Examination of Witnesses (Questions 40-59)
WEDNESDAY 7 FEBRUARY 2001
MR PHILIP FLETCHER, MR MIKE SAUNDERS AND DR BILL EMERY
40. I see the advice you got was from Yorkshire Water. I live in the North East of England and I seem to remember watching the North East News every night for about a month about the performance of Yorkshire Water, I would have thought they were the last ones in the world to ask for information on this because people in Yorkshire were just glad to get water full stop. They could not care less about watering their garden, because they knew they would not get water to drink. I hardly think Yorkshire Water should be the company that should give you the information.
(Mr Fletcher) Those who have tripped up and got it wrong are often the best people in learning the lessons quickly and realising that they need to move on. Just in case there is a misunderstanding, the absolute requirement is that domestic customers should be able to turn the tap on and get safe water at an acceptable quality at the right pressure.
41. Right.
(Mr Fletcher) That is the first thing that has to be safeguarded. No one in ten year event there; that is about hose pipe bans.
42. If there was no 21 per cent leakage then that particular philosophy of OFWAT would be acceptable. When there is 21 per cent leakage I do not think it is an acceptable attitude to take because the wastage of water, in fact, sometimes means people cannot turn the tap on and get the water they want, whether it be drinking water or for washing the car.
(Mr Fletcher) Some of that will be because of a burst that has actually happened and for a short period, normally no more than an hour or two, they certainly lose pressure, they may even have their supply off. Obviously it is part of companies' job to ensure that is cut down. We have standards, we have compensation payments, in place to make sure that hardly ever happens, an incentive which would be met by the shareholder to ensure it hardly ever happens. The investment in dealing with the balance of supply and demand, of which leakage control is a part, that comes back to the overall programme, in which, since their prices are controlled, I need to take a close interest and I need to reflect on what Government is requiring the companies to do before setting the prices.
43. Okay. We will move on. When I read the report it seemed quite obvious to me that in reality you actually did not know what the consumption of water was. I think the Chairman asked you that. Therefore, as you did not know what the consumption of the water was, you did not know what the leakage would be. It seemed clear also from the report that the water companies could fiddle the figures to their advantage. I read this report over the weekend and then we all got the same letter that Mr Leigh has referred to. The point I was making there seems to be being made exactly by Mr Coates himself when he quotes Thames Water as an example. He says "They are in denial about the scale of leakage and are not prepared to designate a senior champion to investigate this. They massage their leakage figures so that the figures show a year on year improvement". Then he goes on to say: "The pipes in London are very old—over 100 years old in most places—but the clay hides or absorbs some of the leakage causing less environmental concerns. Other water companies have not replaced a significant chunk of their old cast-iron mains. Thames Water has replaced none." Is that accurate? If it is accurate, it seems to bear out what I was reading from the report anyway without receiving Mr Coates' letter.
(Mr Fletcher) Could I take the first part and then I will seek Dr Emery's help for the second part. The first bit was why do we not know what consumption is and the answer is because we do not have everybody metered. The vast majority of customers are still on rateable value. I accept that as a social policy decision taken by Parliament, taken by the Government and approved by Parliament but it does mean that it is very difficult to get a real handle on all elements. We are talking about uncertain quantities on both sides of the equation. We are working on it. We have done studies with the industry. We have got best practice identified. We have disseminated that to all the companies. We are looking to them to observe it. Now if I can turn to Dr Emery on how far companies, specifically looking at Thames, are actually forward in replacing their cast iron pipes, which are certainly not always the worst pipes, sometimes pipes go when they are quite modern.
(Dr Emery) The companies have been improving their service on the overall system and that is how we measure the actual serviceability of the network. In those circumstances Thames are improving the service so they have not been replacing the network as an objective, they have been carrying out considerable work on distribution mains to deal with quality problems but not particularly for age or for condition purposes. At the moment they are carrying out enough to continue to improve and stabilise the service provided by the system.
44. I will take that with a pinch of salt. Never mind.
(Mr Fletcher) Very bad for the cast iron pipes.
45. In London to get a drink of water out of the tap, it is undrinkable compared with Northumbrian water in the North East of England. I have to buy this stuff as well. Never mind. The big problem is the non domestic water is the biggest consumption of water and yet 50 per cent are non metered customers, are they not, am I right there?
(Mr Fletcher) 80 per cent of the domestic customers are unmetered. It has been going up quite fast.
46. You could, if you wanted to, insist that the water companies do an exercise randomly, could you not, to find out how much water is being used? You could put randomly into houses all over the country meters, not charge the people for doing it and then you would get an accurate measure of how much water is being used. Why has that never been done?
(Mr Fletcher) Companies are doing experiments of that sort, not meters against which they charge but they are trying to take control areas and then test areas to see what difference it makes to have meters put in. So there is some work going on on that which we are looking, providing we come up with good practice from it, to disseminate more widely.
47. I want to mention this now because sometimes I run out of time. Keeping to water metering, water metering is quite a controversial topic and it draws up some difficult social issues as well, forcing people to use meters, might force people to use less water, etcetera, etcetera. Clearly though I think that water meters are the answer. Have you come up with any sort of solution how you can ensure that even though people have water meters in their homes nobody would be disadvantaged socially by having such a thing?
(Mr Fletcher) We have now vulnerable customer regulations in place, which Government is due to review this year, designed particularly to help those customers who tend to be large users and are on meters but are also on social benefit of one sort or another to try and ensure that they are not disadvantaged, above all that they are not put in a position where they are afraid of turning on the tap because of the cost. It is only 0.07 pence a litre for this as opposed to whatever this costs[1], but even so.
48. What you are actually saying, if I get you right, is there will be systems put in place—
(Mr Fletcher) There are already.
49.—There are already systems put in place where people who have meters, who might be from disadvantaged backgrounds, who might be frightened to use water because there is a meter in the house, measures to help them?
(Mr Fletcher) There are already regulations in place which are built in to the pricing system and they are subject to review this year in the light of the first two years or so experience of their operation.
50. Why is it necessary to give financial incentives to water companies to reduce their leakages to economic levels, as we were told in paragraph 2.38? Why is it not possible to instruct water companies that you have got to do something and penalise them if they do not? Why is it the carrot rather than the stick approach?
(Mr Fletcher) It is both. Just to get to the economic level of leakage has the advantage of meaning that this is in the company's own interest, the interest of its shareholders, as well as the interests of its customers. Where it is a question of having to speed up or where it is a question of them having, if you like, over-achieved and then needing to maintain that over-achievement, then there may be issues for pricing when the periodic review comes in every five years. I agree with the point you are making; it should be carrot and stick, and it is.
51. The present system allows water companies to decide themselves whether it is financially worthwhile to co-operate with you?
(Mr Fletcher) It is very much not that.
52. That is the impression I got reading the Report.
(Mr Fletcher) They have been set targets. The bit of working with the companies is accepting that it is in their interests to get to the economic level. When they have got a robust system of appraisal, I accept that they set the target so long as I can then see it is moving in the right direction.
53. If a company has enough water it is not in their interests financially to do anything about it?
(Mr Fletcher) If we are looking at the North East, which has in Northumbrian a very large source of water, their economic level of leakage will be very different to that of companies in the South East where water scarcity is a real issue.
54. You could say therefore that it is not cost-effective for a company to do that?
(Mr Fletcher) The beauty of the economic level of leakage is that it automatically compensates for the variation between the availability of supply and the cost of dealing with leakage. It would be less worthwhile for Northumbrian to do it than for Thames.
55. Make sure Thames do it!
(Mr Fletcher) It is very important that Thames do it.
Mr Steinberg: And improve the quality of water so we do not have to buy bottled water. Thank you.
Chairman: Mr David Rendel?
Mr Rendel
56. Mr Fletcher, is Thames the worst managed company?
(Mr Fletcher) No, by no means. We have focussed this afternoon on one particular area where the company has not been, until very recently, really getting its act together as it should. In terms of the overall management of the company a significant German company has been prepared to pay what the markets consider a significant premium in order to get hold of a company that is internationally recognised as being good at its job.
57. In other words, it is making good profits. That does not necessarily mean to say it is well-managed in terms of leakage. Are you saying as far as leakage is concerned it does about as badly as any other company, if not worse?
(Mr Fletcher) I am saying both because it is in a difficult area to manage and it has been slow in getting technology in place to deal with it that it has more ground to make up than any other company.
58. That is perhaps precisely why it is a valuable company for somebody else to take over?
(Mr Fletcher) It is not for me to speak for Thames. I draw attention to that as an objective other issue. The point on profits: unless a company makes profits against the price limits that the Regulator sets, it will not be able to invest and carry out what it needs to do hence the incentive-based system which I think has worked quite well.
59. Do leaks get worse if you do not do anything about them?
(Mr Fletcher) It depends on the leak and its character. Broadly over time, yes.
1 Note by witness: The witness raised the litre bottle of water from the witness table. Back
