Examination of Witnesses (Questions 100-119)
WEDNESDAY 7 FEBRUARY 2001
MR PHILIP FLETCHER, MR MIKE SAUNDERS AND DR BILL EMERY
100. My question is we know from 2.37 they do not know how much is being spent on leakage, and we know there is uncertainty about the total amount of leakage. In fact, we might as well be holding water in our hands trying to make this calculation.
(Mr Fletcher) I think we know more than that. We do not know the total costs. The companies know their own direct costs, they are expected to, and will know what they are putting in to particular schemes so they will be able to reach a view on the balance between new investment and reducing leakage and water efficiency measures for their particular company.
101. Why do they not tell you because you do not know, it says, how much has been spent on leakage?
(Mr Fletcher) We do not know a total global position.
(Dr Emery) In our terms, we are looking at the unit costs of sorting out leakage and the economic level of leakage assessment which we ask companies to do at least every two years. That provides the balance between the unit costs of managing leakage down or the incremental costs of providing new water from the different sources. The costs are in that format so that we get the costs in the economic level of leakage submissions as to what it costs the company to maintain that particular position on where it is at the present time. What we do not do is we do not disaggregate the actual total operating costs of the company into how they allocate those to leakage because, in fact, we need the information on the incremental costs on leakage control for the economic level leakage assessment which they have to do at least every two years.
102. Okay. If I can just end on the information on household water efficiency. There are two points which come out of the report, one from your own report, business customers are slow to take up water efficiency measures. What is your however many point plan to tackle that?
(Mr Fletcher) It is called competition for the big users where, although so far direct competition has not had a significant effect, the potential for competition is making the water companies go to their big users and pay a lot more court to them. Paying court often takes the effect of providing studies for them on how they can get their water bills down. The water bill for a company, except in certain industries, we can all think of them like brewing, tends to be a relatively low proportion of the overall costs and, therefore, not the first priority for the management of the company. That is not universally true. We cannot expect as much attention as, for example, electricity or energy costs usually receive. What we can do is try and create an environment in which it will be in the water company's interest and the interests of the non domestic user to focus their attention to at least a degree on the water bill and how to make it lower.
103. Has that been done in the House of Commons, to your knowledge?
(Mr Fletcher) I think, and I could be wrong on this, that the Palace of Westminster would be embraced within the Government's new central government wide initiative, and I know the Palace of Westminster does not necessarily sit within that, to look at water use and to seek to get water bills down, a campaign which I fully encourage and which the Central Procurement Agency[2], which I have not named correctly, is leading on.
104. You say in your own report, page 23 "companies should maintain a long term programme of education to sustain customer awareness of the need for sensible water use". Yet table 9 on page 31 does not make very edifying reading. As far as I can see there are five areas set up by companies who are giving information that needs improvement. You have one of these tables "Good, acceptable and needs improvement", positive feedback there. The number who are good is unfortunately eight, is it? Why have you not ensured that everyone is up to the standards since they have got examples from all over the country of the good, including, I have to say, Thames Water?
(Mr Fletcher) I think if every company had a star the Public Accounts Committee would rightly accuse me of complacency and of failing to push the companies to do better.
105. Do not let that be a major worry.
(Mr Fletcher) Right. This is our view of the position of the companies. The ones that worry me are the downward pointing triangles where clearly they need improvement. In all the cases where we see a downward pointing triangle we are in some form of dialogue with the company on what we think they could be doing to make matters better.
106. Next time you come before us will those triangles be converted into stars?
(Mr Fletcher) I would hope that by the time we see the 2001-02 picture—and the companies will be listening to me—provided that we, OFWAT, do not ratchet up our standard too much, we shall see a lot more stars.
Mr Campbell
107. On that point, and I was struck by the number of stars, I do not think you necessarily get away with any criticism this afternoon. You said, Mr Fletcher, earlier if I remember that leakage is getting better and the NAO report confirms that. In the great scheme of things how necessary and important in your view is controlling leakage?
(Mr Fletcher) It is important as part of the overall picture. Perhaps I could just make the point because it has not come up (and it is pointed out in the NAO Report) that English and Welsh companies do compare well with the international picture, which is some reassurance. There is always a danger that we look too much domestically and we in OFWAT try and look internationally as well. I am encouraged by that. The whole concept of leakage is important. We saw it was important in 1995, we see it is important still, both in its own right as an essential part of the water company's service to the country and its own customers, and absolutely key to maintain the demand/supply balance without unnecessary new investment that might be environmentally damaging.
108. Some companies are owned by international companies—
(Mr Fletcher)—They are still regulated in this country.
109.—Which might account for the higher standards which are brought to bear. If the importance given to leakage is such, to go back to what Mr Griffiths was saying earlier, why is it eleven years on that it is still a major problem? In 1995 there was an estimated 30 per cent leakage and in 2001 there was 21 per cent. It is still a very high figure, is it not?
(Mr Fletcher) It is still a high figure. If the concept of economic levels of leakage is accepted and if the figure, however tentatively I gave the Chairman at the start, is accepted as at least a stab, we are not going to get below 19 or 20 per cent without customers having to pay significantly because it is below the economic level. On that basis, I accept it is a long time since 1989. I have made the point that the really serious work started almost simultaneously with the 1995 drought, so the achievement is primarily within the last five or six years and we are now close to the economic level of leakage.
110. I want to come on to the economic level of leakage in a moment. I have to say in passing that I found that extremely misleading because it overstates the progress that has actually been made because, unless I have misread it, it rather looks as though more progress has been made than is actually the case. You talked about the charges that customers would bear but is it not the case that customers have to bear the charge anyway? The Report talks about the daily rate of leakage being half the rate of the flow of the River Thames. After six years in which there was a improvement it is still a third of the flow rate of the River Thames. That is not really acceptable, is it?
(Mr Fletcher) If this were the nuclear industry or petro-chemicals it would not be acceptable. There the investment in achieving an absolute sealing of the infrastructure is fully justified, virtually however expensive it may be. With water we are talking about a very different industry and a very different infrastructure in which leakage is not simply something to be tolerated whatever level it rises to—I absolutely agree with that—but in which there will continue to be a significant amount of leakage given the various factors that have been put to me this afternoon, the infrastructure, the number of connections on it, the age of the infrastructure, the character of the soil and ground movement, and all the other factors that have a bearing on leakage.
111. You implied earlier that one of the factors against faster progress on this matter was what the customer would have to pay, but as a customer of Thames Water—and I am going to use word "gallons", I know it is old-fashioned and I hope I will not be imprisoned but I am going to use it anyway—more than one in five gallons that comes into Thames Water at one end is lost before it gets out the other end, so as a customer I am already paying for them.
(Mr Fletcher) You are paying and I am paying at the point where Thames has to replace its sources of supply. You are also paying of course an element for the cost of treated water lost through leakage. Against that needs to be set the extra cost involved in pushing down leakage control further than it is at the moment which would directly bite into your and my bills at the point where Thames was pushed below the economic level of leakage. At the moment Thames have not got the robust analysis. They have not demonstrated to my satisfaction what the appropriate economic level of leakage is, therefore they are subject to what we call the "pragmatic targets", which are OFWAT's best stab of what they should be doing, and to quarterly reports they need to send into me and to a series of steps that I have required Thames to put in place.
112. Let me ask you about the economic level then because the assumption, if I understand it correctly, is that it is in the economic interest of the companies to reduce leaks but that is not always the case, is it?
(Mr Fletcher) Not to nothing, but to the economic level.
113. But the assumption is that the reduction of leakage and the level of investment in leakage will be in the interest of the water companies; that is not necessarily the case now, is it?
(Mr Fletcher) It is in their interest, especially if they are in the South East area, and therefore the water scarce areas, to put some sophisticated technology in place to monitor where the leaks are, pinpoint where they are found, and repair them quickly.
114. It could be a lot cheaper. Perhaps this is not going to be an example that proves what I am going to say, but in some areas it is a lot cheaper not to worry too much about leakage but to go off and find another source of water.
(Mr Fletcher) There will always be this balance. Indeed, I have probably rather boringly gone on about it this afternoon. They need to look at both together. If it is the cost of developing a whole new reservoir—to take the extreme case—it is worth an awful lot of leakage expenditure to try and avoid that.
115. But if it is emptying a river out?
(Mr Fletcher) If it is emptying a river out that requires the consent of the Environment Agency which is there as the environmental regulator to ensure on behalf of the public weal that we do not lose water unnecessarily when companies should be working on leakage. If it is developing a ground water source, again, it is the Environment Agency's job to ensure that the abstraction is acceptable in environmental terms.
116. If after a period of prolonged not just heavy rain but indeed the flooding that we have just endured, and we do not know whether we are going to have to endure that again—does that not affect the long-term plan here? In 1995 the planning process was pushed. We have made all of this progress in tackling leakage over the last six years, and let's not under-estimate that, but people would be less convinced now of the argument to do something about leakage, and I am not just talking about customers but companies if they look out into their garden and see it under three feet of water.
(Mr Fletcher) One of the lessons which everybody in the water industry learnt in the mid-1990s was do not assume that what we have got at the moment will endure very much longer, and certainly take no comfort at all from the very heavy rainfall, from a water resource point of view. Enjoy it while it lasts, do not be complacent about it, recognise that it may be part of a pattern of more extreme changes in our weather which could include longer drought periods and make our plans accordingly. I am sure I can speak for the Environment Agency and OFWAT in saying there should be no complacency, we need to work through on this and not assume what we have seen this last autumn will be repeated.
117. Even in an average year, if there is such a thing as an average year, there is an issue about reducing leaks only to a certain point. Dr Emery said earlier that the companies tend to go for the biggest leaks first and you would encourage that. But what about the smaller leaks? Surely if you are reducing leakage it is important and therefore it should be pursued year-on-year
(Mr Fletcher) If I take an extreme example of a little dribble coming out of a connection which is in the pavement outside your house which will never turn into much more than a little dribble and is probably not worth a lot of effort to repair, the cost of sending along teams, holding up traffic in the road, causing pollution and congestion, perhaps denying the road side tree the water on which it depends for life—I said it was an extreme example—there is the spectrum through to the big main going which clearly has to be done at once and which good leakage technology will help to anticipate, so that you can see it when it is a little trickle and before it turns into a major burst causing all sorts of disruption and a great deal of cost for the company.
118. I am interested in your reference, and I am sure it is an accurate one, to the technology and the way that things are changing.
(Mr Fletcher) Yes.
119. As I recall, the Victorians did not have particularly sophisticated technology but they put in place probably the most effective and advanced system of getting water and sewage moving since the Romans. It comes down to investment at this stage. It comes down to how much money goes in rather than the technology.
(Mr Fletcher) It is both. The economic level of leakage will come down because the technology gets cheaper and, therefore, it is worth putting it in more places and getting a better grip on leakage and control. Obviously you are right. If I can just pay tribute in this particular building to Bazalgette who was responsible for dealing with the Great Stink in, I think, 1855 which sent both Houses out of the building.
2 Note by Witness: This is the Watermark project managed by the Buying Agency (from 1 April 2001, OGC buying solutions), an executive agency of the Office of Government Commerce. I understand that the House Authorities have not yet asked to participate in the project. See also Appendix 1, page 000 (PAC 145). Back
