Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 74-79)

3 MARCH 2004

MR BOB BATY, MS PAMELA TAYLOR AND MR CERI JONES

  Chairman: Thank you very much for joining us. As you may know, we had an interesting evidence session yesterday with the Environment Agency, English Nature and the RSPB, who raised a number of issues which we would like to explore with you today. We want to kick off by seeking your views on the draft business plans.

  Q74 Sue Doughty: Could you summarise briefly for us the process by which you developed the draft business plans that went to Ofwat last year?

  Ms Taylor: Ofwat set the parameters, which the companies would then have to cost; so the companies would then go through those parameters and produce their costings. Those costings were then checked independently by Ofwat reporters, who are independent. This is an iterative process, so as time goes on, Ofwat will get further and further understanding into the detail. They also have a bank of knowledge and information from previous periodic reviews; so this is not the first time and obviously they have got previous data with which they can compare.

  Q75 Sue Doughty: Do you find the process satisfactory?

  Ms Taylor: The process this time around has been different from before, and we think that this time the process has been an improvement compared with before. We have liked the idea that Ofwat has asked companies to produce the draft business plans because we welcomed the opportunity of being able to put those into the public domain. It has meant that customers, and also customers' representatives such as their members of parliament, consumer groups and environmental groups, have been able to look at the plans at an early stage. We welcomed that.

  Mr Baty: The framework of the plans of course offers the opportunity for three scenarios. One is a price and environmental programme, which was deemed reference plan A, which was identified as being the minimum requirement to deliver statutory obligations; and reference plan B, which was that programme plus those investments which were considered to have a cost benefit by the Environment Agency; and we were also invited as individual companies to submit a company-preferred plan, and that varies from company to company. For some companies these will be below reference plan A; some are between (A and B) and some are at reference plan A; so this time it was a broader spectrum to work on.

  Mr Jones: It is also worth stressing that in developing company business plans there has been quite extensive consultation between companies and a range of stakeholders, including in particular the Environment Agency, the Drinking Water Inspectorate and WaterVoice. Much of that consultation has been at a regional level between specific companies and the agencies in respect of that region.

  Q76 Sue Doughty: The whole idea of preferred plans is very interesting. Is a preferred plan really a preferred plan? Is it an ideal for you about what you would like to be able to spend over the next five years, or is it something that you have moderated as to what you think you are going to be able to put in?

  Mr Baty: Individual companies are at liberty to assess the issues that that particular company may be wrestling with; and certainly in the South West customer affordability is very high on the agenda, and we are very conscious about the impact of customer charges. In the South West we have invested over £1 billion on environmental improvements since privatisation, so there is a significant environmental benefit already being enjoyed in the South West. We were looking to see whether during this coming period, it is appropriate to balance that out a little bit more given the pressure it is putting on customer charges. We have done that in dialogue with the Environment Agency, and that dialogue is continuing even today. We are waiting for ministerial guidance as to just how that will balance up when ministers' guidance is public.

  Sue Doughty: Are there any other factors that will affect your final plans that you would want to factor in as well at that stage?

  Ms Taylor: At this stage there are still some things that we just will not be aware of and we will not know how much they will cost or when they are going to come in, because a lot of our spend—around 80% of it—is driven by directives from Brussels. Obviously, one of the problems we have is that the timescale for the periodic review, which is in five-yearly chunks, does not fit with the timescales of Brussels directives. There will be some issues therefore that we will not yet know whether or not we will have to deal with them. A little while ago, for example, it looked pretty certain as if we would get a revised Bathing Waters Directive, but now we do not seem to be getting one—at least we do not think so. There are issues such as that, which, with the best will in the world, the current system that we work in cannot cope with.

  Q77 Sue Doughty: We had the Environment Agency in yesterday, and they gave us a written submission.[1] It was fairly critical with some of the submissions, in terms of over costing projects and proposing work that the Agency does not consider necessary, and some work that was not costed in there that the Agency felt was necessary to establish the obligations. What is your view of the environment programme that they are proposing along with English Nature? We have had their views, but what are your views on the programme?

  Ms Taylor: We have to bear in mind that this is deliberately quite a long process. We are attempting to put more and more information into the public domain and to engage more people. We are satisfied that, company by company, the discussions that are happening between the Environment Agency and companies are going extremely well. Initially, there was perhaps some positioning publicly, as there is bound to be in a national arena, regarding what is being said; but when you get into the detail, company by company, we have been satisfied with the discussions that individual companies have been able to have with the Environment Agency. This is a long process and an iterative process, and we would expect to see a coming-together rather than a pulling-apart on things that had to be discussed. That does not mean that every company is the same. We see wide variations between one company and another as to what it is that they are specifying that they believe they require for their environmental spend, and that is to be expected because companies vary, company by company. In terms of the process, so far, apart from that ministerial guidance, we are happy with how it is developing.

  Q78 Chairman: You have just said exactly the reverse of what we were told yesterday. We were told that all was fine and dandy to start with, and it was a much better process and everyone was happy; but as we get to the crunch period, the decision time, inevitably conflicts and disagreements are bound to arise. I am not quite sure how we are getting such a different picture from you.

  Ms Taylor: Maybe because we have been there before. We have been through so many crunches and so many previous periodic reviews that this time around the crunch does not feel particularly worse than other times. I suppose because we are, understandably, pulled in different directions by an economic regulator, and environmental regulator, a quality regulator and the Government, we are just used to being in this position. We think that the way in which Ofwat has conducted the process this time around has been an improvement on the last time around; but of course there will be differences of opinion as we go forward—and you could say that is healthy.

  Mr Jones: From the regional perspective, the environmental programme we have put forward as a company is exactly in line with what we understand the Environment Agency and English Nature would wish to see. We believe that they support it entirely. That has been very much guided by detailed consultation and discussion with both of those agencies in respect of our area. On the issue of costing, one of the problems we have sometimes faced in the past is a lack of clarity about the outputs that we need to deliver. It is quite difficult to come up with robust costing if you are not sure what you are trying to cost. I think we are in a much better position this time. We are in receipt of some very detailed information from the Agency about what each of the drivers would mean on a work-specific basis, and the only way you can come up with very robust costs is to do it bottom-up, assess exactly what will be required at each site and then add those up. I think we are in a much better position than we have been at previous reviews because we do understand what the impact of the drivers will be on a work-specific basis; and we are therefore able to put together some fairly robust cost estimates.

  Mr Baty: We are not free, as companies, just to say how much they will cost; there is a process we go through in conjunction with Ofwat on a cost-based report to price out individual typical schemes. They are compared by Ofwat to set efficiency targets to feed back to companies, so there is a competitive edge in terms of how much those different companies think those particular schemes are going to cost. Then we use that work back in to pricing against particular requirements in an individual company. All that is monitored and checked by the independent reporters, who are operating for Ofwat as the independent regulator. It is not for the companies to freely decide how much these are going to cost. The whole thing is audited and scrutinised as it goes through. We are challenged, understandably, with improved efficiency at each review, and year on year.

  Q79 Sue Doughty: You are reasonably comfortable with the cost-benefit analysis that the Environment Agency and English Nature have done. Do you think it is giving good value for money from where you are coming from?

  Mr Baty: The cost benefit is a slightly different element of it. This is getting the base costs for the three programmes which we would be submitting, that is the reference plan A, reference plan B and company-preferred solution. In terms of the cost benefits on reference plan B, the methodology for determining that—again, we have some reservations as to whether or not that is appropriate in the way that cost-benefit analysis is being carried out. Certainly, in the South West, affordability is a key issue, and recognising the work that we have delivered over the last 15 years we are reluctant to be moving significantly into that particular part because of customer affordability. There are one or two schemes where, clearly, we accept there is a good cost-benefit, and it is very rational, but it gets into a grey area. Clearly, there would be differences between ourselves and our local Environment Agency, and that is where ministerial guidance would clarify that part of it. As a company, we would be reluctant to move too far on that cost benefit purely because of the affordability in relation to customers in the South West, given the burden placed on them over the last 15 years.

  Ms Taylor: We think that more work is needed on the economics of environmental measures. We have been working with the Environment Agency and with NGOs on some projects to look at environmental cost benefits because we think there needs to be improvements in this area.

  Mr Jones: Can I add, as an economist, that it is a difficult area; cost-benefit analysis on environmental improvements is not straightforward. It is pleasing that the Agency is putting more effort into this area. They have made a very good start, but there is a lot more work to be done. As far as the preferred programme that we have put forward is concerned, we have discussed any schemes where we had doubts about the cost benefit with the Agency at a local level, and we are quite happy that the schemes we are putting forward are good value for money.


1   Please see written memorandum, Ev. 1-10. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 6 May 2004