Examination of Witnesses (Questions 100-119)
3 MARCH 2004
MR BOB
BATY, MS
PAMELA TAYLOR
AND MR
CERI JONES
Q100 Joan Walley: It was also about the
transparency of what you are doing and who is doing it, and how
that is adequately monitored.
Mr Jones: The industry does publish
a lot of information; indeed Ofwat publishes a lot of information
each year on the output being delivered. Generally, the industry
is very much on track to deliver all the outputs that were allowed
at the last periodic review. I cannot think what the specific
issues are that were being alluded to, but generally the context
is that we are very much delivering on all of the outputs that
were assumed for this five-year programme.
Mr Baty: There is a June return
to the Regulator every year certifying where we are up to in delivering
the programme, and that will appear in public documents in the
course of the year and published on the performance of each company.
Gregory Barker: Perhaps we can invite
English Nature to specify.
Q101 Chairman: They did not specify yesterday
particular examples of this, but indicated that it was a practice
of which they were aware and which they deprecated.
Ms Taylor: In that case—
Q102 Chairman: Given the close and warm
relationship that you described earlier yourselves—
Ms Taylor: That was the Environment
Agency. I am sure we will have no problem at all.
Q103 Chairman: It is something that you
would like to sort out, and we may wish to make further inquiries
into it.
Mr Jones: Of course.
Q104 Mr Chaytor: I would like to ask
about the judgments made on the environment programmes, particularly
in respect of Northumbrian Water. You appear to have deferred
a substantial amount of your environmental programme, and the
Regulator has expressed some concern about the deferral aspects
in 2010. Can you give us a flavour of how you come to the judgment
as to what to defer, and what you think the long-term consequences
will be? Are you not simply storing up problems for the future?
Mr Jones: The only area that I
can think you are referring to is the intermittent discharge,
or combined sewer overflow programme, where we have proposed delivery
over a 15-year period. The distinction is between the outputs
the Environment Agency has identified which they see as a priority
and would wish us to do quickly, and outputs that we as a company
have identified that had they not been investigated the Agency
would not have known anything about. The Agency at this time does
not believe they are currently resulting in problems in terms
of the quality in the water course. But we are aware that work
does need to be done to improve those assets over a period of
time. The programme we have put forward would deliver all of the
priorities that the Agency has identified within the next five
years, and it would make a start on the other assets that we,
through our proactive investigation, have identified. We think
it is appropriate to deliver that latter category over a longer
period. That is something that we have agreed with the Agency
locally, and it meets their priority requirements.
Q105 Mr Chaytor: Are you saying categorically
that there would be no impact on water quality and—
Mr Jones: Yes, that was very much
the basis of that decision.
Q106 Mr Chaytor: In the preferred plan
you published the bill increase for environmental issues, which
is modest compared to the increase introduced for routine maintenance—
Mr Jones: That is right.
Q107 Mr Chaytor: If the Regulator were
to propose reducing that, how would you respond? You are suggesting
that there should be an increase of £8 over a five-year period
to cover environmental works.
Mr Jones: We believe that our
proposal is pretty much the statutory minimum programme. It is
possible that in some areas the Regulator could take a different
view. However, the programme we have put forward is what the Agency
considers to be the statutory minimum, and we do not really dispute
that. We do recognise that there are areas for judgment. So we
are not saying that the Agency are wrong but we are saying that
there are some areas where it might be possible to take a different
view. We have come to the view that the programme proposed by
the Agency is a sensible one. It is likely that unless ministers
take radical decisions, they would not be able to reduce the programme
by that much, but I am not saying that every single programme
in there is absolutely a minimum requirement. There was always
an element of judgment. I suspect that any reduction would be
less in our case than in those companies which have much larger
programmes, quite simply because if you just took a driver out,
for us the impact of taking that driver out would be much more
modest than it would be in certain other areas of the country.
Q108 Mr Chaytor: Turning to South West
Water, your projected increase again is absolutely insignificant.
Why are you so unambitious in your approach to environmental—
Mr Baty: Probably because the
improvements we have delivered in the past have been enormous,
and the maintenance costs of carrying that work forward and maintaining
it going forward is a big cost driver for us. But in terms of
dealing with the Environment Agency as to what is required, there
again, as I mentioned earlier, there is little between us in terms
of the size of that; but it is relatively small because of the
enormous environmental investment we have made in the past. The
price we are paying for that is that we are now having to spend
a lot of our money on renovation of the water distribution network,
which was curtailed during the previous 15 years to give headroom
to enable us to deliver the coastal programme. It is getting that
balance right which is the challenge we face, against the background
of the highest charges driven mainly by that environmental programme,
and the ability of customers in the South West to pay those bills.
Q109 Mr Chaytor: Can you say, hand on
heart, to customers and visitors to the South West that the beach
clean-up programme, which you have invested in fairly heavily,
has now been entirely successful and you are absolutely satisfied?
Mr Baty: Of the 141 beaches that
we have, 140 of them met mandatory standards and 85% met the guideline
standard, and that is exactly in line with—
Q110 Mr Chaytor: So 15% of them obviously
did not.
Mr Baty: Eight-five per cent complied
with it.
Q111 Mr Chaytor: That is 15% which did
not.
Mr Baty: That is correct, but
that is because those pollution sources are from other discharges,
nothing to do with us. That is ahead of the Government target
that was set when we embarked on that programme. We are very satisfied
and very delighted, but it is the cost to our community that we
represent and work with that we are very mindful of.
Q112 Mr Chaytor: Given that we are talking
about increasing customer bills by £4 per customer by 2010,
is this not a lost opportunity, because the nature of environmental
improvement programmes surely is that this is not a finite activity?
There are infinite improvements that can be made going beyond
the minimum. Are you not again losing the chance of building up
your work now, and will you not find that beyond 2010 you are
likely to have to put up customer bills even higher to compensate
for that? From the customers' point of view, is it better not
to have a gradual steady year-on-year increase rather than as
a political fix for a few years to keep the name of South West
Water in lights, in terms of their customers, and then you are
going to lose out after 2010?
Mr Baty: To some extent it is
the reverse because if you go back to the early nineties, our
charges were going up 16% year on year and that is why we are
away from the pack, driven by the cost of that enormous environmental
programme. The standards that we have achieved—we have got
the best bathing waters in the country and the highest percentage
of top-quality river water in England. Our environmental standards
are high; it is a highly sensitive environmental area and we need
to sustain that, but we have to be careful about pushing it any
further at this stage, given the impact it has on customers in
the region and the money they are paying for it. Our bill is significantly
higher than many other parts of the region. You say that it is
only £4 but it is £4 on top of a bill which will be
£407, given our draft business plan, compared with figures
significantly less than that for the rest of the country. One
cannot look at this in isolation. You reach a point where customers
say, "we are not going to pay at all", and that is a
bigger issue for the industry and the environment.
Ms Taylor: We also have to bear
in mind that expenditure on maintenance of the infrastructure,
which is what Bob is looking at in terms of a profile of his spend
as he goes forward, is spent that will have great impact in terms
of the environment as well. Obviously, if you have a faulty infrastructure,
then you would have pollution that seeps out and so on. It is
therefore important not to think that there is environmental spend
over there, and infrastructure spend over here; that one does
not have an impact on the other, because it does. What Bob is
looking to do is progress the work that has been done and underpin
that work. He believes the profile is best done by at this stage
looking at maintenance.
Mr Baty: The capital investment
programme in total will be at the same level as the last five
years, but it will be focused on different areas of responsibility.
Mr Jones: The very large quality
programme that we have invested in over the past decade and more
has created a lot of new assets, which themselves need to be maintained.
Q113 Mr Chaytor: I appreciate that. Can
I ask Water UK about your attitude to the environmental programme,
because you have stated that you think the concept of the environmental
programme within a five-year review is—the time has been
and gone really and you are arguing that the environmental part
should be taken out. Can you tell us why this is; and what is
your view about the current arrangements for the five-year review?
How should it be improved?
Ms Taylor: It is certainly one
of the things that we suggest needs to be addressed, along with
a raft of possible ways forward. We are not pretending that we
have got a perfect solution to this. What we are concerned about
is that if we look at the position when the periodic review was
first set up, when it was felt wrongly, but people did not know
at the time that if you put a large amount of expenditure in at
the beginning, a bit like setting up the NHS, then everything
will get jolly healthy and then you could afford to keep it topped
up as you go along. Obviously, that is not true with the environment.
If we look ahead to the directives that we will need to implement,
then we can see that the investment profile on the environment
is going to get higher, not lower. We believe that we need to
make sure that we have a process that enables us all to be fit
to face those issues in the future. One of the things that we
do not have, that we think we should have, is a clearer overall
framework. We think that that is the job of government. Defra
made a good start with its publication directing Directing
the Flow. However, it has gone quiet and they have not taken
that further forward. As we have been exploring with you earlier
today, there are some issues that the periodic review process
cannot deal with, for example diffuse pollution. It cannot tackle
those. There are some policy levers that the economic regulator
does not own; the Government owns them, it has created them, such
as looking at diffuse pollution. We believe that we will need
to look at how we can get hold of this idea of integrated catchment
management, which requires a range of policy considerations and
levers, many of which are outside the periodic review. That is
just a fact. We need to make sure we know how to get hold of these
levers and make sure that in the future we can look at the environment
in a sensible and constructive way. If not, we are in danger of
demonising spend on the environment, and that would not be right.
Q114 Mr Chaytor: Do you have support
for this from any other players in the field?
Ms Taylor: We have been very pleased
that just with the initial discussions—and I would not want
to make it any more than that because it would be unfair to tie
in our regulators—with Ofwat and the Environment Agency,
English Nature and Defra, nobody is saying "we do not want
to have those discussions" or "this is absolutely perfect
so leave it as it is". We have signalled that we would like
to look at this as we go forward.
Mr Chaytor: Am I right, Chairman, that
that is what they said at yesterday's meeting?
Q115 Chairman: I do not want another
show-stopper here, but the fact is they did express satisfaction
at the present arrangements and saw no merit in ending the process
of periodic reviews.
Ms Taylor: If that was the Environment
Agency, I have to say that surprises me. At the last meeting with
the Environment Agency, where we specifically raised the issue
of carrying out joint research to look at how this might be better
done, they agreed that that would be a very good idea.
Q116 Chairman: The quality of the liaison
between the various organisations is coming under increasing doubt.
Ms Taylor: I do not think it is.
I think perhaps the quality of evidence given to you might be
because I am absolutely satisfied with the liaison we have had
with the Environment Agency, and I am satisfied that what I am
saying is accurate.
Q117 Joan Walley: In the light of the
debate and dialogue we are having, is it your view that as far
as Ofwat is concerned there could be some useful strengthening
of Ofwat's environmental duties?
Ms Taylor: That is something that
can certainly be discussed. What you have to be careful about
is the periodic review process that was set up in a different
era from now, and hanging more and more bits on to it—you
have to make sure it is viable as you go forward and we do not
just pull the whole process down. They could take further account.
Already there will be additional duties in terms of sustainability
and so on, but how can the economic regulator take into account
policies to do with farming or transport? It cannot be done, so
there has to be a broad framework within which we set these discussions.
Q118 Mr Chaytor: What is that broader
framework? Who else is involved? All the key players are talking
to each other already.
Ms Taylor: They talk to each other
already, but it is very much a dance where the steps are agreed
in advance. When you get up on to the dance floor, you know what
steps you are going to be taking, even if you are a little late
taking them as the Government is right now! At this stage all
that the Government is able to do is comment on the environmental
aspects of it; but would it not be good if the Government had
re-read its own paper Directing the Flow and said "long-term
this is what we are looking for; these are the objectives"
so that periodic reviews would become milestones rather than an
argument as to which direction you need to go in for the next
five years. That is what we are looking for.
Mr Baty: In the early days of
privatisation it was very clear that a lot of the environmental
impact was as a direct result of the activities of the water industry,
which water customers were paying for. The background to that
has changed now and as those have been removed then the issues
are coming from other sources. Is it right that water customers
should be paying for those improvements going forward, and that
is a question for society generally not for the water industry
or for customers to make a judgment on. That needs to be put in
a much bigger forum to understand the position.
Q119 Paul Flynn: You have mentioned diffuse
pollution several times. Can you put a figure on the extent that
diffuse pollution affects your finances? Is it a problem that
those that cause the pollution find that someone else picks up
the tab for it?
Ms Taylor: At the moment, diffuse
pollution already costs customers around £7 per year, and
that is set to rise.
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