Examination of Witnesses (Questions 40-59)
MR PHILIP FLETCHER, MR CALLUM MCCARTHY AND MR DAVID EDMONDS
WEDNESDAY 8 MAY 2002
Mr Jenkins
40. I do not understand all these technical issues so they will be easy questions from me. I am known as the nice guy on this Committee so they are all soft questions. My preference is not for the system we have got, and I think you do a tremendous job given the circumstances you face, but for publicly-owned industries with regulators to improve the efficiency of the delivery of the service. In the context of customers and shareholders it is a bit difficult for us to understand. Do you use international comparisons?
(Mr Edmonds) I do all the time. I have international benchmarking primarily of prices. We look at bundles of prices. If you take a fax or a short or long distance telephone call we bundle those together and compare the performance of United Kingdom industries with other countries in the OECD and North America and that is a very important part of our annual look at how BT performs. We also look to a lesser extent at the quality of service and the range and variety of service and reliability, but international benchmarking is very important to us.
41. How do we do?
(Mr Edmonds) The UK consumer for the basket of telecommunications products he gets does very well.
42. Mr Edmonds, you are from?
(Mr Edmonds) OFTEL.
43. So we do not need you?
(Mr Edmonds) We need me to continue to keep the pressure on the regulated companies that means we will go on getting the best prices in the world in terms of the basket of telecommunications products.
44. Do you get a chance to look at the world comparison prices for energy?
(Mr McCarthy) We do. We look at end prices, pre tax and post tax, of energy, particularly in Europe. There are different features that make comparison with North America difficult. We find it more useful to do benchmarking within Britain rather than comparing transmission electricity companies in Britain and overseas because there is a series of very difficult technical questions associated with the accounting standards—definition of capital and operating expenditure, that sort of question—which make comparisons very difficult even within Britain and we find make them particularly difficult overseas.
45. Accountants by making different rules up make it very difficult to get comparisons internationally, do they not?
(Mr Edmonds) Yes.
46. Do you?
(Mr Fletcher) Yes we do. We published a report fairly recently on international comparisons. Clearly the weight we attach to the comparators means that would love to be able to have more robust comparators dotted around the world. We find it difficult to do, for all sorts of different reasons including social, governmental, hydrological and geographical reasons. We have some quite good comparisons with Australian companies but again they are not perfect. They help to start to give comparisons. There is one potential comparator which meets your preferred model; Scottish Water. Scottish Water in public ownership and subject to regulation has been set very demanding targets on the basis that it can be compared with the private English and Welsh water companies and it has a long way to go. It has to invest a great deal and it has to become a lot more efficient if it is to match the efficiencies made by the companies over the period since privatisation. The test of your preferred model is going to be quite interesting over the next few years.
47. There is a difficulty between investment and profit and judging investment and the longevity of the infrastructure because some of the stuff is fairly new and we are not sure how long it is going to last, particularly the new materials we are using. We have got the investment versus profit equation and then we have got the risk assessment of making supply. You obviously use a risk assessment model. Do you use the same one?
(Mr Fletcher) I would say the risks are different given the very different nature of our various sectors. If there were a justification for having the three of us in front of you it is that we are three very different regulators regulating three very different sectors. So long as that endures, there is some case for the bureaucratic involvement of three different regulators.
48. I thought we were going to get you fighting amongst each other as to who is the best.
(Mr Fletcher) Not only that, we seek to learn from each other in areas where we probably can look at each other's business—for example on the cost of capital.
49. So you do look at each other's models?
(Mr Fletcher) We look at each other's business so far as we believe it is relevant to do so. We meet at fairly frequent intervals in order to discuss it. We mount common studies—there is one just about to start on the cost of capital—where that is relevant.
50. You have looked at each other's models and you have looked at the burden of regulation and you have tried to reduce the burden of regulation. So which of you is doing best? Would you like to lay a claim for being the best?
(Mr Fletcher) I cannot answer that very interesting question because we are each regulating different industries.
51. Mr McCarthy, you do not think you are the best at regulation?
(Mr McCarthy) I think it is, with respect to your introduction about only asking simple questions, a rather difficult question.
52. Good.
(Mr McCarthy) It is not the way in which any of us approach it. We have a set of particular problems and particular opportunities specific to the industries with which we are concerned. I have always made it a policy, not out of defensiveness or any other reason, not to comment on any other regulatory regime or problems in another regulated industry. I know it is a very difficult job to do in gas and electricity and I do not pretend to know enough about water or telecoms.
53. Have you got the same story, Mr Edmonds?
(Mr Edmonds) I am going to dodge your question by giving you an answer to a different question.
54. Are you a politician by any chance?
(Mr Edmonds) I have spent much of my life working with them, sir. BT benchmarks the performance of telecommunications regulators across Europe. BT, with whom I have problems from time to time, in its benchmarking studies shows that OFTEL ranks as the best regulator in Europe amongst other telecommunications regulators.
55. So you are the best in Europe?
(Mr Edmonds) Amongst telecommunications.
56. But you are not the best in Britain amongst the regulators we have?
(Mr Edmonds) I would not dream of commenting on that.
57. A simple answer which you can all answer. How much a year does it cost to run your regulated section?
(Mr Fletcher) The amount we collect from water customers is £11.9 million in the current year. That is 48 pence per year for each household. That is what we collect. Our budget is slightly larger because we will be spending this year and next savings from past years.
(Mr McCarthy) £36 million.
(Mr Edmonds) £19.5 million.
58. How much have you reduced your costs over the last five years in real terms?
(Mr Fletcher) In real terms they are close to being level with where they were five years ago.
59. Why have you not got the RPI—X for you?
(Mr Fletcher) I at least—and my colleagues can speak for themselves—have had to assume a number of new duties over the last five years, including responsibilities under the Competition Act 1998 which is a new feature.
(Mr McCarthy) Two years ago our costs were in excess of £80 million. That is because we were introducing a completely new way of trading electricity in this country which has been a contributing factor to the very significant reduction in wholesale electricity costs. Like-for-like we have been broadly flat over the last five years.
(Mr Edmonds) I have only been regulater for four years and my costs have gone up in the four years I have been there. I have increased my staff from 180 to around 230. To a large extent that was due to the new demands of the Competition Act. It was due to the extra workload that has come into OFTEL following a whole raft of European legislation and is to enable me to continue to provide a service to the UK consumer that the UK consumer wants and deserves.
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