Examination of Witnesses (Questions 120-139)
OFWAT
29 JANUARY 2007
Q120 Mr Mitchell: Yes, but it is
only now developing, after several years of privatisation. You
are only now doing the research that allows you to find out a
lot of the basic factors of the industry. Some of that research
is financed with the companies in a co-partnership. Why so late?
Philip Fletcher: We all get impatient
about this. We would love to have a list of what are the most
cost-effective things. For the moment we have produced—and
it is new—a best practice register that clearly identifies
particular projects that we think have a lot of mileage in them.
It is extremely difficult to attach a precise effectiveness figure
to any individual project.
Q121 Mr Mitchell: If you do not know
basic figures, such as wastage, usage, population and the effects
of metering, on which Don Touhig has said estimates vary, how
on earth can you enforce investment?
Philip Fletcher: It is a fundamental
frustration that we have only 28% of consumers metered. We hope,
especially in the water-stressed areas, to get it much higher.
Q122 Mr Mitchell: Metering is your
answer to everything—it gives you greater control. Let us
deal with the situation as it is now. There is a table on page
31 of the Report, "Company per capita consumption
estimates." The estimates for unmeasured households vary
wildly. The highest is Three Valleys and the lowest is Tendring
Hundred—wherever that is. Similarly, for metered water,
there is a huge difference in estimates of usage per litre per
head per day. The highest is South East and the lowest, again,
is Tendring Hundred. What does that mean? Why is that? Can you
explain those differences in usage? Are people in the south-east
clean smelling and wholesome, whereas the people in Tendring Hundred
stink? Have people in the south-east got big gardens? Are they
washing bigger cars? Why are there such basic, big differences
in usage?
Philip Fletcher: Tendring Hundred
is another example of a small company that can help to give a
lead to others. It has only around 24,000 consumers, so if you
compare that with Three Valleys—
Q123 Mr Mitchell: Okay, take Severn
Trent. The usage is low there—it is 118 litres per head,
compared with 166 in the south-east. Why?
Philip Fletcher: Although we believe
that Severn Trent's leakage figures are now much better, it had
a period three or four years ago when its leakage figures needed
to be fully recalibrated. Therefore, in some circumstances, there
may be continuing queries about a particular company's figures.
Just before we leave Tendring Hundred, let me
say that another very relevant factor is that 64% of its customers
are metered. That is a very high proportion—the highest
in the country by far—and the metering is making a difference.
Another factor is that the customers of Tendring Hundred—in
Essex—are, on the whole, in different socio-economic categories
from those in the rather more opulent Three Valleys area, and
more opulent people use more water.
Q124 Mr Mitchell: Are you satisfied
that you can explain these wide differences in usage of metered
and unmetered water?
Philip Fletcher: Until we have
universal metering—even then it will not be perfect—
Q125 Mr Mitchell: No, the differences
in usage for metered water. You have to be able to explain that
to have a rational basis for your calculations, but you cannot?
Philip Fletcher: Therefore we
need a series of different takes to help us, especially when we
are talking about things such as leakage and per capita consumption.
We do not rely just on per capita consumption to assess leakage;
we also have, for example, minimum night-time flows, which, as
Mr Khan will have experienced when he went out with a Thames team,
look for the lowest point of the night to get a basic minimum
consumption, which will help to give them a different take on
leakage.
Q126 Mr Mitchell: This is now, so
many years into privatisation.
Philip Fletcher: And it is getting
better.
Q127 Mr Mitchell: This is quite basic,
but you do not know the answer.
Philip Fletcher: But we cannot
know it precisely. I absolutely share your frustration, but steadily,
under pressure, the companies are getting better at this and using
different ways of appraising things, so we can now have confidence
that we know the economic level of leakage. That enabled us to
set the precise targets at the last review.
Q128 Mr Mitchell: I wonder whether
the companies are also getting better at fiddling the figures.
After one of our sessions with you, when I was on the Environment
Committee, I accidentally found myself sitting on the train next
to a manager, not an executive, from Yorkshire Water. We had been
talking about the wastage figures. He had not been drinking water,
because he could not get Yorkshire water on the train in London,
so he had been drinking a substitute for water. He became quite
frank and open with me, as people do on these occasions, and he
said, "We fiddle the figures."
Philip Fletcher: Well, I will
put that point to Yorkshire Water.
Q129 Mr Mitchell: Oh no. There is
infinite scope for these figures to be fiddled if you do not know
consumption.
Philip Fletcher: I must not get
too far into it, because we must not prejudice a possible case—the
Serious Fraud Office is investigating, as we speak, whether there
was something seriously wrong with Severn Trent's figures, and
that is mentioned in the National Audit Office Report. However,
we believe that the scope for fiddling—to the extent that
it ever existed—is becoming smaller and smaller as we track
over the years precisely what has happened.
Q130 Mr Mitchell: How many years
are we into privatisation and into your reign as Ofwat?
Philip Fletcher: We are into 17
years since privatisation and six years since I became involved
at Ofwat.
Q131 Mr Mitchell: Other Members have
put the point that you are very soft on Thames, and you are soft
on Thames, are you not? You did not obtain from them for several
years a legally binding undertaking to increase investment. You
did not fine them when you had the power to do so. If they are
profitable enough to be a takeover target, they must know something
that you do not know about their profitability.
Philip Fletcher: They are a very
profitable company at the moment. They have to carry out a whole
series of things to fulfil their obligations by 2010; that includes
this enormous mains replacement. They are at risk of damage to
their profits to the extent that they do that inefficiently; they
are at risk to the extent that they do not put enough money into
leakage control and fail their target. They know that if they
were to fail their target this year Ofwat, in the face of another
failure, would be likely either to fine them, which means the
money goes straight to the Exchequer, not to the benefit of consumers,
or get something very major to the benefit of consumers from Thames.
Again, I will not anticipate because one might always have judicial
trouble if one anticipates, but I can assure the Committee on
behalf of our board that a very severe view would be taken if
Thames were to fail again. They have to do a whole series of things
to improve their service to consumers which is at their cost if
they do not deliver.
Q132 Mr Mitchell: Why is it that
their report indicates that 16 of the water companies believe
that you are not effective in promoting programmes to improve
efficiency?
Philip Fletcher: Mr Mitchell,
that is the Mandy Rice-Davies answer—they would, wouldn't
they.
Mr Mitchell: They know.
Philip Fletcher: They are the
subject of regulatory action. They would love to have an excuse.
Q133 Mr Mitchell: Mandy Rice-Davies
knew human nature. Why don't you know the nature of the beast?
Philip Fletcher: Well, we do know
the nature of the beast. We do not take as gospel what a company
tells us. We have a whole series of checks to ensure that the
company boards are taking their legal duty very seriously subject
to a criminal penalty to provide us with accurate information,
auditors—
Q134 Mr Mitchell: Well, why don't
you do something like they do in Sydney, where they provide consumers
with the money to install effective ways of saving water? The
most they do in Britain is to recommend that you put half a brick
in the cistern. My cistern is full of half bricks because I am
with Yorkshire
Philip Fletcher: Yorkshire Water,
of course—
Mr Mitchell: Sorry, I am with Anglia
in Grimsby.
Philip Fletcher: But Yorkshire
Water, having failed very badly in the drought in the mid-1990s
has actually raised its game, subject to your point about fiddling,
very considerably on almost all fronts on consistent bases and
is now setting the tone for the other companies in a way that
benefits consumers. The leading company helps us drive efficiency
for all the rest of them. We have looked, of course, at Sydney
Water, as is also brought out in the NAO Report. Without taking
anything away from the work they have done, it is worth nothing
that their consumption is still around twice the level of consumption
in England and Wales. They had a very bad position to start with.
Q135 Mr Mitchell: Let me stop you
there. I can remember the day when Mark Thomas, the comedian,
rolled up at Yorkshire Water during one of their periodic droughts
with a tanker of water donated by Saudi Arabia, which I thought
was a good gesture. It says in the Report that Yorkshire Water
solves its problems by transfer of water within the area. I think
at one time they were taking water from Kielder. It is also argued
that that kind of link up is very expensive; too expensive, the
impression is given, for it to be widely used. Which is the truth?
Philip Fletcher: Yorkshire Water
was tankering water, which is about the most expensive way to
do it. But that is necessary in a real crisis. At the same time
they established a sort of emergency link, which is only for emergencies—it
is not a fully robust standard link. Raising the wider question,
what about a national grid that would enable the customers from
the south-east to benefit from something coming from the north?
Q136 Mr Mitchell: That was certainly
envisaged in the 1970s.
Philip Fletcher: It is interesting
that in 1973 the then predecessor of the Environment Agency forecast
all sorts of major engineering schemes. The only trouble was that
it forecast double the level of demand that there is now. Demand
has been pretty well constant for the past 10 years. However,
we are not complacent; a lot of work is going on to strengthen
supply. Last year, the Environment Agency carried out a desk study
to reappraise work done by its predecessors. That came up with
the figure of some £16 billion to bring water from the north
to the south. That is at least four times the cost of strengthening
supply within the south if that proves necessary, possibly including
a new west Oxfordshire reservoir.
Chairman: I have to stop you there.
Q137 Mr Williams: May I declare an
interest, in that while I am in London I am a minor contributor
to the profits of Thames Water. If, as a result of today's hearing,
our Clerk gets his meter, will our witness ensure that a member
of the serious fraud squad goes along to check its calibration?
We do not want to see him penalised for undue influence.
Philip Fletcher: Mr Williams,
on the whole, meters tend to under-record. It is a bit like the
police setting the cameras just slightly over the speed limit
in order to ensure that, if a fine is issued, there cannot be
any quarrel as to whether the reading was the right or the wrong
side of the line. The Clerk, like all metered customers, can be
reassured that he is not being fiddled.
Mr Williams: That is interesting. I did
not know that.
Philip Fletcher: There are checks
to ensure that the companies are not fiddling. Apart from the
criminal duty, the auditors owe a duty of care to Ofwat and a
group of professional engineering consultants called reporters
check independently for Ofwat and for the company on things such
as metering and customer service issues. We are strengthening
that now, in consequence of the nasty shock that we had on finding
that some of the information provided by companies was less reliable
and complete than it should have been.
Q138 Mr Williams: You made the point
that before 2005, Thames spent £200 million on dealing with
the problems of leaks and so on. Over how many years was that?
Philip Fletcher: Let me give you
a very brief history. At the 1999 price review, Thames did not
include any significant mains replacement plans. Following the
significant deterioration of the mains, under pressure from us
and from events, it embarked on a major programme of mains replacement,
roughly from 2002-03 onwards. That had cost about £200 million
by the start of the new regime in April 2005. Since then, it has
been committed to a programme costing about £150 million
a year, plus the extra £150 million that it has to cram into
the five years at its own cost.
Q139 Mr Williams: So, effectively,
the £200 million was similar to what you could have fined
it over the same three years—£66 million a year.
Philip Fletcher: It was not subject
to the statutory undertaking in the same way, but it was clearly
necessary to deliver what we call serviceability, or to start
to do so. That is, to ensure that the assets of the companies
are maintained in a way that is not extravagant, but which maintains
them as fit for purpose. Roughly, maintenance spending has doubled
and more since the pre-privatisation period, when the Treasury's
hand was on it all. We believe that it was entirely necessary
that there was no extravagance in the maintenance programme. We
monitored—
Chairman: You must keep your answers
short. It is not fair on others.
Regina Finn: Also, we could not
fine. We did not have the power to do so during that period.
| 
