Examination of Witnesses (Questions 120-139)
BARONESS YOUNG
OF OLD
SCONE AND
MR ANDREW
SKINNER
5 NOVEMBER 2003
Q120 Patrick Hall: That is to clean
up beaches?
Mr Skinner: In that particular
case we are into shellfish waters.
Q121 Paddy Tipping: You have told
us, and I think it is right, that most of these environmental
improvements are driven by European directives. Are we at the
end of the road? Are there more European directives to come and,
if there are, what discussions are you having? Are you across
there in Brussels talking about these things and giving advice
and, most particularly, not just looking at the principles but
looking at the practicalities and the end costs?
Mr Skinner: It is not the end
of the road because there is the Water Framework Directive, which
we discussed previously, which will increase in some cases the
environmental standards to be met and place more focus on ecological
issues. In our short version, and it is also in our long verison,
we are suggesting to Government that there are important opportunities
in this programme of improvements to make sure that the country
is prepared for those new burdens. As far as being over in Europe,
the answer is: yes, we are there a lot and very much, in the way
in which you have described it, influencing the guidance. Although
the Water Framework Directive is only about 30 or 40 pages, it
has about 1,000 pages of guidance sitting behind it. In those
pages, if wrongly constructed, are costs, and perhaps even unnecessary
costs to this country. The Agency, together with our colleagues
in Scotland and Northern Ireland, working as a UK group, have
put a lot of effort into what in shorthand we call fit for purpose
implementation. That does not mean to say it will have zero costs
but it will be what we believe to be effective, appropriate and
consistent with our previous practice.
Q122 Paddy Tipping: The figure may
be £26 for this review but the Water Framework Directive
is coming on, and we have had discussions before about making
sure these mesh together. How much more is it going to be? It
might be nothing if you get your way.
Mr Skinner: I very much doubt
if it will be nothing. The first point to make is that the Water
Framework Directive cuts cross-sectorally across all polluters
and we are only talking here about the impact on the water companies
but it is clear that there will be additional burdens on water
companies; the water companies' own publications have supported
this. There will be successive periodic reviews and there will
be comparable, perhaps not as big although this one is smaller
than the last one, increases to bear by water companies.
Q123 Paddy Tipping: Barbara told
us earlier on that the public loves you all and loves you more
than other people; you are trusted. What are they saying to you
about bills? What is your own research? Is £26 what people
are prepared to pay? That is not what I have heard and it is not
the research I have seen.
Baroness Young: Certainly the
research took a lowish range of possibilities about what people
were prepared to pay and tested those. It did not test this scale
of bills. The point to make about the longer term, however, is
that one of the features of the environment programme is that
much of it has no choice to it: we either have to do it or we
will be in infraction under European directives or else we will
fail to meet the Government's PSA targets. There is not a lot
of discretion. You could say that you might want to slow it down
and pace it out a bit more but the reality is that, if we do that,
that last five years of implementation of the Water Framework
Directive, which will be covered by the next price round which
is 2010 to 2015, will look like a mountain that is very hard to
climb. I think we have got to keep moving through the programmes
that we have now identified. In terms of affordability, you have
to look at the range. The average is a £26 increase for the
environment, but Thames only has a £3 increase; South-West
Water, which currently has the highest bills, only has as £4
increase. It is very differential depending on the size of the
programmes across the country. Also, if you look at the cost of
water compared with other utility bills, it is comparatively low
and we have not yet put in place proper measures for minimising
the impact of water bill increases on poorer households. If we
could get metering programmes up, that would both reduce demand
and allow smart tariffs to come in that would allow people to
get a slug of water for their basic needs which could be differentiated
in charge if they were a poor household. We could find ways, and
also through the Social Security system, of mitigating the impacts
of bills. I think it would be a bit short-sighted in terms of
the longer term need for environmental protection if we were to
pitch the bills only at a level that could be afforded by the
poorest household.
Q124 Paddy Tipping: You are saying
that you think that the only way forward really is for customers,
with mitigation and the kind of qualifications that you have given,
to pick up the bill. What are the other things you could do? Surely
the polluter ought to be paying all this, should he not?
Baroness Young: There are several
polluters around. If you take pollution in its wider sense, i.e.
abstraction of water from viable wetlands, for example, or rivers,
the great British public in drinking, irrigating their farms,
filling their swimming pools or watering their gardens are the
polluters, and so they are paying in that respect. In terms of
some of the water quality issues, I think we do need to make sure
that we are not paying twice, and so we do need action on the
Common Agricultural Policy. There is, in particular, a real window
of opportunity, if the new reforms come in, to get some decent
shaping of both the basic subsidy payments and the incentive payments
beyond that to make sure that farmers are minimising their impact
on water quality, so that they also pay in a slightly different
way; i.e. by doing things differently in return for the money
they get. That will also have a knock-on effect to the next price
round because if we can reduce the amount of pollution going into
rivers, we will have to take less of it out at the other end,
but we need action on both. It would be unrealistic to say, as
some have said, that it has been the water companies who have
done their bit over the last ten years and it is now time for
the farmers to do it,
Q125 Paddy Tipping: What have you
said in your submission to Mrs Beckett about that?
Baroness Young: We have said exactly
that.
Q126 Alan Simpson: No doubt it is
true that you are more popular with the public than politicians
are, but you are not likely to be the ones who cop it in the neck
in the way that politicians are in respect of the public reaction
to any price rises. I do not think you will find disagreement
on this Committee about the need to comply with directives. The
issues that we are trying to grapple with are about the most equitable
ways of meeting those costs. I would like to try and pick up from
some of the questions raised perhaps before you arrived, Baroness
Young, and just put the money figures together. What exactly do
you expect the 50p to raise for the industry? Can we put some
ball-park figures on this?
Baroness Young: We are talking
now about an environment programme—and this is a moving
target because we are refining schemes all the way through and
basically trying to pare out anything that is not either very
clearly going to hit a real environmental outcome and produce
real impact or cannot be justified at the cost—and so this
number is going down all the time. I think we are at £3.5
billion for the overall programme, over which the Secretary of
State has some discretion on about £0.75 billion. It is £3.5
billion with about £0.75 billion where she has choices to
make. That was a number that originally was up at about £5
billion and we have successively pared that down. In fact, I always
joke with Andrew Skinner that some of our staff are now at the
point of saying that we are cutting too much out.
Q127 Alan Simpson: Can I ask you
to take a step back from that? I am not asking you what the programme
will cost. I am asking you what the 50p would raise. It seems
to me that you cannot be sitting there saying that the 50p will
be on the bills. Actually, the figure that it draws in is going
to be less and less. I just want to know how much you have estimated.
Baroness Young: Our leaflet with
the can of fizzy drink was aimed at trying to help the public
understand just the bare bones of what this is all about and what
it would mean for them. That 50p would have raised £4.5 billion.
Now that we have the programme heading down the way towards £3.5
billion, that is probably under 40p, and so it is still a fizzy
drink, but it is Tesco's own brand rather than a Diet Coke.
Q128 Alan Simpson: I am not quibbling
about that part. I just want to put some fairly static figures
in place. On the original calculations, that would have raised
£4.5 billion. For you, that was the total amount that would
additionally have been incurred as costs for the industry over
this period to 2010?
Baroness Young: Yes, but we are
now, as a result of a process that will go on right through to
the final determination, reducing that figure; it is now £3.5
billion.
Q129 Alan Simpson: I understand but
I want you to stick with me because I do not think it helps us
if, every time we ask a question on a given set of figures, you
try and move the goalposts to somewhere else. I think we are still
trying to catch up with you on the figures that you put in. If
we can accept that there will be improvements and savings and
just stick to this set of figures, you were saying at the time
of submission that 50p on average would raise £4.5 billion
in terms of the costs over the period. That would cover the costs
of those additional obligations faced by the industry in that
period, and so it is about £1 billion of investment per year.
Would that be on top of the investment that has been going into
the industry anyway?
Mr Skinner: Yes.
Q130 Alan Simpson: Since 1990, about
£3.5 billion per year has gone in as investment; you would
be talking about an extra £1 billion and so it would be about
£4.5 billion per year going in as investment. I am just concerned
about the equity issue, about who pays, because the industry has
squealed at us that these extra costs will be unaffordable. Have
you looked at the industry's self-reward programme in terms of
its dividend payment over the last few years?
Baroness Young: Certainly we have
been aware of the fact that water company dividends have held
up remarkably.
Q131 Alan Simpson: In the last couple
of years, dividends have been rising and the returns on the water
industry have been 58% head of the FT Share Index, and so it is
hard to say that this is an industry on its knees and unable to
reward its shareholders. I do not have any qualms about meeting
these costs. I am just concerned about who you are asking to pay
the costs.
Baroness Young: That is an issue
that you need to raise with the Economic Regulator; it is his
job to construct a financial framework for the industry that allows
them to run a satisfactory but not over-satisfactory business.
Our job is to work out what the effective environment programme
is and to have some sort of feel, working with the economic regulator
on the economic regulation of the companies, as to what that would
cost if it was delivered in the most cost-effective way. That
is our job, as the Environmental Regulator, not to take a view
about how that is funded. That is for the Economic Regulator to
do following the guidance from ministers about the size of the
environment programme that ministers are minded to see delivered
as part of that process.
Q132 Alan Simpson: So would you accept
that in the way that you have set out the explanation, all of
your presumptions would lead members of the Committee, members
of the public to believe that what you are saying is, "Here
is the total cost of meeting these additional improvements and
the public are the ones who are going to have to pay"? That
is your 50p.
Baroness Young: I think you need
to address that question to the Economic Regulator because the
way in which the figures are presented means that the costs of
financing the company are spread across a number of these headings
in terms of the way that costs are presented, so the costs of
financing the company will be embedded in some of the total costs
of these schemes and that is one of the issues that I think we
would be wanting to lay on the table for the next price round
in terms of a degree more transparency in the way in which the
companies present their preferred business plans.
Q133 Alan Simpson: Does that mean
that somewhere in these 10,000 words that you are passing across
to the Secretary of State, you will be spelling out that she has
a choice about where the costs are to be met and that choice need
not presume that the entirety of the costs should be picked up
by the consumer rather than self-financed by efficiency improvements
or dividends foregone within the industry? Are you making it clear
to the Secretary of State that she has that choice?
Baroness Young: I do not think
it is strictly true to say that the Secretary of State has that
choice. Clearly it is an important issue that the Economic Regulator,
in his decisions, produces a financial framework for the companies
to operate within which does not over-favour any of the recipients
of benefits in the equation, but he is an independent Economic
Regulator, as I am sure he is going to tell you in a few minutes,
and although the Secretary of State is able to give guidance on
the environmental programme, he is at the end of the day able
to make an independent decision about the way in which the structure
of the water companies' financing takes place.
Q134 Alan Simpson: We will have the
Economic Regulator in a moment.
Baroness Young: He is your man.
Q135 Alan Simpson: I am just asking
whether it is clear from what you are saying that it is not an
automatic presumption that the costs should be met entirely by
the consumer?
Baroness Young: Again Philip will
explain the way in which the costs are structured, but my belief
is that at the moment some of those financing costs are infrastructure
costs for the costs of all the various improvement programmes
and, therefore, the costs of financing are embedded right across
the range of programmes that are delivered to the price round.
What you would see, therefore, if what you were saying was that
you did not want so much of the profit to be passed on to shareholders,
you would see a diminution in the cost of the environment programme,
so it would still be met by bills, but it would be met at a lower
level of cost. The thing I think that Philip will say, and I hate
to put words into his mouth because we are not the Economic Regulator,
we are the Environmental Regulator, is that whatever happens,
we must end up at the end of the day with a bunch of water companies
that are capable of standing up and being financed both through
equity finance and through debt finance and if we do not end up
with that, we are all in grave trouble if the water companies
get into financial difficulties. Now, the Economic Regulator makes
those decisions in an independent fashion and they are not decisions
for us.
Q136 Mr Lepper: There has been some
mention already about managing the demand for water. The water
companies say demand will go on increasing. You talked about or
mentioned Smart tariffs and metering. Now, metering, the impression
I have, is not really very popular, but it is there and it is
available. Is it really practical for the water companies to be
doing more to manage demand?
Mr Skinner: Yes, we believe it
is both by what they themselves do and the way in which they stimulate
choices in their customers. In parallel with the process we have
just been describing which is about the costs over the next five
years, the water companies are putting in proposals to us for
their long-term water resources plans and our general view on
those, which we will be publishing next week, is that the companies,
and it varies between company and company overall, have not got
sufficient attention to demand management and water conservation
issues, including such things as managing leakage in their own
systems and that they are too heavily predicated towards investment
in new reservoirs. We do believe that the companies could do more
and we do believe that metering could be part of those future
solutions and we also recognise that a greater penetration of
metering would make available some of these options about choices
and spreading the costs in the way that Barbara has described.
Q137 Mr Lepper: How widespread is
metering at the moment? Can you give us a rough estimate?
Mr Skinner: I am sorry, I do not
have a figure. My colleagues who follow will answer that question
more than I can.
Q138 Mr Lepper: You mentioned leakage
as well as an issue there and there is this issue, is there not,
about the level at which it becomes economic to do rather more
to deal with leakage than just simply let it continue. Are we
at that level? You are suggesting that we are at that point where
more should be done to deal with leakage.
Mr Skinner: The economic level
of leakage is one of the key yardsticks which Ofwat use and clearly
there has to be a breakpoint where investment does not produce
benefits, but we believe in many cases that that has not yet been
reached and that some of the longer-term proposals of the water
companies, particularly those who are actually forecasting leakage
to rise, not just holding steady which in many cases we think
is insufficient, could do more. The economic level of leakage
of course is a bit of a moving target as the environmental value
of the assets which are affected by the abstraction increases
and then of course the equation changes. Therefore, looking forward
to the Water Framework Directive, looking at the kind of issues
about the ecological quality of waters and, therefore, the value
which will be placed upon them, we can only see that the issue
of leakage is going to become one which has to be kept at.
Q139 Mr Lepper: Are there any companies
which at the moment you feel are taking this issue as seriously
as you would wish them to?
Mr Skinner: Yes.
| 
