Examination of Witnesses (Questions 160
- 168)
WEDNESDAY 3 NOVEMBER 2004
MR ROY
POINTER, MR
JOHN SEXTON
AND MR
JOHN ROBERTS
Q160 Paddy Tipping: But the other
companies are not doing that. You are the only one that is doing
it.
Mr Roberts: That is right.
Q161 Paddy Tipping: Why is that?
Mr Roberts: I think that is because
we, compared to the other companies, have a larger component of
new build in our capital programme and new build brings with it
inherently more risk than there is in maintenance—with maintenance,
you can take a view on it, you can defer a little, you can manage
more easily, it is lower risk—and that level of higher risk
is a risk which is better borne by shareholders than by debt funders.
Q162 Mr Drew: If we can look forward
to Ofwat's future review, what we have learned so far is that
there is a degree of saying, as regards as the price increases,
"It wasn't me, gov, it was the other lot who did it."
How can we actually move this review forward in order that we
can get some greater degree of clarity for the real reasons for
price increases and are you optimistic that Ofwat are capable
of getting that greater degree of clarity?
Mr Pointer: I think there is a
tremendous opportunity—I alluded to it earlier—as
we get past this periodic review to look at the future, the challenges
that are coming to the industry and the nation—I mentioned
global warming and I mentioned the Water Framework Directive—and
to see what changes can be made to the process and procedure going
forward. I think that the industry would welcome an independent
review of the whole way in which water periodic reviews are done.
Q163 Mr Drew: Are you suggesting
that Ofwat is that independent reviewer or should it be someone
besides Ofwat?
Mr Pointer: I think there is a
compelling case to say, "No, we will take it away from all
of the stakeholders", Ofwat being one of the stakeholders,
and saying, "Let's stand back or get up to 35,000 feet and
look at it in the whole" because it is now 15 years in, we
have had three reviews or whatever and it is time to take stock
and say, "Does it meet the needs going forward with the very
different scenarios that we will be looking at as compared with
what they were when the industry was privatised?" The fact
is that the mechanisms and the reviews have delivered. The industry
has delivered what it set out to deliver post-privatisation but
now we are 15 years in and, frankly, I believe at the time of
privatisation one might have expected that the degree of quality
investment and enhancement investment by now might have subsided
but, as we do look forward, it is likely that there will be a
continuing need for further investment and therefore it seems
to me to be an opportune time to look at the process in toto.
Philip Fletcher has already told us—and he may have mentioned
it to the Committee—that he will be carrying out his own
review in which there will be an independent component, but it
may be good to stand right back out of the process completely.
Q164 Chairman: When we had the Regulator
before us, he agreed with the proposition that he is the surrogate
for competition. That is his job. If you were businesses in enterprises
other than the ones that you are in selling in the marketplace
where there could be four, five or ten companies in the North
West, Anglia or Thames, delivering water, then you would have
to achieve a commercial balance between your statutory obligations,
your legislative requirements, European and national, and what
your customers might be able to afford to pay taking into account
what the competition is putting forward and I just wonder, Mr
Pointer, in light of your last comment saying that the Regulator
may have to look at all of this again, you are all business people
of the world and understand that there is a limit to what customers
can pay. Do you actually think that this process, which you said
has gone through four or five different scenarios and ended up
with the price increase being halved, massive capital reductions
and key customer programmes being slashed, is a very clever way
of determining the prices? Should you not be allowed to put forward
a proposition and then have it picked over by the Regulator without
all this guidance?
Mr Pointer: I think, in fairness,
in the earlier reviews, it was very much that way: a company coming
forward and Ofwat taking a view. What the process has developed
to in the most recent review is far more dialogue with stakeholders,
far more engagement with stakeholders and there are pluses and
minuses to that. On the one hand, if you do consult with stakeholders,
stakeholders are going to have a view and how can you accommodate
that in the review but at least it opens the whole process up
and is a very, very transparent process going forward.
Q165 Chairman: If I can now just
deal with a couple of final questions. First of all, transparency.
In some of the evidence we have had, there has been a lot of talk
about, "We cannot talk to you about it because it is commercially
confidential." What are these super-commercially confidential
areas you cannot talk about when Mr Roberts, in putting out his
appeal for funds, will have had to have been very open to potential
investors about risks and returns and activities and expenditures
bearing in mind that none of you are actually at the moment in
competition with each other because Thames cannot take over North
West's customers and vice-versa unless you buy each other out?
I struggle to find what was so confidential that you could not
put it into the public domain. Can you help me?
Mr Pointer: To say there is no
opportunity for competition is not correct. There is opportunity
for limited competition. It is not as much as one might expect
in other industries but certainly big industrial demands and so
on, industrial customers, can go forward with a competitive supply
at the moment, so that is there around the edges. The fact is
that we are and some companies are listed on the London Stock
Exchange and there are requirements that they would have to observe
in making public statements and we are in a process which is very
much in the Regulator's hands at this stage. We make our submissions
and it is then down to Philip Fletcher and the Ofwat team to come
up with their final determinations which, as I said, we expect
in earlier December.
Q166 Chairman: My final question
to you is this. A great deal of the discussion we have had latterly
has been about the lack of the current five-year programme to
take into account the very long-term investment requirements associated
with things like the Water Framework Directive. Given that and
other environmental legislation, given the burdens and uncertainties
of climate change—and we discussed this in our Water
Security and Flooding report with you—do you think we
are coming to a time when it is right to expect the normal commercial
relationship between you as the supplier of water services and
the customers to individually, company by company, bear the costs
of these very big factors, some of which are utterly beyond your
control and which are beyond the customers' control but which
are world, in the case of climate change, problems? Do we have
to look at a different way of paying for impact on water services
of issues like climate change?
Mr Pointer: I alluded to and I
gave an example earlier with the Water Framework Directive where
I think you have a live example that is coming towards us at the
moment. Where as much of the water improvements that have been
delivered over the last 15 years have been quite clearly levelled
at our doorstep, we have been able to make those improvements,
they are the so-called end of pipe improvements. As we look forward,
the improvements that will be required under the Water Framework
Directive will require other stakeholders to contribute to the
solutions and the way in which that will be done is still subject
to debate and discussion and through Water UK, through the companies,
we would be very happy to contribute to find ways in which that
can best be done.
Q167 Mr Lepper: Just on that issue
of dealing with the Water Framework Directive, we heard from the
RSPB in their submission that they felt that the price review
structure as it is at the moment does not allow for effective
planning to deal with that and that we are storing up problems
for the future if we do not look at it much more long term. The
Minister said to us last week—he seemed to be rather more
sanguine—that we have until 2015 to implement the Water
Framework Directive and that we will not even get the definitions
of what is classified as good ecological status until 2006. He
seemed to feel that we can be rather more relaxed. So, RSPB on
the one hand, the Minister on the other, are you somewhere in
between or a little to one side or not?
Mr Pointer: I think there are
some very difficult questions that the framework directive poses
and, certainly from the industry's perspective, the sooner we
engage with other stakeholders, including RPSB and all the other
environmentalists, the better and surely we will come to a solution
where the nation will have to pay and the question is, is it the
nation through its tax system or other systems or should it be
through the water bills?
Q168 Mr Mitchell: It is clear that
you have to do things caused by various decisions not of your
making in the sense that you have environmental improvements,
you have European directives to fulfil and you also have customer
improvements. Is it possible to state in the company accounts
or in the individual bill that the consumer gets what is due to
what? In other words, you are now being faced with an increase
£X for the wretched European Union or to make the water purer,
to stop leakage or whatever.
Mr Pointer: There has been limited
progress in that respect and certainly when the determination
comes through and the stages we have gone through thus far, there
has been a reasonable level of analysis on what components of
the increase in the bill are levied at which particular component
of improvement. There is perhaps more work to be done in that
area but, at the global scale and certainly with the material
and brochures that go with the bills, some attempt is made to
say what proportionately goes where but it is not a precise science.
Chairman: Gentlemen, thank you very much.
I am sorry that our session was slightly disrupted by voting.
Thank you for your patience and forbearance. Thank you also for
your offer of response in writing to one or two other of the issues
that we have raised.
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