Examination of Witnesses (Questions 63
- 79)
WEDNESDAY 27 OCTOBER 2004
MR ELLIOT
MORLEY AND
MR RICHARD
BIRD
Q63 Chairman: Welcome, Elliot. It
is good to see you, as always. You are a regular visitor and in
fact we will probably reserve that place for you permanently down
the other end of the table, but it is nice to see you. We want
to talk about the final ministerial guidance, which we have got
copies of. It seems to be a proclamation of all the virtues because
you are expecting them to look after the environmental damage,
the effects of global warming, and at the same time keep the water
pure and keep the fees down before an Election and after the Election.
So you are really proclaiming virtue to the water companies. Now,
the question is whether they are going to be able to fulfil those
intentions, so let me ask you how this final guidance differs
from the original guidance, the two original ones.
Mr Morley: Okay. Thank you, Chairman,
and could I first of all say it is very nice to see you in the
chair today. I am also joined by Richard Bird, who is the director
of the water division in Defra. The point you make is a very pertinent
one, Chairman. There is a lot of balancing requirements in relation
to water policy and water strategy. You will be aware, of course,
that we do have an independent regulator. The independent regulator
has the responsibility for examining the companies' business plans.
It is the regulator's role to determine the capital programmes
and the overall price increases and the regulator is to bring
forward his final determinations on 2 December. Our role in relation
to Defra is to obviously consult with the regulators that come
within the Defra family, and that is the Drinking Water Inspectorate
and the Environment Agency. They put to us their quality and environmental
programme and that is submitted to the regulator, because of course
there are costs with that as well and the regulator also examines
that after it has been through very careful examination in Defra,
I have to say. So it is gone over in some detail in the same way
as the companies' business plans are also gone over in great detail
by the regulator. We provide ministerial guidance and the ministerial
guidance has not changed very much from the draft guidance to
the final guidance. We have put some emphasis on things like sewer
flooding, which is a problem, and we are quite keen to see an
increase in their capital allowance on sewer flooding. You will
appreciate that the ministerial guidance is that, it is guidance.
It is up to the regulator. You cannot order the regulator to do
this, but the regulator of course takes into account what we have
said. Basically, we feel that the environmental quality programme
is justified in terms of its costing. There is always this dilemma
in relation to keeping prices down, which is important, but also
having good standards of environment and quality, which is also
important. My belief is that of course consumers are concerned
about prices, but consumers are also concerned about clean rivers,
clean coasts and good quality drinking water and that is a very
important consideration as well. You will have seen the draft
determination of the regulator and I think he has done a good
job in terms of trying to balance up these demands and the pressures
that are on him. He is recommending considerable reductions in
what the companies have been asking for in terms of prices. But
he has to be careful, of course, that in terms of seeking those
reductions there are the adequate capital programmes in order
to have the investment and the maintenance. There were some concerns
about the level of maintenance that was allowed, for example in
the last five year price round, so of course there is an impact
on that. So I do not think we have changed our final guidance
very much, apart from just having the emphasis on that and also
the fact that we do think one or two of the environmental programmes
where there were some questions, shall we say, such as the Endocrine
disruptors research, which we think is quite important, some of
the upland management programmes, which we also think are quite
important. We think that they are justified in terms of the overall
package of measures which have been put forward to the regulator.
Q64 Chairman: So no substantial changes
between the principal and the final?
Mr Morley: Not really, no.
Q65 Chairman: Okay. You are satisfied
with Ofwat's response?
Mr Morley: Yes. I think Ofwat
have been reasonable in their response. They did not accept absolutely
everything within the environmental programme but some of the
schemes that were not accepted were not rejected; the regulator
asked for further details, he asked for clarification with the
Environment Agency, and my understanding is that the Environment
Agency and the regulator have been working very well together
in terms of providing that detail. I do not see anything wrong
with the regulator asking for clarification if he feels there
is a need for that within the programmes, because I want to see
that the environment programmes are justified and I believe they
can be justified.
Q66 Paddy Tipping: Could I pick up
on two issues you have raised. One was about upland management.
The big challenge is the challenge around diffuse pollution. The
easy bit in a sense has been done and I would be grateful if you
would talk to us a little bit about how you see progress on that
and how it fits into the EU Directive. Secondly, you mentioned
sewers. Let me just divert from the script a little bit and say
there is nothing in this price round for private sewers because
you have not defined the policy, and I think you are about a year
behind your own timetable. Perhaps you would just say a little
bit about private sewers. I think you are going to make an announcement
now in the spring. Suppose you were minded to do things on private
sewers. How does that link into this price round?
Mr Morley: Okay, and thank you
for that helpful extra that you have put in there, Chairman. If
I could just deal with the upland measures first of all. I am
an enthusiast for a much more integrated approach towards water
management in this country as a general principle. I am a great
enthusiast for the water framework approach in river basins management
and I think that the Ribble Valley pilot is going very well. We
do have a lot of challenges. We have the nitrate directive to
apply, we have the water framework directive, which is a huge
directive which comes in in 2015. You are quite right in what
you say. Really we have made enormous progress on end of pipe
solutions from industrial pollution, from the water treatment
plant sewage works. We have really cleaned up the rivers and the
coasts and I think is it something we can be proud of. In many
cases the rivers and our coasts are cleaner now than they have
been for the last one hundred years because of the effects of
the industrial revolution. We have managed to rectify that. But
we are moving away from measurement of water simply on chemicals
and really I doubt whether we can make a great deal more progress.
I think there is a bit more progress that can be made, but we
are up in the high nineties in relation to quality standard and
things like that. We are moving to measurement by ecological quality,
which is much more challenging. We are going to measure things
like siltation, the effect on the water table in relation to abstraction,
the ecological health of all water courses, lakes, rivers and
ground water. That is hugely different and much more challenging.
There are also challenges for us in relation to how we reduce
agricultural run-off and that will require changes in all sensitive
catchments, looking at inputs, fertilizers, pesticides, looking
at stocking density, manure storage, manure spreading, and I think
that if we have some upland management methods and the two schemes
that are put in can be justified in the sense that it can reduce
cost to the consumers downstream—because removing nitrates
and pesticides costs the average family round about £20 a
year, roughly speaking. So there is a cost to consumers in relation
to what is happening now and we need to remove those externalities
from agriculture and deal with the source of the pollution. So
I am a great enthusiast and I think it is the way we need to go
in terms of an integrated management. On the issue of private
sewers, this is a very difficult one, so I am going to ask Richard
to come in in a moment! But I will tell you where we are with
it. We have had the consultation and round about 80% of the respondents
felt that the solution to private sewers was for them to be handed
over to the water and sewer companies. You can well understand
the logic of that. We are in the final stages of our response
and I will ask Richard to give you some details on that in a moment.
When we have our response it is clear what the preferred solution
is basically, Chairman. There is no point beating around the bush
on this. Therefore, what we have to think about is how we are
going to handle that and how we are going to handle the costs
of it. Because it is out of sync with the current five year price
review there is not likely to be major finance in this current
five year review. That is not to say that we could not maybe make
a start in relation to how we approach this, but we would have
to think about how we do that. I think, to be honest with the
Committee, because of the cost implications it would be easier
to phase that change in so that you spread the cost by looking
perhaps at the worst first, because there is a lot of private
sewers which are not a problem. So you could actually perhaps
look at the ones which are causing the problems as a priority
and then work it through to the rest of the network. Do you want
to comment on that, Richard?
Mr Bird: Well, there is not a
great deal to add, Minister. We are aiming to publish a decision
paper along with a full regulatory impact assessment as soon as
possible next year. Before then we have got to do more work on
costs, which is obviously the critical aspect. We are engaging
consultants to help us do some more work on this. There is a joint
steering group (which includes the water industry, Ofwat, and
the Environment Agency as well as ourselves) which is investigating
this issue. We have asked W.S. Atkins to do some more research
here. So there is ongoing work. As the Minister has said, if action
then needs to be taken in terms of additional costs for the water
industry that can be picked up as part of the interim price determination
process. It does not need necessarily to wait until the next five
year round.
Q67 Mr Breed: Minister, thank you
for those opening remarks. I think they were most interesting,
particularly the last bits about the private sewers. Just going
back on the environmental programme itself, I think after privatisation
it might have been a major shock but most water charge payers
recognised there was a huge capital backlog that had to be cleared
and water charges went up substantially. I think the feeling was
that after about five or 10 years when all that capital worth
has produced real significant improvements, particularly in the
quality of the water and such, there would be a period of time
when we would then begin to see prices levelling off. We would
not see the sharp increases. So the perception has come about,
of course, that the environmental costs that are now being incurred
are producing these very sharp rises and people are saying, "Well,
can we really afford these environmental costs and aren't we not
in effect almost getting ourselves into the law of diminishing
returns in the sense that costs are going up and up to achieve
a relatively modest improvement on what we have already achieved.
How much has that really been taken into account, bearing in mind
that the Environment Agency, and indeed others, have been—I
will not say criticised but it has certainly raised the issue
of the cost of the environmental programme.
Mr Morley: I understand that point
and indeed given the huge input in relation to the capital programme
there is a logic that it should decline or flatten out. You have
to bear in mind, however, that there has been an awful lot of
concentration in relation to cleaning up water treatment in particular
and there is still existing infrastructure that does need to be
maintained and in some cases to be replaced, and that is part
of the capital programme as well. The environment programme is
a small part of the overall price increase. Is it about 20% approximately,
Richard?
Mr Bird: It depends which way
you look at it.
Mr Morley: Well, it depends which
way you look at it. So it is 20% the way I look at it, anyway.
So it is a small element; it is not the major element in relation
to the impact on prices. Although it is true that immediately
post-privatisation prices went up sharply—and we are well
aware of that and we are also very well aware of the regional
differences—I think it is fair to point out to the Committee
that because there was a reduction in the last round, if you take
the interim price determination and you look at that from 1999
you are actually looking at a 3% price increase since 1999 in
relation to water bills (this is on average), which is not unreasonable,
although I accept that there are regional differences in relation
to the prices.
Q68 Mr Drew: Last week, when we had
evidence from Ofwat, they seemed to think that the water companies
were placing undue excuse on the environmental cost. Who is right?
Mr Morley: Well, I think it is
easy enough to have a look at the breakdown of the figures as
a Committee in relation to the environment and quality programme
and the other elements of the companies' business plans, and I
think if you look at a breakdown of those figures you will find
that the environmental quality programme is a small part of it.
Q69 Mr Drew: So given that the water
companies are not saying that to us, they are saying that this
is a major factor in why prices are going up, what powers through
Ofwat or through the Department do you have to at least get the
message out to water companies that they have got to clarify what
their position is?
Mr Morley: Water companies, I
think, have an obligation to clarify it. I would be interested
to read the transcript of the evidence, but there was an element,
I think, of trying to look for excuses in relation to price rises,
although to be fair to the water companies they have not been
doing that in recent times and they have been fairly straightforward
about what is their capital programme and what element is in the
quality programme. You can argue, and Richard touched upon this,
that if you are upgrading your water treatment then there is a
potential environmental benefit and you could argue that is an
environmental issue. It is not necessarily an environmental issue.
You have to do it because of water quality directives and treatment
in any case. It is part of the infrastructure investment that
we would expect to see. So you can get a bit of a blurring in
relation to where the money is going and what it is for, but basically
in relation to the programmes which are advocated by the Environment
Agency and the DWI you will find that they account for a really
very small part of the price increase.
Q70 Ms Atherton: Minister, you mentioned
that the average was a 3% rise—
Mr Morley: Nationally, yes.
Q71 Ms Atherton: Nationally. That
is the critical word, because they are regional and you did accept
that there were regional differences.
Mr Morley: I do accept that.
Q72 Ms Atherton: In the very far
south-west of Devon and Cornwall it is significantly more than
3% and some people will be reaching for their pacemakers with
anger, and quite rightly so. One of the issues you have mentioned
in the past is that the lowest waged area—and Diana is going
to do affordability—pays the highest bills, the reason being
the length of the pipes, the problems with the environmental programmes,
how far the pipes have to go, the sewage pipes, you name it, and
the relative small size of the water company serving the population
of Devon and Cornwall. You have indicated in television programmes
in the West Country—
Mr Morley: Yes. It got me into
a bit of trouble actually.
Q73 Ms Atherton: Oh, I am so pleased,
because it actually does solve some problems for these regional
disparities, which are huge. Have you had further thoughts, in
view of the little bit of trouble, and sorted things out?
Mr Morley: Well, the reason why
I got into trouble is that these are issues for the regulator
and I am very careful not to transgress into the regulator's area.
My comments in the interview, following your suggestions actually,
also caused a share price increase, which is the first time I
have ever had any influence on anything financially really. So
I was quite taken aback by that.
Q74 Ms Atherton: Be assured I have
no shares in South West Water.
Mr Morley: I absolutely accept
that. There is—perhaps difference is too strong a word,
but I sometimes worry about the restrictions on mergers. My concern
is British-based companies because the regulator is keen to have
a separate company so that he can have the price comparator and
the regulator believes that there is a need for a certain number
of separate companies so that he can have the price comparator
to ensure better value. I just worry that that works against the
opportunity of British companies strengthening their positions
both within the UK and also within what is becoming a growing
international market in relation to environmental services. So
I just worry a bit about that, although I understand the regulator's
position and I understand his argument on that.
Chairman: Shall we move on to affordability.
Q75 Diana Organ: As we know, the
Government expressed its concern about the price increases and
the difficulty of ability to pay for certain consumers and I understand
from what you are saying that the independence of the regulator
is very important, but surely we cannot go on with the fact that
water bills are rising above the rate of inflation each time there
is a periodic review and we have the increasing difficulty of
how are we going to put into place measures so that those are
the least able to pay can meet their bills. I understand that
there is a review going on and it hopes to be possibly reporting
before the periodic review of April 2005, but in all honesty what
can government do and what do you hope to put into place to make
it easier for those who are going to find it difficult to pay
the hikes in the bills?
Mr Morley: Well, let me be again
quite honest with the Committee there. It is limited, what the
Government can do, in relation to assisting those people on low
incomes with water bills. It does not mean there are not things
that we cannot do, and I will outline some of those. We did host
a seminar on looking at the whole issue of affordability and we
will be producing a report in the very near future on the findings
of that, although we do operate within fairly limited parameters
on this so I do not want to raise false expectations that there
are going to be enormous major statements of policy because that
is not likely to happen. I do come back to the point that as you
go from 1999 in relation to the growth in people's incomes and
the overall growth in prices of 3% nationally then it is not a
bad impact and the way that the regulation has evolved in this
country (which is designed to protect the needs of the consumer,
to ensure that there is adequate investment but not excessive
profits, that the companies' business plans are what is needed
and no more and to ensure investments in the environment) is that
it has evolved into what I think is quite a successful structure.
There are many countries internationally who beat a path to our
door to have a look at the regulatory framework in the UK because
they are very interested in applying it themselves. But there
are things we can do. For people who are on meters there is a
limit to the absolute maximum price. So if you have vulnerable
groups, people who are disabled, people who have chronic illnesses,
for example, then there is a cap on the prices that can be applied
now in relation to the regulations. We have been talking to the
water companies about flexible methods of payment. I am sure we
all have constituents who are paid benefits fortnightly, and being
able to pay fortnightly and perhaps paying direct either out of
benefits or direct out of bank accounts for many people in terms
of budget management is a big advantage to them. A number of companies
do have trust funds, which are administered separately, sometimes
by a charitable trust. Those trust funds can help out those people
who have financial difficulties and vulnerable groups and there
is a potential for extending that further. I know that the water
companies are also interested in the equivalent of the Energy
Saving Trust, whereby you can give support to groups. In fact
they are actually looking at reducing water consumption generally,
which is an important issue, but the Energy Saving Trust, of course,
is designed to help people reduce energy and the water companies
themselves are quite interested in a similar structure to help
people reduce water use as well. I think that is very good in
environmental terms as well as in social terms.
Q76 Diana Organ: Can I just come
back on two points. One is that of course, as you said quite rightly
from your analysis, it has not been too hard a hit on those people
if we look at the rise in earnings. Of course, for those who are
on a fixed income, either on benefits or on a pension, they are
not beneficiaries of the rise in earnings.
Mr Morley: I would accept that.
Q77 Diana Organ: Those are the most
vulnerable groups. So I was hoping for possibly a little more
from what government might be able to look at from the outcome
of the review to assist those groups. The other is that we have
heard from the water companies, particularly last week. Ofwat
was saying that of course it is the environmental requirements
and standards that are taking up their expenditure. Is there not
more that Government can do, since it is Government (often through
EU legislation) which is imposing on the water companies extra
standards and extra requirements which is costing them money?
Is there not something we can do there to meet the bill, because
effectively we are asking the consumers to pick up everything
that we are imposing and some of those are very vulnerable groups?
Mr Morley: Sure. Well, it is true
that a lot of these are water directives from the EU, although
they are measures which we strongly support in relation to environmental
quality standards and it is an issue of the polluter pays. On
the polluter pays, we are moving to a general position in this
country that the people who are responsible for the pollution
are the ones who pay to clean it up and that, of course, applies
to water and sewage companies. I do not know if there is anything
I have missed out on the vulnerable groups, Richard, is there?
Mr Bird: No. Just to emphasise,
on the vulnerable groups we are looking to see whether there is
any way in which the existing arrangements might be extended to
include more groups and we are due to come forward with proposals
on that very soon.
Q78 Chairman: Could I just ask when
you will make your announcement? I assume it will be before May
2005?
Mr Morley: I think we are looking
at weeks, are we not, Richard? Yes.
Q79 Chairman: There will be no return
to imprisoning people for—
Mr Morley: No. There are no proposals
at all to cut people off, because of the health implications.
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