Examination of Witnesses (Questions 100-119)
OFWAT
29 JANUARY 2007
Q100 Mr Touhig: So you do not believe
that Ofwat is toothless?
Philip Fletcher: We do not believe
that Ofwat is toothless, and we believe that the overall gains
in efficiency—I do not mean water efficiency, not alone,
anyway, but cost efficiency—that the industry has seen over
the period since privatisation in 1989 is evidence partly at least
of Ofwat's effectiveness. Bills, I know, will have gone up by
2010 by approaching 40% in real terms; but for that money, customers
will have seen approaching £70 billion worth of capital investment
to improve security of supply, increasingly important as we face
global warming, to improve service to customers on issues such
as sewer flooding, to deliver the environmental improvements that
we need—
Q101 Mr Touhig: I wish my constituent
Mr Westcott could have something done about his flooding. He has
been suffering this sort of problem for 20 years. He has just
spent £700 on a new wall that has been under water 12 times
since Christmas. I really do not think that he would have much
to say about flooding.
You say that you are not toothless and that
you do have powers. We seem to be in doubt that you are exercising
those powers. Perhaps you are wearing false teeth and you have
them out a lot—you do not have much bite with the companies?
Philip Fletcher: We are not doing
this overnight. We are getting a consistent regime that has steadily
been ratcheting down the inefficiency of the companies since 1990.
You may say that it should be quicker. We all want it to be quicker,
but a consistent regime that steadily improves the efficiency
and effectiveness is—we would suggest to the Committee—very
much in consumers' interests. That is our sole concern: the protection
of consumers is our primary duty.
Q102 Mr Touhig: I am sure that we
would all like it quicker; of course we would. But we have evidence
that you have not acted on recommendations made in January 2002.
Philip Fletcher: We have acted,
but the issue is could we and should we have done more. We are
always open to the fact that we could and should always be open
to the challenge of doing more.
Q103 Mr Touhig: Ofwat is not a religious
order by any chance?
Philip Fletcher: Not to my knowledge.
Q104 Mr Touhig: You just contemplate
a lot; you do not take much action.
Philip Fletcher: No, sorry. Always
a difficult word.
Q105 Annette Brooke: I shall change
the order of my questions, following the statement that the customer
is the highest priority. Can you tell us why the percentage increase
for unfortunate customers in the South West Water area was nearly
13%, and 11.2% in the Wessex Water area? I have to tell you that
the day those bills dropped through people's doors my office was
brought to a halt—not surprisingly, given the percentage
increase in pensions. Is that putting the customer first, particularly
pensioners on fixed incomes?
Philip Fletcher: The duty on Ofwat
is, while protecting consumers, to enable efficient companies
to carry out and to finance their functions. Putting that together—where
the functions placed on them by Parliament, the European Union
and the facts of life, which include the need to maintain their
assets properly—will drive a very much larger capital expenditure
programme than was applied in the 1980s before privatisation,
someone has to bear the cost. There is only one person to bear
the cost, and there is no taxpayers' money in it, so the water
consumer bears the cost. It is Ofwat's job to ensure that the
consumer is not spending on his or her water bill a penny more
than is necessary to do that job properly. That is our endeavour.
In South West's case, very significantly it has the highest bills
in the country. I accept that it is a really significant issue.
The reason for it, as you are probably already well aware, is
that the south-west has a fairly small but not very prosperous
consumer base, but that, under a series of European directives,
it has a very large capital expenditure investment task to carry
out. It has a very long coastline, which is subject particularly
to coastal, bathing and freshwater directives.
Q106 Annette Brooke: I am sure that
that is fine, but the pensioner does not appreciate the increase
on the bill. So can you tell me whether those companies were required
to send out full details about how to get a water meter, for example?
Should not that have been a requirement?
Philip Fletcher: Yes, they were,
and they did.
Q107 Annette Brooke: And they did?
Philip Fletcher: And they did.
Q108 Annette Brooke: And was there
a significant uptake?
Philip Fletcher: Yes. I do not
have the exact figures, but in South West Water's case the rate
soared from somewhere near 30% to more than 50% almost instantly,
over the past two to three years. South West has had very high
volumes, although perversely that costs consumers more, because
although the price of the meter is free at point of installation,
the cost is borne by the body of consumers as a whole. We had
to take that into account in setting the price limits.
Q109 Annette Brooke: I am tempted
to ask you what the profits of those two companies were, but perhaps
you do not have those figures.
Philip Fletcher: We will supply
the Committee with a full table of the profits as recently announced,
as I have already undertaken to Mr Khan.[3]
Q110 Annette Brooke: The other water
company that supplies part of my constituency is Bournemouth and
West Hampshire Water, which seems to get lots of stars for its
performance. Can you tell me what it is doing so right and what
all the other companies should learn from it?
Philip Fletcher: All the companies
need to deliver a basic level of service to their customers. We
need to measure that under common indicators that are applicable
to all the companies, such as the number of sewer flooding incidents—a
point raised by Mr Touhig—the times customers get cut off,
especially without forewarnings, and the overall number of bursts
in pipes. All those are measured and all have greatly improved
over time. That is why we can say with confidence that customers
are getting a much better service than 15 or 16 years ago. But
again, this is not an area about which we are at all complacent.
Customers expect a good service; interestingly they have told
us that they do not want to pay a lot more for it. That is understandable,
but it means that it is probably not worth trying to ratchet up
prices to squeeze out the last very expensive benefit. That is
the same sort of issue that applies with leakage.
Q111 Annette Brooke: Bournemouth
and West Hampshire Water is a relatively small company, whereas
Thames is one of the largest. So can I just ask you briefly: is
small beautiful in the supply of water?
Philip Fletcher: Interestingly,
there is no evidence that economies of scale apply. That is an
issue that Miss Finn and her colleagues are busy explaining to
the Competition Commission in a live case about a merger at the
moment. Therefore, the small companies do have a value to consumers
at large in England and Wales, in helping providers with comparative
information, which underpins all our pressure on the companies
to become more efficient. It is having 22 companies—monopolies,
admittedly—that enables us to say that company A, which
could be Bournemouth, is doing much better than company C, and
that we know that company C can do better.
Q112 Annette Brooke: So is Thames
Water too big to provide a good service?
Philip Fletcher: Thames Water
is very large. It has an awful lot of problems wherever we look.
It has problems with the serviceability of its infrastructure
that are worse than most. Its security of supply is worse than
that of any other company except little Folkestone and Dover Water
Services. Thames has an awful lot of problems.
Q113 Annette Brooke: That is quite
an indictment, given your position as the monitor and regulator.
Are you making representations about where the inefficiencies
are coming from and about the size of those?
Philip Fletcher: Yes, absolutely.
We talk to Thames, and this is not mere contemplation—
Q114 Annette Brooke: But don't you
need to be talking to the Competition Commission?
Philip Fletcher: We do. Where
a merger comes up, in this case a proposed merger between Mid
Kent Water and South East Water—
Q115 Annette Brooke: No, I am focusing
just on Thames.
Philip Fletcher: There is no point
in our talking to the Competition Commission. At the moment it
has no locus or role in respect of Thames Water. It is our job
as the economic regulator, working with the environmental regulator,
the Environment Agency, to ensure that Thames carries out its
obligations to achieve, for example, full security of supply with
headroom by 2010, which Thames has undertaken to do in exchange
for the price limits that were imposed in 2005.
Q116 Annette Brooke: Can I just change
the emphasis slightly? Since April 2005, I understand that Ofwat
has had a duty to exercise and perform its duties in the manner
best calculated to achieve sustainable development—I am
on page 9 of the NAO report. Paragraph 1.11 says: "We found
that some companies had reflected the expected impact of climate
change in their current water resource plans, but others felt
they had insufficiently detailed information and had not attempted
to do so." That refers to the current plans, but are you
making sure that that information is really going to be built
in? There is a complete lack of information reported in the report.
Are the companies going to have the information for the next round
of reports?
Regina Finn: Yes. Guidance was
given to the companies after being developed by both Ofwat and
the Environment Agency, which clearly also has a strong role.
We are working with the Environment Agency to develop that guidance
to provide more detail to the companies for the next price review,
which will set prices for the period 2010 to 2015, to enable them
to take climate change issues into account in their business plans.
Of course, we would argue that the companies should be doing that
in any event, but we are developing the guidance still further.
Q117 Annette Brooke: It does seem
to be quite a time lag. Following on from that and from part of
Dr Pugh's question, the 2002 recommendations from this Committee
made the point, "Where reducing leakage would enable environmental
damage to be reduced OFWAT should consider setting companies targets
below their economic level of leakage." In other words, not
just the tarmac but the reservoirs, which are another consideration
relating to Thames and whether its leaks should be pursued more
rigorously. That was a 2002 recommendation. Have you really moved
on from that point?
Regina Finn: Yes, we have. Straight
after the 2002 recommendations, what was called the tripartite
report was produced by the Department for Environment, Food and
Rural Affairs, Ofwat and the Environment Agency. That developed
further for the companies how they should include environmental
and social costs in the dynamic leakage calculation, which is
another way of achieving the same thing—ensuring that those
costs are fully taken into account. We have commenced a further
review of the inclusion of environmental and social costs, following
the House of Lords report, to further develop that and take into
account recent developments on climate change and carbon footprints.
We have acted on this, and we are going to go a step further in
the next review.
Annette Brooke: It still seems to me
that there is some time lag.
Q118 Mr Austin Mitchell: You are
really a soft touch, aren't you? Sweet and loveable but soft—like
me. We were told that come privatisation water companies would
be able to raise money on the markets for the huge investment
bills that they faced. In fact, they have been inordinately profitable
and the investment has been paid for by increased prices to the
consumer—they have gone up very substantially—and
you have just gone along with it all.
Philip Fletcher: We would not
accept that, Mr Mitchell.
Mr Mitchell: Of course you wouldn't.
Philip Fletcher: But beyond that
we have evidence, not least from the National Audit Office Report
itself, that in respect of leakage the consumer evidence is that
the right thing is being done. Consumers do not want to spend
a lot more to get beyond the economic—
Q119 Mr Mitchell: But the consumer
is paying a lot more for his or her water.
Philip Fletcher: Right, but the
other bit of evidence that I would adduce is in the report produced
by the respected consultants Oxera for the National Audit Office
in respect of this Report. It says in its first sentence on conclusions
that "Ofwat has been developing a regulatory framework that
overall appears to provide the right incentives for companies
to address the demand for water in an efficient and sustainable
manner."
3 Ev 19-23 Back
| 
