Examination of Witnesses (Questions 120-141)
WEDNESDAY 7 FEBRUARY 2001
MR PHILIP FLETCHER, MR MIKE SAUNDERS AND DR BILL EMERY
120. The final point really is while we are talking about economic levels, what do you say about the concern which has been touched on this afternoon that this is very much an economic and financial model here and environmental costs are not given high enough priority?
(Mr Fletcher) That is why we are doing this work with the Environment Agency. It is very important that environmental costs get put in to it. The other side of that coin is that costs need to be put on the environment so that it is properly in the equation and not treated as something that is totally beyond measurement. We have got between us a lot of work to do on that.
Mr Williams
121. Just a couple of sweeping up bits and pieces. Looking at page 35, the bottom right hand graph, there it refers to an interesting experiment that was carried out at one school where a water conservation project was established funded by North West Water and the Environment Agency. Have you found it?
(Mr Fletcher) Yes, I have.
122. It cost £2,787 but made a significant saving for the school. Now, my reading of that is that if we assume the school stayed open every day of the year, to ease arithmetic, that represents a saving of 1.4 million litres of water a year at a capital outlay, once and for all, of one sixth of a penny per litre. Would that be seen as a cost effective method of saving water from the supplier's point of view?
(Mr Fletcher) Yes, it would. Obviously there is a cost involved in actually sending people out, whether it is to a company, school, hospital. But especially in the water scarce areas I am pleased to see companies like Essex and Suffolk accepting that is a necessary and appropriate cost, in the interest both of customers and of the companies, the water companies' own long term business.
123. From a customer's point of view schools are always short of cash and they have to take it from essential services to deal with this. In that case they get pay back in one year and eight months. You held a bottle of water up and you were talking to Gerry Steinberg and you mentioned a figure of half a pence or so.
(Mr Fletcher) Less than that even, 0.07 pence a litre out of your tap, on average. Of course, your own bill may be rather higher.
124. I see. This is cost effective but if one could envisage this being done across the education system, assume this was something like an average project, would that be a worthwhile saving, the volumes are so massive we are talking about, or would it just be literally a minuscule contribution?
(Mr Fletcher) No, it is really worth doing but, of course, it is only really worth doing, first of all—this goes back, I think I was answering Mr Rendel on this point earlier on—if it is maintaining the drive once the initial focus has gone and then best of all ensuring that the lesson learnt in this one school is passed out to others. Of course it is particularly important to do it in schools.
125. You get spin offs.
(Mr Fletcher) Companies who are doing quite a lot in schools find that they make a saving at the school even better if the children in that school really understand that saving water when they are brushing their teeth or doing anything else is quite important, something they will take through into adulthood.
126. Could this conceivably be a more cost effective way of making a worthwhile saving over the year? If you got this extended as a method of dealing in every school, in offices, in hospitals and factories, would this alleviate the need to spend perhaps more money on leakages or would it not be a worthwhile substitute?
(Mr Fletcher) It is something that all companies, especially those in the water scarce areas, should be considering. You may just want to be aware that on pages 36 and 37, appendix one of the OFWAT report, we give some examples of how companies are doing things, including some educational work, and that is put there partly to encourage other companies to follow suit and to take advantage of this.
127. What I am getting at, I am glad of that and I assume they would be doing that sort of thing, is at the end of the day is it more than just scratching at the surface, this type of saving?
(Mr Fletcher) It is worth it, it is not on its own likely to make a huge long term real difference. We would have to have meters, I think, universally really to bring home to all of us as users what water costs and probably our bills would have to be significantly higher before we really started reacting to the price signals. I hasten to say that is not part of my job, my job is to ensure the price is not a whit higher than it absolutely has to be.
128. There is a spin off, because I suppose it is more a matter of the practices that are worthwhile and understanding the cost saving, costs going to the school and people working in the factory or in another business. Are you doing anything to actively encourage every water authority to undertake this sort of operation?
(Mr Fletcher) Each of them has to come to us every two years with their water efficiency plan. That was the table we referred to earlier with the triangles and so on. We look to them to demonstrate that they are working hard at it. Could I bring Mr Saunders in to add something.
129. It is just information I want.
(Mr Saunders) I think in terms of institutions, schools and hospitals, there is a significant scope for reducing water use, and it is for the benefit of those institutions. In a sense, what this example shows is that they should invest the money or the local education authority or the hospital trust should be investing money in reducing their water bill. Probably the biggest scope is with the use of water we have in toilet flushing, that is probably the area where it would be worthwhile spending more on it. That is what we hope to learn in the next two or three years from the joint research funded by Water UK. We hope to get some decent data on this area because at present the research data that the companies have provided still relies too much on assumptions and is not reliable enough for us to begin to say "Well, we think you can manage to do this or that". We need better data.
130. Fine. Really, there is not all that much incentive to the company though for a one sixth of a penny outlay they are making a saving in perpetuity if they can retain the practices and so on. So it is worthwhile from their point of view and the problem is from the type of customer you are considering the outlay is, as I say, a choice between that and some other piece of equipment they might need which they feel is more important. Is there a danger this is falling between two stools and the company is saying "Why should we make the outlay, we get a bit of saving out of it, why should they not pay for it" and therefore because each one is expecting the other to pay nothing is getting done?
(Mr Saunders) No, I think things are actually happening now and Philip Fletcher referred to I think it is Watermark. No, there is a major project by the Government Procurement Agency[3] to look at this. There are a number of other studies in terms of, if you like, producing good practice for schools, an easy guide for schools or governors to use to decide.
131. Perhaps you would let us have a little note.[4] It is the sort of thing I could happily distribute to my schools in my area that they could possibly save some money at the end of it and maybe there are things which they could do themselves to help. Please let us have a note on it.
(Mr Saunders) We will do that.
132. Then hedge-hopping—nothing, as I say, very profound—I was interested in what you said about reservoirs as being not in contemplation at the moment not only because of the environmental question but because of the enormous chunks of capital cost. Within the last fortnight in some of the Welsh press there has been speculation that Severn Trent were actually considering just that and were considering an extension of a reservoir or new reservoir facilities, and yet you tell me you are dismissing it to a long time in the future. Is it a real possibility?
(Mr Fletcher) What I think was being discussed in that particular case was the possibility of raising one of the existing reservoirs which as it happens Severn Trent have recently done on Derwent at Ladybower. That in itself took them ten to 15 years from inception to completion, even though it was raising the dam and not creating a new one with a huge amount of effort in ensuring all the environmental principles were properly analysed and the least environmentally damaging way of doing it was followed through. That was partly why I said not that it was not in contemplation but that we cannot conceive it will happen within, say, the next decade simply because of the huge lead time that would be involved. I know that some companies are trying to look (which is right that they should) 10, 15, 20, 25 years ahead for their long-term supply needs and at that point might start thinking about new reservoirs but their short-term priority is doing things like controlling leakage or developing appropriate least environmentally damaging sources in order to minimise the need for those big step changes in investment in new supply.
133. So we do not hold our breadth about the emergence of a mid-Wales Yangtze project or something like that?
(Mr Fletcher) I think you are right.
134. Sorry to take a rather introspective approach on this one. There are changes also taking place in Wales in the form of ownership in Dwr Cymru. It is an interesting concept of a not-for-profit company. Does that in any way complicate or help or facilitate some of the things that you would like to see done? Would it be, for example, liberating, assuming there are profits, what would have been distributable profits to go into capital investment to reach what you call the economic level?
(Mr Fletcher) Others may not be aware, although I know you are, that this is a proposal by a company called Glas Cymru to purchase Welsh Water DwrCymru, a not-for-profit company limited by guarantee which would have no shareholders of course and would out-source all its business. There are big issues for the Regulator in all that. Oh yes. My announcement last week that I thought on balance it was right it should go forward subject to some stringent conditions was carefully arrived at and maybe on another occasion I shall be in front of the Committee to review the consequences of that. As far as the specific point is concerned of where does this fit in terms of addressing leakage and so on, I do not think if the deal goes through because it is not yet through—
135. I am looking at it as a model. I am not particularly interested in the individual project and I am not tempting you to say something indiscreet about it. It is whether the model is something that you can work with and, if not, why not?
(Mr Fletcher) I reached the view that it is a model I can work with that will enable us, although it will not be easy, to maintain our system of comparative competition which is crucial to the whole way in which the water industry is regulated at the moment to ensure we can identify best practice, which we have talked about this afternoon, in many different fields actually being applied to English or Welsh water companies and then encourage the rest to raise themselves to the level of the best.
136. Can I again ask you, it is a bit wider than the remit and you are entitled to say no to me in answer to this, but is it possible for you to let me have a note? I am looking at it in the context of this obviously but if you want to widen your note, with the Chairman's permission, I am sure it would be of interest to us. It is a new concept in this area. My final question, because I also have received one of Mr Steinberg's little notes, or one of the notes which usually goes to Mr Steinberg, you said that it could complicate comparative competition, yet one of the points which has kept emerging is the frailty of the statistical basis for comparison within the industry. Here we are 11/12 years on and we have what seems to be the shakiest and most diverse way of collecting and obtaining statistics and deriving statics which could be used for comparative purposes but which cannot anyhow under the present system because they are each doing their own thing and doing them in their own way. That is my final question.
(Mr Fletcher) Of course we will provide the Committee with a little note about the particular interactions between the Welsh proposition and the issues we have been discussing this afternoon[5]. On your wider question, comparative competition and the development of good benchmarking data is at the heart of our job. We believe that the benchmarking we have developed is good of its kind, more than good, that it is in the vanguard. We are seeking to set up international comparators. The Scottish regulator, the Commissioner, is using our material in seeking to raise the performance of the Scottish authorities towards the level that is now being achieved by the English companies and Welsh companies.
137. I would not tell our Scots colleagues this.
(Mr Fletcher) DwrCymru, if I could just finish with that one, is demonstrated by comparative statistics to have a long way to go in developing in terms of its operating efficiency the area where some of our data is at its most robust. That is very important to us in helping to ensure that we can keep prices down and get the companies to deliver the necessary high level of service to its customers.
Chairman
138. When you do that note, you and your predecessor had different conclusions for the Glas Cymru and Yorkshire Water proposals, so could you sweep up both?
(Mr Fletcher) I would be happy to expand on that now because I believe my announcement last week was fully consistent with the announcement which Sir Ian Byatt gave just before I came into office, with which I absolutely agree[6].
139. I heard your description of it and it seems to me it would be quite useful, as an indicator with the issues we are talking about, to highlight differences in the incentives in the system by the two proposals, it would be quite a useful public service.
(Mr Fletcher) I will be happy to provide that.
140. That will be helpful. Secondly, and another point Mr Williams was finishing on, this is one of those really rather obscure highly monopolistic regulated industries, or sets of industries, in which the data and objectives are both fragile and very important. One thing I did not talk to you about at the beginning is the whole question of water efficiency which other people have talked about. Given if we did not wash, either ourselves or our clothes, ate only fried food or takeaways, did not keep a garden or pets, then we would look rather efficient by your methods. Is this not a rather daft concept?
(Mr Fletcher) And the National Health Service would be struggling to cope with the consequences of all that fried food.
Mr Steinberg: I recognise those people.
Chairman
141. Sounds like Mr Steinberg's lifestyle, but never mind.
(Mr Fletcher) I obviously accept that one can get, if you like, over enthusiastic on this subject. At the same time, whilst keeping ourselves perfectly clean, our gardens sufficiently watered, our cars even washed, no risk to health from use of water, which is obviously very important, nonetheless we can use less water than we do and that is why the educational programme across the board is quite important as long as it is applied at the appropriate time of year.
Chairman: Thank you very much. It just remains for me to thank all of you for coming and it has been very interesting evidence.
3 Note: See footnote no. 2. Back
4 Note: See Evidence, Appendix 1, page 117 (PAC 00-01/145). Back
5 Note: See Evidence, Appendix 1, page 16 (PAC 00-01/145). Back
6 Note: See Evidence, Appendix 1, page 19 (PAC 00-01/145). Back
