Examination of Witnesses (Questions 126
- 139)
WEDNESDAY 3 NOVEMBER 2004
MR ROY
POINTER, MR
JOHN SEXTON
AND MR
JOHN ROBERTS
Q126 Chairman: Good afternoon, ladies
and gentlemen. My apologies for the slightly late start. I am
afraid that the Committee had some other pressing business which
took a little longer than we had anticipated. Our first witnesses
are from Water UK: Mr Ray Pointer, the Chairman of the organisation
and the Chief Executive of Anglian Water Services, Mr John Sexton,
the Managing Director of Thames Water and Mr John Roberts, the
Chief Executive of United Utilities. I will declare an interest:
I am a customer of Thames when I am down here and United Utilities
deliver my water when I am in the north west and I am sorry, Anglian,
you do not get a look in on this one! There we are, at least I
have representatives of the water suppliers which service the
Jack household. Can I just ask you this on behalf of the industry
which you represent. You all sat down and you made a very careful
assessment of what you wanted out of this price review; you did
all your sums; you put these things in; you did not exaggerate
for one moment the amount of money you needed by way of price
rises; and you took into account all the environmental requirements,
service improvement and responses to the consumer. Then, along
comes the Regulator and chops you in half! Do you really think
this is a very sensible way in which to conduct an exercise that
determines the price of one of the most precious and fundamental
things that human beings require to be both delivered and in a
polluted form taken away because either you did not get it right
and did not understand what the Regulator wanted or the Regulator
listened to what the Secretary of State said by way of advice
and put the guillotine in and really made it look like an exercise
in horse trading? Mr Pointer?
Mr Pointer: Good afternoon, Chairman.
I will start the answer to that question. First of all, what we
are looking at here is a process; it is around two-and-a-half
years long from the start of the process to the final determination
which we expect in early December. As part of that process, Ofwat
consult in the initial stages on the methodology that they will
use to carry out the review and a very important change this time
around was the introduction of a draft business planning stage.
We found this very advantageous because, for the first time, very
early in the process—and the early point is significant
for later—we had the opportunity to consult widely with
stakeholders and just test the temperature of what people's expectations
were, whether they were regulators, quality regulators, customer
groups or whatever, and put forward plans which were comprehensive
and would be clearly subject to consultation and indeed subject
to refinement, particularly in respect of ministerial guidance
that was coming and is still coming down the track on quality
improvements that the nation required.
Q127 Chairman: You have not actually
answered my question because the question I put to you was this.
You went through this exacting process. You have just described
one of the significant differences in the way that this current
review was organised than the previous one. You are all very used
to producing business plans/ investment plans because that is
what makes your businesses tick. You put all this in and you did
all this work and, at the end of two-and-a-half years of careful
analysis, the Regulator comes along and chops in half your proposals.
What I am asking is, as a spectator to this great game, it looks
like it is an exercise in horse trading. Would you have argued
at the beginning that you got your numbers right?
Mr Pointer: I would argue that
we, as companies, got our numbers right for the scenarios at that
time and there were, as you may recall, a number of scenarios
produced to enable customers and other stakeholders to weigh the
costs and benefits of the programmes as they would come forward.
We are two-and-a-half years out, a lot of uncertainty is around
in terms of what requirements might be in some level of granularity,
what they might cost and how they might be brought forward.
Q128 Chairman: Can you just explain
what "granularity" is? I would not like to have that
in my water!
Mr Pointer: A level of precision
on individual items either by quantum in terms of what was to
be built or what it might cost and how it might be constructed.
So, if you think of all the uncertainties at that time, I think
it was—and I come back to it—a very good process to
set in train where, very early in the process, stakeholders from
a wide variety of sources could see what might be possible, when
it might be constructed and what it might do and cost.
Q129 Chairman: Mr Sexton, would you
like to add to this?
Mr Sexton: I would and if I could
speak from Thames Water rather than necessarily for Water UK and
other companies. We are extremely disappointed by the position
we reached with the draft determination at the beginning of August.
We did think that we had put together a well-constructed plan
that actually did reflect what our customers wanted, what politicians
wanted, what customer organisations wanted and what we knew we
needed to deliver the business, and Ofwat have reduced very substantially
the outputs that they require us to deliver. We were surprised
by that. As far as the process goes, I hope very much that Ofwat
have listened to our representations—and I know representations
from third parties on a similar theme—and we are still hoping
that, early December, we will get a final determination from Ofwat
that better reflects the needs of our business.
Q130 Chairman: Come on, Mr Roberts.
Could we have the North-West perspective on this?
Mr Roberts: Certainly and, thank
you, Chairman. In our case, there has been a reduction of about
£900 million from the final plans that we submitted to the
draft determination. Eight hundred million of that is schemes
that have been taken out by the Regulator and I would very much
reiterate what Roy Pointer is saying, we have two things that
are moving here: what are we being asked to do and how much will
it cost? The requirements that are laid on us in terms of the
outputs that we have to deliver move from between one business
plan submission and another, partly driven by what either the
Regulator sees or partly driven by ministerial guidance. In our
case, £800 million of the £900 million difference are
outputs that the Regulator either said, "You should not do
at all" or the majority of these are ones where he is saying,
"I am not convinced that these are the right solutions or
represent value for money. I need to take them away and look at
them in more detail over a longer time period. So, let us just
park them to one side for the time being. They may come back later
on in the programme in later years." That is the position
as it stands at the moment.
Q131 Paddy Tipping: I would like
to share Mr Sexton's unhappiness with him. You get a final determination
in December and you may still be unhappy. Just remind me because
I am not exactly sure of the process. Suppose that you want to
take the Regulator on. Your route is pretty complicated and, dare
I say, hazardous. Just take us through what happens.
Mr Sexton: The process is to appeal
to the Competition Commission. We have two months to decide whether
or not we wish it to be referred to the Competition Commission
and, in so doing, the Competition Commission effectively redo
the determination in full. They will not take a single item and
look at the item, they will look at the whole package. So, there
is a process which, if not too many companies go, the intent of
the Competition Commission would be to complete in six months.
So, by the summer, we should have a final review. The only appeal
route subsequent to that would be a judicial review if we felt
they had not conducted themselves appropriately, which is obviously
extremely unlikely.
Q132 Paddy Tipping: And I think I
am right in saying that nobody has ever been to the Competition
Commission.
Mr Sexton: Some companies have
been; each time, one or two companies have been. So far, it has
been the smaller companies. You mentioned the hazardous nature.
Clearly, it is a huge commitment. It is something that, if you
go to, you have to do well on. Most senior people in the company
are going to be committed to that. It takes resources and I think
we would all prefer to be going on running the business and delivering
the challenges that we have. Inevitably, that decision will be
a hard one to make but I do not think any company is going to
back away from it if it is what is needed.
Q133 Paddy Tipping: Is that a warning
to the Regulator?
Mr Sexton: It is just a statement
of what I believe.
Q134 Chairman: You said at the beginning
that you had had a series of different scenarios put to you. Mr
Roberts, do these changing scenarios suggest that they could be
the best part of £1 billion out in terms of where you started
off and then the subsequent adjustments to different scenarios?
Mr Roberts: I do not think that
necessarily we were seeing at the beginning of the process that
there was £1 billion that could be taken out if we were to
price up all that we thought we were being asked to do. What the
Regulator has done is removed a substantial number of quality
outputs from the programme and he says that he wants to look at
them in more detail and, in his words, "park them" and
he may well then decide, I assume, that they in fact do represent
value for money and they will come back into the programme at
some later date. That is quite possible. What we were doing when
we put in our final business plan was attempting to evaluate the
outputs that we were being asked to deliver over the five-year
period as we understood them and we have to respond to the requests
that were made to us by the quality regulators as to what they
need to see in terms of improved performance and that is what
we were pricing to do.
Q135 Mr Mitchell: I am still not
convinced. What you are saying is different in all three cases.
Mr Pointer says that the requirements are clarified within the
bill that you asked for, Mr Sexton is saying that you asked for
what is absolutely necessary and it is what you want and you are
upset that it has been cut back; and Mr Roberts is saying that
it represents your estimation of the requirement that the Government
impose on you. There must be an element of auction in it, must
there not? It is a game. You put in for the maximum knowing that
the Regulator will want to show virility by cutting it. So, there
must be an element of that kind of auction game in it, surely.
You cannot all be virtuous with strict adherence to requirements.
Mr Pointer: Can I just remind
you of the point I made earlier, that you are at a very early
stage in the process. Remember, at this time, national customer
research was going on and that is another facet this time around
where, instead of customer research being done variously by the
various stakeholders, this time the industry got together with
the regulators and Ofwat and made sure that there was one set
of customer research going on. So, there are a number of moving
parts going all the time and this will change and did change the
components of the plans as they came forward. In addition to a
base plan which the company has put in, Ofwat also requested that
we put some alternative plans, so-called scenarios A and B, to
play some tunes on this. So, there was definitely a way in which
I think the industry with Ofwat was trying to get a picture where
you could see what might be possible and where eventually people
want the whole thing to end up.
Q136 Mr Mitchell: But that is saying
that the game is still going on. Let us be specific. What were
the most important proposed customer improvements that were cut
out?
Mr Pointer: In my own case—and
colleagues will comment from their own company—there was
a strong willingness and desire from WaterVoice, the customer
representative body, that sewer flooding should be eradicated
once and for all, that we are now in the 21st century and, however
you deal with this, it is totally unsatisfactory that people should
be experiencing flood from the sewers—flooding is a wider
issue we know—and we had a strong level of support which
I believe is still there that sewer flooding should be eliminated
completely. In fact, in the current stage of the process—and
of course it is, as you say, an ongoing process—Ofwat have
put in a price cap per property of some £120,000 above which
schemes would be excluded. So, there is an example where we believe
we have a strong mandate from customers that this could be sorted
once and for all but the Regulator is taking a view and saying,
"No, at £120,000, that is rather too much." From
our perspective, we would rather take an approach which talks
about costs and benefits and one needs to try and make some judgment
about the economic costs versus the economic benefit of solving
some of these problems. So, whereas my own company has come at
it from a sense of a strong customer mandate and a cost-benefit
approach, what we are confronted with from the Regulator is a
list of schemes with a ceiling per property of £120,000.
Q137 Mr Mitchell: What about the
other two?
Mr Roberts: Perhaps I can give
an example in a different direction. I mentioned that the big
difference between what we asked for and what we have so far been
given in the draft determination is about £900 million of
which £800 million relates to quality improvements. If I
give you one example of a very big scheme, that was £100
million to create a huge storm water holding tank in Manchester
to stop storm water spilling into the Manchester ship canal. That
was driven by the Fresh Water Fish Directive. Ministerial guidance
tells us that is mandatory, there is no option. In their draft
determination, Ofwat has said that they are not necessarily convinced
that this is value for money. So, they want to remove that from
our investment programme and they want to conduct investigations
into the quality of the Manchester ship canal to decide whether
this is good value for money and I think that is an example of
the kind of examination they want to do. The other point I would
mention is of course what we have not brought to the Committee's
attention and that is that our investment programmes are subject
to independent scrutiny by an independent third party, the Independent
Reporter, who reports to Ofwat on whether what we are proposing
is sensible and is value for money and, in all cases, we normally
get that approval. So, it is not as if we just put these numbers
together, hand them across to Ofwat and that is it, it is independently
certified.
Mr Sexton: I share first of all
Mr Pointer's point about sewer flooding. That was the clearest
message we had from customers that needed to be resolved and from
politicians, I must say, and that was the area we are most surprised
that was significantly cut back by Ofwat. We had two other major
issues that we wanted dealing with: one is the very, very high
leakage rates which we have in London which we have managed to
avoid being a major capital issue at the moment because we have
kept people in supply but, with a huge increase in population
forecast for London, there are no other major water resources
that we can produce readily, we have to tackle leakage. The last
determination gave very, very little funding and what funding
there was was for dealing with leaks, finding them and repairing
them, but the system in London is very old with half the pipes
over 100 years old and they need replacing. We strongly believe
that that is the right thing to do but we have had our programme
on pipe replacement cut back quite substantially. We believe that
is an environmental issue. It is actually essential that we get
those pipes dealt with. The third issue for customers is odour
where we have the one example of our Mogden works which has a
lot of odour and we have had huge customer issues; we have had
the minister visit and we had had local MPs up in arms about the
situation. We put a programme in to deal with it and about 80%
of that was removed by Ofwat. So, there are three areas where
I believe we have a very strong mandate but, so far at the draft
stage, we have not had support from Ofwat to solve these problems.
Q138 Mr Mitchell: Is the proportion
overall that about half the bills have been cut back?
Mr Sexton: It is that order of
magnitude, yes.
Q139 Mr Mitchell: Is that the same
for all companies?
Mr Pointer: Broadly speaking,
yes. It varies but that is a very good average.
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