Examination of Witnesses (Questions 84-99)
BARONESS YOUNG
OF OLD
SCONE AND
MR ANDREW
SKINNER
5 NOVEMBER 2003
Q84 Chairman: We understand that
Lady Young is closeted at Defra on the subject of ghost ships.
We will make suitable arrangements to have her decontaminated
when she arrives! We trust that she will not be too long in doing
that. Meanwhile, Mr Skinner, you are the Head of Environmental
Quality at the Environment Agency. You know the background to
this report and so let us begin by asking what exactly is the
Environment Agency's role in determining the environmental controls
that water and sewage companies are forced to undertake.
Mr Skinner: The Environment Agency's
role is to provide advice to Ministers, and it is Ministers because
there is a parallel process operating in Wales, on the environment
programme for the period of review. We do that in conjunction
with English Nature and also CCW in Wales, because many of the
aspects of the programme are dealing with nature conservation
issues on which they are the primary adviser to Ministers. We
sit with fellow regulators, including the Drinking Water Inspectorate
and of course Ofwat, as a group that seeks to propose a programme
on which Ministers can make judgments and give advice to Ofwat
in their stewardship of the process.
Q85 Chairman: A significant amount
of the regulations themselves presumably are European Union regulations?
Mr Skinner: A large proportion
of the regulations are European Directives. As we say in our final
documents, over two-thirds of the schemes which we are proposing
to Mrs Beckett for consideration stem directly from statutory
requirements from European Directives; others stem from national.
Targets set by Government through the PSA process.
Q86 Chairman: If you are submitting
them to her for her consideration but they are statutory requirements
flowing from European regulations, what choice has she got?
Mr Skinner: The programme is not
entirely statutory-driven, and so there are choices. In the jargon
of the exercise, there are choices to be made, and some of the
proposals we have put forward are ones where we believe there
are environmental and indeed social and economic benefits to be
accrued from doing the schemes, but those are ones on which there
is no statutory driver. In the case of those schemes that are
statutory, the judgment is actually, in our view, about making
sure that they are done in the most cost-effective way by the
water companies to meet the environmental objectives. Another
part of our dialogue with our partners in this process is actually
helping in various ways the scrutiny of the companies' plans to
make sure that, as far as one can judge, they are proposing cost-effective
schemes to achieve necessary outcomes.
Q87 Chairman: Are you satisfied that
all the requirements laid upon companies do actually represent
value for money?
Mr Skinner: I am satisfied, and
I say that with confidence because we have done an extensive exercise
to satisfy ourselves on just that point. The comment has been
made on previous iterations of this process that there had not
been cost-benefit rigour applied to those situations where there
were choices to be made. We have done a lot to make sure that
could not be levelled this time. We have done an extensive programme
of cost-benefit analysis. We have had our approaches assessed
and peer-reviewed and challenged. It is by coincidence that today
is the day that we are required to give Mrs Beckett our final
advice on this matter. The schemes that will be in that final
advice will be a smaller tranche of schemes than we started with
because they have been weeded down by various processes of scrutiny,
and one of those is cost-benefit assessment.
Q88 Chairman: Baroness Young will
be able to kill two birds with one stone, will she not, while
she is there! In past programmes, do you think there have been
occasions where the incremental benefit to be gained has not been
justified by the incremental cost in achieving it?
Mr Skinner: The retrospective
on the programmes in the past is that they have provided a huge
benefit to water quality and water environment. I think the programme
has a huge and successful track record. The retrospective analysis
has not been done in every case, and so I cannot give you that
assurance. Of course, many of the schemes in the early parts of
the programme were also statutorily driven and therefore there
were not the choices to be made.
Q89 Chairman: So you will be perfectly
happy if, let us say, the consumers in the south-west are all
up in arms because of increases in their water bills and they
are told that these increases flow from improvements in quality
and all sorts of desirable things? You are perfectly happy to
go down there and say to them, "It is, and it is for your
benefit"?
Mr Skinner: I would and we do.
Obviously the nature of the geography of the country is that the
environmental burdens do not fall equitably, but we are talking
about meeting environmental standards. In fact, in the south-west
the environmental programme is actually quite small, and so I
could and have very happily had that conversation.
Q90 Mr Jack: Let us just move on
in an examination of the rigour with which you have come up with
the programme. In paragraph 15 of the evidence to the Committee
you say: "The Agency, English Nature and the Countryside
Council for Wales have set out a programme that will require over
5,000 actions at around 4,000 sites from 2005 to 2010. The programme
includes 3,200 main actions to improve sewage treatment works
. . ." and you go on and on. How did you work all this out?
Mr Skinner: We did that by quite
a long and complicated process. It starts, as we have said, from
the statutory drivers that need to be met, the statutory obligations
on the country. That leads to a schedule of schemes, which are
compiled locally in liaison between Agency staff, English Nature
staff and water companies. That brings up a long list and that
has then been put through a number of points of scrutiny: firstly,
to establish whether in fact the environmental problem is something
which has been caused by the water company in the first place,
because there are many impacts on the water environment which
are not for their accountability; secondly, to be confident that
we know the answer to the problem and therefore can specify standards
which the water companies need to meet; and thirdly, the cost-benefit
scrutiny.
Q91 Mr Jack: May I just stop you
there for a moment? Looking through A Good Deal for Water,
and I must compliment you on the pretty pictures, they are very
nice, I was struggling really to find in this document any kind
of detailed economic analysis that would underpin the assertion
that you make in the conclusion of your evidence to the Committee
where you say that all of these improvements are only going to
cost people I think it is on average 50p per household per week.
It says that on page 12. We are intrigued to know how this great
calculations was done when A Good Deal for Water seems
to be an analysis-free zone.
Mr Skinner: The 110 pages of advice
which we are giving to Mrs Beckett today contains a lot of what
you are asking for—detailed schedules by various environmental
drivers, as we call them, various issues to be changed. That will
contain also the cost-benefit outcomes. All the methodology is
in the public domain.
Q92 Mr Jack: Having produced this
volume of work with the rigour of the analysis, which sadly is
not displayed in A Good Deal for Water, in Table 1 in paragraph
36 you list the Plan A and Plan B totals for the work to be undertaken
by the water companies listed. Are the figures there realistic,
in your judgment; are they over-statements or under-statements
of the true costs of doing all that is required to meet all these
thousands of actions which you have detailed?
Mr Skinner: Those are figures
from the water company plans, as you realise. We have made global
judgments about the appropriateness of those figures.
Q93 Mr Jack: Global judgments? I
ask the question because I am interested to know the validity
of this 50p per week per household. I woke up this morning to
discover that some judgment had been made by Ofwat in agreeing
United Utilities' figure and one other. I was not certain whether
that was an interim price review or whether it was the final version.
We have to find out the numbers because there is a missing column
from this document, and that is the water companies' own assessment
of their figures. As you have done all this rigorous work, let
us not be global; let us be specific. Company by company, who
is charging the right amount and, if not, why?
Mr Skinner: I refer you to my
colleagues who will follow afterwards because it is their job,
at the end of the day, to assess those plans. Because we are concerned
to be sure that what we are proposing is cost-efficient, we have
done our own analysis. We can talk about the costs of individual
schemes and the schemes in the company because we have some knowledge
of that business. Translating those costs into individual amounts
on bills is a complex process, which only Ofwat can do,
Q94 Mr Jack: You say in paragraph
36: "Some companies have costed programmes and solutions
that go significantly beyond the Agency's recommended programme."
Mr Skinner: That is correct.
Q95 Mr Jack: The point is that I
do not know which of these companies has gone beyond that. Can
you tell us which has gone beyond your programme?
Mr Skinner: Various companies
have dealt with this in various ways, and most of the figures
which are in the common currency are from the companies' preferred
strategies.
Q96 Mr Jack: Forgive me, Mr Skinner,
if it is difficult to answer the question now. I asked a simple
question: which of the companies listed in Table 1 in your evidence
to the Committee have gone beyond the Agency's recommended programmes?
I am trying to establish whether any of these water companies
are trying to raise money other than is necessary to meet the
recommended requirements under the various directives and national
programmes to improve their water quality, which appears to be
the message you have told the Committee: these are the drivers
of this price increase. I want to know who the guilty parties
are in the column headed "Company" which might be going
over the top and, if they are going over the top, what are they
going over the top with.
Mr Skinner: Some companies have
proposed schemes which are not the ones to which we have given
priority in their programmes, and some companies have proposed
costs which we are, through Mrs Beckett, inviting Ofwat to scrutinise
particularly carefully.
Q97 Mr Jack: Which companies are
the ones that are the goodies and which are the baddies?
Mr Skinner: In our own assessment,
we have identified concerns about the programmes of United Utilities
and of Southern Water.
Q98 Mr Jack: Could you clarify this?
The increase that United Utilities, for example, were given today,
was that at the end of this process or was that something else?
Mr Skinner: No, that is something
completely different. That relates to the management of the existing
programme.
Q99 Mr Jack: It is the existing programme.
I was bit surprised that two had been picked out. How would you
classify the reasons behind United Utilities not following the
programme?
Mr Skinner: It is partly to do
with our judgments about the cost necessary to deliver the programme
that we are asking Ofwat to scrutinise.
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