Examination of Witnesses (Questions 160-176)
3 MARCH 2004
MS FIONA
PETHICK, MR
PHILIP FLETCHER
AND MR
BILL EMERY
Q160 Chairman: Thank you for that answer.
I notice that you aim to include elements of sustainability within
the framework. Is it in fact the case that given issues of financability
the economic arguments are always going to come ahead of the environmental
ones?
Mr Fletcher: I do not think I
do accept that, Chairman. We have got to ensure that the price
limits are realistic, we cannot do a King Canute job on them.
The environmental improvements which are going to be required
of the companies will be very significant.
Q161 Chairman: And indeed required in
the country?
Mr Fletcher: Particularly through
the European Directives, of course I accept that.
Q162 Paul Flynn: Bearing in mind what
you have already said about the cuts in the letter to the Secretary
of State in your memorandum to us, you use the example of cutting
capital expenditure for the period of 2005-10 to 15 billion roughly
at the level of at 2000-05 investment. Is this before or after
inflation?
Mr Fletcher: That would be before
inflation. I noted the points that have been made by Water UK
on what it looks like when you add inflation in. Again when you
get into figures you can cut them different ways, the figure in
the 1999 price rise was about 15.6, that was before the companies
implement those plans, they have made efficiency gains which the
system is designed to encourage which we shall build into the
floor for this review so that all of that benefit comes back to
customers in terms of lower bills than they would otherwise have
been. The £15 billion I was using was an illustration, it
has appeared as the Ofwat proposal and I can see why. It is trying
to ensure that all of the stakeholders, including Ofwat, are thinking
very hard about whether all elements of the capital programme:
maintenance, sewer flooding, security of supply and the environmental
element all need to be done in terms of the £20 billion or
£25 billion programme that was being talked about in the
different exemplifications over this particular five-year period.
Q163 Paul Flynn: You also said that improvements
can be undertaken over a longer time frame therefore as we all
understand the costs would then be mitigated. When you say the
improvements, are you referring only to the environmental improvements?
Mr Fletcher: I have to take a
view about all of the elements here, I am regarding all of them
as improvements. If I can take maintenance as one example it has
focused our attention in a previous look at the 1999 review on
whether enough was being done on maintenance and we responded
to that challenge. The industry and Ofwat under the auspices of
the industry research body have a much better approach this time
round, that means that I cannot ignore the evidence that there
is likely to need to be significantly more invested in maintenance
in this coming periodic review period.
Q164 Paul Flynn: Could you put a figure
on the five billion plus that you have used?
Mr Fletcher: Can I can give you
broad orders of magnitude. The overall figure you might use for
illustration in relation to that £15 billion would see £8
billion to retain base service, to ensure all of those assets,
including the recently installed and rather short-lived vital
high technology assets that companies have purchased are maintained,
that would be £8 billion against the £9 billion the
companies have firmly said they need in their draft preferred
strategy. In enhanced service, at the last review the Regulator
only allowed £100 million, £0.1 billion for enhanced
service, most of it went into dealing with the very nasty problem
of sewer flooding. We have had to say subsequently frankly that
was not enough and the companies are doing significantly more
in 2000 to 2005 to deal with that, all of that will be taken into
account in the price limits I set this summer. There is very heavy
pressure on me, very understandably, from water companies representing
customers to do yet more on the basis that it is unacceptable
to have sewage in your living room. Say £1 billion against
the £1.2 the companies say they really need for mostly sewer
flooding in the next five years. Supply and demand issues, we
got through nine to 10 months of very dry weather last summer
because of the improvements already made by companies and without
any hose pipe ban across the country. We were very pleased. We
are relived it has rained for a large chunk of the winter. The
companies say they need £2.8. If I were using an illustration
of that £15 billion it might be of the order of £2 billion.
Then the quality issues, the companies said in their preferred
strategy they wanted just under £7 billion for drinking water
and environmental improvements, my question was would £4
billion be enough? One can understand the extreme vexation and
unhappiness of the environmental interests and regulators at such
a figure. Again the question I recognise needs to put in the context
of our statutory obligations was just that, a question, would
this be a tolerable level to hold down the capital programme to
a level round the scale that it has been running at since 1989,
which itself was roughly double the level that the water industry
used to be able to invest when they were clamped by the Treasury?
Q165 Paul Flynn: You mentioned the statutory
obligations, do you agree this programme you have means water
companies do not have to abide by their statutory obligations?
Mr Fletcher: They always have
to abide by their statutory obligations, the issue is really one
for government on what they think the water and sewage companies
need to carry out to fulfill their statutory obligations. That
is the question for government. It is not one where I try to take
Mrs Beckett's difficult decisions from her but it is a question
from me to her head of principal guidance on what is the least
that would be necessary to fulfil those obligations rather than
do other things, which we all recognise as desirable. But which
maybe could be done over a slightly longer period, and bring in
the important new information we will have through river basement
management plans, catchment area management strategies, bringing
in the diffuse pollution elements from 2010 onwards.
Q166 Paul Flynn: It might be said after
reading your guidance to ministers and your memorandum to us that
the environment is at the top of your "how to cut costs"
list. Would that be an unfair conclusion?
Mr Fletcher: We are back to the
"whose cuts?". What has been happening since 1989 is
that the environmental programme, I think rightly, has been given
very great prominence, priority indeed. I think if my predecessor
was sitting here, and Bill Emery can almost speak for him because
he has sat through various reviews, he would say that the last
time round we were still being very constrained, though not, we
believe, running any risks with the maintenance of the assets,
so that the overall programme was not set in being whilst the
environmental programme went through its last peak, five years,
2000-05. And it was not just Ian Byatt. Lord de Ramsay, the then
Chairman of the Environment Agency, was saying five years ago
that most of the damage from the last 200 years (the Industrial
Revolution) will have been repaired by 2005. The expectation was
that 2005 will be when maintenance really does get its proper
chance along with the other things, like sewer flooding. I am
resigned to the fact that we shall see probably a significantly
larger programme than £15 billion. I do hope very much that
I shall be able to stand up in front of customers and assure them
that that programme represents value even though it will increase
their bills. I would feel more confidence in that if we had been
able to develop the cost benefit work—I say "we"
because it is a collective effort—further than we have actually
managed in this review period.
Q167 Paul Flynn: There have been some
press reports that there has been pressure from other departments
on Defra regarding water pricing. Water UK in their memorandum
have said, "We believe that decisions on what is included
in the guidance are made by Government collectively and not by
Defra alone, so that the effectiveness of the debate between what
are normally seen as key players is in reality constrained".[14]Would
you agree with that?
Mr Fletcher: I think that is,
if I may say so, properly a question for Elliot Morley when he
comes in, but it would not be surprising if the government recognised
that there are some really difficult issues here, and they confront
all of us involved in the process. None of us wants to see bills
going up, yet I am afraid overall they will and maybe quite significantly.
None of us wants to play fast and loose with our international
obligations, let alone with maintenance of these absolutely essential
assets which have brought these huge improvements. It is a huge
success story. There is a danger in focusing on what still needs
to be done and losing sight of how big a success it has been.
Paul Flynn: I think we recognise that.
I am very grateful.
Q168 Mr Challen: I was quite encouraged
to read the outcome of the customer survey that you did. Looking
at table 3 in your submission, "Willingness to pay for improvements",
we have, under "Company preferred plan" a two to one
majority in favour of probably willing to pay more than definitely
willing to pay more, a two to one majority on those under reference
plan A and still an overall majority under reference plan B. I
was just wondering to what extent this research has influenced
your decisions and whether after this research you will be taking
a more liberal line on price increases.
Mr Fletcher: The first thing to
do is to pay tribute to the committee. It was again part of your
last report that the various players in the last review had done
themselves no favours by coming up each with their own little
survey with their own carefully prepared questions. What we have
done this time, and it has not been easy, is get all the stakeholders
together, including Wildlife Link, representing the environmental
NGOs, and the customer representatives. We have agreed on the
list of questions, we have jointly financed a large survey, we
have reasonable confidence that a very proper job has been done
in these responses that all of us are committed to. Yes, I find
it encouraging that we have sophisticated customers who appreciate
the need overall to make various changes, including continuing
environmental improvements, on the basis of (when they gave these
answers) some basic understanding of what had been included in
their own companies' draft business plans. I am less comforted
by the fact that there are still significant numbers of customers
who are really very unhappy about the prospect of significant
increases in their bills and a minority, admittedly, but a significant
one, who just do not see how they could meet that sort of increase.
In relation to those areas like the south west where the bills
are very high, even in relation to energy bills, I think that
is a very real problem.
Q169 Mr Challen: I have suggested that
support for the poorer customers should be a matter for government
but that is not currently the case, so does that influence your
decisions in these matters more to that end, if you like, rather
than being encouraged by the large majority that is in favour
of paying more?
Mr Fletcher: The water regulator
cannot really bale out the poorer customer by acting as a sort
of Robin Hood to charge richer customers more in order to subsidise
the poorer customers. We already have, and perhaps that will give
my view on the point earlier made by Mr Chaytor, the rateable
value system which is a progressive system. It is very crude but
those who have got the bigger houses will pay more for their water
bills, with the rescue of the poorer individual pensioner who
finishes up in a higher rateable value house having the safety
hatch of going on to a meter and reflecting his or her usage.
That is one safeguard, one reason why I am not too sorry that
we have a mixed regime of metering and rateable value at the moment,
but I do see metering as increasingly important to help safeguard
supplies. It is the only sure way of making sure that people really
pay attention to their water usage. Exhortation never does all
that much except when you have got a drought, so again it is a
nice balance of how you go forward. What the government can do
is think about the tax system. I have to say I am not holding
my breath for changes to the benefits system to give special help
to water customers. The Vulnerable Group Regulations, which at
the moment only help a tiny fraction of those on meters, themselves
only 25% on average, and those who are in particular need with
very large families on benefit or with medical conditions that
require very high use of water.
Q170 Mr Challen: If the government did
provide more support for poorer customers would that then let
prices rise a bit quicker, do you think?
Mr Fletcher: I think a 30% average
increase is already a pretty dramatic increase before you start
adding inflation. If it turned out to be necessary to have a price
increase of anything like that scale I would be concerned about
customer reaction to it, and not just the poorest customers. Although
obviously I should be particularly concerned about the affordability
implications for poorer customers in high bill companies.
Q171 Mr Chaytor: Just pursuing the rateable
value question, which exercises me greatly, as you will have appreciated,
are you saying that the ratio between the lowest band of rateable
values and the highest band of rateable values is proportionate
to the ratio between the typical levels of consumption between
the smallest and the poorest ones and the most affluent ones?
Mr Fletcher: It is not perfect.
It is a bit like democracy. It is the least bad system that one
can possibly have.
Q172 Mr Chaytor: Why is it not a universal
metering system?
Mr Fletcher: Because to implement
it instantly would be hugely costly. We would be looking at vastly
bigger increases in bills. There would be, for you rather than
for me, I am glad to say, questions of whether this was politically
acceptable, and in terms of its major benefit to the environment
of reducing demand it would be not very effective. It would be
universal. It would apply in those areas which have plenty of
water, Northumbria, for example, with Kielder Water, just as much
as the dry south east, whereas Parliament has passed legislation
which gives the government, if companies and government want to
use it, a much more precise instrument in water scarce areas where
mandatory metering could be introduced, provided the government
were convinced by the case for it.
Q173 Mr Chaytor: But you would accept
that the limitations of the rateable value system are partly due
to the age of the property because of the lack of revaluations
up to date?
Mr Fletcher: Yes. The valuation
is still there. It is pretty arbitrary, I know, but it still bears
a rough approximation I am not trying to argue for it more than
that. I think myself it is better to stick to rateable values
than move to council tax which would have all sorts of winners
and losers in relation to whether we stick with rateable value
until we are ready to move on to meters almost universally, and
while we have still got it it is not that bad as some means of
enabling people to pay their bills and recognise that water and
sewerage services represent a significant service.
Q174 Chairman: Thank you, Mr Fletcher.
We are nearly at the end. I just wondered whether you had any
inkling as to when you might be going to get this long-awaited
review.
Mr Fletcher: I do hope very soon
because it is now over a month since the promised time. The government
were aware of my very strong hope that they would produce it at
the end of January. Every few days that now go by put the timetable
for the review at some risk. This is perhaps for the benefit of
others. I am not putting off the final delivery of price limits
for Christmas in time for all the bills to be properly set from
April 2005. That is not at risk but what is at risk to a degree
is proper process, the process not least of companies discussing
the proposals with their customers, including their business customers
as well as their domestic customers, all parties having proper
time to think about each of the remaining stages. The final business
plans, in the light of the guidance, are due in on 7 April. I
am afraid that is probably very difficult to sustain given that
we have lost a month. Delivery of draft price limits by the end
of July. It was hoped for before the House rose. That may not
be possible. Frankly, I do not want to announce them in August
but I might be driven to it. The timetable has been in place for
a very long time. It reassures the City. We have had the end of
November in place for the final price limits. I do not want to
slip on that. At the moment I cannot absolutely guarantee that
I will hit that date.
Q175 Chairman: These are all points which
we will no doubt want to put to Mr Morley when we see him a week
tomorrow if the government has not already announced its review.
Mr Fletcher: Exactly. Maybe your
committee's inquiry will help to ensure it.
Q176 Chairman: Let us hope that the argument
has moved on by then. We are very grateful to you for your time.
We may have a few further questions for you. I hope you will not
mind if we send them to you in writing.[15]
Mr Fletcher: Please do and we
will reply promptly.
Chairman: Thanks very much.
14 Please see written memorandum, Ev. 45. Back
15
Please see supplementary memorandum below
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