Examination of Witnesses (Questions 100-119)
BARONESS YOUNG
OF OLD
SCONE AND
MR ANDREW
SKINNER
5 NOVEMBER 2003
Q100 Mr Jack: One of the things we
are anxious to establish is whether all of this represents to
the water consumer good value for money. If we take the two that
you have picked out, Southern and United Utilities, notwithstanding
your concerns, do they represent good value for money?
Mr Skinner: There are schemes
in the United Utilities' plans which include operations relating,
for instance, to shellfish waters, which are not in our recommendations.
Q101 Mr Jack: They think it is a
good idea. Just explain this to me. That is an environmental benefit.
Why do you think they have put that in?
Mr Skinner: I do not know. I have
not had the dialogue with them and so I do not know.
Q102 Mr Jack: If they took out of
their programme the things that were not in your list, do we know
by how much it would reduce their estimates?
Mr Skinner: Again, there are two
points. One is the schemes in the programme and the other the
unit costs to deliver them. The draft business plan is only two
months old and that scrutiny has not been done.
Q103 Mr Jack: Just to conclude, as
far as you are concerned, Southern Water and United Utilities
have things in their programmes which would increase their costs
beyond the Environment Agency's recommended programme of activities.
Do I therefore conclude that the rest of the companies are
compliant with your recommendations?
Mr Skinner: The two companies
I have mentioned have costs in their programme which we have specifically
suggested to Ofwat should be subject to their examination, though
I am sure they will tell you they have examined all of them. I
can supply a schedule, but it is actually in the material we will
be giving to the Secretary of State later on today, which identifies
which of the companies have met in various respects in the programme
what we have asked for and where they have not.
Q104 Mr Drew: To be absolutely clear,
Mr Skinner, what is the process of engagement you have with the
companies to know what their cost structure really is and what
their strategy is in terms of trying to make these environmental
improvements and how do you then, when you are either satisfied
or not satisfied, rebuild this back into their cost structures,
in terms of the prices they will then set?
Mr Skinner: I do not do that last
step. The structure is as follows. As I explained, at the early
stages of this process, when the environmental programme is being
assembled, that is done in dialogue between my colleagues in our
various regions and their local companies. That leads to the programme,
the programme which the Agency specifies and which Ofwat asks
the companies to cost according to a structure of arrangements,
which leads to these plans, A and B. That is then delivered and
it was delivered two months ago. From our various perspectives,
we are in the process of analysing that. Our advice to the Secretary
of State lists our assessment of all those issues and goes into
the detail, some of which we have touched upon in the previous
exchange. The process is then that the Secretary of State gives
guidance to Ofwat to instruct the companies to go through into
their final business plans. Our role at that stage is to advise
Ofwat, answer questions and help them develop a programme which
meets the requirements which we have specified and which the Secretary
of State has accepted in her guidance. It is quite a complicated
process.
Q105 Mr Drew: To be clear, and I
understand how you work with the companies, how would you describe
your relationship with Ofwat at the different stages? It sounds
as though you start quite informally with Ofwat and then you get
into a formal arrangement. Presumably then this has to be enforced
by the two organisations. What is the parallel relationship?
Mr Skinner: The structure of the
process is that we and Ofwat, together with others, sit round
the table at what is called the Regulators' Group, which is brokered
by Defra officials. That means that there is a fair degree of
formality about the process right from the start. The instructions
to the companies about what they are asked to include in their
plans go out under joint signature from the Agency and Ofwat saying,
"This is what we would like you to do to follow this process".
That all has a formality right from the start, although of course
there is an awful lot of professional interaction of a much more
informal nature as the process goes on, and of course we do not
always agree.
Q106 Chairman: We welcome Baroness
Young. I hope you have been suitably decontaminated on your way
here and that you have sorted out the problems of the ghost vessels
and all of that.
Baroness Young: I would not bank
on that, Chairman, but we are a step further forward. May I give
a profuse apology.
Q107 Mr Mitchell: I thought your
defence of what is said in the paragraph where you said that some
companies have gone beyond the desired level is a bit lame. What
are you actually going to say to the consumer because here are
changes made in pursuance of a European directive and your own
instructions, some of which have been added to by companies loading
in other things which you say are unnecessary. Does that not really
put a responsibility on you to tell the consumer that some companies
are free-loading?
Mr Skinner: We will do so.
Q108 Mr Mitchell: Is that report
saying, "Anglia should not be doing this and it should be
doing that but it should not be doing it in the gold-plated way
it is"?
Mr Skinner: The 110 pages which
go to Mrs Beckett today include that information, and that is
or will be a public document subsequently. We have been very open
about that and Barbara Young has given a number of speeches in
the last couple of weeks saying just those things at various public
fora. At the end of the day, though, the decision is with Government,
who will receive our advice, and advice from the Drinking Water
Inspectorate on other aspects of the programme, and then commission
Ofwat to discharge its duties within the scope of that advice.
The track is for us in the public domain to be very open about
what we are doing and why we are doing it, to give advice to Ministers.
Q109 Mr Mitchell: That is never going
to reach the public, is it? Ofwat is going to come in with its
usual technical gobbledegook and coefficients and percentages.
The Minister is not going to produce a report. How is the consumer
to know that he or she is being duped because the company is over-charging
for things that are not necessary?
Baroness Young: I hope that the
process in which we are involved will in fact mean that when we
get to the point at which the consumer is actually faced with
a bill, we have made sure that all of the environmental schemes
that are in the programme are rigorous, fully tested, least-cost
options, that anything that is extraneous and unnecessary is not
in the programme, and that anywhere where costs look ostensibly
too high or where the impact on bills looks higher than it ought
to be, that has been stripped out. That is the important message
we are giving to the Minister in our advice. That needs to be
very high up in the discussions between ourselves, Defra and the
economic regulator in the next few months, until such time as
the Minister issues definitive advice. That goes to the end point
in that.
Q110 Mr Mitchell: We all hope for
a reasonable outcome.
Baroness Young: I think it is
premature to say that we ought to be winding customers up and
saying that we do not want any gold-plating.
Q111 Mr Mitchell: This is challenging
stuff that goes significantly beyond the Agency's recommended
programme. If some of that still remains after going through the
gobbledegook process, will you be telling the consumer that it
should not be?
Baroness Young: Certainly, if
we felt the process was not working, we would be very clear and
explicit about that, but I have confidence that the process will
actually reach a point at which a sensible environmental programme
is part of the process. There are other issues that impact, of
course, on customers' bills. I do not know whether we have covered
that already. The totality of the impact on customers' bills comes
from a whole range of factors, some of which are in the environment
programme, but only some of them. There are also taxation issues
for the companies and issues to do with wanting to dig up the
roads and the cost of that. There are issues to do with their
own financing arrangements. There are other elements of the quality
programme, like the Drinking Water Inspectorate Programme, and
there are big costs associated with maintaining the serviceability
of their assets. There is a whole load of drivers that will impact
on customers' bills eventually. We think we are part of a process
that will really hone down rigorously that environment programme
to a point where it is big, and there is no doubt that it will
have an impact on customers' bills, but that it is absolutely
rigorously tested and therefore we do not have to go to the customer
and say, "You ought to kick up a fuss about some elements
of the environment part of the programme". It is only the
environment part of the programme that we really are qualified
to comment on.
Q112 Mr Mitchell: You have all these
processes but the consumer is faced with other bills and you are
blithely assuming that they will not mind paying an extra 50p
a week, or whatever it is, for improvements in beaches, water
and sewage elsewhere which they will not necessarily see at a
time when the consumer is being asked for more on the rates, more
on other taxes, more on other charges. This is going to produce
some kind of consumer reaction, I would fear. At the end of the
day, the consumers do not trust you; they do not trust the water
companies; they do not trust Ofwat; they do not trust Government;
and certainly, least of all, do they trust European directives.
Are you not afraid that this is going to produce a kind of reaction
with the accumulation of these charges?
Baroness Young: Strangely enough,
in that line up of villains, we are probably the one they trust
most. We have a head start, or that is what our market research
tells us anyway. It is a big issue in terms of the size of increases
in average bills that may result from this pressure, but we always
knew that. If you recall, five years ago when we were involved
in this process, we were constantly saying that a big price reduction
five years ago was simply going to store up trouble now, and here
it is; it is happening now. If we had had a steady price rise
over that period, it would have been a steady price rise from
now on in, rather than the sort of curve that we might have to
see as a result of the price cut that happened five years ago.
What we are saying is that the market research, which we have
all shared with the customers—ourselves, Ofwat, English
Nature and Government—is not saying that the customers are
not prepared to pay for environmental improvement. The customers
are interested in environmental improvements.
Mr Mitchell: They tell us they will pay
more taxes for better public services but when it comes down to
it in the polling booth, they have a very different position.
Q113 Mr Lepper: Barbara, I think
you are right when you say that of that line-up that Austin gave
us, it is the Environment Agency that tends to be perhaps trusted
more than others. It is usually the Environment Agency which is
telling people that they ought to see rather more rather than
rather less of something. Mr Skinner, you cited Southern Water
as the other company where you thought there were some questions
to be asked about their proposals. Could you just give us one
or two examples of what Southern Water have in their plans at
the moment that the Environment Agency feel are not perhaps absolutely
necessary?
Mr Skinner: The issue which we
are inviting Government and Ofwat to scrutinise is not so much
the schemes in the programme but the way in which those schemes
are stated to impact upon the customer bill. As has been explained
by Barbara, there are all these various issues which come from
company structures, company pressures and taxation. We are very
happy to say that the environment programme is important and will
cost money, but we do not want it to be overstated. We do have
concerns from our own analysis, and Ofwat can do this more thoroughly
than we can, as to whether in fact that is the right statement
about the impact of the environment programme on costs.
Q114 Mr Lepper: It sounds to me as
if you are saying that what Southern Water are doing is trying
to offload on to the customer—they are asking the customer
to pay for some of their environmental schemes—costs which
they, as a company, have to meet but which ought to be met from
somewhere other than the customers' bills?
Mr Skinner: No.
Q115 Mr Lepper: Then I have misunderstood.
Mr Skinner: There are two points.
Firstly, we are merely suggesting to the economic regulator, whose
job it is, that he should look at these issues more closely. It
is not so much whether the costs will call on the question; the
question is whether it is appropriate to allocate it as a cost
caused by the environment programme.
Q116 Mr Lepper: All right, and so
the essential thing you are saying is that it is about questions
on Southern Water's figures?
Mr Skinner: Yes.
Baroness Young: One of the lessons
I think we have learnt from this price round, and I am sure Philip
Fletcher will agree with this, is that there are some issues about
what perhaps ought to be more transparently demonstrable in the
way that companies present figures. It is part of a learning process
and the refinement of the price round process but I think we do
need to be able to disaggregate some of the financing costs more
accurately from the elements of the environment programme.
Q117 Patrick Hall: May I explore
the business about the costs to achieve the environmental improvements?
You have flagged that up as being the cost one fizzy drink per
week, which I think was referred to earlier as 50p per week, which
is £26 a year. If one looks at the evidence that you have
let us have, and at Table 1, could you explain if we are supposed
to be seeing £26 for the whole year as the price increase
on average for all of these water companies? Therefore, with Southern
Trent's Plan A of £3, which is less than 6p per week, does
that mean that there are no problems in that huge part of the
country of Severn Trent or that that you have not set them proper
standards to pursue, or that they do not want to do that? What
do these figures actually mean? I really do want to know how this
50p, or whatever it is, has been arrived at, without reading Margaret
Beckett's 10,000 page document to which you refer.
Mr Skinner: I will try to do it
simply. The £26 relates directly to the column of figures
headed Plan B, and it is an average figure; i.e. it is our judgment
across the country. The fact that some companies have low numbers
in here in some cases is due to the fact that there is not a large
programme of need. Perhaps that has been satisfied in previous
rounds under different geographical circumstances. There is a
huge variation from region to region and company to company, which
is translated through into the bills because of the circumstances
of the region. If you do the average of Plan B, you will find
it is higher than £26, and so we are saying that in our judgment,
and we hope that Ofwat will be able to discover this, there is
scope for the work being done more cheaply but, because the figure
is low, that does not mean to say that we are necessarily unhappy
with the programme.
Q118 Patrick Hall: And so in the
Midlands and in the London area there is less pollution than there
is in other places, which does surprise me.
Mr Skinner: You have named two
regions that do not have any bathing beaches, and that is quite
a significant driver on environmental pressures. Although we may
have this differences about the numbers, there is no doubt that
the programme in United Utilities is a big one, and that is, among
other things, driven by coastal water quality issues.
Q119 Patrick Hall: But it is a programme
that goes beyond what you think is sensible?
Mr Skinner: In that case, yes.
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