Examination of Witnesses (Questions 1-19)
OFWAT
29 JANUARY 2007
Q1 Chairman: Good afternoon, and
welcome to the Public Accounts Committee, where our hearing today
is on the Comptroller and Auditor General's Report Ofwat meeting
the demand for water. We welcome Regina Finn, Ofwat's Accounting
Officer and Chief Executive, and Philip Fletcher, the Chairman
of Ofwat. Unusually, he is also the former Accounting Officer
and Director General and so we have both the present and former
Accounting Officers. We are also joined by the president of the
Spanish Tribunal de Cuentas, whom I shall also be seeing tomorrow.
You are very welcome. We are looking at estimates of consumption,
Ms Finn. I will direct my questions to you as the present Accounting
Officer but of course, Mr Fletcher, you can come in whenever you
want. I presume that you know quite a lot about this subject;
you have been around a long time, have you not?
Philip Fletcher: I was examined
at a previous PAC meeting on similar issues, too.
Q2 Chairman: Okay. You can share
the answers between you as you like. Figure 3 on page 11 shows
average household consumption for water companies. Why do the
estimates of water consumption vary so widely between companies?
Regina Finn: Perhaps I can give
an initial high-level answer and Mr Fletcher can support it if
he likes. The variation in the per capita consumption between
different companies is in part due to socio-economic factors and
climate. A study in 1999 estimated that 60% of the variation was
due to those factors. The remaining variation is due to a number
of factors, such as different levels of metering penetration in
the different areas and the different level—
Chairman: I am afraid that you will have
to speak up; the acoustics in this room are not—
Regina Finn: I beg your pardon.
Chairman: Speak slowly and speak loudly,
please.
Regina Finn: I beg your pardon.
I will do my best. I was saying that 60% of the variation is because
of socio-economic factors and climate differences in the different
companies'—
Q3 Chairman: You say climate differences.
Let us look at the figures. There is a 41% difference between
Tendring Hundred and Three Valleys. That cannot be anything to
do with climate, for a start. How can it be possible that the
customers of the Three Valleys company in Hertfordshire use 41%
more water per day than those of Tendring Hundred in Essex?
Regina Finn: In the first instance,
Tendring Hundred is considered an outlier. It is certainly very
much at the bottom of the range. However, if we look at the difference
in the metered consumption, because metered and unmetered consumption
are different, and at the difference between metered customers
in Tendring Hundred and in Three Valleys, there is also a wide
variation, which implies that much of the variation is due to
socio-economic and climate factors; in other words, to different
types of customers. It is also due to the fact that the Tendring
Hundred area is quite small whereas the Three Valleys area is
bigger. Therefore there is likely to be more averaging in Three
Valleys between different types of customers. Most of that can
be—
Q4 Chairman: So, you are reassuring
the Committee that you can accurately measure consumption?
Regina Finn: I was answering the
question about the differences.
Q5 Chairman: I am asking you a question
now. Leakage is obviously based on consumption. Are you telling
us that you can accurately estimate consumption?
Regina Finn: As the vast majority
of household customers, and that is who we are talking about,
do not have meters—only 28% do—we have to estimate
consumption.
Q6 Chairman: Exactly. That is the
point that I am making. If we look at paragraph 2a, it tells us
that leakage estimates are based on consumption. If you cannot
accurately estimate what their customers use, how can the companies
accurately measure leakage?
Regina Finn: Leakage measurements
are not solely dependent on calculations of per capita
consumption. Various methods are used to arrive at the leakage
figures. Some are estimates but, as the report notes, the data
underpinning the estimates have improved over time and as a result
we believe that the leakage estimates are getting better.
Q7 Chairman: There are big plans
for massive house building, for instance in the south-east of
England. If we cannot accurately estimate consumption—and,
indeed, waste—how can we know how to respond? All those
new houses will need water, will they not? It is an important
question, one that has to be answered.
Regina Finn: There are two aspects
to that. First, we can estimate demand; however, as metering increases
it will be easier as we will have more measured consumption. However,
from the point of view of major developments in certain parts
of the country, all the companies, as part of their water resource
plans and business plans, must estimate and allow for demographic
changes, and building, and increases in population. We will be
forecasting and estimating those issues as the companies develop
their water resource plans and business plans.
Q8 Chairman: Would it be unfair to
say that the inaccuracy of the leakage data make your leakage
targets rather meaningless? You simply do not know what is going
on to an accurate extent, so your targets do not mean a great
deal either.
Regina Finn: We would not accept
that. As the report says, the data has improved significantly
and is continuing to improve. We think that the measurement of
the leakage targets, although based to a degree on estimates and
assumptions—by its nature, it will have to be based on estimates
and assumptions—has improved. That allows us to set targets
that are appropriate for each of the companies in their area—that
is, the economic level of leakage target.
Philip Fletcher: Chairman, may
I say a word?
Chairman: Please butt in.
Philip Fletcher: As both the industry
and its regulator were effectively caught out in the mid-1990s
by the high levels of leakage, the regulator and the industry
together have been working solidly by various means to improve
those estimates. Your starting point—it has been made by
Ms Finn—is that we cannot know consumption exactly when,
with the exception of the Republic of Ireland, only nearly 30%
of domestic consumers are metered. That is a real handicap in
appraising consumption, but by looking at it top-down and bottom-up
we have various different takes on what is to be done. We have
developed those over a decade, and we now have a great deal of
confidence in the leakage targets, which for the 22 companies
represent the economic level of leakage that they need to reach
by 2010.
Q9 Chairman: Mr Fletcher, you might
be able to help with my next two or three questions, because they
are more historic. Paragraph 3.14, at page 16, shows what Anglian
Water, my water company, was doing during last summer's drought.
It sought to fix all visible leaks. If Anglian Water can do it,
why did you not require all water companies to do the same thing?
Philip Fletcher: We said to all
water companies that when there is a drought they need to work
much harder in order to set a lead for their consumers. The reaction
of consumers in a drought is absolutely crucial to the effective
response. Consumers will not respond in a co-operative way, looking
at their own consumption, unless they can see their water company
setting a lead. Anglian was not alone. For example, Southern Water
also prioritised visible leaks. One could argue from an economic
point of view that that is not sensible, because the visible leaks
are often much smaller than what is going on underground, which
never becomes apparent. If companies are going to enlist their
consumers, all of them need to do it. Throughout last summer,
Ofwat, the Environment Agency and all participants were urging
the companies to set a lead for their consumers. Most of them
responded to that.
Q10 Chairman: We will talk about
urging and action in a moment. You said that you have appeared
before the Committee before. Presumably, if we make recommendations
and you agree to them, you think that they should be carried out.
However, page 5 of the executive summary states that "the
evidence does not yet enable Ofwat to say which projects are most
effective in helping consumers waste less water, despite a specific
Committee of Public Accounts recommendation in 2002." Why
do you still not know the most effective water efficiency measures,
despite your agreeing to our recommendation?
Philip Fletcher: Of course we
take the recommendations entirely seriously. When we responded
to the PAC last time round, we made the point that it is not a
matter only for Ofwat; the companies have a duty to promote water
efficiency, and Ofwat should not come between them and their statutory
duty to their consumers. Yes, implementation has taken longer
than we would have hoped. Immediately after the last Report, Ofwat
commissioned work from the industry research body called UK Water
Industry Research, or UKWIR. The first results of that were published
in the following year, in 2003. We have also been working on the
problem solidly since. To illustrate some of the difficulties
in coming up with the most cost-effective measures, one thing
that we do is to insist that all companies maintain a basic level
of work on water efficiency. One crucial element of that is education,
particularly the education of children and young people, because
they are the people who will value water as a resource in years
to come. How do you precisely assess the effectiveness of that?
In my view, it is very difficult to do so, but that does not stop
us for a moment from insisting that companies must have an education
programme as part of their basic expenditure, not by adding to
the bills of customers. Several other things are becoming more
clearly cost-effective, such as what are sometimes rather pompously
called cistern-displacement devices; that is, something that is
put in an old-fashioned cistern with too big a flush in order
to reduce it. It is better still to get another cistern, but that
is another story.
Q11 Chairman: My last question is
about your historic failure, Mr Fletcher, to do anything about
Thames Water's record. If colleagues are interested, this is dealt
with in paragraph 4.8 on page 21. You did nothing to act on Thames
Water's repeated failures until 2006. That is six years after
it first missed a leakage target. Why did you not do anything
effective in that time? Again, if colleagues are interested, appendix
5 on page 34, which is headed "Ofwat action on Thames Water
leakage levels", shows this sorry saga of targets continuously
being missed and Ofwat's flabby response during all that time—and
you were in charge.
Philip Fletcher: Indeed I was,
from 2000 onwards. In the light of what happened in winter 2000-01,
when you may recall we experienced a series of freezes and sudden
thaws, it became apparent that although Thames had apparently
been doing well with its leakage hitherto—we should remember
that the industry has reduced leakage overall by almost one third
since that peak in the mid-'90s—it had a real problem both
in measurement and in actual leakage. From the very first year
when that problem became apparent, Ofwat has considered legal
action to enforce leakage targets. As well as considering legal
action, we have taken practical action on behalf of consumers
to ensure that Thames got on top of its problem. Yes, it is taking
Thames a long time, but our action culminated last year in the
action, which the National Audit Office on the whole appears to
endorse, of requiring a section 19 undertaking, as it is called.
However, that could only be achieved, first, when Ofwat had, thanks
to Parliament, the power to fine companies, which came into effect
only in 2006, giving us the leverage to insist on this section
19 undertaking; and secondly, through the steady accumulation
of evidence and regulatory leverage, which included the application
of targets, enshrined in price limits from the 2005 price limit
onwards. That was the first year in which we had targets that,
instead of being generalised, were signed up to by the companies
as part of their agreement to the price limits that we had set.
Chairman: I am going to stop your there,
because others want to come in, but we can perhaps return to this
later.
Q12 Mr Khan: What is the annual budget
for you as a regulator?
Regina Finn: It is in the region
of £12.5 million to £13 million a year.
Q13 Mr Khan: Do you think that the
taxpayer is getting value for money?
Regina Finn: I do.
Q14 Mr Khan: How do we assess whether
or not we are getting value for money?
Regina Finn: Ofwat costs the water
customer less than 50p a year and through setting price limits
and efficiency targets has saved the water customer several hundreds
of millions of pounds in efficiencies that companies have been
required to meet.
Q15 Mr Khan: Those efficiencies would
otherwise not have happened?
Regina Finn: No, we do not believe
so.
Q16 Mr Khan: How many enforcement
orders have you made?
Regina Finn: We have not issued
any enforcement orders.
Q17 Mr Khan: When did you first have
the power to make enforcement orders?
Regina Finn: Enforcement order
powers were granted to Ofwat in 1991.
Q18 Mr Khan: How many fines have
you ordered?
Regina Finn: We have published
our intention to fine three companies, but have not yet imposed
any fines.
Q19 Mr Khan: In part two of the report
there is reference to inherent weaknesses and inconsistencies
in the information on the demand for water and in the amount of
water lost through leakage. Is that acceptable for a regulator
that costs us £13 million a year?
Regina Finn: The inherent weaknesses
arise because only 28% of households are metered in England and
Wales. That is an inherent weakness and that lack of metering
leads us to have to estimate the data.
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