Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 27 OCTOBER 2004
MR ELLIOT
MORLEY AND
MR RICHARD
BIRD
Q100 Alan Simpson: Well, we might
come back and discuss that one because I do not think we are.
The fact is that that remit was defined by central government
policy.
Mr Morley: Yes.
Q101 Alan Simpson: It was not sort
of behind the scenes negotiations between the regulator and the
industry, it was the Government setting clear obligations which
industry then had to meet. If that is what we are saying is happening
in relation to water, we have to be much more prescriptive and
interventionist to give the industry a role. You talked about
the industry having an interest in reducing water consumption
and water back flow and sewage problems, but there is no intervention
that you are contemplating or that is incorporated in a price
review that would do things like give new planning powers to local
authorities to require water recycling schemes to be built into
all developments or, as they have in some American cities, a requirement
that all new buildings (office buildings and developments) have
to have their own reservoirs built into that as a provision to
counter soak-away. All of those interventionist costs to deal
with the polluter responsibilities are actually absent in our
framework. We just have a price mechanism that is picked up by
consumers.
Mr Morley: Well, I say that it
is not entirely picked up by consumers because the price is spread
in relation to what the companies have to do in terms of their
borrowing requirements and their equity requirements, but it is
a good point, I think, that you are making. We can approach some
of these issues in terms of grey water systems and water use through
building regulations, for example, and I am very keen to do so.
Q102 Alan Simpson: Except every time
we try and do that other departments say no.
Mr Morley: Well, we did set up
the Better Building task force group and that of course was a
joint programme between ourselves and Defra, ODPM and DTI. They
have come out with some very helpful suggestions, one of which
is new building standards designed to cut water consumption in
a new-build home by between 25 and 30% and we are planning to
go ahead with those changes and to introduce new building regulations.
Indeed, there is more we can do in relation to commercial development,
in terms of new development, sustainable open drainage, for example,
rainwater catchment. I think it is certainly a fair point to say
that there is more that we can do. It does not have to be through
the price review process. There are other mechanisms that we can
use on this, not least, incidentally, in terms of public buildings,
the contractual obligations that we can put in in terms of a policy
of sustainable production and consumption. All these are areas
that we are taking forward at the present time.
Q103 Alan Simpson: My final point
on this is just to say that if we want the water industry to play
an active and constructive part in those deliberations we must
also reflect on the changes that have to be built into the remit
of the regulator that allow for that to be taken on board, because
there is a tension which is reflected in the perspective of the
regulator that says this is a price issue.
Mr Morley: Yes. However, under
the changes that the regulator will go through (which were brought
in in the Water Bill under the new office of the regulator where
there will be a board, for example), in the Water Bill there is
a duty to take into account sustainability within that duty, and
indeed defining what that means is going to be an issue but very
much along the lines of what you are saying.
Patrick Hall: Minister, I would like
to pursue a little bit the issues raised by colleagues about long-term
planning. At the oral evidence session that this Committee had
with Ofwat last week I asked a question referring to the Environment
Agency's written evidence to this Committee and on page 9, paragraph
37 of that evidence there is a sentence which reads: "While
the evidence is not sufficient to justify investment now, investigations
by companies are needed to look at the implications of climate
change on water supply and sewerage systems." I asked a question
saying that I found the first part of that sentence rather surprising.
The answer from the Director-General was certainly not to deny
climate change—
Chairman: I thought we might finish the
course. If we can come back in 10 minutes' time, we will resume.
Thank you very much.
The Committee suspended from 4.47 pm to 4.58
pm for a division in the House.
Chairman: I will resume because we are
quorate. Patrick, perhaps you could just give us your question
again.
Q104 Patrick Hall: I was referring
to a question last week drawn from the Environment Agency's evidence
and I read a sentence referring to the evidence for climate change.
In fact the evidence started "While the evidence is not sufficient
to justify investment now" and I think I just said that the
Director-General of Ofwat did not deny that climate change exists
in general terms. What he did say, and I think I am being fair,
was that there was no need to engineer now changes in event
frequency assumptions, and Mr Fletcher used the example of a sewer
needing to cope with a one in thirty year rainstorm. That is the
traditional assumption that is applied and it is still being applied.
Mr Morley: That is right.
Q105 Patrick Hall: He said that evidence
on climate change needed to be clearer before investing in a wholesale
upgrade, which would be expensive, and therefore that is beyond
the scope of the five year price review that we are looking at.
Of course, Minister, it would be expensive to do these things,
but surely it will be even more expensive if we do not do those
things, if we do not prepare for the future?
Mr Morley: I agree.
Q106 Patrick Hall: Do you think there
is a danger of either complacency in the whole system in not planning
ahead, or could it be that the very structure of the industry,
regulation and funding severely limits its ability to prepare
for climate change? I am not questioning the integrity of individuals.
The Government is certainly very cognisant of the need to prepare
for climate change, but it is all very well building this into
a long-term 25 year plan, but if little strategic attention has
been applied to this in terms of five year investment plans then
what does it mean? We are heading towards problems. Could I ask
you, Minister, whether or not you think there is a case here for
very seriously looking at the way these things are going to be
actually addressed in practice?
Mr Morley: No, I do think there
is a case and I think you can argue that five year timescales
are difficult in relation to the financial planning. I think it
is fair to say that the regulator, I guess, will be looking at
the capacity that we have in the UK at the present time, particularly
in water supply security, which is in reasonably good shape, particularly
in the north and the west, although of course if you take London,
the south-east and the Anglian region there is no room for complacency
in relation to water demand and average rainfall in those areas.
It is also the case that we do have to take into account that
weather patterns do appear to be changing. There is no certainty
yet because you need a number of years to actually identify a
pattern, but it does appear that we are seeing drier summers generally
(although not this summer, I have to say) and we are seeing wetter
winters. We are also seeing a greater incidence of intense downpours
in comparatively small areas, and we saw that in Boscastle, of
course, in August. That was an extreme. But we are seeing examples
of that and therefore there are implications for sewer flooding,
which is why extra attention is being given to sewer flooding,
partly because there is an investment need and partly because
of the increased incidence of sewer flooding, which I know the
regulator is aware of and is sympathetic in relation to the investment
priorities. So you are seeing that measure in itself. But in terms
of longer term water security we are not in a situation of desperate
water shortages, nor in some parts of the country do we have any
ground for complacency and it is likely that we will have to build
these in in the future in relation to both dealing with potential
sewer flooding and also water resource management. I would say
that generally when you are building new systems in they are much
better in relation to their capacity, their design, and indeed
how long they last compared to older systems.
Q107 Patrick Hall: Could I just press
a little more on your personal view. It seems easy to say, "Yes,
we accept that there is such a thing as climate change,"
but at the same time we are saying, "But there isn't sufficient
detailed evidence to actually do something about it." If
that is the position then we will not do anything about it until
it is too late, as it were, or at least until it is much more
expensive with all sorts of associated inconvenience and disruption,
which has economic effects anyway. Surely it is not wise to wait
for 101% proof on an issue such as this and therefore a judgment
has to be made, and I guess that needs to come from Government,
for it to take the lead in this. Okay, we do not get 101% proof,
but there is sufficient evidence. We must build this into our
plans because it is in our long-term interests to do so.
Mr Morley: You are absolutely
right and there are research projects under way. I will perhaps
ask Richard to expand on that, not least because I cannot read
without my glasses, Chairman!
Mr Bird: Just to say that in the
same paragraph in the Environment Agency's memorandum they do
refer to a new research project with the UK water industry research
programme to ensure climate change is adequately considered in
the next review. So I think that is exactly the process that you
have in mind in terms of turning more general considerations
for climate into specifics for water companies. So this is very
much on the agenda as an issue.
Q108 Patrick Hall: So we can look
to detailed evidence of that in five years' time?
Mr Morley: We can. Well, yes,
it is possible that in the next round there may have to be an
element—
Q109 Chairman: We will be here in
five years' time!
Mr Morley: There may have to be
an element of building in investment because of the effects of
climatic change.
Q110 Mr Breed: If I could just talk
about the sewer flooding and flooding generally, looking at the
sort of rural areas and with your other hat on in the Department,
if you like. What work is actually being done in respect of the
management of agricultural land and land generally in rural areas
as a really potential contributory help to try to alleviate some
of these flash flooding incidents in a way in which agriculture
is actually undertaken? Of course, we have the added disbenefit
of run-off, which takes a lot of soil with it as well, which actually
gums up all sorts of other sewers and everything else.
Mr Morley: It does.
Q111 Mr Breed: What work is being
done to try and, I suppose, compensate farmers (if that is the
right thing) or to encourage them to farm in a different way,
which may not be as perfect economically as they may wish but
actually would have the benefit of absorbing water when it falls
out of the sky and stop the run-off and everything else?
Mr Morley: Well, there is a lot
of interest in agriculture in relation to farming and using land
as part of water management and there are some very interesting
Welsh studies about the role of forestry and water absorption,
which certainly in some of the figures I have seen suggests that
the role of trees in certain circumstances, in certain soils,
has a much greater effect on water control than was previously
thought and those are issues that of course we are looking at
in Defra because we have a range of objectives in terms of water
management and biodiversity, recreation, environment, agriculture,
forestry. As I mentioned earlier on, I am very keen to have a
much more holistic approach to all these objectives. The other
issue is in relation to soil management. We do have codes of good
agricultural practice and we have a code dedicated to soil management,
because how you manage soil does have a bearing on the rate of
run-off. For example, heavy machinery can compact soils. The way
you plough and ploughing with contours can decrease run-off, the
kind of crops in relation to the areas, of course, and also in
terms of the time for green cover and brown cover. All these things
do have a bearing on water run-off and there are codes of good
practice that farmers can follow. In some cases, particularly
in relation to controlling chemical run-off, there may be a role
for putting certain land into agri-environment schemes as part
of managing that.
Q112 Joan Ruddock: I do say to the
Minister, of course, that it is also a huge problem in urban areas—not
the run-off from our gardens but certainly the sewer flooding
in London—and Ofwat needs to really understand that the
science, I think, and all analyses are showing that there is a
greater increase of these incidents and that global warming is
perhaps happening faster than had been earlier anticipated. You
have just got to look at the number of times the Thames Barrier
has had to be raised. It is very, very significant in terms of
the impact of climate change.
Mr Morley: That is right, yes.
Q113 Joan Ruddock: I wanted to ask
something quite different. We have talked now a lot about environmental
improvements. I was a bit struck earlier on in one of the answers
you gave that there was perhaps some confusion in how an environmental
improvement was described and accounted for in terms of the price
reviews. It seems to me that that confusion ought, in everybody's
interest, to be done away with if it is possible and that there
ought to be greater transparency, not least because we may find
that we have to have more and more environmental improvements
because of things like climate change. Is it not possible for
there to be an agreed set of criteria between the Department,
Ofwat and water companies as to what does constitute strictly
an environmental improvement? For example, if the improvements
are directly related to a European directive on the environment
then that would be very obvious. Is there scope for that? Can
it be done? If it could, I believe it should be done.
Mr Morley: Sure. I think there
is perhaps more work we can do in terms of ensuring transparency
in relation to what programme is for what outcome and the costing
of that. There is a point, and I am very grateful for the opportunity
to clarify, in relation to the environmental programme and that
is that our environmental and quality programme (which is what
we advocate from Defra) is in two parts. One part is what we have
to do in relation to the mandatory obligations that are upon us,
mainly in meeting European directives. Now, we have no choice
about this because it is an obligation that we have to meet. The
other part is what is called the discretionary environmental programmes,
which are programmes which we would like to see. The Endocrine
research work, for example, is in the discretionary programme.
The upland programme is in the discretionary programme. But that
discretionary environmental programme, the non-mandatory part,
is tiny, Chairman. I think you have a figure for that, Richard,
do you not, for what accounts for the discretionary element?
Mr Bird: Yes. A pound of the total.
Mr Morley: Per year. A pound a
year.
Q114 Chairman: Is it possible to
give the bills in a form whereby the consumer knows what increase
is due to what and what they can blame on Europe?
Mr Morley: I have opened an unfortunate
box there, Chairman. Theoretically, yes, although there would
be a cost to that if you broke it down in great detail on the
bills, and of course I do not think any of us want to add additional
costs to the consumers' bills. But certainly in relation to having
the information available and sub-divided in relation to what
is for the environment, what is capital, what is driven by European
directives and what is discretionary, I am sure that can be done
on a national basis and have website accessibility.
Q115 Chairman: On a national basis
or a company basis?
Mr Morley: I think it could be
done on a company basis, could it not, Richard?
Q116 Joan Ruddock: It ought to be
done on a company basis.
Mr Morley: Yes. I think it might
be to a certain extent.
Mr Bird: I think the companies
will have the information. No doubt there is a bit of a judgment
sometimes about which particular category it falls into.
Chairman: Yes. It would be useful to
have it more identified and published.
Q117 Alan Simpson: Minister, we are
in a situation where the Environment Agency is re-drawing its
maps about the areas and properties likely to be affected by severe
weather conditions and flooding. The Met Office are just revising
their advice to us about the incidence of severe weather conditions
and the flooding that will follow from that, yet we have a dispute
between the water companies and the regulator about what they
see as the capping of the cost per property that the regulator
is willing to allow for making provision for sewer flooding. How
do we get out of that, because in practical terms MPs are confronted
by constituents who face not an arbitrary issue about whether
it is likely to happen but what they do when it has happened and
what we are doing in policy terms about things that now appear
to be happening not just on a regular annual basis but irregular
periods within each year? We do not appear to have an effective
intervention strategy that addresses current crises, let alone
a strategy that addresses them in the longer term.
Mr Morley: Yes, although it is
not quite as rigid as I think it has been presented in relation
to the guidelines from the regulator. He believes that cost-effective
spend on sewer upgrades and repairs should be less than £120,000
per property. Now, I know that in areas like the north-west, where
there is a sewer flooding problem, you get houses which are very
much on the borderline about whether or not in some cases the
cost of the upgrade may be more than the property. I understand
that is a problem, but I have talked to the regulator about this
and I know that the regulator is sensitive to the very points
that you make and he is aware that there may well be cases where
there could be justification for sewer upgrades and work to deal
with sewer flooding that may go over that figure. His view is
that that is a matter for the water company to make that case.
But it is not a hard and fast figure. It is not a situation where
you cannot go one penny over that level and it very much depends
on the circumstances. I thought he was taking a reasonable attitude
towards that.
Q118 Alan Simpson: Is this an issue,
though, that we can leave to be resolved between the regulator
and the water companies?
Mr Morley: Well, in relation to
the system that we have and the way that the price setting and
the capital programme is at arm's length—and I think there
is a good argument for that because we had the point that it is
unfortunate that the price review comes up very close to a General
Election—of course it causes anxiety in relation to price
impact but it needs to be done in relation to meeting those three
objectives (the needs of the consumer, the needs of the companies
and the needs of the environment) and that is what it must be
driven by. Now, the companies can make their case to the regulator.
The companies can even in some cases go for an interim determination
if there are unexpected costs which fall on them and they believe
they have a case to take to the regulator. If the companies do
have unexpected costs there are mechanisms whereby the spending
that they have in this five year period can be taken into account
in the adjustments and the business plans in the following five
year period. There is a number of mechanisms that the regulator
can discuss with the companies in terms of meeting particular
problems. So it is not as rigid as it has sometimes been presented
and I think if the companies feel that there is a particular problem—and
I know that there are in certain parts of the country and I know
that there are in the north-west—then there is action that
can be taken. I must make that absolutely clear.
Q119 Alan Simpson: The reason I asked
about whether we can just leave this to be resolved between the
regulator and the water companies is that our own discussions
need to be set in the context of the fact that there is either
none or next to no other country in Europe where water services
are entirely unsubsidised in the way they are in England and Wales.
In Ireland people pay no water bills at all. The question that
I am trying to interject here is, if we just leave this as a dialogue
between the regulator and the water companies everyone else gets
off scot-free. I think there is a whole series of other players
who ought to be brought into this in terms of how we address a
real and current problem. I mentioned earlier soak-aways. There
are cities and countries around the world where it is now part
of the planning obligations for all new developments that they
have to contain reservoirs underneath them and that compensates
for the soak-away land that development takes away. That is not
something that could be resolved between the water companies and
the regulator. We have to have more interventionist planning powers
and duties that are put on the shoulders of developers. You know
as well as anyone else that the building industry in the past
has said, "Oh, no, Minister, you can't do this because it
will increase the cost of the developments."
Mr Morley: That is right.
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