Examination of Witnesses (Questions 80-99)
WEDNESDAY 7 FEBRUARY 2001
MR PHILIP FLETCHER, MR MIKE SAUNDERS AND DR BILL EMERY
80. What is the environmental cost of a river running dry?
(Mr Fletcher) This is where it gets difficult.
81. Indeed.
(Mr Fletcher) You may recall the famous case of Wing Church in Winchurch the initial third London airport inquiry which was valued at its insurance value rather than as an important part of our heritage. The environmental costs tend to bring up just the same difficulty of putting a figure on it. It is crucially important. It is part of a long running debate, and a vital one, between the Environment Agency and OFWAT, that we are able, not in a crude arbitrary penny pinching way, to put figures in place so that we can see costs and benefits and weigh them properly. Low flow is an example from the last periodic review where OFWAT said that some were expensive schemes. We invited the Minister to think again on whether they should be included in the programmes because they did look so expensive for customers and after review we hope and believe that some of them will come back yielding 90 per cent of the environmental gains for a much lesser sum. Now that is the sort of example of where having a handle on cost rather than just saying environmental good is an absolute and must never be tested is very important.
82. One final very quick question. Why buy a large cistern and then put a cistern device in it? Why not buy a smaller cistern?
(Mr Fletcher) Absolutely, you are right, and from this summer the flush comes down to about six litres a flush. We are looking back to a time when nine litres or seven litres was the norm and where it does make sense to put one of these devices in your cistern and reduce the amount going through, as long as you do not get into the problems of what are called double flush, which wastes a lot more water.
Mr Griffiths
83. In 1990 OFWAT requested companies to report their total estimated leakage and to forecast it for the future years and to outline their intentions for the leakage control. Yet page 19 of the NAO report, paragraph 2.15, says that there is uncertainty about the total amount of leakage. So 12 years later we do not seem to have made dramatic progress and there is uncertainty about the amount of leakage. What has been done in 12 years to bring some certainty into it?
(Mr Fletcher) First of all, we clearly started in a position after privatisation where the data was very poor, where the technology was very limited, and for three to four years the industry and the Regulator were not focussing on this issue as being as important as it clearly should have been and as it became in the period of drought, the wake-up call.
84. So you are making a direct criticism of the Regulator at that time?
(Mr Fletcher) I am talking with the advantage of hindsight. I am not criticising my predecessors. I am saying there are so many things you attach priority to at a given moment. There was a great deal to be done following privatisation. Leakage was not (with hindsight) seen as a very high priority, by the industry first of all, and by the Regulator monitoring it. We have all learned from that.
85. I think we know the industry's reputation which has never been of high standing, but we do look to you as the public's watch dog. I repeat my question; why 12 years later is there uncertainty about the total amount of leakage?
(Mr Fletcher) That comes back to my answers around the algorithm, the fact that we have got two uncertainties, the big uncertainty around consumption alongside the big uncertainty around leakage which is getting better. We are getting on top of it.
86. I am going to list a few more uncertainties from the Report that you have agreed. On Page 25, Paragraph 2.37 "OFWAT do not know how much has been spent on leakage." That is an astonishing statement and admission, is it not?
(Mr Fletcher) No, the issue of getting data from the industry is what is going to be essential or useful in regulating that industry, and I think I should not be asking for stuff that is merely interesting. If I ask for what it costs to measure leakage I would have to give very, very clear instructions to the companies on what they include because there are some costs there that they might or might not put into the equation. And at the end of it all I do not know that OFWAT would be very much better off in terms of the knowledge it needs to regulate the industry properly.
87. If you do not know how much any one company has spent on leakage how do you know whether you are being over-critical of one company which you may expect not to achieve as much because of local circumstances as against a company that will have spent less but does not appear to have such a problem?
(Mr Fletcher) Because what I primarily want to focus on is the outcomes and outputs, not the inputs, and what I want to see is a company that is fully up with the latest technology, that has got district metered areas in place, that is then pursuing that down to the further developments in technology that are happening so that they can pinpoint the leak by driving along the road rather than sending operatives out with stethoscopes or listening sticks in their hand tapping the road.
88. 2.41 on page 26, "OFWAT do not know the financial benefits of reducing leakage". Take a guess.
(Mr Fletcher) This is what we need to work on as part of the overall picture for identifying the balance of supply and demand. Leakage is a factor, an important one, in that overall balance. Perhaps I might also accept that leakage is important partly because of the public's perception of it. It is very important that the public should see their company taking leakage very seriously. If the company is not taking leakage seriously they, the customers, will not themselves see any point in trying to save water. I accept it has got that validity outside the business of getting the balance between the demand for water and the supply. We also have to look at the ease of bringing into account new sources of supply, both the costs of doing so and the environmental issues raised in doing so, and then look at the whole picture.
89. I would not imagine that is so difficult to estimate. If there was a new reservoir—and you pointed out the cost of that never mind the likely environmental outcry—therefore, I am certainly concerned that there has not been an apparent proper cost-benefit analysis of the financial benefits of reducing leakage.
(Mr Fletcher) I think you would only get that cost benefit analysis as part of a wider picture. I accept that leakage needs to be put into that picture and the companies are working and we are working with the industry and with the Environment Agency to seek to achieve a better understanding across the board and that is what this tri-partite study which is producing results this summer is primarily aimed at.
90. How many other studies have you got on the go at the moment?
(Mr Fletcher) On all aspects of water business? This is the main one in this particular field.
91. And in other areas?
(Mr Fletcher) In other areas things like bad debt—let's take that as one example where with the ending of the possibility of disconnections, we need to know how well companies are doing in monitoring their bad debt.
92. It strikes me coming from the Report and from your own report that there are studies being conducted now that OFWAT should have been conducting years ago, a decade ago.
(Mr Fletcher) I would accept that when there is an important issue it would always have been better to do it earlier. All I would say is better it is being done now (which it is) than not being done at all.
93. It might be. I do not think it needed too much hindsight because there was plenty of criticism over the decade that there were likely to be water shortages, as there were three years ago, and problems arising from leakage. Page 28 paragraph 2.49 "OFWAT and the water companies disagree on the extent by which leakage should be reduced". The question that begs is who is in charge of this, you or the companies?
(Mr Fletcher) This is some of the companies and it is clear from the NAO Report that, first of all, all of them accept the concept of the economic level. Some believe that the OFWAT targets which were imposed on companies, where we did not believe they had a robust analysis of their position and therefore we needed to come in and set the targets, over-achieved and the answer to that is in their own hands; if their analysis is good enough we accept their targets because they can prove to us what the real economic level of leakage of their area is.
94. Again I see it as a problem that 12 years down the road there is some dispute between the Regulator and companies over the extent to which leakage should be reduced when you have 24 companies to measure and obviously you reach agreement with some and you are in a better position to question the others as to why they do not fall in with the formula that I would have thought you needed in order to regulate them efficiently. "There is also uncertainty"—Page 31 paragraph 2.66—"as to how the cost and benefits to the environment of leakage control should be calculated." It is five years at least since this became higher on the political agenda, so are you satisfied that in those five years there should still now be this uncertainty, to use the words you have agreed with the Comptroller and Auditor General?
(Mr Fletcher) And I accept again that it would have been better to do the work earlier. This is the tripartite study which is being done now. It is a joint effort, and it needs to be the Environment Agency, OFWAT and the Department of the Environment, Transport and the Regions.
95. Page 36, "Information on the cost effectiveness of water efficiency action is incomplete". If you cannot put the case for it, who can?
(Mr Fletcher) I agree with you that it is very important that we put the case, so long as it is always understood that the statutory duty lies on the water company. There should be no question. We would certainly not permit it or endorse it for the companies to say, "We are waiting for OFWAT." It is their job to get on with it. It is our job to look at what they are doing and produce examples of best practice and try and see to it that best practice is then applied across the industry. The report you have there is one of our main instruments for trying to achieve that.
96. I do not think you would in terms of your budget nor would my Chief Constable argue to me that it is every citizen's duty to obey the law and that it is not really up to him to arrest and investigate things; you are there to act.
(Mr Fletcher) I absolutely accept that, but as every Chief Constable—and I come from a past job in the Police—would also say, "We will only police by consent." In a sense, I am not looking for consent. I am saying it is the companies' job to do it and I am there to ensure they are doing it.
97. If we look at company estimates on the long run marginal cost of leakage control, which is table 2.66 of the NAO report, page 32, these show that the long run marginal cost that they estimate varies from 12 pence a cubic metre—I think it is about 12 pence—to £1.35. Why is there such a great discrepancy?
(Mr Fletcher) This is partly about the cost of bringing forward future capital investment. That is a legitimate reason for a big variation in the long run marginal costs. It will be much higher for some than for others. Others are sitting in a position where they have got all the water they need for the foreseeable future. Having said that, there may well be variations in practice that we want to get at. We look to companies to present their long run marginal cost estimates in a way which enables us to see that they are using robust approaches. We look to them to separate out their resource costs, their treatment costs and their bulk transport and local distribution costs, the costs of delivering water. By looking at them, by testing them, by asking questions, by comparing them with their peers in the water industry we can get a pretty good sense of how robust it is.
98. Why has Wessex got such a high cost?
(Mr Fletcher) Because it is one of those companies which is fairly close to its margins and would need to develop new sources if it were in significant difficulty.
(Dr Emery) The Wessex numbers are related to the low flow alleviation scheme that is to sort out the Piddle and the Avon which put a very high value on the costs of water in that particular area if that scheme goes ahead. Of course that has been subject to considerable review following the Minister's decision in the autumn of 1999 to see whether or not there are cheaper solutions for their particular thing. On the basis of having to carry out what would be on the company's costs a £100 million scheme to find displaced water, that puts a very high marginal cost on water in that company which, of course, has a knock-on effect meaning that the economic level of leakage in that company would have to go down to quite low levels to make sure that they were actually tuning their system and the management of their distribution system to a level that was equivalent to the costs, making it the cheapest next alternative is to build that replacement scheme.
99. So, how do we know the ones at the bottom of the table are not accepting high levels of leakage and could not be bothered investing?
(Mr Fletcher) Well, part of their long run marginal cost calculation might be to show, crudely, that they do not need to do very much work on leakage because their position on supply is so good. In practice all of them have to work on their leakage and all of them are doing something about it.
