Examination of Witnesses (Questions 80
- 99)
WEDNESDAY 27 OCTOBER 2004
MR ELLIOT
MORLEY AND
MR RICHARD
BIRD
Q80 Mr Drew: Just to return to the
Water Saving Trust, I have certainly picked that up both from
Water UK and one other company. On what basis is such an organisation
set up? The Energy Savings Trust obviously receives quite a substantial
sum of government money. I do not know if it has got any legislative
basis at all, but what I am really asking is what would be needed
to get this under way because there is a lot of goodwill but that
is not quite the same thing as setting up—
Mr Morley: There is goodwill and
I think to get it going the water companies through their trade
organisation, Water UK, are prepared to put the money up themselves.
Q81 Diana Organ: Can I come back,
Minister? We do have a problem, as you will be aware of, that
many consumers do not have a lot of confidence in the bills that
they are being issued with by their water companies. As you know,
people who live anywhere between Chepstow and the top of the border,
in the marshes area, between Welsh Water, Severn Trent and other
water companies there have been considerable problems about the
billing. Yes, I know, I have written to you about it, about the
problem that they have been wrongly billed for a long time and
they were not on the computer. There is an issue here about the
bill coming through the letterbox and people saying, "Well,
they don't even know who I am, where I am, where I get my sewage
taken away to and who is dealing with it and where I get my water
from." There is a lack of confidence amongst many consumers,
and Candy Atherton's area has similar experiences with lack of
confidence, and yet those very areas are going to be some of the
areas that are going to have the highest increases in their water
bills.
Mr Morley: I think it is a very
difficult one because I know the case in question and it is a
very unfortunate one, shall we say, in relation to which water
company had the responsibility of the billing. There are cases
of that where you get an overlap of boundary. It is not so common.
Until our boundaries changed I had one community where the boundary
ran through the middle of the village and half the village was
in Severn Trent and half the village was in Anglian and the water
prices were different, because they are different, and the sewage
prices were different. Of course, that is not the kind of thing
that leads to a harmonious relationship, basically. So I understand
that, although I think that is a fairly narrow problem where you
are on the periphery of water companies.
Q82 Diana Organ: Ten thousand people
it affected.
Mr Morley: Oh! That is a broader
problem than I thought, actually.
Q83 Diana Organ: Not all in the Forest
of Dean; it is all the way through the marshes.
Mr Morley: Right. I think the
case that you uncovered is certainly the largest of its kind that
I am aware of.
Q84 Mr Lepper: Can we just focus
for a moment or two on the price review process itself. You will
be aware, Minister, that in our first report on water pricing
earlier this year we said we were concerned about the inability
of the existing process to take proper account of long-term planning
on issues such as climate change, research and development into
those issues. Ofwat is about to review the process with a view,
presumably, to informing what might happen next time, in 2009.
Could you just clarify for us to what extent you or the Department
expect to be involved in that evaluation by Ofwat?
Mr Morley: We will be involved
in the evaluation there. Ofwat will look at the system and of
course it is likely they will make a report to Defra within that.
I should say that all water companies are obliged to have a twenty-five
year plan in relation to water resource and management, so they
have to look ahead for the next twenty-five years in relation
to the kind of demands that are going to be made for water and
they have to plan ahead because, of course, there is a need to
ensure that there is security of water supply. That means that
water companies are obliged to take into account the effects of
climatic change because there are some severe potential long-term
effects of that. They are obliged to look at long-term plans in
relation to housing development, for example, and increasing demands
that could be made upon water. So they have that obligation at
the present time. I think the regulator will be looking at the
five year review process and how it works. As a general principle,
all I would say is that the way that we have developed the water
sector in the UK is that it is a long-term industry that requires
long-term investment. It is within a very, very tight regulatory
framework and I do not think it is unreasonable to have as much
long-term planning as you possibly can.
Q85 Mr Lepper: It is great that there
is that long-term view that the industry is encouraged to take,
but on the other hand that planning still gets chopped up into
five year segments, inevitably, in terms of the money that is
likely to be available to carry forward those plans. Of course
the current pattern of those reviews always tends to coincide
with a General Election within a few months or so of the decisions
being taken and the inevitable balancing act between long-term
issues dealing with climate change, the context now of the water
framework directive as well that we have to operate within, the
needs of the environment and the sorts of issues that Diana and
Candy have dealt with about the pressures of pricing on their
constituents in particular and for all our constituents always
come into this. Is there another way of dealing with this?
Mr Morley: There may be, and I
think that is part of what the regulator is looking at. All I
would say to you, Chairman, is that I have an open mind on these
approaches and I recognise that there is a need for long-term
investment, long-term planning, and sometimes in relation to some
of the bill problems the longer you can spread the investment
then the lower the impact there is on consumers and I am very
much in favour of that as well.
Q86 Mr Lepper: I wonder if I could
just carry on with this issue about the water framework directive.
Again, we have had RSPB saying to us that this price review does
not deal with plans for the water framework directive effectively,
that it is storing up additional problems for perhaps the next
two price reviews. Any thoughts on that?
Mr Morley: Well, I do not really
accept that. We have until 2015 to implement the water framework
directive. We will not even get the definitions of what is classified
as good ecological status until 2006. We will not even get the
definitions until then, so there are not huge spending implications
in this price round. But a lot of the work that will be done,
for example work on the nitrate-vulnerable zones in terms of meeting
the nitrate directive, in terms of meeting the drinking water
directive, in terms of meeting the ground water directive, and
some of the ways that we are shaping the upland management schemes,
the agri-environment schemes, will all contribute, Chairman, to
the outcomes of the water framework directive. So it is not as
if nothing is going to be done in the next five years. An awful
lot is going to be done in the next five years in terms of meeting
those requirements.
Q87 Mr Lepper: So RSPB are being
perhaps a little bit over-concerned, a little bit alarmist?
Mr Morley: I think they are quite
keen on seeing as much money up front as they can possible argue
for, and I do not blame them for that, but I think the right balance
has been struck in relation to the required investment.
Mr Lepper: Thank you.
Q88 David Taylor: Just to pick up
one or two loose ends. I think David has covered the longer term
issues fairly well. Would you accept that politicians in general,
the Environment Agency, the water industry in general, and perhaps
Ofwat have been slow to accept that climate change is in fact
a reality and not some theory which may or may not fit the facts
of climatic change over the last few years, and if you did accept
it that the forward plans for capital expenditure over a very
long period (you have talked about 25 year plans a few minutes
ago) have started to climb almost in parallel with the acceptance
that we are talking about serious sums of money here? We have
had evidence and there are suggestions that the water industry
have tried to respond in an appropriate way but they felt the
downward pressure of Ofwat, who felt the downward pressure, presumably,
of politicians. So the twenty-five year mechanism is translated,
as David said a moment or two ago, into five year lumps. Is it
really the right way to respond to things when just a year or
two ago certain patterns of climatic activity were described perhaps
by experts as just one in two hundred years and now that has been
revised very rapidly indeed, and capital expenditure has got to
come in parallel with that?
Mr Morley: That is absolutely
right, but there is certainly no government that is taking climate
change more seriously than this one, in terms not only of giving
a lead internationally but also in looking at adaptations in relation
to climate and the long-term implications that there are for our
economy and for our country. The water companies also accept that,
which is why we do have the twenty-five year plans, but we are
seeing some changes in relation to potential pressure because
of the climate. Thames Water, for example, are going ahead with
the desalination plants. In some ways that is a pilot scheme and
that is designed to deal with pressures in the summer basically,
where you can get low flows and water shortages, and there may
well have to be further investment in terms of ensuring that our
water supply is secured. That is also, I might say, on the other
side of the coin, allied with the targets which the regulator
sets for leakage, for example. There have been considerable improvements
on leakage nationally by the water companies, but there are still
one or two companies who have to do a lot more on that. We also
need to raise awareness about water being an important resource.
The Water Bill, for example, in terms of abstraction changes and
controls, is also part of implementing a more sustainable approach
towards water with an eye on the range of pressures that there
are on water resources in this country, and of course climate
is one of them and that is built into the approach.
Q89 David Taylor: Is it possible
for the law of diminishing returns to apply to investment to prevent
and reduce leakage in much the same way as you yourself said there
was in relation to quality? At what point do you acknowledge that
we have come about as far as we economically can do and that resources
would be better applied in other areas?
Mr Morley: That is right. There
is what is called the economic level of leakages and that is a
level of leakage which is at a certain low level where it is not
cost-effective to try and spend large sums of money to get that
lower. Some companies are probably at their economic level, but
not all.
Q90 David Taylor: Which ones would
you say were not?
Mr Morley: Thames is not at its
economic level of leakage.
Q91 David Taylor: Severn Trent?
Mr Morley: Severn Trent have actually
changed their calculations, which makes their leakage look a lot
worse. They may be right, actually. If they are right, then they
will not be at their economic level.
Q92 David Taylor: Finally, Anglian,
where the border runs straight through Leicestershire, between
Anglian and Severn Trent?
Mr Morley: I think Anglian has
got quite a good record on this, has it not, Richard?
Mr Bird: I think so. I think the
Committee will have an opportunity to ask them next week about
that specifically, but certainly I think Thames rather stands
out here.
Mr Morley: To be fair to Thames,
they have some real problems in relation to London clays. They
have problems in relation to it. It is enormously difficult digging
up roads in London, as I am sure London Members will be aware,
so I have some sympathy with Thames. However, they still could
do better and we do expect to see them do better.
David Taylor: Thank you.
Q93 Chairman: There is almost an
element of fudge-ability and fiddle-ability in these loss estimates,
is there not?
Mr Morley: Yes. There are always,
shall we say, different ways of interpreting figures, Chairman!
Q94 Alan Simpson: I am just wondering
whether this five year price review helps us to address longer
term issues about climate change or whether it hinders us, because
it seems to me that what we have set up is an impossible contradiction
between the water companies required to plan on a twenty-five
year water resource management basis and Ofwat squeezing them
on the five year price review process. It just seems that this
is a no win process for the environment. We put pressure on the
companies. They say that they want to do things. We ask whether
they have got the resources and they say, "Well, it's all
very well, but there's a hole in my bucket, dear Eliza."
We are in real danger of just spinning round on this in ways that
pretend that we have an agenda that relates to long-term climate
change when we do not.
Mr Morley: Yes. The twenty-five
year plans help, obviously, because the companies are obliged
to look quite a way ahead. We have also had programmes like the
Foresight Programme with the Office of Science and Technology,
but that is looking at flooding and coastal defences. There is
a bit of a read-across in relation to it. It is water management.
Yes, I accept your point that it is clearly better to have longer
term planning, and that also includes longer term price planning,
because it is such a tightly regulated industry. It is almost
part of the state apparatus, even though it is privately funded.
It is a very strange hybrid link that has developed over the years.
Now, in that respect perhaps we should just accept that the water
sector is always going to be tightly regulated and to look at
the advantages of that, which is that you can have long-term planning
with stable returns in relation to investment. That is the big
advantage of water companies. It is capital intensive but it is
a nice, steady, safe return for investors. So there is a quid
pro quo in this. I have no objection to looking at it in the
longer term and I would be very interested in the regulator's
views on this and once the price review is out of the way we will
have more time to talk about things like that. Of course the regulator,
quite understandably, has been very much focused on the current
reviews and the work that he and his staff have to do, along actually
with our own water division, I have to say, as well. Also, as
a general principle, I do not think it is desirable for consumers
to see prices go up and down and up again. I just do not think
that is desirable. I would much rather see a steady, nice smooth
approach in terms of long-term investment in relation to water.
Q95 Alan Simpson: But is not the
price review almost the antithesis of what you were saying about
the polluter pays principle, because the price review is about
the consumer paying?
Mr Morley: But the job of the
regulator is to apportion that cost in a fair way. Yes, there
is a cost to consumers and there are no two ways about that, but
the companies themselves are expected to raise part of that cost
through borrowing and through equity, and the regulator seeks
to ensure that that balance is struck.
Q96 Alan Simpson: But I do not think
that that in any way engages with the question of the polluter
pays. Whether companies raise money through equities or through
long-term loans, it is a mechanism for meeting obligations; it
is not about requiring the polluter to pay. The Department today
has come out with, or slipped out an announcement that it has
just agreed to a 7.5% increase in carbon emissions from the April
figures.
Mr Morley: The DTI modelling has
demonstrated that we were short of about 7.5%, not—
Q97 Alan Simpson: My understanding
was the DTI are lobbying rather than modelling—
Mr Morley: I think we are straying
a bit here, Chairman, but that is not our interpretation at all.
I am very happy to talk to Alan afterwards about it.
Q98 Alan Simpson: The issue here
is how the industry and how us as a government give the industry
a remit to address long-term climate change.
Mr Morley: Yes.
Q99 Alan Simpson: You have made reference
to the role of the Energy Saving Trust and it is an important
one in energy issues. However, the role of EST has to be seen
in the context of us as a government having made a commitment
to completely eradicate fuel poverty by 2016.
Mr Morley: Yes, and on target
to do so.
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