Examination of Witnesses (Questions 1-19)
Wednesday 17 March 2004
Mr Philip Fletcher, and Ms Sue Cox
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts, where today we are looking
at the Comptroller & Auditor General's Report on Ofwat, regulator
of the public sewer network of England and Wales. We welcome Mr
Philip Fletcher, the Director General of Water Services. Would
you like to introduce your colleagues?
Mr Fletcher: On my right is Dr
Bill Emery, who is Ofwat's Director of Costs and Performance and
our Chief Engineer. On my left is Sue Cox, who heads the Service
and Performance Team.
Q2 Chairman: Could I ask you, please,
to look at the Executive Summary in paragraph 7, point B, which
you will find on page 3, where you will see that the number of
properties flooding internally with sewage has remained static
since 1994 at around 5,000-7,000. Is that right?
Mr Fletcher: That is right, of
course.
Q3 Chairman: Why have you made so little
impression on the problem?
Mr Fletcher: Chairman, can I start
with the relationship? Ofwat is there as the regulator of a privatised
sector. That is not in any way to duck our responsibilities, but
these are assets which are the responsibility of the ten water
and sewerage companies in England and Wales. Having said that,
of course, we are very concerned that this extremely—it
is hard to overstate it—unsatisfactory business of sewer
flooding should be continuing. Reductions have been made by the
companies, urged on by Ofwat, in the numbers of properties at
risk, and substantial further steps are being taken, but yes,
still an unacceptably large number of properties are experiencing
sewer flooding each year.
Q4 Chairman: If we now turn to page 15
and look at paragraph 1.18, you will see there that the number
of properties internally affected by sewer flooding is relatively
low. What I put to you, Mr Fletcher, is that you and the companies
concerned have tolerated this problem precisely because the number
of people affected is low and therefore it is not an enormous
political problem, with a small "p", and therefore,
despite the enormous distress and inconvenience caused to these
people, it can be safely ignored.
Mr Fletcher: As the NAO Report
points out, it is 0.03% of the 22 million properties in England
and Wales but, Chairman, I would not accept that that means it
is de minimis and can be ignored, nor, I believe, would
any of the companies, nor, I am absolutely certain, would WaterVoice,
which is the representative of customers and is linked with Ofwat,
and sees sewer flooding as a particular target for making further
significant progress in the price review period which begins from
April next year.
Q5 Chairman: Let us look at WaterVoice's
target, which we find reference to in paragraph 2.2 on page 19,
which is this target to eliminate the backlog of properties at
risk by 2010. Is there any chance that you can achieve this with
the industry?
Mr Fletcher: We can certainly
make significant progress in the period to 2010 in the work done
by companies, paid for by customers. As you know, Chairman, I
am just in the period leading up to the publication of draft price
limits in the summer, and publication of final price limits before
the end of this coming year. So I cannot say just at the moment
fully what progress there would be, but I can refer to the draft
business plans which the companies prepared last year and which
will serve as the base for their final business plans, hopefully,
next month. These show all of them paying strong attention to
the guidance which both the Secretary of State, Margaret Beckett,
and I have given them, which is to show what could be done to
take down and certainly address all the at risk properties, the
11,000 plus, that we have at the moment on the companies' registers
over the period to 2010. It would not eliminate the problem because,
first, a lot of sewer flooding is caused by events other than
hydraulically overloaded sewers, events notably like blockages
in the sewer, caused by things like fat, which tends to accumulate.
And second, because over the course of the coming five years,
2005-10, we shall see other properties come on to the at risk
register as the companies continue their analysis and further
properties are identified.
Q6 Chairman: Would you say that sewage
ending up in your living room is about the worst service failure
that can happen to anybody?
Mr Fletcher: Short of threats
to life and limb and health, it is one of the most unpleasant
events that can happen to any household.
Q7 Chairman: Is the figure of £125
compensation to the people who are so affected not insulting?
Mr Fletcher: The figure you are
referring to, Chairman, is the payment under the Guaranteed Standards
Scheme.
Q8 Chairman: The reference, for colleagues,
is footnote 29 on page 20. This figure of £125 is calculated,
is it not, as broadly what the average person would be paying
in sewerage charges for a year?
Mr Fletcher: What it actually
relates to in any individual case is the sewerage element of the
bill for that household. If this were intended as fully recompensing
compensation for every bit of harm and damage which the customer
had suffered from the invasion of sewage, then I would accept
your point. I guess that the Committee becomes more than fed up
at witnesses appearing before it and saying "Well, it depends."
My "Well, it depends" in this case is what is this payment
about? It originated, at Ofwat's instance, soon after privatisation
in 1992, before which no payments had been due at all when the
previous regional water authorities and before them the local
authorities had been responsible for sewerage. It is enshrined
in law. It is given authority by a statutory instrument negative
resolution through Parliament, and it was enhanced, again on Ofwat's
recommendation, at the end of the 1990s to put it in terms of
saying that for every internal sewer flooding incident you are
entitled to a rebate of your sewerage charge. It is primarily
about a recognition that the company—whatever the cause—has
failed to give you the service which you as a customer deserve.
That is what it is intended to do, not to be total recompense.
Q9 Chairman: Would it be fair to describe
it thus: that I do not have to pay for my sewage this year if
it ends up on my living room floor?
Mr Fletcher: That is one way of
putting the picture, but can I go on to say it really is not meant
to be compensation in full, let alone insurance. No doubt the
Committee may want to ask me more about that, but this is an area
which we, the Association of British Insurers, the companies,
WaterVoice and all the other stakeholders want to get further
into and to make progress on.
Q10 Chairman: Can we now turn to page
27, paragraph 3.15, which looks at "backward-looking serviceability",
which is rather a complicated phrase, which you will be familiar
with. It is a way of working out what might happen in the future
by looking back to the past. Some people have described it as
you walking backwards towards the edge of a cliff. Is that a fair
description?
Mr Fletcher: No, Chairman, but
it has sufficient elements of truth in it to mean that we and
the companies were determined to introduce more of a forward-looking
element into their appreciation, and then our appreciation, of
the overall condition of these networks which, buried beneath
the ground, many of them very old indeed, are quite difficult
to assess. We have this concept first of all of condition, ranked
according to five grades, with danger of imminent collapse as
the lowest, fifth grade. That is not good enough as an indication
of where your priorities for investment should be, because even
a grade five sewer may actually, as the NAO Report rightly points
out, be able to continue to perform its function quite successfully
for many years. Therefore, given that resources are not infinite,
we need to get the companies to look at the priorities, and we
have been trying with them, helped by the industry's research
body, UKWIR, to develop a forward-looking approach to serviceability.
Although this is something that will only really prove its worth
over decades, nonetheless, the industry and the regulators together
have made significant progress between the last review, when your
comment would have been more justified, and the review which we
are in the middle of at the moment, where we have many more forward-looking
elements in our assessment of serviceability.
Q11 Chairman: Can you describe for us
what the common framework is? It is mentioned in paragraphs 3.21
to 3.23. This is a way of trying to reduce the regulatory burdens
on companies, is it not? What I am worried about is, will this
mean that bills might be higher, as you step back from companies?
Mr Fletcher: Yes, it may well
mean that bills will be higher. If I may, I will bring in my colleague,
who is an engineer and has been particularly instrumental in helping
develop that common framework. To answer your point about costs,
I am afraid I have had to warn customers now for over a year of
the likelihood that their water bills will increase from April
2005. This does not mean that Ofwat has gone soft, that we will
give up on our job on behalf of customers of scrutinising very
firmly the plans from companies. But all the evidence suggests
that a number of pressures, including the need to make sure that
we are not putting this crucial infrastructure at long-term risk,
will tend to mean that price limits will have to go up to enable
the companies to make further investment to deal with the problems.
Q12 Chairman: I want to end by dealing
with two threats to your world. One is climate change, and I want
to ask if you have assessed the effects of climate change. The
other is that we have had a well publicised report from Kate Barker
today advising the Government that we are going to have to do
a lot more housing development. How will this affect your work,
do you think?
Mr Fletcher: If I take climate
change first, Chairman, I understand your colleagues on the Environment
Committee are just launching a study of their own. I believe that
we are certainly seeing evidence of climate change already. If
the Committee care to look at the pattern suggested by the internal
sewer flooding incidents per 100,000 customers on page 15 of the
NAO Report, you will see there a wide variation between companies.
You will particularly see United Utilities, number three from
the left, with a very high spike indeed. As the footnote brings
out, United Utilities, Blackburn particularly, was subject to
very heavy weather indeed on 14 June 2002, 87 incidents in that
particular town alone due to a one-in-73-year event. More and
more companies, and more and more customers, unfortunately, are
experiencing the result of very heavy rainfall in sudden downpours,
often during the summer, which is a change in the regular climatic
pattern, and does have implications for sewer flooding and overloaded
sewers. You also mentioned Kate Barker's report, Chairman, which
is just one piece of evidence of the pressure on the south-east
of England in particular for more development, as the over-heated,
or at least more heated than other parts of the country economic,
geographical area, which is also unfortunately geographically
and hydrographically the driest part of the country. Parts of
the south-east of England, on a per capita basis, are drier
than countries around the Mediterranean littoral, so there are
really serious issues about long-term supply to those areas. Both
the points you have made highlight pressures that are coming,
no doubt gradually, but we cannot anticipate just where the one-in-100-year
storm is going to take effect, and therefore sewers will always
fail to cope with that sort of event, I am afraid. We need, with
the companies, to plan further—I would bring in here the
Environment Agency and the other environmental regulators—to
ensure that we are properly looking forward without foolish anticipation,
without trying to put gold-plated investment in before it is needed.
Q13 Chairman: My last question is: are
you worried about the invulnerability of the sewerage system to
terrorists?
Mr Fletcher: In terms of the sewerage
system, I would say no, Chairman, not particularly. Water, however,
is a resource vital to life, and it is clearly very important
that Government, with the companies, should be taking all appropriate
steps to ensure that water supplies are safeguarded. Ofwat is
not in the lead on this issue, but I do make it my business to
ensure that proper steps are being taken in my own role in the
interests of customers, and I am satisfied that proper steps are
being taken.
Q14 Jon Cruddas: Can I come to the Barker
report and issues around housing development and regeneration
in a minute, but first I would like to ask a couple of questions
around the nature of the sewerage network. You mentioned earlier
the asset inventory referred to on page 26 in paragraph 3.8. When
is the next asset inventory planned? Is this a regular piece of
work?
Mr Fletcher: Can I bring in my
colleague, Dr Emery, on that?
Dr Emery: The asset inventories
are done on a five-year time cycle for supporting information
for our periodic review. The first one was in 1992, the second
one was in 1997-98, the third one was completed and sent to us
as part of the draft business plans last summer. There were some
questions on that which will be addressed, and it will be updated
in the final business plans we will have from the companies in
the next few weeks.
Q15 Jon Cruddas: Not wishing to pre-judge
the outcome of that, but given the data we have available here
is the 1998 data, are there any trends that we should be aware
of compared to the 1998 report of figure 11?
Dr Emery: I think the headline
numbers coming out from a number of the companies show that they
are classifying more of their sewers into grade 4 than they have
done in the past. The question we have not yet resolved is whether
that is a classification change or a deterioration change. The
difficulty we have had with analysing the asset inventories to
date has been that these particular inventories are dogged by
marginal changes in the way that they have been looked at. They
are statistically based assessments, and you can explain the variations
in these things by a change in the way they have assessed it.
So at the moment we do not have a real feel. Our overall strategy
in this is to say that we are moving to a much more systematic
method, and over a number of successive periods we will get a
proper answer as to how stable this is.
Q16 Jon Cruddas: The reason I ask is
because in paragraph 3.16 on page 27, the second bullet point,
the NAO suggest in the last long sentence "A national study
into deterioration rates and methods of characterising the effect
on behaviour of sewerage networks would strengthen information
on the condition of networks and would provide Ofwat with an additional
source of evidence to complement its serviceability assessments."
Mr Fletcher: Could I start on
this one, and again bring Bill Emery in? I think that, with the
NAO, we are always concerned that we are taking forward and properly
encouraging the companies to ensure that they have a proper grip
on these networks. But the NAO's focus, I think, is right. It
is to complement serviceability assessments. I think we are going
to go on wanting to put the emphasis on whether these assets continue
to be fit for purpose, looking forward, not just looking backwards,
and that is the crucial issue, rather than just, subject always
to these problems of classification, whether more are drifting,
as companies come to understand their assets better, into grade
4 or even grade 5.
Q17 Jon Cruddas: I am not sure whether
by that answer you agree that there should be a national study
into deterioration.
Mr Fletcher: The NAO, it would
be fair to say, has put this in fairly tentative terms, and I
would not want to instantly grab it and say this needs to be brought
forward, but rather to say yes, this is a helpful suggestion,
which forms part of the thinking—and we have, of course,
had the NAO Report for some months already—that we and the
industry and the industry research bodies are undertaking.
Q18 Jon Cruddas: It does say at the beginning
of paragraph 3.17 "Ofwat does not believe that there is sufficient
evidence available to say whether there is a future problem with
sewer networks." That can be turned on its head as well,
to say that you do not have evidence that there is not a structural
problem.
Mr Fletcher: That is why we want
to be looking forward rather than just backwards. It is to meet
the point the Chairman very fairly put to us of the danger that
we might be facing some sort of cliff edge. We do not believe
we are facing a cliff edge. There is no sign that, for example,
a very heavy investment in the 1920s or 1930s is all about to
suddenly start failing at the same moment, or that the Victorian
sewers, many of which were over-engineered, thank goodness, will
fail in their continuing robust service, including, of course,
the sewers that are running more or less beneath our feet as we
speak.
Q19 Jon Cruddas: Presumably you would
agree there is a degree of ambiguity about where we are.
Mr Fletcher: There will always
be, I think. These are assets that were installed over centuries
by a huge variety of different bodies, many of which did not keep
any proper records of what they were putting in place. When the
NAO talks about patchy records at privatisation, it is, as always,
accurate, but perhaps a little kind to some of those predecessor
bodies. The companies are working from that handicap and their
understanding is going to grow over time. We focus them—they
focus themselves—on the critical sewers, those which, if
they failed, would be very difficult to repair and therefore it
is best to anticipate and put the repair in at the moment you
most want it, or which are absolutely crucial for the network,
and that is where the surveys have been concentrated, and we think
that is right; that is where the priorities should lie. But developing
gradually over time does make sense.
Dr Emery: In the light of the
Report here, and we have been discussing with colleagues in the
companies and with the UK Water Industry Research association
about research into how to do these more systematic asset deterioration
studies. It is something that remains quite difficult to determine.
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