Examination of Witnesses (Questions 151
- 159)
MONDAY 8 JUNE 2009
MR JONATHAN
HODGKIN, DR
TONY BALLANCE,
MR PETER
ANTOLIK AND
MR RICHARD
AYLARD
Q151 Chairman: Good afternoon, ladies
and gentlemen, and welcome to a further evidence session on the
Committee's inquiry into the Ofwat Price Review 2009 and the Draft
Flood and Water Management pre-legislative scrutiny. May I for
the record welcome Jonathan Hodgkin, who is the Director of Regulation
and Investment for Yorkshire Water, Dr Tony Ballance, who is the
Director of Regulation and Competition for Severn Trent, Mr Peter
Antolik, the Strategy and Regulation Director for Thames Water,
and Mr Richard Aylard, who is a Director of the same company,
Thames Water. We are constrained this afternoon by time so we
will try and keep our questions crisp and I wonder if our witnesses
would reciprocate in terms of their answers. There may be some
further points that we do not get to that we would like to deal
with by means of correspondence. The inquiry is in two parts.
The first part will concentrate on the Ofwat Price Review, the
second part will concentrate on the Bill. Could I start by asking
our witnesses to comment on Ofwat's performance. Some of the evidence
in PR09 has suggested that Ofwat have acted in what has been described
as a piecemeal way; bits and pieces of the review have come out
and you have not had the coherent picture of what they are after
that you would have liked. Perhaps you would like to comment on
Ofwat's performance so far.
Mr Hodgkin: Chairman, perhaps
I could pick that up. I think that PR09 was always intended to
be a version of PR04 plus a slight amendment, if you like, to
the PR04 process. In that sense, I think there have been some
improvements to the process. In Yorkshire Water's case at least
we have had an opportunity to discuss with Ofwat the progress
of the review. We have found it possible to understand the process
they are taking in the review. Of course, it is always helpful
to have more information and more time with the regulator would
always lead to a better outcome.
Q152 Chairman: Do you think feel
it has been less of a horse trading exercise? The last one seemed
like some companies just shoved in everything they ever wanted
to spend and were quite happy when it was knocked backed by 50%
because they said, "Right, fine, that is okay." Do you
think this one has been better structured, particularly in terms
of the incentives and penalties that Ofwat put into the price
setting process?
Mr Hodgkin: I think it has been
a better process in the sense that there has been more of an attempt
to fit this five-year process into a long term for the industry.
So the Strategic Direction Statement is a helpful context-setting
for the exercise. I think there has been some innovation in methodology.
The capital incentive scheme I think has been a helpful step forward.
It has given companies an earlier sight of the likely capital
programme but we are not at the end of the process and we have
two very important statements to come. The real test will be whether
one can see a consistency between the draft and final determinations
and everything that has gone before, and until we have seen those,
it will be hard to say.
Q153 Chairman: One of the issues
that has emerged, if you like, is the optimisation in the use
of water. The Walker review has perhaps focused our minds on that
in the context that it is going to publish work on the question
of metering. I am not going to ask you specifically about that
but, obviously, from one standpoint, using less water, using it
in an optimum fashion, means that you can consider not having
to make certain capital investments in the future but, on the
other hand, it means less revenue, which obviously is very important.
Do you think that the incentivisation process has actually addressed
that issue properly in the context of PR09?
Mr Hodgkin: I think what Ofwat
have done this time round is remove the disincentive to water
efficiency. As you will probably be aware, they have introduced
a revenue correction adjustment to the price cap, which means
that at the end of the five-year period, if revenues are different
to forecast, we will get a correction for that. The implication
of that is that if we pursue water efficiency measures and water
consumption falls as a result, the company does not lose out from
that. Now, that is a step forward from where we are currently,
where the company has a direct incentive to sell as much water
as possible.
Q154 Chairman: Can I just have some
idea of what that means for your respective companies? Have you
actually built into your submission some actual reduction targets
and, if so, of what order?
Mr Antolik: At Thames Water we
have brought in a programme of metering that we believe will displace
about 13 mega-litres a day of demand for water that would otherwise
be there.
Q155 Chairman: Can you just put that
into context? How many mega-litres a day? I would not know one
of those—I probably would if it fell on my head.
Mr Antolik: I will just refer
to my colleague. I believe a mega-litre is a swimming pool. Is
that right? Roughly, one mega-litre a day is an Olympic-sized
swimming pool.
Q156 Chairman: How many mega-litres
a day does London consume in the form of Thames Water?
Mr Antolik: Thames Water provides
2,600 mega-litres a day of water on average.
Q157 Chairman: So it is a one two-thousandth
plus reduction.
Mr Antolik: It is 13/2600. About
one two-hundredth, yes. So metering is a part of the overall supply
and demand approach. We see it as a very important part as well,
particularly in the South East, where we are water-stressed.
Dr Ballance: I do not have the
figures to hand but certainly we have in our plans to reduce consumption,
again, through selective metering—not in as advanced a way
as some of the companies in the South and East because we do not
have the resource difficulties that they face in the short to
medium term but we also have within Severn Trent the lowest per
capita consumption in the industry, I believe. We are around 130
litres per head per day, so we are already at the level where
government wants companies to get to in terms of consumption levels
in the industry.
Q158 Chairman: I would not like to
cast aspersions on the cleanliness or otherwise of your water
customers but how do you manage to achieve that?
Dr Ballance: It is difficult to
say. There is a range of numbers in the industry. By the nature
of those numbers, they are estimates, because we do not have customers
that are metered across the piece but our estimates are from a
consumption monitor that we have in place that monitors a number
of domestic customers with meters on all their household appliances
as well as a meter on the overall usage, which gives us some confidence
that we are measuring the consumption levels for properties reasonably
well.
Q159 Chairman: Given the state of
the economy, one might understand that over the next, say, couple
of years you could see lower levels of water being consumed by
industry. Couple that with efforts to optimise, that, technically
speaking, could represent pressure on revenue. How does that affect
your ability to raise capital when you have to illustrate to those
to whom you turn for money that ultimately you can repay it?
Mr Antolik: Clearly, that is an
issue for the companies and in the current five-year period where
we have no ability to correct for under-recovery of revenue. Thames
estimates that something around £200 million of revenue has
been not collected from customers and that does put pressure on
your ratios when clearly you have no ability to retrieve that.
Going forward, I think all of the companies had the opportunity
to revise their water resource plans. In our statement of response
to the consultation on our draft plan, we did take account of
lower commercial usage and potentially a lower level of growth
in the South East, so we were able to at least forecast our revenues
consistent with that but it is an issue that the company will
still bear that risk each year within the next five years until
it is trued up at the end.
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