Examination of Witnesses (Questions 485
- 499)
WEDNESDAY 28 NOVEMBER 2007
MS REGINA
FINN AND
MR JONATHAN
HODGKIN
Q485 Chairman:
We welcome now Ofwat in the shape of Ms Regina Finn, the Chief
Executive, and Mr Jonathan Hodgkin, the Director of Network Regulation.
What exactly does that mean? It sounds like you are in the wrong
inquiry, and should be dealing with NetworkRail!
Mr Hodgkin: It means lots of different
things --
Q486 Chairman:
I was right!
Mr Hodgkin: — but there
is a big network of pipes and sewers out there that need regulating.
Q487 Chairman:
So you are Mr Regulator for the pipes and sewers?
Mr Hodgkin: Indeed.
Q488 Chairman:
Good. You are very welcome. Just give us a few moments' background
of the responsibilities of Ofwat in terms of dealing with the
issue of flood risk. How do you do it?
Ms Finn: First of all, thank you
for the opportunity to talk to the Committee and we are inputting
to a number of these reviews, including the Pitt Review right
now. As you have heard from many other people this is obviously
a multi stakeholder issue; there is quite a lot of cross-stakeholder
responsibility, and in our area as the economic regulator, very
broadly speaking, the legal responsibility is with the water and
waste water companies, particularly the waste water companies
clearly, to effectually drain their areas, and it is our duty
to ensure that they do that. That is clearly not an absolute duty
in that it is countered or softened by issues where there are
severe events, but our job is to ensure that the companies do
that to the appropriate standards, that customers receive the
service they pay for, and that is done in the most cost efficient
way, and that the bills of customers in particular reflect only
the amount that the companies need to spend in order to achieve
that. That is broadly speaking where our responsibility lies.
Q489 Chairman:
In the report on the floods in Hull last week there was a suggestion
that your powers to look specifically at drainage systems should
be reviewed, and that is not surprising bearing in mind what happened
in Hull. How do you react to that observation?
Ms Finn: I think the report is
not explicit as to how, and I think first we need to take account
of the recent events that did happen, and I think it is common
cause that we have seen exceptional weather and an exceptional
event and that we all have something to learn from that. One thing
we can learn is that the water and waste water system in many
cases was quite resilient to what happened during the summer and
that the system worked quite well, so there were more than 600
sewerage assets affected by the floods but the vast majority of
those recovered quickly and effectively, and customer service
was not significantly interrupted.[17]
Similarly a number of water treatment works, apart from the Mythe
Treatment Works, were affected by the floods and were shut down
and service to customers was not affected, so the first thing
to do is to learn about what went well and effectively as well
as what we can do to improve the future. Particularly in relation
to drainage and flooding we already have quite a strong role in
relation to protecting customers from flooding from sewers. There
is a significant programme in place, for example, in the current
five-year investment period by the sewerage industry, 1.2 billion
is being invested in protecting and reducing the risk to customers
from sewer flooding; we take that very seriously. That money is
being invested and being done on a risk based assessment, and
being done by identifying where customers are at risk and ensuring
that is the work that is prioritised and done, and we do have
the power to enforce that and are enforcing it. Companies are
carrying out that investment to the required level, and notwithstanding
that it is terrible for anybody to suffer sewer flooding really,
it is an awful experience and we want to reduce it as much as
at all possible, since 2001/2 the number of properties at risk
from that have reduced by half down to 0.03 per cent at this stage.
We need to go further and investment is earmarked to do that,
but the system is in place to ensure that we can address these
issues, and a lot has been done successfully. What we need to
do with all stakeholders now is to look at what the effect of
the exceptional events that we have seen is and what that means
for the future.
Q490 Chairman:
But how are you going to conduct that factfinding activity that
you have just described?
Ms Finn: From the point of view
of the future we have a role, along with a number of other stakeholders
that you have already heard from, and we will play our part in
that, but our particular role is to look to investment for the
future and how that should be targeted and best be spent and used
by companies to protect customers. In doing that our role is to
assess what the companies bring to us in their business plans
and to ensure that the right investments are made each five-year
period when they come to us looking for price limits to be set,
and what we are working on is developing an appropriate analytical
framework that will allow companies to take a systematic look
at, in particular, critical infrastructure, the degree to which
there is a probability that that critical infrastructure may be
more vulnerable than we may have thought, the degree to which
there is a likelihood that that critical infrastructure might
be affected by any future weather events, and the impact, crucially,
of anything that might happen to that infrastructure, and thus
allow companies to prioritise what is the best area in which to
invest and then to set out and evaluate the options for achieving
the best results and apply a cost benefit analysis to ensure that
the things they do are cost beneficial for customers. So that
is part of our role that we will be playing.
Q491 Chairman:
Obviously at that particular stage it is quite difficult for you
to comment on how water companies have used the investment monies
that they, if you like, had your approval for in the current spending
round, because that is a done and dusted job, and we are not far
away from you starting the process all over again. But one of
the characteristics of that process which concerned me was the
almost seeming horse trading that went on. Companies lobbed in
huge bids at the beginning, you had a Secretary of State direction
letter, you looked at that, you looked at their bids, and roughly
halved them, and there did not seem a great deal of logic in what
you were doing last time in coming to a conclusion. It was how
far can we go so that the customers can bear it versus the demands
of the company for what, in an ideal world, they wanted to invest
and spend. Now, you have talked a lot about looking at things
and learning lessons and doing cost benefit analysis. Are we going
to have a more structured approach as far as the 2009 review is
concerned to cut out the horse trading and try and get down to
a bit more objectivity?
Ms Finn: You will understand I
would not necessarily agree with your analysis of the last review
—
Q492 Chairman:
But you thought there was an element of truth in it, did you not?
I could see you smiling!
Ms Finn: What I would say is that
in planning for the 2009 review we are very conscious of the need
to take a long-term approach to this sector and ensure that we
plan for not just the next five years but for the next generation
of consumers of water and waste water services and, indeed, the
water environment. We have already required all the companies
to develop a 25 year vision, a strategic direction statement of
how they are going to do that, so we can set the business plans
within that longer term framework when we evaluate what they need
for the five years. Other things we have introduced or built on
from previous reviews is the need to use cost benefit analysis
across all of the investments that the companies propose, that
is something we are proposing to use in PR09 more widely than
last time, which will allow the best solution and not just the
obvious solution, and I think one of the particularly interesting
things for us is to see how we can take that longer term view
and make sure that companies invest, as your previous witnesses
were saying, not just in the short term but for the longer term
future to protect customers, so that is a new direction and a
new approach in how we are dealing with this.
Q493 Mr Drew:
On the issue in Gloucestershire as you are aware we are meeting
tomorrow in a private setting but I think it is fair enough that
I rehearse the arguments. The degree of ill feeling towards the
way that the floods were coped with by Severn Trent was not because
they did not try of their best eventually, and I took that up
with them last week when they gave evidence to us, but they were
unable to secure a supply of fresh drinking water through the
first two weeks of the post-flood crisis, and it was felt locally
that there should be some recompense, not in the sense that there
was a great demand for bills to be just eliminated or huge compensation
to be paid to individual householders who were without water for
much of that time, but that there should have been something given
in terms of monetary support as a statement to people who had
suffered quite badly. Now, as you know, Severn Trent decided they
would absolve themselves of their debt, if you like, to the population
by the £3.5 million payment to the Gloucestershire flood
fund, and we wrote to you subsequently, as you know—when
I say "we", Parmjit Dhanda, MP for Gloucester, and myself
wrote to you—to say this was insufficient and this was a
neglect of their responsibility, yet you supported them in what
you thought was a reasonable gesture. Would you re-think that
now given that, with the benefit of hindsight and even what Severn
Trent said, the level of suffering that people had to endure was
such that some greater statement of responsibility should have
been made by the company? What are your feelings now with respect
to that?
Ms Finn: Firstly it was clearly
a terribly distressing situation for people to be in, to be without
a piped supply of water for that period of time, although the
supply of bottled and bowser water was put in place and was a
huge operation, clearly. We are conscious that there are statutory
obligations on the company through guaranteed service standard
regulations which are put in place by Defra[18],
but they are not absolute and the company is right in saying that
in severe or exceptional weather events it is not obliged to pay
statutory payments that it would otherwise have to pay if customer
supplies were interrupted, so that is fact. One of the very interesting
things is that we have been working closely with the Consumer
Council for Water as it carries out research with customers in
the area, and unquestionably individual customers have suffered
significantly, and there seems to be a strong view among customers
that rather than compensation directly to them their key concern
and focus is that the company rectify any weaknesses in its system
and invest to ensure that this does not happen again. That is
where customers would like to see most effort going. Certainly
it is Severn Trent's responsibility to pay for the clean-up and
fixing the assets and repairing what happened and customers' money
will not go towards doing that; that is something that the company
has to bear. It is a matter for Severn Trent as to what, if any,
gesture it wished to make to the community, and it did make a
gesture of paying £3.5 million or making £3.5 million
available. There is no obligation on them to directly compensate
customers, and the view that we have received so far from customers
is very much that on aggregate they would most like to see the
system being made secure which brings us back to the key issue
of identifying critical infrastructure, because Mythe was a critical
piece of infrastructure, a single point of failure, where a lot
of customers suffered, whereas with other water treatment works
that went down customers could continue to be served by alternative
supplies, and that is the focus customers wanted to see Severn
Trent focusing on.
Q494 Mr Drew:
Where people still do feel let down is that although I accept
what you are saying, that people do not want to go through what
they went through again and it would only be right and proper
that the Mythe and similar installations, pieces of critical infrastructure,
are sufficiently protected now as a matter of course and that
we should do everything humanly possible to prevent such an event
from recurring, but I think where people do feel genuinely let
down is with regard to the fact that you as a regulator could
have said, "£3.5 million to the general fund—a
good gesture; now do something about people's bills in the short
run. We are not expecting the bills not to be paid for a year,
not even expecting cash in hand to be shelled out to those people,
but some gesture to the individuals who suffer would be right".
As a regulator surely you must have some authority in that area,
even if you have to go to Severn Trent and persuade them, rather
than instruct them.
Ms Finn: From our point of view,
first, the statutory standards are suspended in the event of exceptional
weather and it is a matter for the company to make a choice there.
Q495 Chairman:
What is the definition of "exceptional"?
Ms Finn: Exceptional weather events
are not clearly defined and that is something that is part of
the focus for the future. You have heard other people say this,
I think, but we need to evaluate what "exceptional"
means, and certainly the 1:150 event that happened this summer
was exceptional in any 150 years. We need to consider whether
standards are changing or we need to evolve standards around what
has happened this summer, but in the case of Severn Trent what
we would be reluctant to do would be to ask the company to do
something that the majority of its customers are saying is not
the primary thing they want the company to do; they want the company
to focus on investment to ensure this does not happen again. So
we think there is a significant challenge to Severn Trent to tackle
this.
Q496 Mr Drew:
Where do you get your evidence from in terms of knowing that,
because that is not what my constituents are saying to me?
Ms Finn: I fully appreciate that
individuals will have different views; that is absolutely right.
Q497 Mr Drew:
I am talking about whole communities.
Ms Finn: We get our evidence from
work that the Consumer Council for Water has done, both qualitative
and quantitative research with focus groups.
Q498 Mr Drew:
Did they hold any sessions?
Ms Finn: Yes, a number.
Q499 Mr Drew:
I hope there were more there than at the Severn Trent session
because I had to persuade the chairman of my parish council in
the area it was being held to go to it, and we doubled the numbers,
so it was not a great success in terms of going out to listen
to the public because the public did not know about it.
Ms Finn: I think the research
did have enough people to make it valid. Certainly we had Ofwat
team members attend it as well, but it was attended by enough
people for it to be valid.
17 Note by witness: The 600 sewerage assets: over 300
Sewage Treatment Works and over 300 Sewerage Pumping Stations. Back
18
Note by witness: The GSS scheme is encapsulated in statutory instruments
which are sponsored by Defra as the responsible Government department. Back
|
