Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 20 MAY 2009
MS ANNA
WALKER AND
MRS SUE
ELLIS
Q1 Chairman: Good afternoon, ladies
and gentlemen, and welcome to this the first public evidence session
of the Committee's joint inquiry into the Ofwat Price Review 2009
and the Draft Flood and Water Management Bill. We will try and
separate out the questions but inevitably where water is concerned
there will be a certain joining together of the different streams,
if I can put it that way, of thought on the subject. Can I formally
welcome Anna Walker, the Chair of the Independent Review of Household
Charging for Water and Sewerage Services, and Sue Ellis, the Head
of the Secretariat again for the same inquiry. You are both very
welcome indeed. It might be quite useful if we could have a few
words from you, Ms Walker, about the response to your call for
evidence and to know, in the nicest sense, how much it has been
dominated by what I would call the "usual suspects"
of people you would have expected to have heard from and/or members
of the public who could well be affected by the outcome of your
deliberations.
Ms Walker:
Certainly. We had 78 responses overall to the call for evidence.
They came from a very wide group, so the usual suspects in the
sense that some companies responded, some consumer bodies, some
specialists, some academics, and so on, but a very wide range
overall. Over and above that we have had five workshops in different
parts of the country which were open to the public to come. The
public only came in significant numbers to the one in Plymouth
in the South West, reflecting quite clearly the concern about
water prices there. Indeed, a lot of individual emails and letters
and indeed letters from groups like pensioner groups from people
in the South West. Interestingly, there is just beginning to be
some interest here in London over what could happen to water prices
going forward in London because of the significant investment
which is going to have to be made in the Thames Tideway and the
London sewerage network going forward.
Q2 Chairman: What is your assessment
from the evidence you have seen so far and the contact that you
have had from the public who pay for water services about their
understanding of the factors that determine the price that they
pay?
Ms Walker: I think the understanding
in the South West is really quite considerable of why the prices
are where they are. However, there is a very strong sense of unfairness
there, and I was very struck at the end of the morning that we
had down there when somebody in the audience said you could look
at this Review and make recommendations but if those recommendations
only covered or dealt with issues of affordability that would
not take away from the very strong sense that there is in the
South West about the unfairness of where water bills are as a
whole. Indeed, that was reflected in the correspondence that we
received, particularly from people who had moved from other parts
of the country into the South West and who were then facing very
considerably higher water bills.
Q3 Chairman: Did that sense of unfairness
reflect on the disproportionately high cost of the bills perhaps
compared with other parts of the country?
Ms Walker: I am sure that is what
it reflected because they are particularly high in the South West.
However, other parts of the country will catch up with them. United
Utilities and Thames Water, for example, have got very significant
investments to make. In other words, high water bills, as infrastructure
has to be replaced, particularly because it is now being replaced
to high environmental qualities, is an issue which is going to
have to be faced in the water sector as a whole and is going to
impact on water customers.
Q4 Chairman: Finally, before I move
on to a supplementary from David Lepper, again looking at the
generality of the members of the public that you have had contact
with, have you distilled from that a view that they have of water
companies as entities? Obviously they may have a particular view
in the South West, but did they make any comments about the nature
of the companies and the way they conducted their business, particularly
when it came to the price-setting mechanism?
Ms Walker: It is interesting.
CCWater's evidence as a whole suggests that about 64% of customers
are positive about the service and the value for money that they
receive from water companies. The letters and emails and contacts
from the South West have a very clear thread through them of calling
for competition and choice, and the two of those thoughts are
used interchangeably, but the message that I, at any rate, took
away from it was a sense of frustration where they were dealing
with a company who was the sole supplier for them and they had
some very difficult terms and conditions. That is against a backdrop
that there is no doubt that South West Water has put a lot of
effort into talking to its customers locally and particularly
doing what it can to help those in debt and struggling to pay
their bills, but they have got a very sizable problem.
Q5 David Lepper: You talked about
the responses that you had had and you mentioned pensioner groups
particularly in the South West. Among those who responded were
there organisations representing disability groups making any
particular points on behalf of their clients, those they represented,
about water pricing?
Ms Walker: No, not as such. Indeed,
we have had to work hard to really engage what I would call health
specialists (to call them the health lobby is unfair to them).
We have wanted to have a real exchange with health specialists
because there is no doubt that water is an essential of life.
One of the things which comes out of the call for evidence and
the five workshops that we have had is that everybody believes
that people are entitled to the water which is necessary and a
way must be found of achieving that. We have had feedback from
mental health, MIND in particular, and we have certainly had feedback
from some of the groups about vulnerable customers, drawing our
attention to those with disability as well as those with physical
illness, but not the disability groups as such. That is fair,
Sue, is it not?
Mrs Ellis: Yes.
Q6 Miss McIntosh: The timing of your
Review is obviously falling between two stools and you are not
expecting the outcome to affect the Price Review 2009, but have
Ofwat given you any indication that they will have any regard
to your recommendations or are you going to have to wait five
years before they work their way through?
Ms Walker: Let me say just something
about the timing and then come to your question. The interim report
will be published in June. We expect the final report to be published
in October. It would never have been published before October,
actually, the reason being that we feel that it is right to publish
it when Parliament is sitting, so this is determined by the parliamentary
timetable. We are already in significant discussion with Ofwat.
Ofwat will know from our interim report what our recommendations
are, and our objective as a team is to be pretty hands-on between
the interim and the final report. That is the point of having
an interim report, so that we can take our emerging conclusions
and really discuss them and refine them. The point I am really
making is that by the time the final report is in front of people
it will not come as a surprise to anybody. The crucial thing then
will be the Government's decisions on that report and I myself
have spent a lot of time as a regulator, or indeed as a civil
servant responsible for regulatory bodies, and although there
is a point at which decisions have to be made about the Periodic
Review, I think many of the things which are in this report, if
accepted by government, could be incorporated sooner. They would
not have to wait until the next Periodic Review.
Q7 Miss McIntosh: One thing that
is concerning me, because my county, Yorkshire, was very badly
affected by the summer floods in 2007, so we are obviously mindful
of the fact that we are coming up to the second anniversary, is
that the Environment Agency, as I understand it, have come up
with a programme of works agreed with the water companies as to
the way to proceed to protect critical infrastructure which is
deemed to be very vulnerable. I am sure this is going to be a
source of some interest to Ofwat. It is obviously a source of
some concern to the water companies because my understanding is
that how this is to be financed, funded and programmed is outwith
the projections for the Price Review 2009. It does raise, though,
issues of not just how it is going to be paid for but how properties
are going to be protected. Some were dams, some were utility companies,
critical infrastructure covering a whole raft of different types
of infrastructure. Do you have a view?
Ms Walker: I am a bit surprised,
actually, at you saying that there is no investment in the question
of the capacity of the sewerage system. What I understand is often
the issue is local strengthening to the sewerage and surface drainage
network.
Q8 Miss McIntosh: Could I clarify,
Chairman, because I am assuming that is in there.
Ms Walker: It is in there, yes.
Q9 Miss McIntosh: I am talking about
the pumping stations, the dam that almost burst and flooded the
M1 where lives could have been lost with the properties behind,
utility companies, electricity companies. I think it is Gloucestershire
where they did lose their power. Yorkshire Water have got a whole
separate grid—they serve my area—now in place, so
they have looked after that aspect in times of flooding. It is
things like emergency pumping stations and utilities like electricity
and gas stations, and sometimes water companies with the pumps.
My understanding is that financing of that is not included in
the Price Review. I have a very real concern that Ofwat, with
the greatest will in the world, may go and look and see how the
water companies propose to finance that separately from the 2009
Review and yet it is the strengthening of the critical infrastructure
that is important, and should there be a summer flood or an autumn
flood this year, we do not want to see that infrastructure fail,
so it is that which is separate to the 2009 Review that concerns
me.
Ms Walker: I do not know the answer
about the extent to which Ofwat is taking those issues on board.
I am sure you are aware that the Government has now accepted Mike
Pitt's recommendation that Ofwat should have a duty to look at
that, and of course it will the critical water infrastructure
in order for the sector to be capable of dealing with a flood
like that, so I would be very surprised if Ofwat was not thinking
that issue through, but I could not tell you definitively.
Q10 Miss McIntosh: I am not asking
you to comment for Ofwat because we will have an opportunity to
question them. I know I am straying into the second half on the
Flood and Water Management Bill and the Pitt recommendations are
absolutely apposite there. It is a case of how are we going to
pay? Are we going to ask water companies to pay? If customers
do have to pay, should that be clear on the face of the Bill because
it is additional to the 2009 Review, but I have a very real concern
as to the transparency of the payment, the fact it will be paid
and the fact, for example, if I was a customer, would I rather
be flooded because the money had not been spent and the repair
work had not been done to shore up the critical infrastructure
or would I rather pay, if I can afford to do so?
Ms Walker: One of the recommendations
that we do make, not so much in relation to the critical infrastructure
for flooding, it is about environmental improvements, is how important
that there is transparency about what the costs are and that that
is understood by people locally because of this question about
paying and also because it has become clear to us that there are
often decisions to be made over the period over which investment
is made. The costs can be influenced in some cases by taking a
longer or a shorter period of time to carry it out, but that business
of really explaining to water customers what is at stake, what
the costs are, and gathering their views in is something that
we believe is very important. We believe it is very important
so people do understand but also we believe that there is a risk
that because we can see a continued upward pressure on water prices,
and just learning from the sense of anger that there was in the
South West, for it to have legitimacy people have to understand
what it is that they are paying for and why.
Q11 Miss McIntosh: That is very helpful.
Can I come to just one last question on the Review, if I may.
The background against which the Ofwat Price Review is taking
place, and your Review and the Cave Review, is that we are facing
exceptional and unprecedented financial circumstances. Are you
factoring that into your Review? Have the water companies given
you a sense of how this will impact on the uncertainty of their
future plans?
Ms Walker: We certainly are very,
very conscious of those wider issues. If I may, just before we
leave it because you have raised the question with me about some
of the flooding issues, what we have been looking at is there
are two elements of the Water Bill, surface water drainage and
highways drainage, where there has already been a debate of course
about non-household charging. We believe, looking forward, that
ways need to be thought of to incentivise those who can make a
difference, to have sustainable drainage systems in place. We
have all got to think about it: local authorities will have to,
householders will have to in due course, and those actually surfacing
roads will have to.
Q12 Mr Williams: We will have the
opportunity to talk to Ofwat later, but one of the things that
really worries me is the financial sustainability of the water
companies and obviously the recommendations that you make are
going to have implications for that. Already one water company
has had a reduction in its credit rating and its ability to borrow
is obviously adversely affected by that. Do you take that into
account at all, the ability for companies to finance their business,
or do you just look primarily at customers' needs?
Ms Walker: We most definitely
do take on board the ability of companies, and indeed it has been
very interesting because one of the issues that we started with
in this Review, the terms of reference asked us to look at the
fairness of charging systems going forward. so we felt we needed
a debate over what fairness was, and one of the principles that
has emerged from that is that a charging system has to be fair
in the sense that it has to allow companies to cover their reasonable
costs. Given that in some circumstances (although not all) water
companies are monopolies, then clearly Ofwat as the regulator
has got a role to play in ensuring that they are reasonable, but
we have thoroughly recognised that. Indeed, I personally was caught
in quite a discussion down in the South West about profits versus
the cost of investment and so on.
Q13 Mr Williams: Have you had any
feedback about Welsh Water and its not-for-profit style of operation
and whether that is good for customers. Does it provide a better
service and a more efficient way of providing services?
Ms Walker: One of the workshops
that we had was in Merthyr Tydfil, precisely so that we could
explore the different Welsh circumstances. What I think I would
say is that it is a different form of company offering potentially
different benefits and it does certainly seem to work for Wales.
Whether it would necessarily transport automatically to the rest
of the country, I think is not clear. We thought that both models
were working and we are very conscious that the amount of investment
(on average £4 billion a year) that has gone into the water
sector since privatisation, modernising and updating this really
essential network has actually been very positive for the customer.
The issue going forward is how the regulatory system as a whole
can incentivise companies and customers to think about using water
carefully and economically and how the whole system can be incentivised
to do that so that even if costs go up we can kind of anchor them
at a reasonable level.
Q14 Paddy Tipping: You talked to
us earlier on about the timetable of your Review and the Price
Review and I have to say I am slightly confused about this and
I hope you are going to sort me out.
Ms Walker: I will try!
Q15 Paddy Tipping: Are you saying
to us that the recommendations from your Review will be included
in the Ofwat Price Review, that everything you say in your Review
will be in in time so that Ofwat can make decisions about it?
Ms Walker: No, I am not saying
that. What I am saying is that if the recommendations we made
are accepted by government, I can see ways that they can be factored
into the on-going regulatory regime, they do not have to wait
until 2015.
Q16 Paddy Tipping: So you are not
talking then about interim price reviews?
Ms Walker: No, absolutely not.
The key recommendations that we are likely to make which are relevant
here include: looking at the value of water on a wider basis for
investment purposes, so you take on board the scarcity cost of
water where it is scarce, that is one thing. If government decides
to go with metering, one of the points that we are making is that
that would have to be a transition from one charging system to
another and that needs to be led. That is the second. A third
would be around affordability issues and that could be factored
into the arrangements during the period of time. One point I should
have made when I was being asked questions earlier about this
question of companies and what is going to happen to companies
in the current climate is that we have recognised right from the
start how we have to ensure that they remain ready to continue
their investment through this period.
Q17 Paddy Tipping: I understand that
but I also understand that the companies are putting their bids
into Ofwat at the moment.
Ms Walker: Yes.
Q18 Paddy Tipping: If I were running
a company, which I am pleased I am not in the current climate,
I would be anxious that I am putting a plan into Ofwat and I do
not really have a clue what is going to come out of your report.
That is pretty unsatisfactory, is it not?
Ms Walker: I would think that
the companies would not be overly surprised at what was emerging.
Q19 Paddy Tipping: So what are you
doing the report for then if they know what needs to be done?
Ms Walker: What we have tried
to do is as we have begun to formulate our own views; part of
the reason for the workshops was to take those around; talk to
people to make sure they were realistic. It was precisely that
sort of discussion which has led us, importantly, to make a distinction
between different parts of the country. So we do believe—and
the report will reflect this—that there are some very sharp
issues to be faced where water is scarce. If you are in Wales
and there is less scarcity of water there is less of that.
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