Examination of Witnesses (Questions 20-39)
WEDNESDAY 7 FEBRUARY 2001
MR PHILIP FLETCHER, MR MIKE SAUNDERS AND DR BILL EMERY
20. Is it not a measure of effort?
(Mr Fletcher) But it may be misspent effort and, as a regulator, I think one of the things I need to be rather conscious of is that I do not pursue every interesting question. I fully accept I might get it wrong sometimes but it is quite important that I do not look at absolutely everything in the companies wherever the data may be pursued and that I go for the data from the companies I really need to do the regulation job properly.
Chairman: Let us widen it out, I might come back later.
21. Can I just go back to this question of the 20 per cent you gave to the Chairman of the Committee. You hesitated for a moment before you answered that question. Is that an answer that you are pretty confident about? How do you think you can improve it? Are we going to be stuck with roughly 20 per cent over the next five, ten, 15 years?
(Mr Fletcher) My hesitancy is because it is never going to stand still and because we have quite a lot more work to do to come up with a figure I would be more comfortable about, and even that would be moving. The things that we need to do more work onand which we are doing work on through what is called the tripartite study with the Environment Agency and the DETRinclude the social costs and the environmental benefits and even perhaps disbenefits associated with dealing with leakage. What we have got at the moment is something which focuses very heavily on the economic end of the thing, there is more work to be done. That said, the work so far does not suggest that when we can be more sophisticated about environmental and social costs they are going to make a huge difference to the picture.
22. Why does OFWAT set their targets according to the company and not according to different zones in the UK? Surely there should be more stringent levels in areas where there is more risk of a shortage of water than areas where that risk is less?
(Mr Fletcher) We are talking, of course, about 24 companies which vary hugely in size. I accept the thrust of the question that there will be some areas, and again the most obvious one is Thames, responsible for a great swathe of the Home Counties and for London, to focus particularly on the area north of the river in London, the area south of the river, which is more typical of other conurbations, and the rest of the Home Counties which is more typical of the rest of the country if we are to get a real handle, for the company to get a real handle, on the issues it is confronting. Most of the companies are doing work to try and focus on zones and then down to district metered areas. For the purpose of target-setting one way in which we may want to move is towards clearer targets where a company is not fully on top of it yet, and that particularly means London.
23. This honest economic level of leakage you have been talking about, what is OFWAT doing to ensure that leakages will be cut so the environment will benefit even if there is not an economic demand on companies to do this?
(Mr Fletcher) This is where the study we are doing with the Environment Agency and the Department comes in. We look to get a much clearer handle on the costs which will be greater in some cases than others, a very obvious point; for example abstraction from some sources. If we take the South East abstraction where it is going to affect low-flow rivers like the Piddle, the Hampshire Avon and the Darent, that is likely to be more damaging than in the North East where Kielder Water means that Northumbrian is going to have enough water to do whatever is needed for a very long time to come. Getting the focus right geographically is an important part of the overall situation.
24. What is OFWAT doing to monitor how companies are attempting to increase consumer efficiency with the water they use? How is OFWAT encouraging the adoption of best practice?
(Mr Fletcher) We have been monitoring, advising, urging the companies. Again, it is not us alone, it is for the companies, their representative body and others to fulfil their duty brought in by the Environment Act 1995 to promote water efficiency. We monitor closely what it is they are doing. They present to us each year their plans for water efficiency. We look to those plans both to show what they are doing in numerical termsquite a lot of it is Inputsand whether what they are doing is appropriate to their particular area and for the particular time. This particular autumn and winter would not, for example, have been the moment for a water company to launch an expensive campaign on water saving.
25. A Mr Nick Coates has copied a letter to me which he sent to you dated 1 February. He cited repeated failures within Thames Water with their internal communications and the efficiency with which they answered or, more accurately, did not answer his queries. Can you tell us a bit about what you are doing to encourage coherence in the customer service departments of the companies?
(Mr Fletcher) Just a brief reference to the particular case. I have seen Mr Coates' letterand I did not know he had copied it to youI have written to him to say that I am asking the Thames Customer Service Committee, which is one of the ten committees established on privatisation to protect customer interests, specifically to follow through the points that he is making about the lack of responsiveness from Thames. The particular case turned onand I only quote it because it illustrates a general problemthe likelihood that flooding in his garden was caused not by Thames' pipes or even by Mr Coates' own pipes but by private pipes from a housing estate next door, and sorting out leakage and efficiency when you have this tangle of water company-owned and private customer-owned pipes is part of the issue. I hope that Thames will now get on with that particular case, but I do think it is quite a good example of the general drive where the customer service committees and staff, who are OFWAT employed staff, are in the lead in pursuing complaints and looking to monitor and, where necessary, seek improvements in customer service from the companies themselves.
26. Going back to this 20 per cent level, if water leakages are maintained at this leveland maybe you cannot answer this but try anywayare customers at risk of losing their supplies, having hose pipe bans, the rest?
(Mr Fletcher) Not for the next two years.
27. That was the answer you gave the Chairman and presumably you cannot give us any more information than that. How can you because it is just a crystal ball, is it not?
(Mr Fletcher) It is but a great deal of work is being done by the companies and they are being pushed in it by the Environment Agency as well as ourselves. And it is in their own interests, of course, to get properly on top of their water supply and demand strategies and when they have the right answers then that is something they can bring to me at the next periodic review if it clearly demonstrates the need to spend more money. So the position on security of supply, if we were faced with a drought going through two summers and a dry winter, one can never be absolutely confident, but we are much more confident now than we were in the mid-1990s.
28. Assuming we have weather patterns broadly comparable over the next ten years to what they have been over the previous ten-year period, you are pretty confident now that we have seen the last of these hose pipe bans?
(Mr Fletcher) We have not had one for three years now. I think we are much better placed. I am conscious of Sod's Law and if I state something here to you now, in two years' time when I very much hope to be in the same job, you will have me back and there will have been a problem.
29. I will demand your sacking, of course!
(Mr Fletcher) For which I do not want to give too many grounds. On the other hand, equally, I do want to say it is much better and a lot of work is going in. This is not something to be relaxed about and complacent about with what is falling from the sky. This is to be very conscious that the pattern we are seeing may not be one of a constant but rather one where we are going to see more extreme changes as a result of global warming with perhaps more sudden floods which we have had over the last autumn and perhaps long dry spells as well and we need to workthe "we" here includes public agencies generally as well as the companiesto deal with that.
30. I was intrigued by the answer you gave the Chairman about Central London and its particular problems. Can you say a little about that?
(Mr Fletcher) This is one very obvious example where some of the economic and social disbenefits of leakage repair come into play. We hear a lotand I too live in Londonabout utilities digging up roads and causing congestion in key sites. Sometimes that has to be Thames Water digging up the road to deal with a leak, but it is quite important that they do their digging at the right time of day or very often night in as sensible a way as they can to minimise the disruption that follows. Also in Central London in residential areas there are very few garages so when they have to dig up they have to move cars which in Birmingham, where I also live in the week, is not a problem because people tend to have garages, so I do not want to, if you like, let Thames off the hook but they do have some specifics on leaks they need to look at. They have been slow getting their district metered areas in. They are now in and they are looking to move fast to gain the knowledge to understand the data they are now receiving.
31. I thought the reason for leakage was because the pipes are old.
(Mr Fletcher) That is a factor as well. We are dealing with 19th century infrastructure and it would not be sensible to replace all of it, as the NAO Report brings out. This is a matter of usually repairing, occasionally replacing, and repair of pipes takes time.
Mr Leigh: Thank you.
Chairman: Mr Gerry Steinberg?
32. On Page 22, Paragraph 2.5 it says: "... OFWAT do not believe that customers wish to pay for companies to carry out the investment needed to ensure that they can always meet all demands for water." I am very sceptical of that view, Mr Fletcher. I find is difficult to accept, to be quite honest.
(Mr Fletcher) I am sorry, Mr Steinberg, I was slow to get your reference.
33. Paragraph 2.25, Page 22. What I am saying is I am very sceptical about what OFWAT are saying there that customers do not want companies to carry out the investment needed to ensure that they can always meet the full demand for water. Why do you come up with that sort of conclusion?
(Mr Fletcher) We are particularly talking here about things like hose pipe bans where our yardstick is the expectation that a hose pipe ban should not need to be imposed more than once in every ten years on average, given the weather patterns that we expect to look at. I think we are dealing with a sophisticated group of customers, that is the British public as a whole, who, partly through the experience of the drought, know that developing water sources is something that is not cost free, either in economic or in environmental terms, and is prepared to pay a price in terms of being careful with water, both generally88 per cent are doing something about water saving on the NAO surveyand specifically when we are in drought time.
34. My view is the British public when they turn their tap on wish to get water.
(Mr Fletcher) Absolutely.
35. Right. So on two counts I still find that difficult to accept. Why should it be the customer who pays anyway? Why should the shareholders not pay? If they buy a share in something they should expect to invest in the company that they expect to get a profit out of. Why should it always fall on the customer anyway?
(Mr Fletcher) One of my primary duties is to ensure that companies can finance their functions. This is in part because they need to carry out, as you will be aware, a huge investment programme required of them by Government policy essentially, to observe European Directives and the environmental standards required.
36. Come on. You are flannelling a bit, are you not?
(Mr Fletcher) No, honestly, I am trying not to. I am really trying not to.
37. You are eating into my time by flannelling.
(Mr Fletcher) I will try and avoid doing that.
(Mr Fletcher) Price limits are set by the regulator in the light of the capital expenditure they need to carry out. That capital expenditure is double what it was pre-privatisation. If it all came from the shareholder then we would get no investment in the companies and they would be unable to do the job and I would have fallen down on my job.
39. You have a big investment anyway.
(Mr Fletcher) There is a big investment there but it is constantly having to be increased and taken further with new borrowings, new investment, which are required of them by Government.