seat. I have been in Dr Emery's seat a long time ago.
2. You are at least familiar with the method. Welcome to you. Would you care to introduce your colleagues before we start?
(Mr Fletcher) Thank you, Chairman. On my left, Dr Bill Emery, Director of Costs and Performance and Chief Engineer, on my right, Mr Michael Saunders, Consumer Affairs and Tariffs.
3. I normally try and give you a steer on each question about where we are talking about in the Report. I want to talk about Figure 1 on Page 3 and also paragraph 2.13. Figure 1 shows that leakage has fallen by about a third since 1995 and according to paragraph 2.13 total leakage in 1999-2000 was still 21 per cent of the total amount of water put into the supply. How can it be right for so much water to be wasted and what do you consider would be an acceptable level?
(Mr Fletcher) Quite a lot of progress has been made from a very unsatisfactory position just before and just over the drought in the mid-1990s. We are in no way complacent about where we are now or where we need to be but, as you would expect, the work that was done initially made the biggest gains because that was when we had the most headroom to make up. From now on it is a matter of working very hard to get fairly small gains. Figure 1, which you have drawn attention to, shows where we aim to get to more or less by 2002-03 which represents the five-year period that was established when the Deputy Prime Minister published his ten points which both the Regulators and the water industry signed up to. On the second part of your question, 21 per cent, that is still an awful lot of water. We are never going to get anywhere near nothing. We are talking about 300,000 kilometres of pipes, a lot of them of course not in the water industry's ownership but in the ownership of individual householders and other customers. We are talking about a great many connections. All of those have the potential to leak. It would not be efficient to look for nil or anything like nil leakage. That is why we have adopted this concept of the economic level which we aim to get to by 2002-03.
4. I simply asked you what you thought was an acceptable level.
(Mr Fletcher) To start with, the economic level is never at a fixed point but always something from which you can move further as the technology and your understanding improves.
5. What is that number in that case? On here we have in Figure 1 what looks like 3 million cubic metres a day by 2002. Do you think given the current technology that that is an acceptable level?
(Mr Fletcher) I do not want to sound complacent. No, we can do better than that, but not a lot better without starting to impose costs.
6. I am pressing you, Mr Fletcher, because you did not give a very clear answer to the Environmental Audit Committee to the exact same question. I would like to get a clear answer on what you consider to be an acceptable level given today's technology and today's structure of the industry?
(Mr Fletcher) Just under 20 per cent of water into supply would be an acceptable level.
7. Between 19 and 20?
(Mr Fletcher) Yes.
8. Thank you, that is helpful. I see from paragraphs 2.59 and 2.60 that OFWAT classify a number of companies as having both high or medium leakage and less than adequate water resource position. Does that mean that these companies have not done enough to tackle leakage and, if so, what are you doing to safeguard the customers concerned?
(Mr Fletcher) There are one or two companies that stand out as both being at risk on security of supply and as yet in an unsatisfactory position on their leakage; Thames is the most obvious. There is a chart—I do not know if you want me to refer to it—on page 41 of the other document we drew attention to, that is the OFWAT Report in part of Appendix 4. You will see at the bottom of that page there is a little matrix which draws attention to those companies which have both a tight supply position and high leakage. You will see that Thames is right out on its own in the top left-hand corner. The companies which are in italics are those that have done a robust appraisal for leakage purposes. The sorts of companies that we have been particularly focussing attention on are both those in non-italicised type and at the top of the page.
9. The question was have they done enough to tackle leakage?
(Mr Fletcher) No is the answer. If I could take one or two of those examples. Thames may take a while so perhaps I will say briefly that with Thames we have sought improvements from the company whose supply position does not look entirely secure after the next two years or so unless they get on with the necessary work. They are intending to get on with necessary work. They have a lot to do. They have a lot to do also in establishing clearly where they are in terms of leakage. If we accept, for the purpose of debate, that Central London is particularly difficult in dealing with leakage for reasons I can go into, nonetheless they have a lot to do and they would accept that some of the work that is needed they have only just got into and they need to do more. If we look at South East Water, which is also in that list, South East got into rather a muddle over its figures two or three years ago, took part in a joint investigation with OFWAT, as a consequence of which, having firmly established exactly where they were in terms of leakage, they had a great deal of room to make up, and they are on course to do so by the key date of 2002-03.
10. It is true to say then that Thames has not done enough yet and that fact puts to some extent at risk their customers because there is a tight supply process?
(Mr Fletcher) There is no risk to customers at present. Thames has not even had a hose pipe ban for ten years or so, nor is it likely with what has been happening outside that there would be any problem with the year we are in and it will be most improbable in 2002. But work to improve supply and work to improve leakage is a matter of years, therefore it is something to be got on with now.
11. Paragraph 2.15 is my next port of call, and that describes how water companies estimate their leakage and states that there is uncertainty about the total amount of leakage. I must say when I looked at it I thought they were pretty rough and ready, both methods. In view of these uncertainties, what reliance can OFWAT place on the leakage figures reported by water companies, especially when companies only just achieve your targets?
(Mr Fletcher) The reliance we need to place is on how the company overall is tackling its approach to leakage issues, which includes not simply leakage but also the work which is shown in the NAO report in the figure at the bottom of page 19, methods for estimating leakage. One of the main problems with leakage figures is that to get to them you have to work through another unknown which is the unmeasured consumption with 80 per cent of household customers not on meters. So you have to allow for that, and a number of other things; the residual is your leakage. To have confidence in the companies we need to be sure that they have worked their way through all those elements and we are looking to give them help through appropriate studies to carry out the estimates in the appropriate way.
12. The simple fact of the matter is the minimum night flow method is a pretty rough and ready method?
(Mr Fletcher) That is only to be used, we advise, as a check on the total integrated flow method, which might be called the top down method, with minimum night flow as a check which would come up with roughly the right figure. Sometimes night flow is a very poor indicator. Central London, the West End, has its peak at two or three o'clock in the morning.
13. What a surprise. I will not ask what they are doing. Let me move on. Paragraph 2.51 in particular and 2.56. Since privatisation OFWAT's approach to setting leakage targets has, according to paragraph 2.51, emphasised the importance of companies reaching their economic level of leakage, the level at which they minimise the costs involved. But paragraph 2.56 shows that for 2001-02, 12 years after privatisation, only six out of 24 companies are expected to reach this level. Why have the companies not acted more quickly to do something that I would have thought you believe to be in their own self-interest?
(Mr Fletcher) Six have got there already, Chairman, and they need to work hard to maintain that position. We are looking to the rest to have achieved their economic level by the target date of 2002-03. We thought it right there should be a five year period for getting there because the sort of work which needs to be done needs to take a bit of time. For example, you need to put in place the district metered areas which are the means of identifying leakage in an area of one to 2,000 properties, roughly. Then you will need further technology to pinpoint your leaks and then, of course, you need your means of actually solving the problem. Now working through, understanding the data that is coming through, most of which for these companies is new data, needs to be thoroughly explored, then they can really concentrate on it. That is why we have had this glide path, more or less a straight line on the graph you drew attention to earlier, to take them to the right point by 2002-03.
14. How long is it since privatisation now?
(Mr Fletcher) 1989, eleven years.
15. Effectively 18 out of 24 still have not done the task?
(Mr Fletcher) I think you can make it look worse than that, Chairman, by saying over the first five or six years of that period leakage did not get the concentrated attention it deserved.
16. Right.
(Mr Fletcher) That was true of the companies certainly but I would accept it is something that OFWAT did not give as high a priority as, in the light of the drought, we should have done up to that point. So, it was actually getting worse up to that point. The progress has been since the drought, since the wake up call that gave, reinforced by the Deputy Prime Minister's ten point plan and the progress that has been made since.
17. Essentially in the last five years?
(Mr Fletcher) Yes.
18. It is not rocket science, is it?
(Mr Fletcher) No, though the technology is improving all the time and that is why the economic level is never a fixed point. The technology becoming cheaper, becoming better, will always enable you to ratchet down.
19. Others, I am sure, will come back on that. Let me press on. Paragraphs 2.37 and 2.41 show that OFWAT do not know how much companies have spent on reducing leakage or what financial benefits have resulted, while paragraph 2.64 refers to wide variations in company estimates of the long run marginal costs of supplying water. Without reliable information how can you ensure that leakage is reduced sufficiently without water companies incurring excessive costs, if you are focussing on the economic level?
(Mr Fletcher) Yes. The cost of leakage to a degree is a piece of string. They clearly need to do work, for example water is bubbling up through the road. Even if they have a completely secure supply in position they would need to do something. They could perhaps pick and choose a bit when they did it. The costs, therefore, vary considerably from company to company and it is entirely natural that they should. The NAO report uses Welsh estimates to multiply up for the country as a whole, I do not think the NAO puts huge weight on that, and nor would we, but it helps to give a broad order of magnitude. I do not think by trying to fine tune down just what companies spend on leakage we will actually get them focussed on the most important thing which is, first of all, the security of their supply and, secondly, within that equation getting the leakage targets within it.
